A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” – first line of the whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System by “Satoshi Nakamoto” in November, 2008.
It’s been called a “game changer” by Wall Street executives and “disruptive” by technology innovators. Some go as far as calling it “probably the biggest technological invention since the PC in the 1970s and the internet in the 1990s.”
You might have heard of it. You might know it has something to do with Bitcoin. But there is so much more to blockchain, as people, companies, and even industries are discovering, due to its versatility and reliability.
What is Blockchain?
Think of blockchain as a completely connected (“distributed”) ledger system or registry. It can securely process transactions, and do so without the use of costly intermediaries and their associated risks of fraud and loss and accompanied fees. So, what makes it so special? What’s different? And where does the name come from?
In general terms, blockchain is made up of digitally recorded and encrypted data in the form of blocks. The blocks are all connected via a distributed network forming a chain – thus, blockchain. These blocks, in the real-time, digital world, steer the transactions. Bitcoin, as the best-known example, uses blockchain technology to control its transactions – no banks, governments, checks, paper, or coin to bother with.
Unlike traditional ledgers managed by a central agent or agency (e.g. a bank) which controls and monitors transactions, blockchain gives all parties access to the blocks, revealing the status of the transaction in such a reliable way that the intermediaries are unnecessary. While the technology, mathematics, and cryptography behind how blockchain functions is complicated in the details, the application of such a reliable tool built on assuring the validity of the involved transactions has far-reaching potential across industries.
Said another way, blockchain creates a way to verify a specific transaction occurred at a certain time and in a certain order. By the nature of its structure, it is very difficult to alter, hack, or delete even, combining reliability with its easy digital reach as a tool to span the globe.
Here’s a simple video explanation.
What’s That Mean for the Legal Profession?
Blockchain will have an impact on the legal profession itself as well as various legal implications for our clients. We are already seeing the use of blockchain to develop “smart contracts.” Logic commands can be built into the contracts to execute an event upon triggering, and do so without further intervention to execute them. A simple example of this functionality would be the release of escrow funds upon the occurrence of an event. The validity and security of the transaction make the process extra inviting for use.
The decentralized, distributed nature of blockchain opens its use up to all kinds of peer-to-peer market applications, from music distribution to energy trading to secure medical data transfers. Services and marketplaces are in constant development to explore the potentials of blockchain. Real estate transactions, for example, might be managed solely on a blockchain system (e.g. see Sweden).
So, having a basic understanding of the functionality of blockchain allows you to prepare for another revolutionary change in processes. Clients will turn to the legal profession with a multitude of novel legal, regulatory, and operational issues concerning blockchain and its applications.
You may not know how the technology works per se, but you can count on being approached to deal with the changes to your clients’ businesses and address the subsequent complications that arise.