Money, Technology, Wall Street

Lawyers And Bitcoin And Blockchain

If a client asks about using a blockchain-based smart contract, don't be left speechless.

By  
on

A major part of the work of many attorneys is helping to facilitate secure transfers of assets. From mortgage closings and business sales to divorce proceedings and securities law, asset “management” in many ways enters regularly into the practice of law. For that reason, attorneys should be paying attention to what is going on with Bitcoin, and in particular the technology that underlies Bitcoin: blockchain.

Bitcoin and by extension blockchain might sound to many attorneys like the kind of kooky idea that has little relevance to the law – an electronic currency hoping to replace the U.S. dollar?! – and in a sense, that is true.

Bitcoin is highly unlikely to ever have much of an impact as an alternative currency. But Bitcoin is built around a system to transparently and efficiently transfer an asset between two parties. That system is called a blockchain, and it is in essence a secure distributed ledger. For all of the mystique and controversy of Bitcoin, it is really grounded in a pretty boring innovation – a new type of bookkeeping system.

A blockchain involves recording ownership of an asset and then “broadcasting” the registered owner of that asset using an anonymous key to a group of parties in a network. Any change in asset ownership by any member in the anonymous network is recorded and broadcast across the network, including an authorization key that verifies the legitimacy of the transfer. Because the entire record of transactions is recorded by many different parties across the network, a blockchain reduces the risk of fraud, and the risk of simple errors in transactions that are typically corrected through reconciliation in traditional bookkeeping.

All of this is relevant for attorneys in that if blockchain is widely adopted, it reduces the need for many complex transactions that attorneys are currently involved in, from the use of escrow accounts to title checks. Unsurprisingly then, many major Fortune 500 companies are looking at how they can integrate blockchain into their financial operations. This includes everyone from major banks like Citigroup to electric utilities.

In fact, new iterations on Bitcoin such as Ethereum are already being developed specifically with corporate finance applications in mind. These forms of electronic currency are not intended to be used by consumers so much as businesses looking for ways to make asset recording and transfer quicker and cheaper. Thus, attorneys should begin thinking  about how they might incorporate this technology into their practices.

Attorneys operating in ancillary areas of the law such as the securities world and litigation finance may be among the first to begin seeing blockchain in their work. The NASDAQ recently announced a new initiative to try and use blockchain to speed the securities clearing process, and litigation finance firms could use tokenization in blockchain to create “smart contracts” that would make their businesses more efficient. While portfolio management systems like Mighty already greatly speed the management of litigation finance operations in areas like personal injury claims, blockchain-based systems can enhance this process, especially for attorneys dealing with many claims or with particularly complex matters.

Sponsored

None of this means that attorneys need to get up tomorrow and change the way they do business, but it does mean that they should begin becoming familiar with the concept of blockchain, so if a future client asks about using a blockchain-based smart contract, the attorney is not left speechless.

Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively through Morning Investments Consulting and writes for Litigation Finance Journal. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.

Sponsored

CRM Banner

Topics

, , , , , , , ,