Bitcoin is already disrupting banking. Fortune calls bitcoin napster for finance. “In the long term, peer-to-peer finance threatens to weaken banks and other financial agents just as peer-to-peer file sharing did the music industry.” JP Morgan Chase is interested in using it to streamline their internal payment processing and reduce the cost of sending money overseas. Companies such as IBM, Samsung, Overstock, Amazon, and Swiss investment bank UBS are experimenting with the technology.
But most don’t realize that banking is just the beginning for bitcoin. Several projects are in the works that will disrupt many aspects of law, including contracts, identity verification, property transfers, and documentation. Here’s what lawyers need to know.
As Technology Review reported, the value of a bitcoin has dropped precipitously, from more than $1,100 to just over $200, and with it, many people’s enthusiasm for the currency.
But bitcoin is both a currency and a protocol.
The currency is the first online currency that doesn’t have a double-spending problem. It’s also decentralized, meaning no central authority can take or inflate it. Transferring bitcoin is secure, immediate, and free.
So even without a boom in value relative to other currencies, people are using it as a bulwark against confiscatory or inflationary monetary policy in places like Cyprus and Argentina. Free international transactions mean it’s also impacting money transfers in countries with stable currencies.
Bitcoin the currency exists on the bitcoin blockchain, which is a series of connected computers which host a ledger of every transaction in bitcoin.
Currently, the blockchain can host information other than a record of currency transactions. But developers are working on expanding what the blockchain can store, and ways to make it easier to store and access information on the blockchain.
This is the basis of ongoing innovation in the space. A peer-to-peer, decentralized way to facilitate and record transactions of all kinds has the potential to reduce the need for gatekeepers, middlemen, and trust. This potential is why in the past 36 months investors have pumped a billion dollars into the industry, according to SecondMarket founder Barry Silbert. He has personally invested in 48 Bitcoin-focused startups.
Last month the first journal dedicated to cryptocurrency research launched, called Ledger.
Called Bitcoin 2.0 or crypto 2.0, here are some areas blockchain tech will disrupt:
One goal of moving transactions onto the blockchain is trustless trust.
Trustless trust begins with the blockchain itself, which is the large network of computers running the protocol. These computers are distributed throughout the world, owned by people and organizations who do not, for the most part, know or trust each other. Instead, trust is established through math problems too hard to solve with one computer principle, this competition keeps the block chain secure because the puzzle is too hard for any one miner to solve every time. This means that no one will ever gain access to the encrypted links in the block chain and the ability to rewrite the ledger.
One method people are using to create this is M of N transactions. These obviate most of the need for trust that a traditional escrow would require. In its most common form, you give three people keys to release the funds to the person you’re doing business with, but don’t give them access to the funds. Funds are released when two of three agree the requirements have been met.
This system is useful for mediation, shared financial management, time-locked transactions, trusts or wills, etc. Fortune even imagines a scenario in which “a script uses a data input such as a regular Google search to monitor real-world events that would automatically trigger disbursements or other actions.”
Everyone sees right on the blockchain the addresses and amounts involved. Bitcoin transactions are the most transparent and trustworthy possible, as every transaction is publicly viewable at all time and constantly verified by thousands of computers hosting the blockchain.
Fortune again: “That means loans without banks, contracts without lawyers, and stocks without brokers, executed and recorded across hundreds of servers at all corners of the earth.”
The Initiative for CryptoCurrencies and Contracts (IC3) is an academic consortium led by Cornell University in Ithaca, New York. Launched in July, it researches how to create self-enforcing contracts with blockchain technology.
Property ownership recorded and transferred on the blockchain is still in the idea phase. But this is the area many believe to be most likely to have a huge impact, on the law. A 1997 paper by computer scientist and former George Washington University law professor Nick Szabo describes smart contracts as agreements enforced not by law, but by hardware or software that would “fully embed in property the contractual terms which deal with it.” Again, the goal is trustless trust. Szabo wants every transaction to be as smooth as buying a snack from a vending machine.
Besides lowering the costs of transactions and minimizing the complexity of contracts, trustless transactions offer the millions of people with poor credit access to finance and assets for the first time. When repossessing a car is as simple as an algorithm disabling the vehicle until payments are made, the cost of trust goes down to near zero. That means more open credit, and lower interest rates.
People are working on a way to move mortgages, leases, etc. on the the blockchain. A trust fund could be dispersed when a web scraper finds an obituary.
Some of those people are working on a concept called Colored Coins. The coins are colored to represent property, contracts, or assets. In this way, the blockchain contains what is owned, who owned it, and when it was obtained. And these coins, representing property, can be bought, sold, and exchanged on the blockchain. One goal is to make property transfers as transparent and easy as paying with bitcoin.
“It is going to be very easy for the asset management industry as a whole to use Colored Coins,” Alex Mizrahi said to CoinDesk. He’s leading the development of the Chroma Wallet for the Colored Coin project. “For example, some of the first places we are going to have adoption will likely be real-estate and portfolio management. A portfolio manager can issue one color that represents a portfolio of stocks backed by the real holding and sell it globally. If he is savvy and his products are good, his colors are going to have demand. So transferring ownership is very easy, quick and safe – just like bitcoins.”
Proof of Existence puts your documents on the bitcoin blockchain in order to establish and record creatorship. You drag the file in, pay, and the service stores a cryptographic digest of the file, linked to the time you submitted it. All this for a mere 5 mBTC, a little over $1 at the time of publishing.
While it’s impossible to know how exactly these technologies will change their industries, we do know that technology tends toward efficiency. Disruption will likely decrease or eliminate the need for lawyers in many areas. Smart attorneys should familiarize themselves with blockchain technology.
Do you use bitcoin? How do you think it will impact law? Let us know in the comments!