Google the words “blockchain and law firms”, and only four names appear on the first results page: Norton Rose Fulbright, Burges Salmon, Clifford Chance and Clyde & Co.
The popularity of blockchain tech, which took off since its original development for bitcoin nine years ago, is finally reaching into the legal world. But not many lawyers know what to do with it – and the time to get to grips with it is fast running out.
“Blockchain has moved on from something that people [in the legal sector] were thinking about two years ago on a conceptual basis to accelerating quite quickly over the last couple of months,” notes Clyde & Co partner Lee Bacon.
Burges Salmon senior associate Adrian Shedden cites a “blockchain and bitcoin fever” which has gripped many in the market “because of a consumer focus and everyone having a computer in their pocket”.
The use of blockchain, which is in essence a constantly expanding list of records which are linked and secured using cryptography, to manage information seem endless.
Parting from open-source projects like R3’s Corda to cryptocurrency Etherium and the ambitious Decentralised Autonomous Organisation (DAO) project, the jump between blockchain theory and the adaptation to a commercial reality is narrowing fast.
The appetite for fintech innovation has certainly increased over the last 18 months thanks to the growing appetite from private entities, governmental departments and financial regulators. Just last week, the FCA struck a new agreement with the Hong Kong Insurance Authority, the Hong Kong Monetary Authority and the Securities and Futures Commission to support fintech innovation in the banking, securities and insurance sectors.
Last month, six of the world’s largest banks joined together for a project aimed at creating a new form of digital cash for clearing and settling financial transactions over blockchain. The firm behind that was Linklaters.
Largely though, the push towards blockchain projects has come straight from developers or from pro-tech clients looking to make a key difference in their internal systems.
“We are definitely seeing a lot more clients saying ‘let’s do something commercial with this’,” Clifford Chance senior associate Brian Harley claims. “Clifford Chance is now doing paid work on a few projects.”
One major [unnamed] corporate Clifford Chance client is making a receivable trading platform, putting invoices up on the blockchain and trading them.
“It’s no longer proof of concept,” he says. “Every big financial institution, corporate and insurers have teams looking at blockchain.” Put simply, law firms need to stop monitoring the trend, and start coming up with solutions.
One big signal of the response to the shift towards commercial blockchain within the legal world was the news last week that Clyde & Co has launched a smart contracts consultancy to advise insurers and clients in other sectors on all aspects of smart contracts, blockchain and distributed ledger technologies.
It’s a bold statement of intent, onlookers say, which shows the pressure for global law firms to be the first over the line when offering the latest tech to clients.
The team, which will operate from London, San Francisco and Dubai, is led by UK insurance and reinsurance partners Bacon and Nigel Brook.
To be able to offer both technical and legal expertise, the firm’s consultancy (which has christened itself ‘Clyde Code’) has partnered with blockchain specialist Gary Nuttall, who operates his own consultancy focused on the financial services sector.
Clyde & Co’s plan is to tap into the appetite in the insurance sector and offer something new.
“We believe we are the first to do this,” Bacon says when talking about the launch of the consultancy. “We are working mostly 50 to 60 per cent on insurance and reinsurance matters. We believe in the benefits of smart contracts and blockchain tech – if there was a tech made for the insurance market it would be this.”
The opportunity certainly exists within that sector. Imagine if, in the instance of a category five hurricane, insurers could have systems in place to automatically analyse and detect the threat and instantaneously reimburse clients who would otherwise have to go through lengthy claims. Then apply the same to delayed flights, or tracking assets or cargo. The use of blockchain technology could reduce thousands of hours of manpower spent on handling vast amounts of claims handled for an insurance company – and produce game-changing savings instead.
The idea of the examples above – and many more — becoming a reality could explain the attraction to blockchain from insurers, but the actual implementation of a system that works in practice may yet be an uphill battle. After all, there are yet to be any widespread public success stories in their sector.
This isn’t an unsurmountable problem, according to Bacon and Brook. “We are attracting existing clients and new clients, which is always good,” Bacon claims. “In terms of timing [for each blockchain project] it depends on how complex and how comfortable clients are with the technology, how long it’s going to take to set up the software coding. We can do something within 2-3 months if the clients have the buy-in.”
Although Clyde & Co partners could not reveal current deals, the firm has one prominent deal this year in an advisory role for Emirates NBD Bank on the development, implementation, validity and enforceability of a blockchain solution.
But despite these promising developments, no contract solutions have significantly displaced traditional contracting. Regulatory hurdles and the handling of potential litigation relating to blockchain are still tortuous points for potential investors.
“The pitfall in lawyers using blockchain is that there is a lot of hype around this,” Shedden says. “The majority of applications are completely unnecessary.
“You don’t want to decentralise the data. You want a centralised ledger where everyone can access the same content at the same time. It doesn’t stick to the true genesis of blockchain technology, but there are a number of workarounds because of the level of infrastructure investment. There are iterations of distributed ledger technology that will be suited to getting smart contracts and smart licencing that has come from iterations of this tech.”
The key aspect that lends itself to automation is where there is some kind of standardised process that can be coded and executed on the occurrence of certain events, he continues.
The firms that win the work will be able to sell not just technical knowledge but understanding of regulation and the true practical applications of a smart contract.
The race to claim innovation is no more pronounced than in the legal blockchain market. But, as Shedden remarks, “The big pitfall is lawyers rushing into this, and not fully understanding what they are rushing into.”