Blockchain is a technology on the rise with the potential to shake industries and economies. This is our first in a series of five articles on ground breaking technologies that may have enough momentum to make a dramatic impact on the legal profession.
The first technology is: blockchain
Blockchain is a distributed digital ledger that relies on shared verification without a single authoritative version.
Impact Rating: ★★★★☆
Blockchain has the potential to fundamentally alter financial, legal and many other industries. It's potential is found in cost savings from reducing the role of professional services and manual processes involved in transactions and record keeping.
Governments, major corporations, and a diverse range of small businesses and individuals, are investing in blockchain technologies. It's more than likely that law firms will have to interact with blockchain technology in the near-to-medium term future. For some, it will eventually become common place.
Where to begin with blockchain
Blockchain for Dummies offers a helpful definition, “blockchain is a shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network”.
In essence, blockchain is a record book that is shared many times over on computers and servers around the world. The contents of the record book are verified by comparing line items across all of the shared record books; they must match exactly. Jamie Skella explains in the Australian Financial Review how this can work for a simple currency transaction.
"When John wants to send money to Sue, a new line item is created detailing that transaction. This line item then gets sent off to hundreds of other computers who have a copy of the record. Those computers confirm that this transaction is authorised, and ultimately they agree (or disagree) that everything about the transaction is legitimate before giving that line item a tick of approval. It has to match up perfectly on every copy of the record."
A shared ledger or record book is a reasonably simple concept, but researching its practical use and potential can feel like falling into a rabbit hole.
The most common known use so far has been as one of the underlying technologies behind digital currencies, notably Bitcoin. But as these digital currencies have gradually entered the mainstream, so has the growth of blockchain in other areas (see below).
If there is no master copy, can't it be easily manipulated?
Not in the traditional sense. Perhaps to the delight of lawyers and compliance officials worldwide, a fundamental of blockchain technology is that each line item cannot be altered after it is entered. The only way to update the ledger is to add a new line. New entries are typically verified by cryptographic validation.
What can blockchain technology be applied to?
Blockchain in its current use for financial transactions been compared to what the internet offered for communications twenty years ago.
Sweden is well into a trial blockchain technology to manage their land title registry. This could have massive repercussions worldwide, and should catch the eye of any conveyancer. It's potential to reduce fraudulent or error-riddled land title certificates alone has already sparked debate in Australia. Combined with the further possible benefit of reduced administrative costs involved in processing titles (meaning less involvement from conveyancers), blockchain may be decisively compelling for land regulators.
The technology has also been discussed as benefiting a broad range of areas. Not limited to voting, media distribution, resource management, licence management and more.
Are there downsides?
Blockchain is a new technology, and like any new technology, it requires stepping into the unknown. When used as the backbone of a currency or even as a simple inventory system, there is a primary question of integrity in the technology.
Bitcoin has been tested rigorously so far and appears to be unscathed, even after years of dismissal and scepticism. But the same can't be said of similar currencies that have been compromised, like the Ethereum DAO breach in 2016.
Blockchain's other potential downsides relate to how it is implemented. It has been argued that blockchain has at least two clear vulnerabilities, a 51 per cent attack and an eclipse attack.
- 51 per cent attack - where a majority of the shared ledgers are either coordinated or controlled by a single entity.
- Eclipse attack - where shared ledgers are unable to communicate with other legitimate ledgers, and routed to communicate only with malicious ledgers.
Furthermore, the inherent transparency in blockchain ledgers may also be a a roadblock for some applications. Private, though legitimate, transactions would extremely difficult if not impossible to include in a blockchain ledger.
At least as far as digital currencies, blockchain might be gaining some permanence. The federal government has already recognised the potential of digital currencies using blockchain technology. Transactions to purchase currencies like Bitcoin are no longer subject to GST. Recognising that blockchain currencies are not products that should be subject to the GST. Of course purchases made using Bitcoin are subject to the same taxes they would be if Australian dollars were used.
Meanwhile the ASX is considering a private blockchain system to replace its CHESS equities settlement and clearing system. Should the move go ahead, it would be a world first for a share market adopting blockchain for such a critical use.
It's likely other industries, including the legal profession, will consider blockchain depending on the outcomes of these deployments.
Blockchain for Dummies, IBM Limited Edition - Manav Gupta
Here's a blockchain explanation your parents could understand, Australian Financial Review - Jamie Skella
What is blockchain, and why is it growing in popularity?, Ars Technica - Alistair Dabbs
The Ether Thief, Bloomberg - Matthew Leising