Online sources that provide legal services are already testing smart contracts, and some experts predict that cryptocurrencies will oust the mediation of lawyers in the same way that they are ousting payment operators and banks. Let’s try and answer this: Why is it not too late for lawyers to side with blockchain?
Blockchain Is Already Merging into Legal Services
Rocket Lawyer and LegalZoom, two largest players in the U.S. online legal services market, intend to implement blockchain and smart contracts and are already testing these technologies. They allow users to reduce costs and enter into legal agreements without the need to pay a lawyer, which is especially crucial for independent contractors and small businesses. Blockchain will help continue to democratize this market, making access to legal services even cheaper. Charley Moore, CEO of Rocket Lawyer, says the company’s task is to use technology to expand “access to justice.”
At the moment, Rocket Lawyer allows users to create and sign contracts online, but the implementation of what is required under the agreement is usually monitored offline. For example, a business may issue an obligation to pay a certain amount to a freelancer after completing a job by some deadline. Moore points out that using smart contracts will automate the tracking of this part of the agreement, that is, performance. Such an opportunity will be useful for contractors, small businesses, and workers seeking timely payment from their employer.
At the same time, as Moore points out, users will not even have to interact directly with the blockchain or use cryptocurrencies, as all will happen behind the scenes. “We are not releasing any sort of a product that would require our users to be knowledgeable about cryptocurrency. That’s just not the kind of user we serve,” he said.
In a conversation with DeCenter, lawyer—and partner and head of the Fintech, blockchain, and cryptocurrency practice at GRAD law firm—Maria Agranovskaya also emphasized the importance of taking into account the peculiarities of the client. “Many have tried to create something like blockchain lawyers, but it will not work without an individual approach to all clients. Each company decides for itself which technology to use and how to work with data. After all, you need to take into account everything: the direction of work, who the customers are, and how many there are. If you want a blockchain, then you will have another business. If you want to invest in innovation, then this is a startup. In any case, all new things are the engine of progress. If people want to optimize their relationships, make them more transparent and fixed, then yes, this company needs a blockchain,” says Agranovskaya.
Rocket Lawyer has already launched a private beta version of the program called Rocket Wallet, which is described as a platform for “legal contract execution and payment on the Ethereum blockchain.” Rocket Lawyer is working on this project in partnership with the blockchain startup OpenLaw and investment firm ConsenSys and plans to launch the product later this year.
LegalZoom, the main competitor of Rocket Lawyer, announced work on the implementation of smart contracts in September in collaboration with Clause, the provider of decentralized solutions for the legal sector. “LegalZoom’s North Star has always been to democratize law. Making sure every American and small business owner can access the same resources previously available only to larger corporations. This collaboration makes cutting-edge technology available to and useable by consumers and small businesses in ways previously unimaginable,” said Vanessa Butnick Davis, VP and Legal Managing Product Counsel of LegalZoom.
LegalZoom will use the developments of Clause and its subsidiary Accord Project, which will allow users to edit, sign, and execute legal smart contracts on the Clause platform, as well as perform blockchain transactions. In addition, with the Smart Clauses tool, one will be able to integrate accounting, billing, and payroll systems into contracts.
Alexander Treschev, the founder of RACIB (The Russian Association of Cryptocurrencies and Blockchain), considers the market of legal blockchain services aimed at the general population to be extremely promising, and he notes such a need for Russian realities. “Suffice it to say that in Russia, the number of queries on the topic of legal services in search engines is more than 100 million monthly. People are interested in obtaining competent legal information, but few are willing to pay the price charged by lawyers. In Moscow, for example, the average price for a consultation is about 5,000 rubles (USD 75). The mass segment remains uncovered. Unfortunately, there are often situations where a person comes with one question, and instead, they are consulted on a number of related topics just to increase the price tag. Blockchain could solve the problem of trust between a supplier and a consumer of legal services, make transactions between them transparent and easily audited, and make secure transactions using smart contracts with guaranteed results, eliminating the human factor,” said Treshchev in a commentary for DeCenter.
U.K. Law Commission Is “Reforming the Law”
Such a motto is indicated on the website of the Commission. And one of its current areas of work is focused on smart contracts. “It is important to ensure that English courts and law remain a competitive choice for business. Therefore, there is a compelling case for a Law Commission scoping study to review the current English legal framework as it applies to smart contracts. […] There are questions about how this feature would interact with contract law concepts such as implied terms, or contracts which are held to have been void from the outset. There are also questions about interpretation, liability, applicable law, and dispute resolution,” as stated on the Commission’s website.
Many experts agree that in the foreseeable future, smart contracts will not be able to replace legal professionals.
“The well-known economic principle ‘demand creates supply’ exists in the legal space, too. A significant number of clients of our law firm Norland Legal are high-tech startups and companies that are familiar with the blockchain technology. But even in private conversations, we did not encounter clients’ need for legal assistance with smart contracts. It may still take some time for sufficient infrastructure to be created for the distribution of smart contracts,” as commented by Alla Abarysheva, head of the venture investment and IT practice department at Norland Legal, for DeCenter.
Gary Tse, an employee of the law firm Taylor Vinters Via, believes that claims that smart contracts are ready to replace lawyers are based on the vagueness of the smart contract concept. “Advocates of smart contracts putting lawyers out of their jobs have in mind smart contracts where the entire legal agreement between contracting parties is expressed in its code. In other words, code is law and lawyers will no longer be needed unless they are also programmers. The other side of the debate sees smart contracts as code that automate the enforcement or execution of an underlying legal agreement, whether expressly written or not. Most of the smart contracts we see today belong to the latter category and resemble code much more than law,” as Tse writes.
In his opinion, there are categories that are almost impossible to express or define in code, but easy to communicate in a written agreement. In particular, these include the parties to the contract. “Currently, it can be said that a smart contract identifies the parties to the transaction based solely on public addresses, and the respective owners of these public addresses. However, this is unsatisfactory for two reasons. Firstly, the public address in a smart contract transaction may point to another smart contract instead of a wallet with a determinate owner. This information cannot be discerned from the public address alone because the public address of a wallet is often indistinguishable from that of a smart contract,” says Tce. In addition, even if the public address refers to the wallet, its owner is “pseudo-anonymous” and cannot be determined by the public address itself without additional information. All of this greatly complicates the legally necessary task of identifying the parties involved in the agreement. Tse suggests that this problem can be solved with the development of blockchain identity. “Until then, a smart contract itself may not amount to a valid legal agreement due to the lack of certainty as to the parties,” the specialist writes.
Another disadvantage of smart contracts, which arises from their inability to speak in languages that people can understand, is the impossibility of tying contract performance to a subjective standard. “Just as a vending machine relies on mathematical calculations to check if you have inserted enough money, a smart contract’s code relies on deterministic and precise logic to execute its instructions. However, commercial contracts often use language such as ‘reasonable’ or ‘best endeavors’ to provide flexibility. These subjective standards cannot be translated into code or reduced to a formula. As long as there are parties who desire flexibility in their contracts, it is unlikely that smart contracts will replace traditional contracts,” Tse said.
Similar concerns are shared by Russian lawyers. Gleb Bazurin, a lawyer with the practice of Digital Technologies of Liniya Prava law firm, told DeCenter that smart contracts are still in test mode and at this stage have a somewhat limited scope, at least within the framework of Russian law. “The use of smart contracts is limited by regulatory barriers, including the legal requirements for the mandatory form of the transaction, the issues of determining the applicable law and the place of contract, the consequences of the invalidity of the transaction, etc. Not all agreements or their conditions, however, can be ‘automated.’ It is difficult to imagine how the program will be able to determine a ‘reasonable time’ or assess whether the parties have made ‘sufficient efforts’ to fulfill their obligations. Additional restrictions are provided by law—for example, some transactions must be certified by a notary ‘on paper,’” said Bazurin.
The complexity of legal agreements as the main reason for maintaining the role of lawyers is highlighted by Alla Abarysheva. “Traditional law firms will retain a dominant position on complex transactions and resolving disputes when the blockchain fails. Simple linear transactions like “money in the morning, chairs in the evening” can be implemented by legal blockchain startups,” said Abarysheva in a commentary for DeCenter.
And although today’s smart contracts are imperfect, many experts are convinced that after some time, smart contracts will inevitably become part of legal practice. “Despite the fact that smart contracts are currently not a panacea, in many cases, they need to be audited, and their full, effective implementation requires a huge amount of economic and organizational efforts. In my opinion, the introduction of smart contracts is too demanded by the market to abandon it. Moreover, there are quite successful individual cases on their implementation, and the number of such cases will only grow,” as Maria Andrianova, legal adviser to Health Graphix, shared her opinion with DeCenter.
Lawyers Start for Compromise
Anthony Pompliano, founder and partner of cryptocurrency investment company Morgan Creek Digital, is on the side of those who believe that smart contracts pose a threat to lawyers. But Gary Tse notes that smart contracts, by contrast, offer new opportunities for legal professionals, and instead of replacing written agreements, smart contracts can work in tandem with them: “This hybrid model allows contracting parties to benefit from the legal certainty of written contracts and the efficiency of smart contracts. An example of this is Initial Coin Offerings (‘ICOs’), where companies offer digital tokens for sale to the public. A smart contract facilitates the collection of virtual currencies and distribution of the company’s digital token, with a written agreement setting out the risks purchasers assume and the rights they have against the vendor. As a result, the advent of smart contracts has actually created demand for legal services.”
Alla Abarysheva is of the same opinion and notes that “in any case, the traditional legal business needs technology, and technology needs the support of professionals, including in the legal sector.”
Thus, many experts consider the blockchain not as a “competitor,” but as a “partner.” “Smart contracts can be used in the legal space. They are not the only tool. Also, artificial intelligence—any technology has the right to exist. I think the combination is the most powerful tool. The legal profession implies creativity and an individual approach to each case, so I don’t think that technology will completely replace people,” as Maria Agranovskaya told DeCenter.
Maria Andrianova notes the need for automated transactions on her own experience. “Practically from the very beginning of my practice, I began to feel and still feel an acute need for a mechanism that would provide predictability and transparency in making and executing transactions. In particular, this need is acute in the case of transactions with a foreign element, when national features and conflicts related to the choice of the applicable law can be superimposed on an already complex scheme. A smart contract could well become such a mechanism in the future after eliminating its existing shortcomings,” as she shared her opinion with DeCenter.
Tse also stressed that lawyers must be prepared for the threats posed by smart contracts: for example, blockchain congestion can lead to severe transaction delays, and the smart contract code may contain a vulnerability that, if detected by hackers, will lead to the loss of funds or leakage of information. “Which party should be liable for the losses suffered as a result of errors in the code of a smart contract? Who should bear the risks arising from delays in the blockchain network? A smart contract will not provide the answers to these questions. It is therefore up to the drafter to protect his or her client’s interests by recalibrating the standard contractual clauses, such as indemnities and force majeure, to address these new risks,” as Tse writes.
Where to Apply
Along with other specialists, Tse believes that the area that will acquire great importance in the future in connection with the development of smart contracts is oracles. “Smart contracts are currently limited by their inability to access real-world information outside the blockchain. Oracles help to overcome this by verifying such information and delivering them to smart contracts,” as he notes.
The insurance company AXA has developed an oracle to transfer information about the time of arrival of the aircraft from the aggregator, which calculates this time, to a smart contract, which is used to compensate for flight delays. As a result, the smart contract automatically makes payments upon receipt of the relevant information.
In this case, the task of a lawyer is to adequately assess the risks arising in the process of technology development. So, according to Tse, the threat of centralized oracles is the possibility of a hacker attack. Decentralization significantly reduces these risks, but at the same time, any oracle may turn out to be faulty or provide incorrect information, as a result of which the work of the smart contract will also be disrupted. Consequently, a lawyer can see such risks and provide the necessary protection to their client.
Another area in which smart contracts can be effectively involved is the confirmation of the origin and authenticity of documents in notarial practice.
Maria Andrianova highlighted several other important aspects that can be improved through automation. “Regardless of the sector in which transactions are made—real estate, international supply of goods, transfer of intellectual property rights, mergers and acquisitions, etc.—the amount of time, energy, and attention has always required and continues to demand the resolution of the question of mistrust to the counterparty. How to minimize the risks associated with the movement of assets..? As a rule, risks are minimized due to a series of complex and often costly measures involving consultants, third-party independent persons (guarantors, depositories), a personal vigil over the process of representatives of the parties (sometimes you just sleep at the location of the asset), use of standard methods for ensuring the fulfillment of obligations (pledges, sureties, bank guarantees, other similar mechanisms), and the use of additional methods for administrative pressure when the violation of transaction becomes simply unprofitable. All these methods are imperfect because they are subject to the human factor, and sometimes they disproportionately increase the costs of the transaction. And even if we eliminate the bad faith of counterparties, the execution of the transaction can be difficult or not happen at all due to an elementary error… Eliminating such errors can take a fatal amount of time for a project.”
In addition, Andrianova notes the problem of deliberate abuses associated with the emergence of loopholes in making international deals. “Having completed a huge number of international deals, I can say that a big problem may be the difference in the formation of the parties or in their understanding of this or that mechanism. It so happens that the legal system of some states is not effective. For example, it can be used for avoiding a particular deal with the understanding that there are administrative levers allowing to commit violations with impunity,” as she told DeCenter.
Whom to Wait For: Expert Opinion
“For small businesses, [the introduction of smart contracts] is not particularly relevant since automation does not save much [costs]; large businesses are very interested since automation of services/transfers (communications, investment platforms, banks) would save huge money for them,” says Gleb Bazurin. In his opinion, the main players in the “legal blockchain” space will be large businesses experiencing such a need, and new market players specializing exclusively in the automation of a contractual function. “The advantage is the automatic execution of the contract when triggers are activated. But this is an advantage only for mass processes where self-fulfillment saves the time of contract specialists in banks, telecom, and transportation. The disadvantage is based on the advantages, as self-fulfillment at the stage of execution of the transaction means a lot of work toward describing the execution algorithm (legally) and translating it into code. In addition, a smart contract can quickly and accurately calculate individual transaction parameters, for example, the price of a product, depending on the quantity requested by the buyer. Thus, on the basis of a smart contract, S7 Airlines made payments for providing its aircraft with fuel. The price was calculated automatically depending on the amount of fuel needed to carry out a particular flight,” he said.
“I think that in the near future, one of the major players will turn their attention to the mass market segment and opportunities for its development using blockchain systems… Projects that combine the experience of traditional legal services and the competence of blockchain technologies experts will take a dominant position. In addition, large law firms have sufficient financial potential to invest in interesting blockchain startups during the development and launch phases,” said Alexander Treschev. He also drew attention to the Right.Legal project, in which a blockchain system was created bringing together lawyers from across the country. They can provide legal services remotely and take remuneration for them, corresponding to the needs and capabilities of the client.
“Currently, processes are underway to transform the traditional legal services market. Those players who will be able to ensure technological superiority and will be the first to propose new, more efficient transaction mechanisms, will be able to maintain their position in the market and force out those who are not ready to accept the changes. The widespread adoption of smart contracts is a matter of time. In the transition period, in my opinion, a viable option could be the combination of conventional mechanisms and documents with smart contracts as separate instruments in the execution. At the same time, a big responsibility will fall on the person who draws up the transaction documents, as you always have to remember that such documents are made not only for contractors who know the situation but also potentially for law enforcement agencies, banks, and courts,” said Maria Andrianova.