Understanding the Future of the Law on the Blockchain

My company is involved with many developing technologies and I sometimes forget how unknown things like the Smart Contracts are, let alone the underlying blockchain itself. I don’t say this in a bragging sort of way, but rather just to point out the need for perpetual education concerning new developments, while not simply being the boring updates discussed at most CLE [continuing legal education] events like “Mitigating the Risk of Corporate Account Take Over & Business Email Compromise Fraud” and “Ethical Issues in Buying, Selling, or Transferring a Law Practice.” If these subjects ARE interesting to you, I’m happy that you’re happy.

My colleagues poke fun at me saying that with heightened accessibility through companies like LegalZoom and technological developments like ROSS, lawyers will be out of jobs soon. (1) This might not be so bad (2) I think the legal profession will simply shift away from the current (soon to be outdated) or traditional way of practicing law into something new and different. A large part of this new paradigm will be writing contracts in a programming language rather than spoken language (not that lawyers ever even wrote in a manner that was readable for non-lawyers anyway).

The legal profession has a storied history with the noblest stated intentions yet the ignoblest execution. The common law developed as a way to protect property while promoting the essential concepts of justice and fairness. Now law firms rack up hundreds of thousands of dollars in billable hours and use it as a threat against future adversaries to deter them from seeking justice. Somewhere along the way, the justice system was inverted and incentives were perverted so that only if a person is harmed in totality will that person seek to salvage justice.

Because of this shift, consumers are demanding new alternatives to the old and broken system and Smart Contracts will help fix some badly damaged cracks.

I recently conducted a highly informal poll of my friends and colleagues in the legal profession around the United States. With a mix of specialties, areas of practice, and backgrounds, there were exactly ZERO who had even heard of Smart Contracts and only one who expressed familiarity with the blockchain.

Firms who get involved now will have a hand in shaping SC’s development and acceptance in the legal community. And if more people do not become aware and involved, it will be the big firms who control the landscape and shape the regulations so that they will limit out smaller firms and clients. Meet the new boss.

So how will smart contracts impact or change the current system? The changes will occur on two fronts: how the law changes, and how lawyers will change.

1. Whenever a smart contract fails to do what the parties intended it to do, there will be much upheaval and commotion. This inevitability has already shown itself with the “theft” in the DAO, which illustrates the importance and the difficulty in writing such complex contracts in programming language. My old law professor always said “sympathetic plaintiffs make for bad law” and I don’t see that being different when it comes to litigating smart contracts.
   There will surely be an old business man who gets roped into entering a smart contract with a big company headed by some suave Harvard MBA grad who promises ease and efficiency. Things go wrong and the old guy seeks restitution the only way he knows how, the trusty old legal system. Here, a jury feels bad for the old man who got swindled into using some technology that most people don’t understand, much less a guy who still calls his grandson when his computer freezes — and this is how bad case law is established for smart contracts.
   At this point (or hopefully earlier), the system will need to establish legal remedies that avoid the problems that caused the demand for smart contracts in the first place, while still allowing for mistreated plaintiffs to find justice. I don’t know what these regulations will look like, or how they will fit into the system as a whole, but I know that we will need something, particularly in the short term, to help smooth the transition of acceptance of this new technology.
2. Firms and small practices will have to either hire programmers to meet these needs, or train their existing staff to keep the work in-house. Understanding how the technology works will be a necessity for all lawyers who intend on using smart contracts, and not merely in a cursory manner, but to a level where they can explain it to clients and answer questions from people with a complete lack of knowledge in this area.
   Another likely scenario in the adoption of smart contracts is that an unexpected outcome occurs where both parties are surprised and dissatisfied. When this happens, clients will need arbitration, mediation, or some other alternative dispute resolution to find an equitable outcome that wasn’t in the original agreement.

Another significant issue concerning contracts is how the different legal systems will adopt them. In common law countries including the U.K., Australia, India, U.S. (except for Louisiana which is kinda weird), and Canada (except for Quebec which is kinda weirder), smart contracts are accepted and unregulated until Congress (or other similar governing body) decides it needs to be regulated, or until a test case arises through the judiciary.

However, in civil law countries, including almost all other countries (except for the Middle East), government adoption might need to happen earlier in the process. People who start using smart contracts in these jurisdictions are risking unfavorable regulations that could retroactively affect their agreements.

This uncertainty and friction reveals the greatest problem.

The blockchain was developed to avoid all these bureaucratic issues and work independently of centralized authority. Until the fall of the State (which is extremely unlikely to occur soon), we will need to figure out how this decentralization-focused technology will coincide under our current system, how it will grow and develop and decrease our reliance on the centralized status quo.

To me, this particular shift does not happen in glorious revolution, but through tinkering and adjusting at the margins where we can find more well-suited areas like those I’ve mentioned before. As the technology develops, becomes more and more reliable, easier to code accurately, and adopted by the general populous, only then can we look to make broader changes. This is a long process, but the possible benefits and potentially eliminating practically all transactions costs make it an endeavor worth pursuing.

Let me know what you think,
Hoss

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