Blockchain, Web3 and the law: Is the legal profession making the most of these new opportunities? | Anchorage

Blockchain and other distributed ledger technologies (DLT) that underlie krytpossets are being adopted across the business world for a variety of purposes. In the financial sector, DLT is used to create decentralized organizations to offer financial services without centralized intermediaries, bypassing banks, traditional exchanges and brokers in a development known as decentralized finance (DeFi). In agriculture, Japanese technology firm Fujitsu helped set up the Rice Exchange, the world’s first global blockchain-based trading platform for rice. In fact, Forbes magazine has identified 15 industries that could significantly benefit from blockchain technology.

It is a trend that has become known as Web3, or Web 3.0, the latest version of the World Wide Web that is based on DLT. Even law firms, often slow to adapt to innovative technology, are embracing Web3. Most are figuring out how it works and the legal and regulatory implications so they can advise clients operating in this new environment.

Some law firms use it themselves to streamline their operations and make them more secure and transparent. To facilitate this, some have joined the Global Legal Blockchain Consortium to develop standards that will govern the use of blockchain technology in law. But, use DLT in own operations is quite different from only advise customers about DLT. Generally speaking, the legal profession appears to be in the slow lane to the Web3 ecosystem. Is there any likelihood of them speeding up adoption for their own use?

What is Web3?

First, some background. Web 1.0 was the initial phase of the World Wide Web which was characterized by static websites with little or no user interaction. Web 2.0 was the second phase that started around 20 years ago as websites evolved to allow users to interact with website owners and other users on social networking platforms such as Facebook. Web 2.0’s data is highly centralized and controlled by a relatively small number of large technology companies, such as Alphabet, Amazon, Apple, Meta and Microsoft.

Web3 is based on blockchain technologies, decentralization of control and data, and crypto-assets. Proponents claim that it is less influenced by Big Tech and that it provides better security, privacy and scalability. Web 2.0 still dominates, but Web3 is gaining ground.

Web3 has its critics. Under the headline “Web3 is just a fresh batch of the same old crypto nonsense”, FT columnist Jemima Kelly writes: “In truth, Web3 has become just the latest marketing term used to try to prop up and repackage the overlapping ideas about crypto , non-fungible tokens, and ‘decentralized finance’, all of which seemed brilliant innovations until the entire market began to tank.”

Law firms as providers of legal advice on Web3

Although Web3 is just a marketing term, there is no doubt that DLT is on the rise. An example of the knowledge law firms acquire and spread in this arena is provided by Clifford Chance, one of the UK’s top five law firms. The 400 lawyers in its global Tech Group – among them blockchain and cryptocurrency specialists – “deliver strategic technical legal advice to help clients stay ahead and outpace the pace of change”.

“There is no doubt that blockchain offers a number of benefits for business, including decentralization of transaction validation, transparency and trust, immutability, high availability, high security, model simplification, faster deals and cost savings,” the group says. “However, it also raises a wide range of new legal issues, and as such requires multidisciplinary legal expertise to fully map out the design challenges that a commercially viable blockchain solution must address.”

Clifford Chance’s Tech Group advised a global bank on the implementation of a blockchain-enabled remittance platform, using cryptocurrency-like functionality to perform efficient cross-border transfers. It advised a UK banking association on its policy work on blockchain, including preparing its response to a European Securities and Markets Authority discussion paper on the use of DLT in the securities markets. And it advised an international insurance industry consortium to set up a reinsurance platform using blockchain and smart contracts.

To get a broader impression of how the legal profession informs itself about Web3 in order to be able to advise clients on these matters, you need look no further than the Norwegian Bar Association’s second edition of Blockchain: Legal and Regulatory Guidance, published earlier this year. The 236-page report tells lawyers what they need to know about blockchain, cryptoassets, DLT-based platforms and products, decentralization and smart contracts. It explains how these technologies are changing the way legal, financial and real estate services are performed and their impact on litigation.

Sir Geoffrey Vos, Master of The Rolls, writes in the foreword that “any lawyer will require knowledge of the blockchain, smart legal contracts and crypto-assets – both conceptually and functionally”. These demands come at a time when central banks are close to launching their own digital currencies “that will put cryptoassets into mainstream use”, when there is “widespread use of digital transferable documentation”, and when we are seeing a transition away from traditional software programs such as MicroSoft Word for smart machine-readable documents.

The Law Society is the professional body representing lawyers in England and Wales, but the report was largely written by the Blockchain Legal and Regulatory Group at Tech London Advocates. TLA is a gathering of technology leaders whose blockchain group is made up of lawyers and technologists from the UK’s leading law firms, legal consultancies and academic institutions.

Law firms as users of Web3 for their own business

While it is clear that law firms know enough about Web3 to provide their clients with valuable legal and regulatory advice on the matter, and to assist with litigation, it is less clear how many law firms have actually adopted Web3 technologies themselves to run their own businesses. There is plenty of evidence to show that some companies are well ahead on this path. Yet law firms have been slow to adopt leading technologies in the past. The suspicion is that they are behind the curve again with blockchain adoption.

There is no shortage of advice for law firms on how to use this new technology. The second part of the Law Society report highlights how they can use blockchain-based processes in areas such as data governance and protection, smart contracts, intellectual property rights, tax, ESG (environmental, social and governance) and dispute resolution. For example, it provides an in-depth analysis of the advantages and disadvantages of smart legal contracts (SLC), examples of successful SLC projects to date, and the impact of decentralized autonomous organizations (DAOs) on the legal profession. A DAO is an open source interface that works through smart contracts for users to interact with their own digital assets; therefore, in most jurisdictions, a DAO is just software, not a company or other legal entity, creating uncertainty for lawyers.

There are many technology companies ready to help law firms build blockchain-based infrastructure and applications. ConsenSys, based in New York City, is one of them. “Lawyers can leverage blockchain technology to streamline and simplify their transactional work, digitally signing and immutably storing legal agreements,” it said in its explanation. Blockchain in the legal industry.

“Using scripted text, smart contracts and automated contract management reduces excessive time spent preparing, customizing and maintaining standard legal documents,” it adds. “These cost savings are passed on to the customer. In addition, blockchain democratizes access to the legal system by cutting down on consumer complexity and lowering large legal costs.”

Because many manual tasks can be performed automatically, the hours spent preparing and amending legal documents are significantly reduced, which in turn can drive down the hourly fees lawyers charge clients. Lower fees can increase demand for legal services.

One of the best indications of blockchain intent from the legal profession is the Global Legal Blockchain Consortium, mentioned earlier. It includes 300 law firms, large companies, technology companies and universities. Major law firms among its members include Baker McKenzie, DLA Piper, Dentons Canada, Hogan Lovells and Freshfields.

The consortium was created to develop standards to govern the use of blockchain technology in law, in relation to things like data integrity, data security and data protection in contracts, documents and communications; interoperability between large legal departments and law firms; and using blockchain to extend legacy systems to extend their lifespan.

Law firms slow to adopt Web3?

All is well and good. But many law firms are not convinced that they should rush to adopt Web3. They hardly admit that they are technological laggards, but many industry commentators emphasize that this is the case. “The legal industry has been slow to modernize”, is how ConsenSys summarizes the sector’s use of blockchain.

Notarize, a US company that offers online notarization as an “easier, smarter and more secure” alternative to notarizing paper documents, says there is often a reluctance to change. Although Notarize has won a lot of business – it was placed 24th out of 500 in the Financial Times’ list of “The Americas Fastest Growing Companies of 2022” – it says that “some law firms are resistant to blockchain technology”.

These firms fear obsolescence, but hope that a significant portion of the population will prefer to do business as they always have. “If Web 1.0 and Web 2.0 are any indication, avoiding the implications of new technology is a recipe for reluctant adoption at best, and a loss of millions (or in some cases billions) at worst,” warns Notarize.

Jonny Fry, CEO of consultancy TeamBlockchain, says the introduction and use of any technology in the legal sector risks being a slow process “as lawyers are inherently cautious and reluctant to change – they know only too well the potential legal and financial implications involved”.

Writing for London business newspaper CityAM, Fry outlines the benefits that blockchain technology could bring to the legal sector, but lists four obstacles standing in the way:

• Technological indifference. “Historically, there has been a lack of investment in technology in the legal industry,” says Fry.
• The importance of evidence and documentation. Most documents are still in paper form, so lawyers focus on using these rather than trying to create or find blockchain-based alternatives.
• Blockchain is not accepted or trusted in many countries due to legal concerns about the lack of central governance the decentralized approach.
• Blockchain is difficult to scale. It is limited by the speed at which a peer-to-peer network of participants is able to agree on the state of a digital transaction ledger, and this is one reason why the technology is not more widely used.

The barriers are lifting

It cannot be denied that the third point, of legal uncertainty, has held law firms back. But things are changing. It was only a year ago, in November 2021, that the Law Commission for England and Wales published advice to the government which concluded that the current legal framework is “clearly capable of facilitating and supporting the use of smart legal contracts without the need for statutory law”. reform”.

It added: “Existing legal principles may apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law in specific contexts. Although some types of smart legal contracts may give rise to new legal questions and factual scenarios, existing legal principles can accommodate them.”

So to conclude, it’s only a matter of when, not if, law firms will start using smart legal contracts and other Web3 technologies in a bigger way.