Demystifying Smart Contracts: Disrupt or Be Disrupted

We are delighted to have Louisa Van Eeden of Lexis Nexis UK join us as a guest blogger on The Attic. Her first post took a look at how millennials are shaping the future of the legal industry. This article tackles blockchain-powered smart contracts.

The fast pace of change in the legal industry can make those returning to the market wary, those already working in the industry stressed, and those entering the market feeling a need to race to keep up. It can be overwhelming. As technology advances and more tools become available, it seems that traditional modes of working are being replaced, or at least challenged. From contract management systems to shared databases, e-billing to electronic signatures, many of the benefits of the increased uses of technology are clear, with increased transparency, speed, and efficiency being just a few. But the rate of change can be dizzying.

In amongst the tech-related chatter, you might have heard about smart contracts. That’s right – the smart revolution, known for smartphones and smart televisions, is now sweeping through the legal profession. Powered by blockchain technology, these are contracts that do not need to rely on human verification or interpretation. Taken at its most basic, these things aren’t new – just look at direct debits – but they are raising interesting questions and challenges, including relating to the significant expansion of such systems’ sophistication and scope. We are in the early stages of our understanding and implementation of these, but as with anything new in the current market, it’s a case of disrupt or be disrupted. Namely, educate yourself and ride, if not get ahead of, the revolutionary wave.

What lawyers need to lead the way on smart contracts

The rate of innovation across the market will vary widely, however. As Simon Rhodes, Director of Knowledge and Learning at Herbert Smith Freehills LLP explains in a recent LexisNexis report, Smart Contracts – A View From the Legal Industry: “We believe a number of AI tools will be commonplace in the next three to five years hence our piloting a number of varied technologies. For us, ultimately, it’s always about the clients. So any developments must be linked to how we support our customer needs. Our definition of artificial intelligence (AI) is wide; we see it as a broad ecosystem of technologies that can improve our efficiencies and value offering by either replacing or enhancing human involvement. Therefore we must innovate collaboratively with our clients in offering holistic, technology-backed services.”

  • Remember: Technology for, not instead of, people

“Technology-backed services” is an interesting way for lawyers to look at smart contracts and other new tools. They are, in essence, ways for legal professional to automatically execute various business processes across organisational boundaries. They are tools to be used by legal professionals; not tools that will necessarily replace the individual. As Charles Radclyffe, CEO at the technology company, NetKernal, explains in the report: “Organisations need a distributed computing platform that can help them automate. With an operating system for automation in place, literally any business process, financial instrument or legal document can be automatically executed.”

  • Client buy in is key

Proactively speaking with clients ahead of change is an advisable step towards adopting any new technology. Not only will this make them more supportive of any change, but it kickstarts conversations around the business of the client. An intimate knowledge of the client’s business means you can look down the road and anticipate what the possibilities of automation might be – and what, if any, legal issues you might encounter.

  • Begin ongoing reviews of processes now

Furthermore, moving forwards legal professionals will need to be more tech-savvy. With smart contracts in mind, lawyers should – as Kit Burden, Partner and Global Co-Head of Technology at DLA Piper advises – be “reviewing their practice areas and considering what functions or transactions (or parts of transactions) could be simplified or commoditised so as to be rendered into a blockchain-friendly form.”

Considering your current processes and its potential is also an important step, as Kit identifies, towards developing smart contracts because it’s unlikely to be lawyers devising the technology. Instead, it will be coders and programmers. But that’s just the “how” of the issue. In larger companies, lawyers will be able to provide the “why” and explain “what” needs to be achieved from such blockchain-based processes if they have done the advanced preparatory work. They can be “heavily engaged” in the formation of such new processes. After all, as Kit goes on to explain, it’s “the historical province of the lawyer, ie to ask the ‘what if…’ question, and then craft the contract terms to try to deal with it.”

It is also imperative for lawyers to arm themselves with knowledge early on in the process precisely because so much remains to be established in this area, especially with regards to more significant and B2B-focused smart contract regimes. It will enable lawyers to “fully consider the workings of the proposed regime and highlight the points of potential legal challenge (e.g. as to the intended points of binding contract formation, the ownership of newly created rights, use of data, governing laws and dispute forums, etc.).”

The vast expanse of possibilities engendered by the advance of technology into the legal sphere is a thrilling, yet sometimes overwhelming prospect – but forewarned is forearmed.