BTC Inc
by Giulio Prisco, Feb 11, 2016

How the Blockchain Will Usher in a Future of Frictionless Legal Transactions


blockchain regulation

Blockchain technology, the “distributed ledger” in which Bitcoin transactions are recorded, when applied to the information management protocols of the legal profession, has the potential to turn the paperwork delays now endemic to most transactions into quaint memories of how things used to be done.

Using blockchain applications now in development, the execution of a legal transaction can be algorithmically encoded so it happens almost instantaneously. The “proof of existence” that is the required basis for trust among parties is reduced to a mathematical formula that locks out error and eliminates the need for humans to establish trust through time-consuming traditional means.

Bitcoin digital currency gave birth to the blockchain, which serves as Bitcoin’s distributed payment system. Blockchains are still considered by most people to be distributed payment systems, but payments are only one of the applications of distributed ledger technology. The premise is simple: When a payment from one bitcoin wallet to another transfers funds to the recipient, the Bitcoin network establishes proof of the payment. That proof is permanently recorded in the tamper-proof public blockchain (the ledger), and it is open to inspection. Thus the blockchain establishes distributed consensus that the payment has properly taken place.

The real innovation of Bitcoin is that it was the first operational distributed database to achieve popularity with a critical mass of participants - “miners” - who validated transactions without a central authority. Now, as is quickly becoming apparent not only to Bitcoiners but to banks, insurance companies, governments and a wide array of players around the world, databases built on distributed ledger technology have countless applications beyond payments, and in particular to legal applications. For example: while the recipient of a cash payment can deny that the payment has taken place, the blockchain contains irrefutable evidence of the transaction. If the private and public cryptographic keys used can be traced back to the identities of the participants, the fact that the payment has taken place (or any other critical fact) is established beyond doubt.

In a distributed cryptographic ledger, a private key is a secret key used to sign transactions, linking them uniquely to the wallet (and its owner). A public key is derived from a private key and is the public address for other wallets to send transactions. This system of “public-key” cryptography can be adapted to authorize identities and confirm details in any transaction in any industry imaginable. This is the reason why venture capitalists and leading financial firms such as Goldman Sachs and Nasdaq are investing millions in blockchain startups and technologies, and the impact will be profound as blockchain applications enable the frictionless flow of value around the globe.

A recent Accenture report defines a distributed consensus ledger (DCL) as a ledger of transactions replicated on multiple nodes on the internet or a virtual private network. Each transaction is signed uniquely by the user’s private key. Transaction integrity and confirmation are enforced through cryptography, agreed through the consensus of DCL nodes. The report notes that DCL is a more accurate term to describe distributed transaction databases with replicated data integrity maintained by cryptography, than generic use of terms that describe specific features, such as blockchain.

Distributed ledger technology permits establishing proofs of existence, for example the existence and ownership of a document, at a certain point in time. Theft of intellectual property can be prevented by recording a time-stamped cryptographic hash - a signature that is practically unique but also practically impossible to invert - of a computer file in a DCL. The computer file can be a book, scientific article, song, film or work of art, and after establishing the proof of existence the creator can show the creation to others - for example to a scientific journal or to a publisher - without fearing theft. If a derived work is produced in violation of the owner’s copyright, the owner would be able to demonstrate ownership of the original version.

Proof of Existence, one of the first proof-of-existence services, launched in 2013 as an open source project and has been described as “a notary public service on the Internet, an inexpensive way of using Bitcoin's distributed computing power to allow people to verify that a document existed at a certain point in time.”

The Accenture report makes a difference between public and private DCLs. A public DCL is permissionless, open to all. Anyone can access it, set up a node and participate in consensus cryptography. A private DCL is a closed group of nodes who set their own rules on consensus, access and participation.

The Bitcoin network is an operational public DCL, but a growing number of operators - including Accenture itself - are exploring private, “permissioned” non-Bitcoin ledgers. Distributed ledgers with public and private keys assigned to named individuals by a central authority, which would simplify legal disputes and decisions, have also been proposed for government use. According to a recent report produced by the U.K. Government Office for Science, distributed ledger technologies have the potential to help governments to collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and generally ensure the integrity of government records and services. The country of Honduras, for example, has already begun replacing its real estate records with blockchain technology.

The Hyperledger Project, recently launched by the Linux Foundation with the participation of an impressive list of technology companies and financial operators, wants to build a generic open-source distributed ledger technology suitable for all sorts of DCLs. Symbiont, a partner in the Hyperledger Project, is leveraging distributed consensus to develop an issuance and trading platform for smart securities on blockchain technology.

Distributed ledgers for evidence and proof of existence can have important applications to the practice of law and governance. Perhaps the most interesting use case is the blockchain-based “Governance 2.0” initiative Bitnation, a collaborative platform for DIY Governance. Bitnation wants to leverage proof-of-existence technology to provide the same services traditional governments provide, from dispute resolution and insurance to security and much more - but in a geographically unbound, decentralized and voluntary way.

Led by Susanne Tarkowski Tempelhof, Bitnation launched several pathfinders and proofs of concept including the first marriage registered on the blockchain and the first blockchain passport. The organization also developed and tested workable DIY land titles recorded on the blockchain in Ghana, where 70 percent of land lacks proper title, preventing investment and borrowing in real property markets.

In November, Bitnation partnered with the Estonian government to offer a public notary service to Estonian e-residents based on blockchain technology. E-residents - foreign non-residents holding a digital identity issued by the Estonian government and authorized to start and operate a business online under Estonian regulations - “will be able to notarize their marriages, birth certificates, business contracts and much more on the blockchain,” stated a joint press release.

Many questions remain: will lawyers need to become coders? Will privacy be protected? How will liability be established if parties on the blockchain are anonymous? What will redress look like? Will securities laws be complicated or compromised? Intellectual property laws? And if blockchain transactions are immutable, how will errors be corrected?

Firms looking to adapt for the purpose of improving client service and strengthening competitive advantage would be advised to keep a close eye on breaking news in this field, where developers are engineering the mechanisms for addressing these and other questions.