What is blockchain and why should legal practitioners care?

February 1st, 2023
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In October 2019, the Minister of Justice and Correctional Services, Ronald Lamola announced that 45 000 trust files had gone missing from the Pretoria Master’s Office (Linda Ensor ‘Pretoria Master’s Office missing 45,000 trust files’ (www.businesslive.co.za, accessed 8-12-2022)). Apparently, these files were ‘destroyed during a storm that caused the roof of the storage facility to be blown off’ (Ensor (op cit)).

‘This … led to a backlog as dummy files needed to be opened’ (Ensor (op cit)). This crisis was ‘exacerbated by the fact that before 2013 files were not kept on an automated system and clients do not have copies of all documents [in order] to open dummy files’ (Ensor (op cit)).

This announcement was shocking and disappointing, especially considering that technology had not been employed to record files prior to 2013.

To maintain law and order, it is essential that we must be able to trust government and public registries to keep safe and accurate records. However, trust is fading, especially if we continue to depend on registration systems, which still take place manually.

In particular, an area, which needs this change is the Deeds Office. Although the Electronic Deeds Registration Systems Act 19 of 2019 has been published, it will only come into operation when the President fixes a date by proclamation in the Government Gazette. Our current system is dependent on the integrity and the correct performance of the functions of conveyancers and the deeds registries’ employees.

Technology is evolving fast and every day, while the legal sector is unfortunately famous for resisting technological changes or being slow to catch up with other businesses. However, legal practitioners who take charge now could speed up the process.

What is blockchain?

‘Blockchain was first introduced in 2008’ as the technology supporting bitcoin transactions (Robert Sheldon ‘A timeline and history of blockchain technology’ (www.techtarget.com, accessed 8-12-2022)). ‘Governments, businesses and other organisations are researching and deploying blockchain technology to meet a variety of needs – most of which have nothing to do with digital currency’ (Sheldon (op cit)).

But what is meant by blockchain? ‘Blockchain is a system of recording information’ relating to transactions in blocks ‘in a way that makes it difficult or impossible to change’ or hack the information (Euromoney Learning ‘What is blockchain?’ (www.euromoney.com, accessed 8-12-2022)). The blocks are linked to form a digital chain, and as the transactions increase, the chain grows. It works like a digital ledger, as the technology records, duplicates, and shares transactions on the entire network of computer systems represented on the particular blockchain. ‘Every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger’ (Euromoney Learning (op cit)). The term ‘DLT’ (Distributed Ledger Technology) is used to refer to this decentralised type of database, which is managed by multiple participants. Blockchain ‘transactions are recorded with an immutable cryptographic signature called a hash’ (Euromoney Learning (op cit)). ‘The ledger itself can also be programmed to trigger transactions automatically’ (Francisco Guillén ‘How the blockchain works’ (www.blocktac.com, accessed 8-12-2022)).

Considering our fight against corruption in South Africa (SA), and that documents necessary to enforce rights often go missing, blockchain technology certainly offers a solution, as transactions can be recorded efficiently in a permanent and verifiable way. Imagine, how different our state funds may be managed, if tender transactions were to be recorded on a blockchain for transparency.

When will blockchain be used?

Unfortunately, according to the Harvard Business Review, ‘true blockchain-led transformation of business and government … is still many years away’ (Marco Iansiti and Karim R Lakhani ‘The truth about blockchain’ (https://hbr.org, accessed 8-12-2022)). The reason for this is that ‘blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution … quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems’ (Iansiti and Lakhani (op cit)).

Regardless of how slow the South African economic and social systems will adapt to blockchain technology, as jurists, we must look ahead to be able to lead our profession, position ourselves as experts to advise role players and protect our clients’ rights and interests.

How could blockchain change legal services?

Although the age of blockchain may change the traditional role of a lawyer, it will simultaneously offer entirely new practice opportunities – but only for legal practitioners who are progressive enough to familiarise themselves with blockchain technology. Will your legal practice regard blockchain technology as a threat or opportunity?

Blockchain will improve cost savings, automation, integrity of data and make legal services more accessible and transparent for clients. Only legal practitioners who will be open to embrace these changes and adapt to blockchain technologies will reap the benefits of exploring new practice opportunities.

Blockchain has the potential to impact on various aspects of legal services. In particular, relating to ‘smart contracts’, recording and valuing of intellectual property and recording transactions to land and real estate properties.

‘Smart contracts are simply [computer] programs stored on a blockchain that run when predetermined conditions are met’ (IBM ‘What are smart contracts on blockchain?’ (www.ibm.com, accessed 8-12-2022)). According to Wikipedia, ‘vending machines are mentioned as the oldest piece of technology’, which works on the basis of a smart contract (Wikipedia ‘Smart contract’ (https://en.wikipedia.org, accessed 8-12-2022)).

Considering opportunities for entrepreneurs in this fourth industrial revolution era, it is likely that legal practitioners will increasingly be required to advise on the law and legal conditions relating to smart contracts. For example, imagine how easy it will make life for a property manager of numerous lease transactions if these transactions were to be concluded as smart contracts, which could automatically collect and pay monthly rent and commission. Smart contracts will lower the cost of such transactions, which could increase the demand and overall accessibility to these type of legal services.

Blockchains may further provide for built-in arbitration procedures, which will save a lot of costs on dispute resolution, which rules must obviously be coded with the help of competent legal practitioners.

Furthermore, as a blockchain will have a built-in authentication process, it may unfortunately substitute the function of notaries. However, the integrity and safe keeping of such relevant authenticated documents will be enhanced.

What will drive the change to blockchain?

It is expected that the South African economic and financial sectors will first move to blockchain technologies, as banks worldwide must decide on policies on accepting or managing cryptocurrencies for payment and their status as stand-alone currencies.

For example, in Australia, it is apparently already increasingly common to find businesses, including law firms that accept cryptocurrency as a form of payment. Early in 2022, the Nigerian government further adopted blockchain technology ‘to launch a nation-wide wallet which will enable the international commercialisation of all [intellectual property] forms being created and registered within the country, both locally and internationally’ (Cision PR Newswire ‘Nigeria to launch major crypto initiative, IP Exchange Marketplace and Wallet, on Algorand in partnership with Developing Africa Group and Koibanx’ (www.prnewswire.com, accessed 8-12-2022)).

Due to the technical nature of blockchain, it enhances trust in record keeping and financial transactions. The fact that a blockchain offers an unbreakable trust could drive people to demand the use of it. However, will this be the case in SA? Although blockchain will be the ideal technology to replace some government functions to make official record keeping more efficient, accurate and trustworthy, initially it is likely to be met with resistance as it may lead to the retrenchment of many government workers.

Legal practitioners who are aware of these changes and are prepared to learn about these technology developments will take the lead and make their careers and legal practices future-proof.

How will your legal practice adapt?

Change always requires momentum. To move forward during these changing times, it is recommended that legal practitioners belong or form interest groups to make progress in this new practice development area faster together. If there is sufficient interest, such interest groups could help drive the necessary change in the profession to help modernise faster by adopting available technologies, which could make justice more attainable and save us all time and costs.

Although there may only be a few legal practitioners currently specialising or interested in technology law, legal practitioners are encouraged to learn of new legal practice areas and expanding legal services as opportunities as needs arise. There is no doubt that top legal practitioners will always be in demand.

Not far in the future, and perhaps it has already started happening, attorneys helping with divorces, deceased estates or transfers of properties may get instructions involving the transfer of division of cryptocurrencies in blockchains. Also, no doubt that legal practitioners assisting businesses are starting to get more queries about smart contracts.

There appears to be a big hype about blockchain on and off in the media and there is still so much to learn. It is hoped that this article starts to give colleagues an understanding of the potential of blockchain technology and for ideas how to plan for new legal practice development areas to support technology transactions in SA.

Emmie de Kock BLC LLB (cum laude) is a Lawyer Coach and Managing Director of LawyerFirst Coaching & Consulting t/a Lawyers Working Smart.

This article was first published in De Rebus in 2023 (Jan/Feb) DR 54.

 

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