There is No Escape from Blockchains and Artificial Intelligence… Lawyers Better Be Prepared!
A course in “Creative Thinking” or “Disruptive Innovation”, “creating a vlog” or “producing a video featuring a potentially disruptive platform product” …
These are topics that you would normally expect to find on the curriculum of a University of Technology, Design or Business. And this makes sense. Online platforms are disrupting traditional industries, such as banking, transportation and hospitality. Video is considered to be the future of media and content marketing.
But what if I tell you that these courses and assignments are included in the curriculum of a law school. “No way?” is the usual first reaction. “What have creative thinking, vlogs or videos got to do with being a lawyer?”
The initial reaction of students, practitioners and academics is usually one of surprise. And then the questions come.
“Why should lawyers “vlog”? Why should lawyers try to invent innovative new products? Why should lawyers care about video or social media?”
From the perspective of the traditional legal profession, these are all valid questions. Lawyers tend to be conservative. They are not usually known for their capacities for innovation or agility. And law students are probably not the most creative “YouTubers”.
But things are changing rapidly and this change seems certain to accelerate in the short to medium term. Lawyers and law schools cannot afford to ignore these changes. The legal profession is one of the most disrupted sectors of the consulting industry today. Legal Tech, artificial intelligence and blockchain technology are changing the way lawyers practice law. Platform technologies are giving headaches to litigators, judges and regulators. The new economy, which is characterized by “sharing”, challenges many of the traditional assumptions, doctrines and concepts of law and governance.
To deal with the challenges of Legal Tech and the new economy, a more creative and innovative approach to the law school curriculum appears to be justified. Only then will we have lawyers equipped with the necessary skill set to operate effectively in the new world of disruptive innovation that is emerging around us.
What is Legal Tech?
Legal technology — or Legal Tech — refers to platforms, IT services and software that first made law firms and lawyers more efficient in performing their activities. Practice management, document storage and automated billing and accounting software are obvious examples. Soon Legal Tech became more advanced and started to include technology that assisted legal professionals in due diligence and discovery processes.
So far, there is no real need for a more innovative and creative legal approach. Technology merely supported existing ways of operating. Yet, Legal Tech continued to evolve. Startup companies and their investors began to show a serious interest in replacing lawyers and disrupting the practice of law.
We can broadly distinguish four categories of startups in this field. The first category includes startup companies that offer a range of online legal services without the need for consulting an actual lawyer. Examples are Avvo and LegalZoom.
Online “matching” platforms that connect clients with lawyers belong to the second category. These platforms help consumers to find the right lawyer without the costlier involvement of a law firm.
The third category is artificial intelligence companies. A.I. tools enable lawyers to “outsource” time-consuming (and expensive) legal research activities. There are tools, such as LegalSifter and Seal, that assist in reviewing (and understanding) contracts faster.
The artificial intelligence lawyer ROSS, which is built on IBM Watson’s technology, goes even further. Its platform has the potential to release lawyers from the bulk of their repetitive work. Collecting and analyzing the case law and legal literature, for example, is one of the tasks that ROSS can perform faster, better and cheaper than lawyers.
Finally, blockchain technology startups attempt to replace lawyers as intermediaries in certain types of transaction, notably real estate and intellectual property. Also, corporate processes that often rely on legal intermediaries could be streamlined by implementing “blockchain” technology. If blockchain technology becomes widely accepted, existing legal processes and structures will quickly become redundant. Particularly, notary and registry services are likely to disappear in the near future.
And it will not stop there. Platforms, artificial intelligence and blockchain technologies offer opportunities for developing new technologies. Leveraging the “Big Data” that is collected by using Legal Tech solutions, for example, will only lead to more creative and faster tools.
The Emergence of a New Type of “Lawyer”
Still not convinced about the importance of a “Creative Thinking”/”Disruptive Innovation” course in a law school curriculum? Let’s explain why the new “technology-based” economy requires a creative and innovative lawyer.
(1) Tech-savvy lawyers
Law firms and legal departments generally recognize that Legal Tech cannot be ignored. There is a lot of talk about it in the legal profession. Conferences, seminars, professional magazines are dedicated to the topic.
What does seem clear is that adopting Legal Tech helps law firms and legal departments improve client engagement and satisfaction. Legal Tech allows clients to be more involved with the legal service that is offered to them. It is fair to say that in terms of speed, accuracy and performance, Legal Tech startups are revolutionizing the legal industry.
But a closer look reveals that law firms and legal departments have a hard time innovating. Of course, the better firms often find innovative solutions to their clients’ problems. Yet, they are reluctant to fully embrace Legal Tech innovations.
Convinced that the implementation of Legal Tech gives them a significant competitive advantage, several law firms and legal departments have recently introduced the position of “chief innovation officer” (or a functional equivalent). To receive an “outside” perspective, they sometimes appoint “non-lawyers”. Their role is simple and straightforward: accelerate innovation and take it to the next level.
(2) Business-savvy lawyers
The automation and standardization of high volume legal tasks will transform the role of lawyers and other legal professionals. We can already see that they become more and more involved in complex, nonstandard legal tasks.
This trend will only continue. Big Data and artificial intelligence will make Legal Tech solutions more intelligent. More legal work (such as contract drafting, legal risk management and dispute resolution) will be outsourced to technology and robots. Lawyers and legal advisors will increasingly assume the role of project managers and business advisors.
As such, the capacity to work in multi-disciplinary teams will take on a much greater significance. In the technology-based society/economy, this means that they have to work closely with accountants or fiscal advisors, but also with engineers, designers and architects.
Technological disruption and the proliferation of platforms generate a continuous flow of new opportunities that are transforming the way we live and work. Crucially, lawyers and legal advisors will find themselves operating as a “bridge” between the diverse range of actors who must work now together in dealing with increasingly complex challenges. A business-oriented perspective means that they are better placed to help their clients maximize efficiency, enhance client services and reduce costs.
(3) Network-savvy lawyers
As a final step, Legal Tech has the potential to rapidly transform law firms and legal departments into “virtual law firms” with an emphasis on connecting legal (and other) professionals and collaboration. A “virtual law firm” is basically a platform. When implemented successfully, the effect of the platform model will be the creation of a flexible and accessible community of professionals with different skills and experience. The bigger the community, the easier it is to offer solutions tailored to the needs of the clients.
We can already distinguish a spectrum of law firms. At one extreme, there is the traditional law firm characterized by a hierarchy with partners at the top and varying levels of associates, paralegals and non-lawyers below them. At the other extreme, we find those firms that adopt an “Airbnb”-type platform organization, mainly providing a match-making/coordination service. Between these two extremes, there can be enormous variations, depending on the level of implementation of Legal Tech.
Also, it should be noted that “legal platforms” can adopt a variety of approaches. UpCounsel offers entrepreneurs on-demand access to experienced lawyers. LawyerlinQ in the Netherlands offers law firms the possibility to insource special knowledge and skills for more complex projects. LexSemble is a crowdsourcing platform that allows multiple users to edit “legal knowledge entries”. The information gathered from the cloud helps the platform to develop a machine learning analytics engine. This engine can be used to assist in legal decision-making and prediction activities.
How Legal Tech Is Changing Legal Practice
Legal professionals, such as lawyers and judges, play a crucial role in establishing trust and truth. They negotiate, draft and interpret contracts. They help enforce them. They help perform due diligence. They create laws and regulations that protect the weaker parties. They design structures that enable the registration and transfer of property and intellectual property.
It needs no further explanation that a well-drafted contract helps establish mutual trust between the contracting parties. Important matters, such as truth about ownership and control, the transfer of ownership and the allocation of risk and control are normally covered in a contract. Putting the contract in writing makes enforcement and dispute resolution easier.
But as we have seen the world is changing. It could even be argued that Legal Tech is replacing the traditional role of legal professionals. Slowly, but surely, counseling, dealmaking, matchmaking, gatekeeping and enforcing roles are being performed by “technology”. And this trend seems likely to accelerate in the near future.
Consider “smart contracts”. This term was first introduced by Nick Szabo, a computer scientist and legal theorist, in 1994. A smart contract is a computer program code that enables the verification, execution and enforcement of certain terms and conditions of a contractual arrangement. An often-cited example is the “purchase” of music through Apple’s iTunes platform. A computer code ensures that the “purchaser” can only listen to the music file on a limited number of Apple devices.
While smart contracts appear to work for very simple “iTunes”-like transactions, more complex arrangements in which several parties are involved require a verifiable and “un-hackable” system. It is here where blockchain technology can play a crucial role.
Blockchains and Law
A blockchain is a shared digital ledger or database that maintains a continuously growing list of “blocks”. A block contains records of recent transactions among participating parties involving digital assets. Once the transactions are verified, validated and completed, the block will be added to a chain of previous transactions in a linear and chronological order.
What makes the blockchain such a revolutionary technology is that the ledger or database is distributed to a countless number of participants (nodes) around the world in a public or private peer-to-peer network. These participants can be individuals, organizations, and even things. The only condition is that they have an Internet connection. Network connectivity is important. It allows for multiple copies of the blockchain to be available across the distributed network. This makes it practically impossible to alter or erase information in the blockchain.
But perhaps the most significant feature of the blockchain is that fraudulent transactions will almost never occur. Why? What measures ensure the integrity and authenticity of the transactions in the blockchain network?
First, blockchain uses a “distributed consensus model” where the network “nodes” verify and validate transactions before they are executed. Because they can do this without comprising the privacy of the parties involved, it is often argued that blockchain’s “distributed consensus model” is safer than a traditional model in which transactions are first validated by a third-party intermediary, such as a bank or notary.
Second, the use of cryptographic hashes makes tampering with blockchain records extremely difficult, if not impossible. Cryptographic hashes are complex algorithms. These algorithms use details of the blockchain to generate a unique “hash value”, which ensures the authenticity of each transaction. Even a minuscule change to the blockchain will result in a different hash value, making manipulation instantly and readily detectable.
Finally, digital signatures help establish the identity and authenticity of the parties involved in the transaction. Clearly, these security measures make blockchain validation technologies more transparent and less prone to error and corruption than existing methods of verifying and validating transactions by third party intermediaries.
Unsurprisingly, blockchain technology is mentioned as one of the most important technological innovations since the Internet. The peer-to-peer interactions and transactions in a decentralized network where all participants are equal and responsible for verification and validation provides unlimited opportunities.
In the financial world, a global consensus record of information and transactions leads to more transparency. It also offers global access to finance in areas where the banking system — in contrast to a mobile network — is not readily available. Donations and aid can be provided without the interference of bureaucratic organizations. It will encourage direct transactions, including compensation, between the creator and consumer.
In short, blockchain technology creates a platform for truth and trust. Intermediaries, including lawyers, are replaced by code, connectivity, crowd and collaboration. The technology increases transparency, while at the same time significantly reducing transaction costs.
Legal Tech and Its Implications
It is surprising how few legal professionals are aware of developments in Legal Tech. At least, that is the strong anecdotal impression that I have based on discussions with lawyers, corporate legal professionals and law professors. And even after the opportunities of these new technologies are explained, they generally don’t seem to feel immediately threatened. Rather, they usually react by giving several reasons why blockchain-based smart contracts and other developments described above will not (at least in the short to medium term) fundamentally change the need for lawyers or the way that lawyers work.
(1) Technological Implications
There are of course technological issues. It is widely acknowledged that the world of blockchain has not reached maturity yet. Also, many legal professionals believe that “code” in smart contracts can only deal with very simple transactions, such as buying music or perhaps a car. These transactions generally don’t require legal assistance.
And it doesn’t stop there. Many argue that more complicated legal arrangements will always be drafted and negotiated with traditional forms of legal assistance. And, even if more complex transactions can be coded and included in smart contracts, lawyers will remain responsible for drafting the terms and arrangements (which will then later have to be coded by specialists).
(2) Legal Implications
Legal professionals also refer to the legal implications surrounding smart contracts and blockchain technology. There are basically two arguments. The first relates to the question of whether legal contracts can be “smart contracts”? Perhaps smart contracts reflect the underlying contract between parties (to use a smart contract to execute their arrangement). It is relatively easy for legal professionals to argue that “smart contracts” are void and invalid. Many of the rules regarding the formation, interpretation, conditions and remedies available to legal contracts cannot easily be applied to smart contracts and require substantive adjustments in contract law.
The blockchain evolution also raises additional legal concerns regarding — for instance — privacy, data protection, security and integrity. The technology itself may offer genuine data and privacy protection. The storage of blockchain data across a global network of nodes will undoubtedly not comply with the many rules, directives and guidelines issued to protect consumers. The legal issues with sharing platforms, such as Uber (cars) and Airbnb (lodging), show that blockchain-enabled sharing services may not be accepted quickly and without resistance on the part of incumbents challenged by new ways of delivering a service or product.
(3) An Example: The Decentralized Autonomous Organization
The recent launch of a digital decentralized autonomous organization, “The DAO”, in May 2016 shows how new initiatives can often struggle with the technological and legal implications.
Christoph Jentzsch, the co-founder of IoT company Slock.it, was one of the “key founders” of The DAO, a new style venture capital fund. The original idea was to set up a corporate-type organization without using a conventional corporate structure. The DAO wasn’t a traditional “hierarchical-type organization” in which authority and empowerment flows “downwards” from investors/shareholders through a board of directors to management and eventually staff. The DAO didn’t have a physical address. The DAO was “merely” computer code.
Indeed, The DAO didn’t have any directors, managers or employees. The governance structure was built on software, code and smart contracts that ran on a public decentralized blockchain platform, Ethereum. The automated structure was intended to give “participants” in The DAO direct real-time control over contributed funds. Everyone could become a participant by purchasing DAO Tokens during a crowdfunding campaign in May 2016. The DAO raised more than $168 million from approximately 10,000 “investors”. Like shares in a traditional listed corporation, DAO Tokens were designed to be fully transferable and tradable on “peer-to-peer” exchanges.
The DAO had to operate as a kind of venture capital fund managed directly by the token holders. The “wisdom” of the crowd would lead to smarter and more game-changing investment decisions (at least, smarter than the ones made by experienced venture capitalists). A series of smart contracts granted them voting rights. In this respect, the blockchain-based smart contracts mimic the role of articles of association or bylaws. Since the code of The DAO was open source, the token holders would not only vote on “investment proposals”, but also on any change made to the code. Accepted proposals would also be backed by a software code, defining the relationship (in terms of rights, obligations and performance metrics) between The DAO and the funded proposals.
The jury is still out on the effectiveness and efficiency of a decentralized autonomous organization. Fundamental flaws in The DAO code made it possible for hackers to transfer one third of the total funds to a subsidiary account. This, and other technological limitations, practically meant the end of the initiative.
But even if the code had been flawless, the legal implications and questions were already brought to the fore in numerous blog posts: Can The DAO issue tokens (or shares) without being governed by corporate law? Will The DAO be subject to taxation? Are The DAO’s smart contracts legally binding? Who owns the intellectual property rights generated by the funded proposals? Will minority “token holders” be protected? How will conflicts between the token holders, The DAO and the proposals be dealt with?
Yet, despite the technological and legal issues, there are some important lessons to be drawn from The DAO example.
Blockchains and “Decentralization”
Legal professionals should not be fooled by the infancy of the smart contracts and blockchain technology. Consider blockchain-based currency, Bitcoin. Until recently it was still viewed as a hype, susceptible to fraud, price manipulation and corruption. Yet, the pace of innovation in cryptocurrencies is faster than ever.
Also, the high levels of investor activity in the blockchain area appears to provide a reliable indicator of the commercial maturity of the “blockchain technology”. The interest in the technology will undoubtedly increase. Particularly, the applicability of blockchain-based smart contracts to digital marketplaces, the sharing economy, the Internet of Things (IoT) and artificial intelligence will undoubtedly accelerate its development.
What is perhaps more important here, however, is that we are moving from a “centralized” to a “decentralized” world; from a world of vertical hierarchies to a world of horizontal, open and autonomous networks.
This process is accelerated by rapid technological change. It really started with the Internet. It enabled a free, fast and global exchange of information and ideas. Social media revolutionized the way we exchange and share information. The social impact of these changes has been astonishing. Within one generation, every aspect of social interaction has been transformed.
Increasingly, we rely more and more on information that is created, produced, and consumed by the crowd. The role of journalists, media and other expert intermediaries becomes less important. Until recently, consumers of information were dependent on media organizations and corporations to disseminate information. Now, social media platforms facilitate the real-time exchange of information. According to the Pew Research Center, 62 percent of the adults in the United States now rely on social media when it comes to news. Information and ideas are exchanged and shared at a faster rate than ever before.
Of course, one shouldn’t underestimate the challenges. For instance, “fake” news, biased information and the explosion of “native advertisements” (where ads cannot easily be distinguished from the real content) are a rapidly increasing problem on social media. That is not to say that fake news didn’t exist in the “pre-social media” era. Yet, many argue that traditional newspapers and other official media outlets (if independent) provide at least some verification over the published information.
As a counter-argument it should be noted that there are other ways to solve these “fake news” issues. The social media platforms themselves can engage in “fact-checking” or they can introduce a third-party verification system. This will, however, add a bureaucratic layer between the “creator” and “consumer”. It will run counter to the decentralization trend we are currently experiencing.
It is more likely, however, that a combination of technology and the crowd will offer the solutions. Stronger technical detection (similar to the detection of SPAM-email) and easy reporting of misinformation by the crowd are currently mentioned as possible solutions. These solutions correspond to the peer-to-peer “exchange” of assets and services that are discussed here. Again, the unlimited potential of the blockchain technology is a clear example.
Lawyers and “Decentralization”
What then is the role of legal professionals in this new “decentralized” world? The ultimate answer is that they have to accept that legal implications will not stop innovations and developments in technology. They should learn from peer-to-peer music sharing company Napster. Instead of emphasizing the illegality of the service, Spotify found ways to charge consumers without sacrificing the convenience and accessibility of the streaming service.
In other words, instead of explaining the implications and using legal arguments and concerns as a barrier to innovation, the legal industry needs to find ways to encourage friction-free interactions, conversations and the creative exchange of assets and services. In this way, they can add value and retain their role in the economy of the future.
In the case of blockchain technology, legal professionals should focus on the opportunities to enter into contracts in a cheaper and more secure way. In order to advise blockchain contracts, they have to become familiar with the technology. Sometimes, it is even being argued that it is necessary for lawyers to learn “code and coding”, at least to some degree.
The “sharing economy” means re-thinking everything we thought we knew about property, privacy and employment. For example:
Property: In the sharing economy, products will become services. People will care less and less about ownership. This has implications for property law. Also, as the distinction between “commercial property” and “personal consumption property” becomes blurred, other areas of law needs to be revised. Think of tax laws, bankruptcy laws and liability and insurance.
Privacy: With the development of “Internet of Things” and artificial intelligence, more and more personal information will be registered, recorded and analyzed. Existing privacy laws need to evolve to accommodate the developments, while at the same time securing the integrity of the connected systems.
Employment: Companies with fewer or no assets are becoming more common in the sharing economy. Trust is created through platforms and distributed networks. This encourages a direct “peer-to-peer” contact between the service provider and consumer. Consumer protection laws, tax laws and, of course, labor laws need significant revisions.
In short, legal doctrines and concepts need to be re-designed around sharing and decentralized “peer-to-peer” platforms. And this involves “out-of-the-box thinking”.
Legal Tech and the Need for a New Legal Education
Legal Tech is disrupting legal practice. New technologies that decentralize the world mean that the legal profession must exist in a permanent state of innovation. A task that is not easily accomplished by over-extended and — often — cumbersome legal organizations that have lost the capacity for agile re-invention.
The result? At best, legal services are rendered irrelevant. Junior professionals and support staff seem likely to be among the first victims of Legal Tech. Legal Tech could perform most of their work in the near future.
Ironically, Legal Tech presents tremendous opportunities for law students. All too often, legal professionals bring their traditional legal “tool kit” to solve the contemporary problems of the new world. This approach might have worked well when innovation cycles were longer, but in a world where innovations occur with remarkable speed, the traditional tool kit is oftentimes out of touch with the radically different needs of a decentralized world.
Legal professionals are being asked to deal with issues that they don’t fully understand and within a legal framework that doesn’t always offer clear or helpful answers. Building the capacity of law students to better understand the challenges of today’s society will enable them to provide a more effective service to clients operating in the new economy in the future. In this way, a “Creative Thinking”/”Disruptive Innovation” course not only helps them understand technology and the importance of software code, but, more importantly, provides them with the resources and capacities that can assist them in becoming the much-needed legal professional in the decentralized world.
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