Blockchain 'smart contracts' to disrupt lawyers

The global director of IBM Blockchain Labs, Nitin Gaur, who was in Sydney last week, says he is a "huge fan" of Ethereum, pointing to its "rich ecosystem of developers". He predicts law to be among the industries disrupted by the technology.

Transferring to the digital era

"Now is the time for agreements to be transferred to digital era," he says. "What the internet has done for information, blockchain will do for value. It will remove the friction and frustration in the current system of networks and build a new trust system."

When Prime Minister Malcolm Turnbull talks about the jobs of the future, he could be speaking about the coding of smart contracts. King & Wood Mallesons is among the law firms already teaching coding to lawyers, as blockchain technology points to a new world where corporate governance is monitored by computers. For example, on Ethereum, a share certificate could be programmed to automatically send the owners of stock dividends should corporate profits reach a certain level.

This is not science fiction. Last month, a new company was formed, The DAO – which stands for "Decentralised Autonomous Organisation". It is purely a creature of computer code, with no human executives or board of directors. Rather, it runs a series of smart contracts on the Ethereum blockchain.

The DAO, described in a recent New York Times article as "a sort of technology-enabled leaderless collective", has raised around $US150 million in virtual currency; its funders will receive digital voting rights on potential projects with decisions to be made via an online polling of shareholders.

Lawyers might be interested to know that one of the first startups to apply for funding is DAMN, or the Decentralised Arbitration and Mediation Network.

DAMN also operates as a network of smart contracts on the Ethereum blockchain. It is creating an "opt-in justice system for commercial transactions" to provide a new form of cross border dispute resolution, according to a profile in industry publication CoinDesk last week.

The burgeoning blockchain community was abuzz last week after Fred Ehrsam, the co-founder of blockchain company Coinbase – in which Westpac Banking Corp holds an equity stake through Reinventure Group – published a 2500 word essay on the Coinbase blog predicting Ethereum would "blow past bitcoin entirely".

"We now stand only nine months out from the beginning of the Ethereum network and the level of app development is already faster than Bitcoin's," he said, pointing to the combination of its full programming functionality and ease of use.

"We are finally getting rapid iteration at the app layer."

Value of currency soars

The value of the digital currency, or token, on the Ethereum network – the ether – soared in mid May by 50 per cent as news of The DAO spread through the blockchain community. The price of ether reflects future expectations about the number of developers will want to acquire the currency to use the network.

IBM is participating in a community driven approach looking into impact of blockchain on the legal profession which is exploring how to enforce the legality of smart contracts in blockchain.

"Whatever we do we will be operating in a framework governed by existing legislation and policy about the practice of law," Gaur says. "The smart contracts used in the proof of concept stage are about enforcing business rules, but what if they can enforce legal contracts? These are questions that have to be answered in context of blockchain."

Other companies and collectives are also pushing forward with the digitisation of legal agreements. CommonAccord is creating global codes of legal transactions, automating legal documents such as master service agreements. These were discussed at a conference hosted by the MIT Media Lab last week; rather than exchanging contracts, transactions are done by file synchronisation with partners, via blockchain or any other method.

"Blockchain is a particularly important fit because smart contracts can automate routine transaction functions while the legal text provides a frame for legal enforcability," CommonAccord says in a description of the technology on its website.

The pace of adaptation in the legal profession may be driven by the pace of blockchain innovation in major clients such as the big banks. In March, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp were part of a global group of banks part of the R3 CEV consortium that executed "smart contracts" on five test blockchains, including Ethereum. The smart contracts were programmed to facilitate issuance, secondary trading and redemption of commercial paper.

Barclays is using R3's Corda technology to build smart contracts; it is experimenting with new versions of the standard derivative documentation issued by the International Swaps and Derivatives Association.

CBA chief information officer David Whiteing will provide an update on the bank's thinking about blockchain at the annual stockbrokers conference in Melbourne on Wednesday. CBA has recently seconded a staff member to work at R3 full-time in Sydney.

Senior management from R3 was in Sydney last week; the visit included a meeting with representatives from the Australian Securities and Investments Commission, Australian Prudential Regulation Authority and Austrac.

Blockchain hackathon

The Blockchain summit in Melbourne on June 28 and 29, which will bring together leading banks, technologists and venture capitalists, will feature a session on the application of smart contracts in banking.

An 88-page report by Goldman Sachs last week quantified the big savings for global capital markets and the legal industry from employing blockchains. The investment bank predicted $US11 to $US12 billion per year could be saved from streamlining clearing and settlement of cash securities, while $US2 to $US4 billion a year could be saved from moving real estate titles to distributed ledgers.

Banks are continuing to search for the killer app. Westpac last week hosted a hackathon, in which 14 teams spent Thursday, all of Thursday night and Friday hammering out blockchain solutions across five categories of finance, government, healthcare, agriculture and property. In the property category, one team proposed a blockchain for a register that records underlying beneficial ownership of property held via trust arrangements. The competition was won by Full Profile, which has been investigating how blockchain could help solve entrenched agricultural industry issues such as counterparty or credit risk, stock reconciliations and reporting and traceability from source to consumer.

Westpac's chief information officer Dave Curran acknowledges there is lots of hype around the blockchain but says "I don't think it is over-hype".

"There is serious, high potential in blockchain and we should be playing with it. It has my attention."

"Blockchain feels a bit like like Napster did, but just when we were thinking about how that was going to work, iTunes turned up and the world changed. Blockchain might best be applied outside the finance space, but if I'm wrong, I don't want to miss it."