CHICAGO — The complex intersection of blockchain technology and its applications in the law is a question that the legal industry continues to grapple with, often with growing ferocity. And last week, the Chicago-Kent College of Law hosted an all-day conference that was packed with more than 700 attendees, including Big Law partners, technologists, and professors from leading law schools. Also in attendance were leaders of cutting-edge tech companies, who are working to lead the blockchain revolution.
Setting the Stage on Blockchain
The day of more than two dozen talks was kicked off by Dan Katz, associate professor at the law school and a usual suspect in the legal innovation community. Katz leveraged a quote by Socrates, about his fear of the impact of the written word, to embarrass the luddite in all of us:
If men learn this [writing] it will impact forgetfulness in their souls; they will cease to exercise memory because they reply on that which is written, calling things to remembrance no longer within themselves, but by means of external marks.
My meta-level takeaway was that blockchain technology, and its future applications, are still in their infancy, and will grow exponentially. In a nutshell, blockchain is a new-ish technology in which a public ledger (rather than a private computer server) keeps track of complex transactions while securing the data with strong encryption by using various incentive structures and consensus mechanisms in a decentralized fashion. Tony Lai, a fellow at Stanford Codex and founder and chairman of Legal.io, cited research which estimates that blockchain will generate $3.1 trillion in value by 2030!
Crypto-Currency and Its Regulation
Cryptocurrencies — including the heavyweights Bitcoin or Ethereum — all use blockchain technology, but each have characteristics and “flavors,” which can make them feel more like currencies, in some cases, and more like securities in others. The conference featured a number of speakers who were experts on the current state of regulation of crypto-currencies, including employees of the US Securities and Exchange Commission (SEC), and the International Monetary Fund (IMF), as well as compliance officers of some crypto-exchanges. Indeed, for many, this issue — are crypto-currencies a security or not — is one of the central questions as to blockchain and its undergirding of crypto-currencies. Much has been written on this and even more debated, meanwhile the SEC and other regulators have weighed in and continue to do so on the topic, usually (not surprisingly) on the yes, they are securities side.
Blockchain has numerous applications in the smart-contracting movement, most obviously eliminating the requirement that a bank act as intermediary — and that’s just for the transfer of money. Over time, you should be able to perform credible complex transactions without any intermediaries.
John Roth is the chief compliance officer of Bittrex, a major crypto-exchange; and he painted a clear picture of just how large and complex the world of crypto is, emphasizing that Bittrex trades “over 190” crypto-currencies. In fact, Bittrex, was founded in 2014 because there was no visible, US-based exchange which could give investors’ confidence in what they owned.
Later in the day, Jess Cheng, Fintech Counsel for the IMF (who stressed that her views are not necessarily those of the IMF) spoke about how the many member nations of the IMF are working hard to create a regulatory framework around crypto-currencies. Before joining the IMF, Cheng worked on blockchain-based solutions for Ripple, a famous and leading cryptocurrency seeking to solve inefficiencies in the settlement system between financial institutions, and thus is qualified to speak about crypto from both the business side as well as the regulatory side, including topics such as “Know Your Client” requirements, for example.
Crypto is different from other areas of the financial world, because whole ecosystems are unmoored from the “real world”, Cheng said. These ecosystems allow for robust and liquid markets for intangible things (like computer storage space) which have the potential to create eBay-like markets in underutilized assets.
Amy Hartman, assistant director in the cyber unit in the SEC’s Division of Enforcement (and who also stressed that her views are not necessarily those of the SEC), explained how there was a priority need for regulators in late-2017 to have deep expertise in cyber cases. Those cases began focusing on trading issues, hacking, and, most relevantly, Initial Coin Offerings (ICOs), which are often, in essence, securities which confer ownership. Before any investigation into an ICO, regulators must look to the underlying nature of the “coin” or “token” in question and ask the issuers to explain the nature of the offer, Hartman said.
Of all the topics discussed, smart contracting is likely most relevant to practicing attorneys. Smart contracts, simply stated, are contracts that have some amount of computer code embedded in them. They are not just Microsoft Word documents, but rather “living” documents that impact factors in the real world under certain conditions. For example, you could have a shipping contract in which payments are self-executed once the commodities contracted for (or their GPS-tracking device) reach their agreed-upon destination.
That said, blockchain has numerous applications in the smart-contracting movement, most obviously eliminating the requirement that a bank act as intermediary — and that’s just for the transfer of money. Over time, you should be able to perform credible complex transactions without any intermediaries. If you don’t think eliminating intermediaries is valuable, then you have never bought an apartment in Manhattan, and fidgeted impatiently as teams of expensive attorneys slowly work through a pile of papers in order to transfer ownership of a shoebox. Lowering friction in transactions is a very good thing.
Nina Kilbride, Chief Commercial Officer of Monax, discussed how her company (among many others) is now working to bring blockchain-based contracts into the mainstream. She told the audience that blockchain is “fundamentally legal technology” and her company is creating an “infrastructure for legal products,” including “no-code” platform for smart contracts, or, as she called them “active legal agreements.”
Identity Protection and Cybersecurity
Finally, conference panelists attested to how blockchain technology holds a lot of promise with respect to identity protection and how we (and our digital identities) interact with the old-fashioned internet (the World Wide Web), as well as the internet of things.
Here is the promise of blockchain in a nutshell: You could have your permanent identity features (think: date of birth or social security number) and your transient identity features (think: address or credit score) stored and facilitated through the “pipeline” of a secure, distributed ledger that has the ability to dramatically reduce the friction of working with governments and private institutions.
If that’s still not resonating, one of the speakers — Jennifer O’Rourke, founder of Attest, a digital identity company — solidified it for me. O’Rourke explained how Attest wants to digitalize the key markers of your identity, taking all your physically identity documents and putting them on your phone and in your pocket.
So what does a blockchain-based solution look like? Picture in your mind an Attest identity wallet, similar to your Apple wallet, but which holds the most sensitive information in your life: your driver’s license, passport and social security card. But, more than that, Attest would also hold details of your relationships with critical private entities like insurance companies, 401K providers, and (arguably less critical), retailers.
Anyone who has spent time at the DMV renewing a driver’s license can understand this value.