How Bitcoin Could Change Everything for the Legal VerticalHow Bitcoin Could Change Everything for the Legal Vertical
Your clients need to know Bitcoin, blockchains and IoT options around smart contracts.
March 1, 2016
By Mick Erlandson and Jude Soundar
The technology behind Bitcoin and the blockchain ledger already allows an individual to place assets in digital escrow or distribution and investment vehicles with just a few clicks — and without the need for an institutional intermediary. In the future, we may see disputes over these assets decided in transnational digital arbitration in virtual jurisdictions like BitNation, a “virtual nation” that provides nation-state services via the blockchain. These services are enjoying exponential growth.
Advisers serving the legal and financial verticals should be paying attention now. The legal industry, specifically trust and estate planning, is on the brink of a radical shift.
In its first conceptualization, the blockchain was merely a device to determine ownership of arbitrary units, known as bitcoins, within its own ledger at any given time. Encrypted addresses within the system either hold a number of units or remain empty. The blockchain database is hosted on a groundbreaking decentralized, immutable platform to record the ownership of digital property. Rather than tracking ownership on a single individual’s laptop or a corporate back-end server, the blockchain system is entirely new. It allows anyone to watch transactions in plain view but requires a 51 percent consensus of “users” to make edits to the global digital “spreadsheet.” Ownership and transaction data is replicated across every computer in the network and observed, stored and distributed by an unlimited number of competing peers simultaneously, each verifying and fact-checking its rivals and correcting any rogue attempts to cheat the system.
In short, the network gains value with every peer vigilante (bitcoin miner) that joins. Notably, the user base of blockchain technology’s first implementation, bitcoin, has grown to create the most powerful and secure distributed supercomputer in the world. Venture capitalists are taking the next step to build on the concept of blockchain “property,” assigning real-life values to the tokens stored. Rather than floating as cybercurrency, some entrepreneurs have connected coin units to ownership in the “real-world,” like gold or shares of ownership in a company, allowing this second-level implementation to function like floating securities on a decentralized exchange. An example of this “side chain” function that represents real-life assets is Colored Coins, an open-source protocol for creating digital assets.
While Colored Coins and similar implementations of tangible assets may be interesting fodder for securities lawyers, and provide a way for the banking system to curb transaction costs, these are far from a watershed techs for most people.
What is a seismic application for businesses and the legal field is the ability to affix conditions for future transfer on blockchain coins, resulting in what are referred to as “smart contracts.” Smart contracts will substantially lower the costs of trust instruments traditionally drafted by lawyers. In fact, the cost savings and increased efficiency allow for new uses of trusts once prohibited by cost. Partners serving the technical needs of legal firms should ensure clients understand the benefits and risks.
There are also links into Internet of Things projects. As background, in an ordinary trust, a trustee is typically contractually obligated to check for a condition and make payment to an account if that condition has occurred. The simplest of these conditions is time and date — some beneficiaries receive a monthly or annual payment from a traditional trust. Because the blockchain system keeps an accurate and irreversible internal clock, it can administer a smart contract akin to a trust or escrow, with property under the watchful eyes of thousands of peers, until the predetermined moment of transfer is reached. Beneficiaries receiving periodic distributions would bypass the costs of a trustee. More technical applications for “securities” would allow for asset holders to program smart contracts that send value at a particular time, resulting in autonomous digital options, arbitrage, dividend payments and futures contracts.
These conditional smart contracts function like “macros” on a blockchain’s spreadsheet. You could help legal clients exponentially decrease costs in the world of trust and estate planning by harnessing this tool.
Beyond cutting administrative costs, smart contracts make a number of futuristic applications for trusts cost-effective. This is particularly transformative when coupling smart-contract trusts with other technologies in the Internet of Things space. Implanted sensors or databases, referred to as “oracles,” could serve as sources of information for smart contracts, which would continuously monitor to see if a set condition exists to transfer the property, automatically executing this transfer at that exact moment.
One could easily imagine connecting wearable technology into a smart-contracts trust fund, where meeting exercise or health goals will trigger a distribution. An individual might reward a child for completing various chores, doing homework or quitting smoking. Suppose a user wants to create a trust for a child, but wants the funds to be distributed only if the child graduates from college and continued to stay fit while away from home. The smart-contract trust could automatically query the university’s academic records to see if the child graduated, simultaneously checking a Fitbit-type implant to see if the child reached exercise goals. Once the goals were met, the funds would be distributed automatically and economically.
In contrast, trusts in use today remain highly undemocratic, expensive to administer and impossible to scale affordably. Money and time spent on human trustees in their administration of a trust can be exorbitant. Nowhere is this problem more present than preparing assets for death.
With few exceptions, death leads to the most certain and important administration of a trust in the cycle of life. But dying is expensive. Retaining counsel to draft a proper will is only the beginning. Assets must typically be probated, a lengthy process where an attorney, an executor and a judge all spend time and money, with the amount of both increasing with the size of the estate. Sibling rivalries can devolve into years-long battles over the true intent of the deceased. Smart contracts and trusts offer a solution in cost savings and clarity by automatically distributing the estate and transferring deeds within moments of the decedent’s last breath.
There are a number of advantages that a legal firm could pass on to clients once a partner sets up the process of generating smart contracts. No executor, trustee or judge is required, so human intervention beyond the will of the grantor is never an issue. Computers always do what they are told, so the smart contract will follow the wishes of grantor exactly as instructed. Costs are shifted toward the front end of trust and estate planning, rather than in the execution phase, resulting in cost predictability and savings.
As with the development of any new legal instrument, use of the blockchain will evolve from its current nascent stage into a complex tool for lawyers to build conditioned transfers of assets at a fraction of the present-day cost. With lawyers typically slow to embrace technology, the question remaining is what type of business model will master the implementation of Smart Contracts and Trusts, and who will be the pioneer that transforms the legal landscape. While there are a number examples of startups and distributed autonomous organizations creating smart contracts – Factom, Ethereum, and the previously mentioned BitNation come to mind – none of these has been adopted widely by the legal industry. Time will tell which blockchain implementation will gain traction in the legal marketplace.
Mick Erlandson is a licensed patent attorney handling government and corporate law issues for a multinational company. He frequently writes on the implications of technology on the legal system, governments, and public policy. Jude Soundar is a lawyer focusing on technology and IT policy issues and a Fellow in the Truman National Security Project.
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