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Will legal systems be improved by blockchain?

Image credit: REUTERS/Dado Ruvic

Blockchain could help legal systems run more smoothly and efficiently. But data privacy and regulations may limit its impact.

In 2008, Apple’s creation of the app store led to the introduction of apps for everything. More than a decade later, it now seems there is a blockchain for everything. Blockchain, the technology that is best known for underpinning the Bitcoin cryptocurrency, has spawned a new raft of ambitious startups looking to make the most of it.

Blockchain has a simple underlying premise: to allow people to share digital assets with another internet user. The transfer is carried out securely and can be seen by all users of the network it is shared upon, using a public record of all transactions. Blockchain networks can be open to anyone or act as a private system that is only accessible to those granted permission.

Despite analysts at Forrester predicting in 2017 that the beginning of the downfall for blockchain proposals will begin by 2018—the technology’s combination of transparency and security has led to blockchain being developed for almost every industry. Many blockchain efforts are in their early stages, with developers still attempting to get wide rollout, but blockchain applications are being developed to track food safety information, distribute movies and store electronic medical records.

But how could blockchain be applied to the legal profession and regulatory environment? “Blockchain technology can affect the legal practice in two significant ways”, says Primavera De Filippi, a Researcher at the National Center of Scientific Research in Paris and Faculty Associate at Berkman Klein Center for Internet & Society at Harvard University. It has the potential to act as a secure database where documents, such as evidence, can be stored and then referenced later on if arguments arise.

The ‘use cases’ for a blockchain that holds evidence are already starting to be developed. Evidence management company CaseLines is attempting to patent the use of blockchain technology for handling legal documents. In China, the country’s supreme court has ruled that evidence that has been verified on the blockchain can be admissible in local court proceedings. Separately, the United Kingdom’s Police Foundation thinktank has suggested cases could be logged using a blockchain system, and that there could be “significant advantages” for the criminal justice system.

The second potential application, De Filippi says, is in creating a way for contracts to be created and transferred digitally, reducing the need for legal instruments. Smart contracts can remove the need for a middle-party in deals and reduce overall costs. Smart contracts, in some cases, have moved beyond the concept stage and are starting to be used in the real world. For instance, the Open Law group creates legal agreements that are then securely stored on the [cryptocurrency] blockchain. “Blockchain technology can significantly reduce the costs of entering into contractual agreements, by enabling people to transact directly with one another through a computer interface, as well as reducing the costs of monitoring and enforcement”, De Filippi says.

One industry in which this is already happening is shipping. IBM and Maersk have started to use smart contracts at more than 20 ports around the world to track the movement of containers and share shipping documents. The firms say more than 154m shipping events—including arrival times, customs forms, and invoices—have been recorded in the system and it has reduced costs to the industry.

The transparency around the document sender and creator within blockchain applications may also help banks prevent fraud. In particular, it could help easily identify people involved in financial transactions and prevent money laundering. Financial groups have to understand—through regulations referred to as ‘know your customer’—who owns accounts and is making transactions. The blockchain can be used to verify the identity of those completing transactions. When it is used, it has the potential to disrupt the entire industry. There is a significant chance that blockchain being heavily used by financial services reduces the ‘know your customer’ burden to the degree that certain regulatory solutions are cannibalised and no longer needed.

However, most of these technologies aren’t in place yet. People have seen this massive explosion of cryptocurrency and assume there must be a significant use of blockchain. The hype around blockchain to the recent surge in artificial intelligence. But AI has reached the stage where businesses now understand how they may be able to take advantage of it, but that maturity has not yet happened with blockchain.

Primarily, for blockchain, there is one significant hurdle to overcome before it can be widely deployed. “The legal profession should ensure that uses of blockchain technology actually comply with the law and do not tamper with fundamental rights, like the right to privacy”, De Filippi says. Europe’s General Data Protection Regulation (GDPR), which came into force in May 2018, strengthens the rights of individuals and increases the safeguards on their personal data. Likewise, the California Consumer Privacy Act, which goes into effect on 1 January 2020, and has similar safeguards as GDPR. India is in process of updating their data protection framework. Their Bill also draws upon GDPR and is likely to be enacted in November 2019. China, too, is in process of implementing standards relating to their data protection requirements imposed by their cybersecurity law. These privacy safeguards, and others, may have a stalling impact on the adoption of blockchain tech.

In the short term, blockchain has a difficult future. When you look at a hardening regulatory environment around data privacy and cybersecurity—whether you think that’s right or wrong—implementation of blockchain in the legal sector is going to face some challenges.

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