Blockchain technology was first popularized by its use within cryptocurrencies, the technology has been steadily rolled out in use within just about all industries, including supply chain and healthcare.
One of the most promising niches for blockchain to have a real impact on is the legal sector, and in particular legal contracts.
Legal contracts are the beating heart of business and personal agreements, as well as government regulations.
Historically these contracts have been paper-based or electronic contracts relying in some cases on a third party to validate and change the terms of an executed contract.
New traits of Blockchain coming with its decentralized, transparent, and immutable properties promise to address traditionally contract management-related inefficiencies, costs, and complexity.
This article will dive into how blockchain can revolutionize legal contracts from smart contracts to automating compliance, and discuss its potential benefits, challenges, and future potential in the legal space.
Table of Contents
What is a Legal Contract?
Two or more parties make a formal agreement to do or not do something specified, which has the force of a contract under the law. A legally binding contract typically includes the following: • Offer and acceptance: one party provides something of value, and the other party accepts it.
• Consideration: Under the second definition, each party must provide something of value to the other party.
• Mutual intent: Both parties must want to be bound by the terms of the contract.
• Capacity: To enter into the contract, both parties must be of sound mind (i.e., not minors).
• Legality: The subject matter of the contract must be legal and not contrary to public policy.
In traditional legal contracts, usually in business or corporation contracts, many steps go from drafting to review to notarization to signing. Disputes and lack of clear terms can also make running a transaction a highly time-consuming and costly process.
What is blockchain technology?
Fundamentally, blockchain is a decentralized distributed ledger technology that enables a secure and viewable way of storing data across a network of computers (nodes). The information on each piece of data (or block) indicates transactions and is linked to past blocks cryptographically.
Some key features of blockchain include:
• Decentralization: There is no central authority watching the blockchain. It is instead maintained by a distributed network of nodes.
• Transparency: Data from each transaction has a copy on the blockchain for everyone to see; therefore, it is valid to verify data.
• Immutability: When once written onto a blockchain, data cannot be altered or deleted and it provides data integrity.
• Security: Blockchain uses encryption and consensus mechanisms such as proof of work or proof of stake to ensure that data is safe and tamperproof.
Being this transparent, secure, and trustworthy—and still with no third parties, like notaries or lawyers—for these features makes blockchain technology a near-perfect fit for contracts and agreements.
How Blockchain Changes Legal Contracts
1. Smart Contracts: Automating Legal Agreements
Smart contracts are perhaps the most revolutionary applications of blockchain for legal contracts. A self-executing (also self-enforcing, self-governing) contract is when the terms of the agreement are written at lines of code.
This is known as a smart contract. In other words, the contract will run certain actions that are defined according to certain conditions when they are met without any manual involvement.
How Smart Contracts Work
Developers write smart contracts in something like solidity or another programming language and then deploy them to a blockchain. Once done, the contract is stored and executed over the blockchain.
For example, let’s take a look at a simple smart contract to sell a car. When we take this case, the seller receives the amount of cryptocurrency that the buyer wants to pay, a certain amount of cryptocurrency. Smart contracts automatically verify the payment has been made.
When it’s confirmed, the car becomes the buyer’s to own and the payment is sent to the seller. The use of smart contracts for legal contracts is enabled by the stationary application of blockchain.
A smart contract executes actions automatically when predetermined criteria are satisfied, eliminating the need for manual intervention and writing the contents of the agreement directly into lines of code.
Developers create smart contracts in programming languages like Solidity (for Ethereum) and often deploy them on blockchain platforms. Once deployed, the contract is stored and executed on the blockchain. Consider a basic smart contract for car sales.
The terms of the contract and agreement might include:
• The buyer pays a certain amount of cryptocurrency to the seller.
• The smart contract automatically verifies that the payment has been made.
• Upon confirmation, the contract transfers ownership of the car to the buyer and sends the payment to the seller.
As a result, smart contracts eliminate the need for intermediaries like banks or lawyers, as well as the dangers associated with human mistakes, delays, and fraud. Furthermore, because the contract is stored on the blockchain, the agreement is transparent and unchangeable for both parties.
Smart Contracts Key Benefits
• Automation: After the terms are coded in the contract, the contract runs automatically if the conditions are met. It eliminates delays, paperwork, and human intervention.
• Cost Efficiency: Smart contracts offer drastic reductions to legal and administrative fees due to the fact they have no need for intermediaries.
• Transparency and Trust: As the contract is stored on a public blockchain, everyone can see the terms of the contract and there’s no dispute involved.
• Security: Blockchain has cryptographic security properties which means it’s practically impossible for any odd one to alter the committed framework once it’s introduced.
• Enforceability: In the case of smart contracts the interpretation and possible delay of the coming into force of the agreement are done away with, as smart contracts automatically make the terms of an agreement come into force.
2. Improved Validation and Verification.
The verification of identity, signatures, and authenticity is one of the critical functions of legal contracts. In the case when they are relying on third-party notaries, banks, or attorneys to authenticate the contract, this model is used. This, however, results in additional costs and delays.
With blockchain technology, you can automate, secure, and tamper-proof the entire Validation and Verification process. This means contract parties can digitally sign the agreement, and store it on blockchain, creating an immutable record of the contract.
Signatures on Blockchain
In a contract management system, public key cryptography each party in the contract can produce a unique code that points out that he or she agrees to the formation of the contract and is willing to be contracted.
Usually, a contract is signed electronically utilizing the blockchain system and where the sign is made part of the transaction, it cannot be changed or emulated once executed.
This has the advantage of eliminating middlemen such as notaries and the need for third-party verification such as attorneys thereby saving so much time.
3. Transparency and Auditability
In a traditional legal contract, some important information can be concealed from one or the other party or would not be easy to discover. The transparency feature of blockchain alters this by ensuring that every participant has a clear record of the contract’s execution held on an unalterable database complete with a time stamp.
For instance, a supply chain contract can record the entire history of an item from its manufacture to its delivery on a blockchain. Also for auditing and conflict resolution, which can take place between two companies, both parties can know exactly what happened and when everyone is held responsible.
4. Reducing Fraud and Disputes
Fraud is an issue of great concern in the legal segment. Given the fact that fraud cases include changing the terms of the contract, forging signatures, or impersonation, the result is a long judicial process and rather expensive.
Cryptography makes Blockchain almost immune to fraud, and its combined distribution and decentralization means that no party can easily cheat.
Since the data stored on the blockchain can be changed by only the participants of the network, any interference with the contract or its clauses will be easily detected. It also becomes very challenging for the wrong players to manipulate or forge the contract after signing it.
Moreover, smart contracts can minimize the possible disagreement since nobody will know what to do with the ambiguity.
For instance, where there are several conditions of the contract such as penalty clauses and standard terms tactfully drafted to form part of the contract term such that non-performance of the contract brings in the penalty terms then this very contract has limited chances of legal disputes as the stipulated terms can be more or less electronically implemented.
5. International Connection and International Agreement
With the globalization of markets and trade, people engaging in contracts across borders are today very many. The challenges associated with traditional legal contracts include; jurisdictional differences, language barriers, and time differences all of which are barriers to efficient legal success. Blockchain could help streamline such a process.
Due to the blockchain, smart contracts can be developed and run regardless of the local requirements for third-party involvement. Cryptocurrencies (like bitcoin, ethereum, etc.) also help in making easy and frictionless cross-border transactions which further are beneficial in business dealings.
Besides, the elements of jurisdiction issue in the cross-border contract agreement can be solved by blockchain which provides the recognized record shared by all parties across the world.
6. Tokenization of Assets
Blockchain will also allow for the use of assets for tokenization of legal contracts within a deal. Tokenization means the process of creating an asset, physical or non-digital into a token that will be traded in a blockchain. Anything that can be organized and has value can be tokenized such as Real estate, art, or even ideas (intellectual property.
For instance, the real estate smart contracts on the blockchain may be tokenized properties in which the property is expressed in tokens that may be exchanged or sold. This would enable a virtually seamless and secure change of ownership with compliance with the terms of the contracts.
7. Everyone’s Data Privacy and Information Confidentiality
In my opinion, one major challenge of employing blockchain in legal services is the privacy of data. As you know, blockchain is transparent, and some contracts are secret, for example, let’s consider the healthcare or financial sectors.
Concerning the latter, permissioned blockchains, for example, solve this problem by providing access to specific contract information only to particular individuals.
These private blockchains allow specific pieces of data to be shielded, while still being able to be contained within a blockchain’s inherent properties, such as decentralization and permanent record-keeping.
Challenges and Considerations
While blockchain holds enormous potential for transforming legal contracts, there are challenges to overcome before it can be widely adopted:
1. Legal Acceptance and Control
Another huge barrier to blockchain-based contracts is the fact that such contracts might not be given legal tender. A large number of regions have mostly fallen behind the question of legal regulation of blockchain and smart contracts.
While Switzerland and Estonia set the precedent of legal regulation of blockchain usage, most legal systems are not yet fully developed in this sphere.
Sustainable business processes require clear regulations and legal standards to apply blockchain contracts to the courts and adopt legal systems effectively.
2. Technical Barriers
Smart contracts are technology-based contracts that heavily depend on technology to write efficient and error-free smart contract codes. Lack of proper coding is one of the biggest problems since a grammatical error in the code may be used to cause problems legally.
Further, blockchain technology is not mature enough, there are problems with the scaling and the power consumption of some blockchains like Ethereum.
3. Legal Requirements
The paper reveals several requirements for adoption by legal professionals, including the comprehensibility of the written material and the format in which it is presented.
The legal profession’s conservatism might lead to a reluctance to use blockchain-based contracts.
Lawyers, judges, and various personnel operating in the legal industry will have no understanding of blockchain technology and its effectiveness and hence they will require familiarisation on this aspect. As a result, new legal processes might be necessary.
4. Interoperability Issues
Despite these advancements, blockchain is still in exploration with various blockchain platforms many of which have distinctive standards and protocols. However, for these blockchain-based contracts to become more popular, integration between one blockchain with the other will be significant.
5. Privacy Concerns
The nature of blockchain implies a high level of transparency which can be opposite to the privacy provisions of legally binding agreements, for example in the sphere of medical data or personal information. Maintaining privacy and at the same time enhancing the entity’s transparency will continue to be difficult to achieve.
Conclusion
At the core of these discussions lies the fact that Blockchain has the potential to disrupt how legal contracts are made and can be both signed and optimized for compliance.
Blockchain provides streamlining work through the application of smart contracts, elimination of intermediaries, reducing fraud, and enhancing transparency in the legal profession.
However, the legal profession must solve several problems associated with regulation, practical implementation, and acceptance to achieve increased popularity.