David Gardner, partner at UK law firm TLT comments on the rise of blockchain and why lawyers need to familiarise themselves with this new technology.
At the start of 2022, the Law Society worked together with Tech London Advocates to produce the second edition of its Blockchain Legal and Regulatory Guidance. The update to the guidance is timely, as the blockchain and its diverse applications continue their march from the furthest fringes of the internet into the mainstream. It’s increasingly important for lawyers to develop their knowledge and understanding of the technology that underpins the blockchain and the legal risks arising from its application in areas ranging from cryptocurrency to digital artwork.
The updated guidance convers a range of key issues for legal practitioners to be aware of when advising on distributed ledger technology (DLT) matters. It was written with contributions from a wide range of experts including the Law Commissioner for commercial and common law, Professor Green.
The guidance identifies three key growth areas for 2022:
In this blog we take a more detailed look DLT and blockchain and why it’s crucial for those working in the legal world to understand their impact. We also consider the contentious issue of whether blockchain can be sustainable.
What is distributed ledger technology?
In the guidance, the Law Society describes DLT as “an umbrella term for technologies that seek to store, synchronise and maintain digital records across a network of computing centres”. The Law Society explains that blockchains are one of the most well-known examples of DLT. Blockchains are formed where bundles of digital records are securely encrypted and strung into a sequence of data container structures known as blocks. The blockchain is stored on a distributed network of computers known as nodes. The role of the nodes is to upload data onto the blockchain and to verify its contents. Well-known public blockchains include the Bitcoin blockchain and the Ethereum blockchain. Those blockchains keep a record of cryptocurrency transactions and are accessible to anyone who downloads the right software on their laptop or smartphone.
Significance for legal practitioners
As well as digital currency applications, Blockchains can also be used to execute and verify smart contracts between nodes, where multiple parties can share “one version of the truth” via their shared trust in security offered via the encryption on the blockchain. Blockchains underpin Non-Fungible Tokens (NFTs), which can act as a digital certificate of ownership with use cases ranging from virtual football cards to ecological re-wilding projects. See also HERE.
In his foreword to the Guidance, Master of the Rolls Sir Geoffrey Vos predicts that in the future every lawyer will need to be familiar with blockchain and its key applications in crypto assets and smart contracts.
TLT is already working with a number of clients across a range of sectors as they look at blockchain-based solutions and assess the risks in this rapidly growing area. These range from retailers and sports/leisure providers interested in minting NFTs, to financial services institutions concerned about their exposure to crypto-currency transactions. There are potential applications for DLT across all our key client sectors in Financial Services and Fintech, Retail, Digital, Clean Energy and Real Estate. In the Public Sector, the Bank of England has been looking into central bank digital currencies (CBDCs) since 2020.
Blockchains and ESG
With more companies paying closer attention to their ESG credentials and wanting to align themselves with organisations that reflect their own values, it’s important to understand the ESG debate when it comes to blockchains. The “proof of work” or POW method, used by the Bitcoin blockchain, infamously requires country-sized energy consumption. This is because nodes compete solve a complex mathematical puzzle before recording new information on the blockchain. Solving the puzzle first requires significant computational power (and therefore electricity consumption).
There are several different strands to the arguments advanced by blockchain advocates about making blockchains more sustainable. Due to their power consumption requirements and incentive to use cheap energy, blockchain providers and bitcoin miners may seek out and finance more renewable energy projects. This could be the catalyst for new, more innovative projects, driving the adoption of clean energy. .
However, for as long as Bitcoin and others resist calls to move away from the energy-intensive POW method, businesses and consumers will be hesitant to adopt technology that relies on and incentivises mass energy consumption. The reality is that Bitcoin mining today is still overwhelmingly powered by fossil fuels and diverts significant energy resources from other uses. As commercial, environmental and regulatory pressures around ESG align, in the next few years, we’re likely to see blockchains and the applications that use them developing and marketing solutions better aligned with ESG objectives.
As mentioned above, there are a huge range of blockchain applications, stretching far beyond the confines of Bitcoin and other crypto assets. Organisations considering investing in or developing a blockchain solution should ensure they investigate the credentials of the solution provider and the operating model of the particular blockchain. This will be vital to all organisations who have serious ESG objectives and want to ensure their blockchain innovations contribute to those objectives rather than undermining them.