Why Blockchain Is More Important to Lawyers Than They Probably Understand

7 Min Read By: Randolph A. Kahn

IN BRIEF

  • There are technologies that are worth exploring by lawyers because it helps attain authenticity, integrity, completeness, transparency, etc.
  • Blockchain technology holds promise for many other applications including real estate deals, portable secure health records, and financial transactions.
  • Blockchain is a transformative technology that is possibly revolutionizing various industries and business processes.

Introduction

Laws in the United States have evolved to be technologically neutral, so that laws won’t dictate what technology to use, but rather mandate the attainment of a legal “end state.” In other words, laws will make clear that chain of custody, authenticity, completeness, immutability, veracity, privacy, and security are vital to compliance, but they won’t dictate how to attain it. That way, companies and individuals are free to buy or build whatever technology makes business sense and aren’t trapped into using a technology as it becomes obsolete. For example, the Health Insurance Portability and Accountability Act (HIPAA) Security Rule’s major goal “is to protect the privacy of individuals’ health information while allowing covered entities to adopt innovative technologies to improve the quality and efficiency of patient care.”

While laws won’t tell organizations what to buy, there are technologies that are worth exploring by lawyers because it helps attain authenticity, integrity, completeness, transparency, etc. One such technology is blockchain. Before I tell you why it holds so much promise for lawyers and others as well, it’s worth revisiting what it is and what it isn’t.

What is Blockchain?

For starters, blockchain is a technically complex system based on math, algorithms, and encryption. “The blockchain uses public key cryptography to create an append-only, immutable, timestamped chain of content.” (IEEE. A Case Study for Blockchain in Healthcare: “MedRec” prototype for electronic health records and medical research data. August 2016.) In contrast, the explanation that follows is simple and will likely make you want to learn more and at a deeper level. If you have heard about blockchain, it may be in the context of Bitcoin, but they are not synonymous. While blockchain is the technology behind many cryptocurrencies, like Bitcoin, blockchain technology holds promise for many other applications including real estate deals, portable secure health records, and financial transactions.

According to Gartner, technology analyst firm, “Blockchain is a type of distributed ledger in which value exchange transactions (in bitcoin or other token) are sequentially grouped into blocks. Each block is chained to the previous block and immutably recorded across a peer-to-peer network, using cryptographic trust and assurance mechanisms.”   

How Does Blockchain Technology Work?

Unlike a traditional clearinghouse, a blockchain implementation does not depend on just one entity to maintain the ledger of transactions. Blockchain depends on many independent third parties—miners—who compete to both verify each transaction and be the first to solve a math problem in exchange for payment. It is each miner’s responsibility to maintain an independent, often public memorialization of the transaction on the ledger of the chain (“block”) of transactions. The verified chain of transactions is derived when a majority of the thousands of anonymous, independent ledgers match. The use of distributed, anonymous, self-interested arrays of verifiers helps make bitcoin very hard to subvert. It would require collusion between 51 percent of miners, who likely don’t know each other, to perpetrate a fraud.

Transactions are executed within the blockchain environment and thereafter are aggregated in blocks, which are retained forever and are constantly revalidated with new transactions memorialized in new blocks. Similarly, there is a third-party retention of salient evidence of transactions, and validation of transactions. The chain of blocks, all verified, connected with hashes, and time-stamped accordingly, show the exact time the transaction took place, as well as the time of each subsequent verification. All this adds integrity to the blockchain process.

Like any technology, however, blockchain is not without its technical limitations. First, the database for “public” blockchain transactions, in which all transactions are stored, is public and not “owned” by an individual to the transaction. Private blockchains do exist but have limited personal use. When using a public blockchain, only the individuals involved in a transaction have access to all the information, including certain private information about the transaction, but the transaction and select information related to it is available to the public. Another issue is the need to rely on a third-party computer and entities to document transactions. Normally, business between two parties is limited to the systems controlled and used by the parties to the transaction. These uninterested, anonymous third parties have no stake in altering or hacking information; in fact, it is in their best interest to validate only real transactions in order to receive the transaction fee. Errors in effectuating and validating transactions will happen, though given the algorithmic nature of the process, they should be very limited.

Future Use That Should Matter to Lawyers

Blockchain is a transformative technology that is possibly revolutionizing various industries and business processes. Beyond its potential for securely transacting business and transferring money, there are many other business activities that would benefit from its use.

For example, “[t]he Pentagon and U.S. NATO allies have been moving discreetly but aggressively in recent months to develop military-related apps exploiting the capabilities of blockchain. NATO is considering the technology to improve efficiencies across such traditional processes as logistics, procurement and finance . . . if ‘significant portions of the [Defense Department] back-office infrastructure can be decentralized,’ DARPA wrote, “‘smart documents and contracts’ can be instantly and securely sent and received, thereby reducing exposure to hackers and reducing needless delays in DoD back-office correspondence” (Washington Times, 2017). The reason lawyers care is that the various uses of blockchain make better business evidence, promote the discovery process, and provide a risk-mitigated way to execute various types of business.

Help with Ownership

Blockchain can be useful for transactions involving proof and chain of title, ownership of property, or identity of a person. Because the ledger is an ongoing, validated, and secure log of all things that have happened, perhaps going all the way back, ownership can be known with exactitude.

Help with Secure Life-long Medical Records

Blockchain records similarly hold promise for the medical industry as Personal Identifiable Information that could be properly encrypted and securely stored in the Cloud for long-term access by authorized medical professionals and the patient alike. According to Brian Forde, editor of MIT Media Lab Digital Currency Initiative, “By putting your health records into a blockchain-managed system, you and your doctor should not only be able to update and review your medical information in real time, but also know it has been held securely.

A novel design feature of MedRec is the way records are validated and added to the blockchain. The miners for MedRec are medical researchers who are rewarded with access to census-level data of the medical records.”

Perhaps most intriguing is that Blockchain records can be securely stored, accessed, and shared over the lifetime of the patient with multiple providers. That allows medical records to have portability, longevity, and security that promotes care and treatment over the life of the patient.

Help with Disaster Recovery Backup

Blockchain could also be useful as a means to back up important information from an organization’s servers in much the same way as using a Cloud provider today, with differences related to its public facing and distributed technology design. With encryption, the content could be scrambled and securely stored in a third-party location that could be made available in the unlikely event of a disaster that requires information to be restored. In today’s information security environment, such protections may be more and more essential.

Help with Litigation Discovery

The litigation process could be greatly enhanced if ESI were blockchain records in that they would be “self-authenticating”; stored publicly, which would add to their integrity; and would be complete as they are captured real-time in total and validated as part of the blockchain process. Further, if managed in the blockchain environment overtime, chain of custody would be known and easier to demonstrate if challenged.

Help with Transactions Between Devices in the Internet of Things

With the exponential growth of transactions between smart devices, called the Internet of Things (IoT), traditional intermediaries like banks won’t be able to handle the volume of transactions. Here, too, Blockchain can execute and track such transactions. Many companies are testing out the utility of blockchain and IoT, from security to storage management.

Conclusion

Whether it’s secure real estate transactions, chain of custody, smart contract, multi-party agreements, or UCC filings, blockchain may be a gamechanger. According to the Harvard Business Review, “It can validate—and secure—almost anything. From voter authentication to government processes, health information, and proof of intellectual property, Blockchain can serve as a secure process to validate almost anything of value, and to keep it safe.”

While Bitcoin and other cryptocurrencies may wither away, blockchain is here to stay. U.S. law will likely never dictate that Blockchain be used, but, depending on the business being transacted, there are lots of reasons to see if it can make electronic business happen “faster, better and cheaper,” while being legally compliant.

ABOUT THE AUTHOR

Chicago, IL

Randolph A. Kahn

Randolph A. Kahn, Esq., is an internationally recognized authority on the legal, compliance and policy issues of business information, electronic records, e-business processes, and information technology.…

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