Jun. 4, 2014

How Bitcoin Will Bring About A Legal Practice Revolution

Law360, New York (June 04, 2014, 10:17 AM ET) -- Law, by nature, is more reactive than innovative. Look at how long the desegregation battle took in the courts. Think also about how, only now after 20 years or so, we have ubiquitous e-filing between lawyers and courts. In sum, the law is slow, slow to work and slow to innovate.

But, that is all about to change, and lawyers must start to prepare for the black swan — or once-in- multigenerations event — that is coming to law from the rise of cryptocurrencies, such as Bitcoin, and their decentralized asset ledgers.

For those who do not know, Bitcoin is a kind of decentralized money that allows for the frictionless — read, basically free — transfer of value from peer-to-peer computer nodes. Think of Bitcoin as a kind of email for money.

For purposes of disrupting the legal profession, the most important innovation wrought by Bitcoin is not via its role as a currency but the underlying network itself, which is called the blockchain. The blockchain is a decentralized and totally public asset ledger that records all bitcoin transactions and is searchable by anyone. It is totally open and transparent. So what does the blockchain have to do with law, you might be asking? The answer is basically everything.

Encoded in the Bitcoin network programming itself is the ability for simple contract enforcement and commercial mediation. Additional software applications are now being written that would allow, for example, an auto loan creditor to electronically disable the vehicle if a payment is not received timely via a bitcoin payment registered on the blockchain. No lawyers needed.

Completely situs-free corporations can also be created on the blockchain, called decentralized autonomous organizations (DAOs) or corporations (DACs), that will have their bylaws, transactions and voting all accomplished via the computer blockchain.

But the blockchain is not set to disrupt only commercial and contract law. It has its sights set on probate and property law as well.

For example, a will can be written and registered on the blockchain with instructions to transfer bitcoin upon the death of the testator where the blockchain is asked to search the social security death index at regular intervals for record of the person’s death and to make the appropriate transfer once that record is found. No lawyers needed for the transfer.

Similarly, all property assets can be registered via the blockchain also and property transfers can be effectuated without the need for lawyers or to pay transfer and other related taxes and fees.

One of the unique facts of Bitcoin and other cryptocurrencies is the fact that transactions are generally not reversible. This means that if a buyer transfers a large amount of bitcoins to a seller and then does not receive the goods, the buyer will have no recourse or even, perhaps, no specific legal jurisdiction in which to sue. To get around this issue, the Bitcoin platform, as noted above, also has built in mediation, and even escrow capabilities.

That is, in a large transaction, the participants can agree in advance to involve a neutral third party who acts as a mediator and then, only when two of the three participants agree, is the deal consummated and the bitcoins finally transferred. These transactions are called multisignature transactions and they can be programmed into the blockchain fairly easily.

This also means that even dispute resolution services — traditionally the domain of lawyers — will be impacted by the mediation and escrow capabilities built into the blockchain programming. Indeed, there are several well-funded and capable companies that have already set up Bitcoin arbitration services, and more sophisticated offerings are already in the works.

In addition, some law firms have already started accepting bitcoins as payment for legal services, and it must be expected that parties looking for lawyers who specialize in cryptocurrencies are likely to want to pay their bills with these "digital dollars."

Law firms should consider cryptocurrencies as a potential additional source of revenue, and the additional publicity and business that being an early adopter of such a transformative technology will bring is also likely to be a boon to those lawyers who jump on the bandwagon early.

The exchange rate risk of holding bitcoin must also be considered (but bitcoin can always be turned back into dollars quickly via established and reputable bitcoin exchanges). The IRS has already ruled that bitcoins are not an actual currency, but more like property (and it is currently legal to accept bitcoins as payment for goods and services here in the United States).

Make no mistake, such crypto law or math-based law, where transactions can be written in math-based computer code, is coming, and probably much quicker than lawyers might project. This means that lawyers must start educating themselves about Bitcoin and its evolutionary changes to law. It also means that lawyers should start thinking about how they can fit their services into such crypto contracts and transactions.

Computer code is not likely to be good at enforcing contracts where there are factual disputes involved in a breach, so lawyers will be needed on the front end to plan for such contingencies and also to set up a dispute resolution mechanism consistent with blockchain parameters and known deficiencies. What law controls a corporation that exists only on a computer network?

Answers to these questions demonstrate that crypto law will definitely need its own legal code that outlines efficient enforcement and commercial mechanisms that allow for the efficiencies of blockchain transactions to be promoted while protecting clients’ economic interests.

Think of the lex mercatoria, the quick and efficient legal system that evolved in the Middle Ages to promote and protect commerce, for the modern age. Hence, Bitcoin will not only change the nature of many legal transactions in the future, it is also likely to spawn its own legal system as well.

Lawyers should know and understand that these changes are coming, and they are likely to come

quickly. It may not be from Bitcoin itself since there are a large number of competing cryptocurrencies that are now coming into the marketplace, but it will come from the blockchain and related software programs that are being written today. Welcome to Law 2.0.

—By Stephanie D. Alexander, Tripp Scott


Stephanie Alexander is a partner in Tripp Scott's Tallahassee, Florida, office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


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