Blockchain Technology: Transforming the Practice of Law & Society as a Whole

By: Dr. Robert Spangler, Associate Executive Director, Operations and I.T., New Jersey State Bar Association & Lisa W. Spiegel, Esq., Associate Executive Director, Continuing Legal Education, New Jersey State Bar Association

Since its creation in 2008, blockchain technology and its capacity to provide data transparency, reliability, and security has garnered the excitement of business leaders, attorneys, technologists, and techies alike. Used properly, it has the capacity to transform both the legal industry and the world we live in. However, due to the experimental nature of the technology, a lack of federal and state guidance on its definition and acceptable use, and (until recently) a lack of practical use cases, significant confusion still exists as to how its steady rise will impact society and the legal industry. This article aims to describe the theory behind blockchain technology, explain in layperson’s terms why it has attracted so much attention, and provide insight into its application in the law.

What’s a Blockchain?
The concept behind blockchain technology is surprisingly simple; at its core, a blockchain is much like a traditional ledger book, with the addition of (courtesy of modern technology) several powerful security features. Successful application of the technology effectively transfers the storage of business records and other data out of filing cabinets, spreadsheets, and traditional databases, to chains of data that are stored on several distinct types of networks. Users of a blockchain can add data to it, but only with the approval of everyone else in the chain, making it safer and more secure than traditional ledgers books and other modern databases.

However, while the two are often viewed as equal, blockchain technology is not the same as cryptocurrency.  While bitcoin and cryptocurrency are built on blockchain technology, the use cases for blockchain extend far beyond currency. Blockchain technology is simply the foundation cryptocurrency is built on.

A New Approach to Data Integrity and Security
To gain a better understanding of blockchain technology, it’s often easiest to start by picturing a classic accounting calculator – specifically the kind that uses paper receipt tape to record each calculation as it is made. Much like an accounting calculator, as blockchain transactions occur or data is added to a chain, a new entry is made in a chronological “chain” of linear information that can’t be reorganized.  But, unlike a paper ledger, each transaction is stored in an encrypted block of information, and each block is unique and can only be created once. In addition, a blockchain does not exist in one single place; blockchain transactions are part of a distributed peer-to-peer network, meaning a copy of each transaction is sent simultaneously to everyone participating in the blockchain. With each new block of data that is added, the entire blockchain is updated and sent to participants, who must approve or deny the change.

Each block of data in a blockchain contains data combined with a unique digital fingerprint called a hash, along with the hash of the block immediately preceding it. Blockchain hashes contain the specific details of the contents of a block, and no matter how many blocks are created in blockchains, each hash uniquely correlates with the data contained in its block, making it unique like a human fingerprint. As new blocks are added, the previous block’s hash is attached to the next block in the sequence, securing the chain and requiring the hash to remain the same forever. Changing any of the data inside the block causes the hash to change, and if the hash changes the block is rejected by the chain. Consequently, this system of linked hashes makes blockchain data highly resistant to a wide range of common security issues. In addition to rejecting the tampered block, if a hash is changed, all of the blocks in the chain following the changed block are deemed invalid, making it easy to quickly identify at what point an issue has occurred. (1)

While hashes are effective as data protection tools, the use of only one security technology is not sufficient to prevent tampering altogether. In addition, with the amount of computer processing power available to average people, it is theoretically possible to rapidly recalculate and replace all hashes in simple blockchains that don’t have additional layers of security. Because of this, blockchains also include a security measure called “proof of work” that slows down the creation of new blocks, creating a time delay that makes it extremely difficult for hackers to recalculate hashes and rebuild the chain before inconsistences can be spotted and rejected by users on the network.

Finally, as mentioned above, instead of relying on storage in a single repository like a user’s desktop or a corporate network, blockchain data is stored in multiple locations simultaneously. In technical terms, this is accomplished using a peer-to-peer network, or a potentially unrelated network of individual computers. The blockchain continuously checks to make sure that its hashes and data are correct. Each participant of the blockchain is required to review and verify (if they are accurate) new blocks, and the blockchain itself checks the included hashes to make sure it hasn’t been compromised or tampered with. Assuming the block is valid, what’s called “consensus” is achieved when either an algorithm determines validity or a predetermined threshold percentage of the blockchain participants approve the block, and the new block is added to the chain. Blocks that have been tampered with do not become part of the blockchain. (2)

Who has access to the data in a blockchain?
There are several types of permission models in blockchain technology. Public blockchains, for example, allow anyone to join. However, open access isn’t appropriate for all uses, and while public blockchains can be valuable in certain situations, they are not suitable for situations that require privacy. Accordingly, private blockchains allow only one organization to control the decentralized peer-to-peer network. The organization can control who has access to all aspects of interaction with the data in the blockchain.

A third level of blockchain technology, called a permissioned blockchain, can be either private or public. In a permissioned blockchain, individual users control who has access to data, as well as how much data they have access to. (3) When a user adds data in a permissioned blockchain, they are the only ones that can set access and viewing permissions for that information. This is useful in cases of highly confidential data, such as health records or financial information.

Finally, when the highest level of security and privacy is required, blockchains can also be both centralized and permissioned. In a centralized and permissioned model, blockchains are only distributed to a few computers and access is restricted to certain preapproved individuals. Centralized and permissioned blockchains operate very quickly and have attracted the attention of some of the most respected companies in the world, with technology giants like IBM creating platforms to use the technology in virtually any industry. (4) 

How Does the Law View Blockchain?
On August 8, 2019, Governor Murphy established the New Jersey Blockchain Initiative Task Force. He charged them with identifying opportunities and risks associated with blockchain technology, finding various types of blockchains that could be used in New Jersey, locating projects and use cases throughout the world that could be put to use in New Jersey, and identifying how our state could potentially use the technology (or other related secure digital technology) for recordkeeping. The first report of the Task Force is due to come out in the winter of 2020. In addition to the Task Force, on January 27th, 2020, S898 (Cryan)/A1178 (Zwicker) re-introduced a bill that permits corporations to use blockchain technology for certain recordkeeping requirements. It is pending in the Assembly Science, Innovation and Technology Committee, which is headed by Assemblyman Andrew Zwicker. In the Senate, it is pending in the Senate Commerce Committee, where Senator Joseph P. Cryan is Vice Chair. This is the bill’s second introduction in the legislature; it was first introduced in 2018 and went to a second reading in the Assembly but never made it to a full vote.

Nationally, 19 states have some form of blockchain technology initiative underway, ranging from creating task forces to establishing universal definitions and use cases. Among them, the nationally-discussed Illinois Blockchain Technology Act (BTA) of 2019 provides further clarification surrounding best practices for the technology and offers a new definition of smart contracts, clarifying that they are contracts stored as electronic records that are subsequently verified by the users of a blockchain. While there were some questions surrounding permissibly and enforcement of smart contracts, the BTA provides Illinois with four permitted uses for blockchain and smart contracts, including:  a smart contract, record, or signature may not be denied legal effect or enforceability solely because a blockchain was used to create, store, or verify the smart contract, record, or signature; in a proceeding, evidence of a smart contract, record, or signature must not be excluded solely because a blockchain was used to create, store, or verify the smart contract, record, or signature; if a law requires a record to be in writing, submission of a blockchain which electronically contains the record satisfies the law; and if a law requires a signature, submission of a blockchain which electronically contains the signature or verifies the intent of a person to provide the signature satisfies the law. (5)

Additionally, in 2019 the United States Senate Commerce, Science and Transportation Committee approved the Blockchain Promotion Act, bipartisan legislation that directs the Department of Commerce to come up with a nationally recognized standard definition of "blockchain" technology, identify possible uses by the federal agencies, and establish a blockchain working group within the Department of Commerce. A report was issued on the bill in December of 2019, and discussion is expected to continue throughout 2020. (6)

Blockchain For Digital Signatures
The federal Electronic Signatures in Global and National Commerce Act ("E-SIGN Act”) of 2000 made electronic signatures as enforceable as signed paper contracts in certain situations. (7)  As a result, one of the most anticipated advantages of blockchain technology in both the business and legal fields is the ability to increase reliability and validity of digital signatures using a blockchain-based signature. Unlike traditional digital signatures, blockchain signatures use a two-part key system (a public key and a private key) to act like an electronic notary and validate that the document signer is who they claim to be. Signing a document with a blockchain signature adds a new block to the chain, and like other forms of blockchains, the entire chain validates the signer’s identity.

Smart Contracts
Perhaps the most anticipated business use of blockchain technology, smart contracts are digital versions of traditional print contracts between various parties. However, unlike print or PDF contracts, smart contracts contain specific computer-based instructions that are stored and automatically executed when terms or conditions are met. (8) Practically speaking, smart contracts work on an “event/response” system, where every event triggers the contractually agreed response automatically. One use case for smart contracts that is frequently discussed is their application in real estate transactions, where they can fulfill the role of an escrow service because the blockchain can store both the payment and ownership rights, and when the agreed conditions are met, payment and ownership can safely and automatically change hands.

In addition to automating the escrow process, smart contracts bring the security benefits of blockchain to every traditional contract setting they replace; as conditions are met and a contract is executed, permanent records are created and automatically distributed to every member of the blockchain. The result or output of the contract is validated by the network, reducing or eliminating altogether many common contract issues that lead to misinterpretation and disputes. Crucially, tampering and hacking become almost impossible when blockchain is used due to various security and transparency features built into the technology.

Healthcare and Medical Records
In 2019, Aetna, PNC Bank, and IBM collaborated to create the Blockchain Healthcare network Initiative (9). With highly-respected companies leading the discussion, technologists have devised many ways for blockchain technology to transform the medical space, including using the technology to usher in a significantly more individualized treatment approach by creating a decentralized database of patient medical records that is not dependent on specific computer networks, operating systems, and other propriety systems and can immediately and effectively travel and grow with a patient over a lifetime.

Health records inherently become more complex as we age, and every healthcare provider has a different and often proprietary way of recording data. The need is clear; between 2009 and 2018 there have been 2,546 healthcare data breaches resulting in the exposure of 189,945,874 healthcare records, which roughly equals more than 59% of the population of the United States (10). In addition to data issues caused by hacking and breaches, 250,000 people in the United States die every year because of medical mistakes, making it the 3rd leading cause of death in our country (11). Because blockchain is decentralized and can be shared quickly, it can provide professionals with the ability to securely and instantly share or receive patient information in a way that has never been available.

While this concept may seem futuristic, the country of Estonia started using blockchain technology for secure medical records and healthcare data, and as of October of 2019 95% of all of the country’s healthcare information is in a blockchain and 99% of the country’s prescription system is digital. (12)

Dispute Resolution by Blockchain?
The distributed peer-to-peer network of blockchain technology and the self-policing nature of the chain itself has led to a great deal of discussion regarding the technology’s potential application to resolve disputes of all kinds. Moreover, emerging from a convergence of the rise of blockchain technology, large financial investments in online legal service providers like Rocket Lawyer and Legal Zoom, and widespread availably of technology, a new wave of blockchain-based companies have begun to offer consensus-based dispute resolution services (13). For example, companies like tech startup Jur promote models of arbitration using smart contacts and blockchain technology that they label as enforceable under the New York Convention, therefore producing legally binding arbitration results in over 150 countries. According to their website, Jur “allows anyone to build a jurisdiction on the blockchain to offer quick, affordable, and fair dispute resolution”. (14)

However, even with these developments, the application of blockchain to legal services is still evolving, and the lack of clear federal and state guidance on the technology highlights the fact that work remains before this use case experiences more widespread adoption.

Where Do We Go From Here?
Blockchain technology continues to provide innovative ways to improve the practice of law, facilitates the ease and accuracy of sharing information, and simplifies many activities that were complex and potentially prone to errors or disputes in the past. However, a lack of federal and state guidance regarding use cases and admissibility have slowed the pace of adoption until a better foundation is in place. Moreover, as data privacy regulations like GDPR, CCPA and SHIELD come into effect, questions surrounding newly minted privacy rights like GDPR’s right to be forgotten may actually directly collide with the permanency of blockchain data, which is one of its fundamental strengths.

Even so, while the future is unclear, what is apparent is that the level of investment, benefits provided, and innovation emerging show that blockchain technology is here to stay, and will likely play a major role in our lives in the future. The next step for our industry, and society as a whole, is to try to understand what it can offer and how it may impact you and the clients you represent, so you can be prepared to handle developments when widespread adoption finally arrives.

References

1. Rosic, A., & Blockgeeks. (2020, February 8). What is Blockchain Technology? A Step-by-Step Guide For Beginners. Retrieved from https://blockgeeks.com/guides/what-is-blockchain-technology/

2. Hammerschmidt, C. (2017, September 22). Consensus in Blockchain Systems. In Short. Retrieved from https://medium.com/@chrshmmmr/consensus-in-blockchain-systems-in-short-691fc7d1fefe

3. Introduction to Permissioned Blockchains. (2019, June 2). Retrieved from https://101blockchains.com/permissioned-blockchain/

4. IBM Blockchain Platform. (n.d.). Retrieved from https://www.ibm.com/blockchain/platform

5. Illinois Embraces Smart Contracts with New Blockchain Legislation. (n.d.). Retrieved from https://www.natlawreview.com/article/illinois-embraces-smart-contracts-new-blockchain-legislation

6. S. 553 — 116th Congress: Blockchain Promotion Act of 2019.” www.GovTrack.us. 2019. February 14, 2020 https://www.govtrack.us/congress/bills/116/s553

7. https://www.fdic.gov/regulations/compliance/manual/10/x-3.1.pdf

8. Smart Contracts. (n.d.). Retrieved from https://blockchainhub.net/smart-contracts/

9. Landi, H. (2019, January 28). Aetna, IBM launching new blockchain healthcare network. Retrieved from https://www.fiercehealthcare.com/tech/aetna-anthem-hcsc-and-ibm-creating-new-blockchain-healthcare-network

10. Healthcare Data Breach Statistics. (n.d.). Retrieved from https://www.hipaajournal.com/healthcare-data-breach-statistics/

11. Ray Sipherd, CNBC (2018, February 28). The third-leading cause of death in US most doctors don't want you to know about. Retrieved from https://www.cnbc.com/2018/02/22/medical-errors-third-leading-cause-of-death-in-america.html

12. Halim, S., & Halim, S. (2019, January 11). Learning from the Estonian e-health system. Retrieved from https://www.healtheuropa.eu/estonian-e-health-system/89750/

13. Distributed Magazine via NASDAQ.com (n.d.). Blockchain Technology Is Now Entering the Dispute Resolution Arena. Retrieved from https://www.nasdaq.com/articles/blockchain-technology-now-entering-dispute-resolution-arena-2018-08-07

14. About Jur.IO (n.d.). https://jur.io/frequently-asked-questions/