Starting Out

The rise of artificial intelligence and its replacement of human workers is now well-documented, but will the blockchain technology known as ‘smart contracts’ one day replace lawyers?

Rick Thomas

Rick Thomas

Blockchain, put simply, is a digital network containing ‘blocks’ which are records of transactions – whether tracking the movements of cryptocurrency (such as Bitcoin), representing personal data or even facilitating voting systems – which are chained together through a common set of rules. Think of it as a series of linked ledgers, or spreadsheets.

Blockchain technology has exploded recently – both in number of users and awareness. There are few words currently more buzzworthy than blockchain, and while the technology has come to be thought of primarily as the foundation for Bitcoin, it has evolved far beyond underpinning the virtual currency.

Back in 1994, Nick Szabo, a legal scholar, computer scientist and cryptographer, realised that the system of decentralised ledgers could be used for ‘smart contracts’. Smart contracts are self-executing packages of computer code where the terms between the parties have been directly written into the coding. The code and the agreements contained therein exist across the decentralised blockchain network. Such contracts permit trusted transactions to be carried out among disparate, anonymous parties without the need for a central authority, legal system or external enforcement mechanism. They render transactions traceable, transparent and largely irreversible, absent a change to the underlying rules of that blockchain. Imagine a world where a string of computer code is capable of recognising the fulfilment of certain conditions and thereafter automatically transfers an asset. That world is almost here.

The technology has had its teething issues. In June 2016, the Decentralized Autonomous Organisation (DAO), an investor-directed venture capital fund which ran on the Ethereum blockchain, was hacked for $50m when a vulnerability in its code enabled users to siphon one-third of the DAO’s Ether (the cryptocurrency used on Ethereum). In a controversial decision, the blockchain community at the time decided to ‘hard-fork’ Ethereum, which had the effect of restoring virtually all funds to their place just before the hack. Effectively, the blockchain was reset to a specific point in time.

In theory, assuming no hiccups, a transaction effected through a smart contract will be legally binding, although this has not yet been tested. It is clear that if the technology is adopted certain functions of a lawyer, such as executing a contract, or confirming a party’s obligations have been complied with, will be replaced. That said, the legal and commercial terms of a contract will still need to be negotiated and provided for. A lawyer will need to take the ‘deal’ and convert it into legally binding principles, as is the case now, which is then reflected in the coding of the smart contract. Will lawyers learn to code? Will law firms become oversized IT departments? I am fairly sure the answer is no in both respects. However, contract lawyers and programmers will likely be cosying up in the future as their currently separate roles become entwined.

There are hurdles for smart contracts, such as replacing subjective determinations. Read any commercial contract and you will quickly realise that lawyers are smitten with the word ‘reasonable’. You will also find frequent ‘best efforts’, ‘good faith’ and ‘as soon as reasonably practicable’. The use of subjective measurements is intentional and many contracts are about being relational, rather than transactional. Contracts are often designed to evolve with a relationship – standards such as ‘reasonable’ offer this flexibility whereas concrete rules and metrics do not. Smart contracts may not be the best approach for some transaction types, such as a share acquisition of a company, in which the underlying purchase agreement is typically complex and extensive in length (corporate lawyers breathe a sigh of relief).

Other issues to overcome include how a smart contract could be varied; at present we usually sign a deed of variation. What happens when a party does not complete its contractual obligations, or believes it has but this is disputed? Will smart contracts conform to modern-day contract law principles which have evolved over hundreds of years, or will a new area of law emerge? And how will contracting parties be traced, verified and prosecuted when the foundation of blockchain is anonymity?

UK lawmakers need to move fast to keep up. As the Law Commission states in its annual report: ‘It is important to ensure English courts and law remain a competitive choice for business. There is a compelling case for a… study to review the English legal framework as it applies to smart contracts’.

I believe smart contracts will become a secure, efficient, and widely-accepted form of contracting – particularly for cross-border and high-frequency financial transactions. The technology will eventually replace certain functions of lawyers, but will not replace lawyers outright and will likely free up lawyers’ time to perform other tasks.

Rick Thomas is a member of the Junior Lawyers Division executive committee and a business lawyer specialising in cross-border transactions