Bitcoin prices have doubled in the last ten months, buoyed by the idea that cryptocurrencies and blockchain increasingly are going mainstream. A big thumbs up from China also gave it a boost. Are these signals for law firms to pile into the emerging technology?
Not yet, say many observers, as uncertainty continues to mar the outlook. While there are some useful niche applications, client demand for blockchain products and services remains limited. Still, law firms need to pay attention.
"At the moment, you won't find big law firms that have allocated many resources in this area. For many situations, the implementation [of blockchain technology] is too time consuming and inefficient," says Adam Armstrong, a partner at Torys in Toronto. "But you still need the expertise."
"Lawyers will go where the opportunities are," according to Mike Hollinger, a partner with a focus on venture technology and emerging companies at Dentons in Toronto. Hollinger says that the current low corporate uptake belies its potential — particularly with regards to private blockchain. "The investment will be worthwhile. It's a mistake to think that things will remain as they are."
However buggy and impractical, these early experiments in distributed ledger technology (DLT) are changing how we view market interactions and our current centralized systems. Regardless of what one thinks of blockchain in its current state, or whether much remains of the current paradigm, DLT likely will continue to make progress as it evolves, observers say. That's because decentralization is the key to achieving increased automation, disintermediation, and digital connectedness. Blockchain, as embodied by Bitcoin with its funky but problematic consensus mechanism, may simply be its first iteration.
"We are starting to re-think all processes," said Andreas Park, associate professor at the University of Toronto. "The [current blockchain] technology is just too clunky, with far too many serious problems. But ... the future is public open access platforms."
Whatever DLTs eventually evolve into could be lucrative for law firms as their complexity creates unique regulatory issues that will require expert advice. For the moment, however, there is limited scope for law firms to earn their crust in blockchain, particularly after regulators effectively called a halt to most initial coin offerings. We are a long way from realizing some of blockchain's loftier promises. But the big lure for companies is the prospect of huge savings by removing expensive humans, particularly in verifying transactions. Potential new ways to monetize income streams is another big incentive, as is immutability.
"It's going to change the way that people will do business and live their lives," added Hollinger, pointing to the launch of Verified.Me, a blockchain-supported digital identity network.
So, where are we currently positioned? So far, few companies have moved beyond experimentation, though there is no lack of enthusiasm. Led by the financial sector, worldwide spending on blockchain solutions is expected to nearly double to $US2.9 billion in 2019 from the $US1.5 billion spent in 2018, according to the Worldwide Semiannual Blockchain Spending Guide from International Data Corporation (IDC). The number of patent applications for blockchain is also exploding, with IBM, Bank of America and Alibaba among the leaders. Almost two-thirds of CIOs questioned expected some blockchain deployment in the next three years, according to Gartner's 2019 CIO Survey.
But as a rough bellwether for blockchain, bitcoin prices mirror the uncertainty that clouds this sector. After losing three-quarters of its value last year, the most popular cryptocurrency staged a remarkable comeback in 2019, thanks to institutional investors finally showing some interest. Recently, prices got a jolt after Chinese President Xi Jinping said the country should accelerate the development of blockchain technology. There's talk the world's second-largest economy wants to issue its own digital currency. This follows Facebook's announcement in June of Libra, its crypto effort that for now has mostly earned brickbats from regulators and pundits alike.
"Whatever happens to Libra, it's a vote in favour of what's happening in this field," said Addison Cameron-Huff, a blockchain lawyer. "It's a sign that people should start paying attention."
While not exactly blockchain, central banks around the globe, including Canada's, are mulling similar moves to prevent losing control of money to private companies. Some observers warn, however, that we are far away from this kind of paradigm shift, at least in Canada, which still enjoys a lot of institutional trust.
"This would have huge implications," said Tracy Molino, a blockchain and payments regulatory counsel at Dentons, referring to any possible move by the Bank of Canada to offer payment methods on the blockchain that aren't tied to a commercial bank. "If they decided to issue digital currency, it would mean that paper money would be grandfathered out. I don't see it happening anytime soon."
Blockchain's appeal is that it creates an immutable, transparent ledger that is distributed among many computers, so no one entity is in control. Everyone is receiving the same information in real-time. The "truth" is determined by a consensus mechanism. Under perfect conditions, this would allow people to trust each other without resorting to third parties, like banks, lawyers or even governments.
A public blockchain, where anyone can participate, uses a rewards-based consensus mechanism like "proof of work" to make sure everyone agrees on "the truth." It's the system that underpins cryptocurrencies like Bitcoin, the peer-to-peer payment system for which blockchain was initially created.
Blockchain is also the foundation for so-called private, or "enterprise" blockchain, a much more recent and arguably less revolutionary version, as it is a closed system where the participants are known to each other. Some argue that private blockchain is a misnomer because it misses the crucial elements — it's not really decentralized, and it's not really trustless. Enterprise blockchain tends to have a particular purpose, useful for projects like supply-chain management or the settlement of financial trades. The consensus mechanism is simply the participants agreeing on rules, though there is no central administrator.
So far, blockchain technology has yet to prove that it's a safer, cheaper and more efficient way to transact in a large-scale setting. Some academics and regulators view cryptocurrencies like Bitcoin as little more than facilitators of speculators and criminals, and prone to manipulation. Recently, several scholars have proposed that it was a single individual who caused the 2017 meteoritic rise in bitcoin prices.
It's not hard to see how this might prove a hard sell to the staid world of corporate law. Blockchain "doesn't really fit [large law firms'] risk profile," said Cameron-Huff. "The general feeling is, 'we don't want to go near this.'"
Crypto experts like Cornell University's Emin Gun Sirer, highly respected by both enthusiasts and skeptics, are working on solving one of blockchain's most vexing problems — how to achieve scalability, decentralization and security all at the same time. But there are as yet no generally accepted, in-production alternatives to the proof of work consensus. At the moment, public blockchains are slow, expensive, possibly vulnerable to attack, and a massive waste of energy.
Ironically, public blockchains also have a centralization problem: too few people in charge of the entire system. A small number of miners, mainly from China and Russia, hold most of the power, make the rules, and validate transactions.
For enterprise blockchain, there are few examples where they are demonstrably better than conventional databases. The Gartner CIO survey said only three per cent of CIOs in their report have a form of live and operational blockchain for their business. Creating common standards, making projects scalable as well as figuring out how to cooperate with competitors are major stumbling blocks.
"I haven't seen one [use case] that even scales beyond an individual or a small set of transactions," said Cathy Bessant, chief operations and technology officer at Bank of America, in an interview with CNBC in March. BofA has the largest number of blockchain patents of any financial company, in part to hedge its bets on the technology. "All of the big tech companies will come and say 'blockchain, blockchain, blockchain.' I say, 'Show me the use case. You bring me the use case and I'll try it.'"
Though company bosses see promise in decentralized systems, blockchain is not a priority in practice.