President's Page by Renee Ezer
In service to my year of exploring attorney wellness, I recently had a weekend of R&R in the Bay Area. While I was there, I had the good fortune to catch up with an old friend, Jeff Makoff. Jeff is a partner at Valle Makoff LLP in San Francisco who represents a wide variety of technology companies in business disputes and transactions. In these matters, he’s become quite knowledgeable about blockchain technology and its applications in business and in the practice of law.As I’ve also been using this year to get a grip on evolving technology, especially as it relates to the practice of law, I asked Jeff if I could interview him to better understand this technology trend. Here’s our conversation:
RE: What is ‘blockchain’ technology?
JM: Blockchain is a system in which a network of stranger-users – such as web-connected people who do not know each other -- collectively verify facts and complete transactions through an open, “tamper-evident” data ledger. Various terms are used to describe the basic goal and putative achievement of blockchain, including “tamper-evident data repository,” “distributed database”, and “immutable distributed ledger.” The “block” in blockchain is a piece of data --a fact or transaction -- attached to information that verifies when it was created, and proves it has not been altered and has been validated by the group. The “chain” is the digital history of that block, including prior blocks and subsequent blocks, all of which create an audit trail. Notwithstanding the “open” nature of a blockchain, the actual human identity of blockchain users can be concealed behind private passwords and identity codes.
RE: What does blockchain add to what we already have?
JM:The current Internet is great at making connections, but it’s terrible at validating information. True and false information is managed similarly on the Internet, so users are required to use judgment to ascertain key facts and use intermediaries – such as banks and retailers -- to complete many transactions. A well-implemented blockchain creates a highly-reliable source of information and keeps track of transactions. With trusted information and the ability to transact, people can engage in a wide variety of direct transactions with confidence and without third-party intermediaries merely to connect parties and complete transactions. Blockchains could create a growing set of accurate databases and direct trading networks. Such a system would help solve two major problems of the internet --bad information and fraud.
RE: How does blockchain work?
JM:Blockchain uses three principles to generate reliable data. First, to be deemed true, a fact should be verified and deemed reliable by a large number of independent people In other words, there should be “consensus”. Second, the source of information and its history should fully disclosed and be available to everyone. So, there should be an audit trail. And, third, information deemed true by consensus should be extremely difficult to alter and all persons who rely on the information should be told if it has been changed. On an engineering level, blockchains rely on cryptography to expose alteration. Each block has a complex identifying code that is regenerated if data in the block has changed. Each block also holds the code -- called a “hash” -- of the block before it. The smallest alteration of data in a block triggers a dramatic recalculation of all hashes, invalidating the entire chain because user consensus will be to stick with the unaltered chain.
RE:Is it ‘block chain’, ‘blockchain’ or ‘the blockchain’?
JM:“Blockchain”, as one word, is used to describe a technology system that’s based on blockchain technology, as in “We are building a blockchain system to track real property transfers”. “Theblockchain” often refers to the entire blockchain ecosystem the same way the internet describes the internet ecosystem, as in“We are developing apps for the blockchain”. “The blockchain” also is used to describe a particular blockchain, as in“It is almost impossible to change a transaction once it has been added to the Bitcoin blockchain”.
RE: Are there blockchain apps?
JM: Yes, they’re called “Daaps”, -- for “Decentralized applications”.
RE: How does blockchain relate to Bitcoin and other cryptocurrencies?
JM: Bitcoin and other cryptocurrencies are built on blockchain technology. The originators issue a limited set of electronic “coins” and use blockchains to track ownership and transfers. Like all currencies, the value of cryptocurrencies ultimately is driven by supply and demand.
RE: Who’s developing blockchain technology?
JM:A lot of people are focused on blockchain, including major financial institutions, law firms, content creators and entrepreneurs who see possible applications in every field. It’s moving as fast as technology can move. Well over $1 billion in venture capital already has been invested. New blockchain-related businesses and departments are forming every day.
RE: What are the most likely future uses of blockchain?
JM:Time will tell. Think about areas in which legal rights and financial relationships derive from the occurrence or non-occurrence of a verifiable facts or chains of transactions. Think about notary books, real property title transfers, Secretary of State records, anything that uses a ledger, anything in which a duty is triggered automatically by a verifiable fact, a set of facts or an event. Think about “smart contracts” that enforce themselves - in whole or part. Blockchain code is open source and can support thousands of use cases.
RE:How will blockchain affect lawyers and the legal profession?
JM:It’s going to. First there’ll be a lot of legal work related to businesses built around blockchain, with accompanying business organization, regulatory and intellectual property issues. Larger law firms are racing to launch blockchain-focused practice groups. Bar associations, legislatures, interest groups and businesses are under pressure to ensure that their legal-regulatory environment is adaptable to blockchain applications. Next, like the Internet, blockchain will seep into the way we practice, practice tools and the management of law firms. Some of this we will notice and the rest will be in the background.
RE: Is the law changing because of blockchain?
JM: Yes, it is. Delaware law was amended to permit corporations to use “distributed electronic networks or databases”-- which are blockchains -- to create and maintain corporate records, including stock ledgers, the data of which can be transmitted to stockholders. In California, a bill was introduced in February 2018 to revise the definition of "electronic record” and "electronic signature" to include records and signatures secured via blockchain technology, making such records legally binding. Likewise, Florida, Tennessee and Nebraska legislators are contemplating bills that legally recognize blockchain signatures as electronic records, similar to one passed in Arizona in 2017. Additionally, Nebraska has another bill pending related to blockchains, comparable to one Nevada passed in 2017, which prohibits local governments from taxing and/or regulating the use of blockchains. In Vermont and Delaware, blockchain data is admissible evidence in court. Also in Vermont, legislators are considering a bill which regulates blockchains in an effort to promote and expand financial technology opportunities for both public and private sectors within the state. Hawaii and Illinois have both studied blockchains to determine if and how to regulate the new technology. State bar organizations should take note or potentially be playing catch-up.
RE: Who regulates the use of blockchain?
JM:The same people who regulate everything –and nobody in particular. The SEC is now focused on fraud in the promotion of cryptocurrencies and cryptocurrency derivatives. Other regulatory bodies are waiting to see what problems arise with blockchain before adopting regulations. Some agencies have a “do no harm” approach to blockchain – trying not to burden the industry with regulations and encourage blockchain to develop. Absent federal legislation, most blockchain regulation will fall to the states. In July 2017, the Uniform Law Commission introduced a model Regulation of Virtual Currency Businesses Act.
RE: How do you think people will make money with blockchain?
JM: It’s unclear. I think there’ll be a lot of trial and error, similar to the early days of e-commerce and cloud computing. The most prominent blockchain use, in Bitcoin, has some unusual attributes. Participants are permitted to ‘mine’ for new coins by solving complex puzzles. The coins have value because there is demand, which induces time and resource-consuming activity that grows the network. Absent such unusual incentives, many blockchains will likely become components of database systems in which some services are paid-for. Blockchains don’t have to be public, and it’s not hard to imagine a world in which a trusted private business manages fact or transaction-specific blockchains for a fee. Certainly blockchain engineers and consultants will be in great demand.
RE: How are law firms using blockchain?
JM:Right now a few law firms are developing sufficient blockchain knowledge to be leaders in the transition. By designating partners and practice groups who are focused on the law and business of blockchain, a firm can send the message that it’s a “Web 3.0”, rather than a “Web 2.0”, law firm. It’s still Day 1.
RE: What disputes are arising around blockchain?
JM: Most of the action is regulatory and law enforcement, such as the “Silk Road” drug marketplace prosecution. Recent articles have commented that not all people who invest in Bitcoin are reporting and paying their taxes. Our firm has just started to get calls on owner-level disputes in blockchain businesses formed in the past couple of years. I’d anticipate that most of the news in the next year will concern friction between existing regulation, emerging business plans and models, and the unique nature of blockchain.
RE: What are the concerns and negative impacts of blockchain?
JM:There’s a lot of concern about fraud, manipulation, privacy, security, scalability and the ability of blockchain to improve things outside its main use case – which is a ledger of cryptocurrency transfers. The prospect of thousands of massive, decentralized, trustworthy, low cost databases and direct transaction tools – in theory – disrupts everything from banks, to retailers, to Google. One surprising concern is environmental. Blockchain in its current form requires massive computer processing power and electricity for the storage, transfer and analysis of data files that grow very large, very quickly. Perhaps these are not dissimilar to the early bandwidth and storage challenges presented by the Internet.Engineers are working to develop energy efficient blockchain approaches to reduce the amounts of electricity required to maintain large blockchain networks.
RE: Is blockchain a fad that will go away soon?
JM:No way. It’s real.
RE: What should a solo practitioner or small firm do to stay up-to-date on blockchain developments?
JM:We’re just starting to see blockchain continuing education programs. Go to one. If you are really interested, subscribe to the e-newsletter of coindesk.com which has all things blockchain. Blockchain is a hot topic online and there are dozens of YouTube videos by experts.
RE: Jeff, thanks for your time today. I learned a lot.
JM:My pleasure. Always good to catch up.