Friday, September 01, 2017
Kiss the trusted adviser goodbye: that, it appears, is the message for the profession from Daimler AG’s recent US$115 million bond issue, all of which was done digitally using blockchain technology.
We’re talking everything: from the organization, distribution, allocation and execution of the loan agreement to the confirmation of repayments and of interest payments related to the private placement-type transaction in late June between the car manufacturer and Landesbank Baden-Württemberg (LBBW). Lawyers were reduced to participants in a “parallel process” dictated by regulatory authorities who were understandably not prepared to allow what was a pilot project to proceed without traditional safeguards.
Here’s why blockchains are a threat to the profession: they eliminate middlemen because they eliminate the need for counterparties to trust each other. They work on the principle of a distributed ledger, which everyone involved can inspect but no one can change without the agreement of others or a process that is the subject of such an agreement.
In the Daimler transaction, the borrower, the bank and the investors accessed a decentralized portal where documents and contracts are confirmed. Once the agreement was signed, the blockchain generated digital tokens that smart contracts allocated to investors.
Generally, arranging this type of transaction takes from 10 weeks to four months, and requires about 20 pages of documentation. Blockchain technology reduced that window and workload significantly. Santander InnoVentures, Santander Group’s global corporate venture capital fund that focuses on early stage fintech investment, has estimated that blockchains could reduce global banking costs by up to $20 billion by 2022. No wonder Daimler and LBBW are looking to expand their use of the technology, initially to syndicated loans and export financing — undoubtedly with considerably less input from lawyers.
The fact is that lawyers are middlemen too, especially where their contribution is akin to that of a contract manager. If there’s any doubt that lawyers are in blockchain’s sights, consider this response from Vitalik Buterin, co-founder of Ethereum Foundation, a leader in cryptocurrency and blockchain technology, when asked who might suffer from the phenomenon: “I suspect and hope the casualties will be lawyers earning half a million dollars a year more than anyone else,” he said.
Indeed, it’s the “smart contract” aspect of blockchain technology that may be of the most direct interest to lawyers. And, ironically, as technology continues to intrude on their traditional functions, it may be their saviour.
Here’s how Don and Alex Tapscott, co-authors of Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, define smart contracts: “Smart contracts are a form of a program that gives certain conditions and outcomes to money. If there is a transaction between two people, this program can be used to help verify the product or service and whether or not it was fulfilled. Once it has been verified, it can then be transferred to the person’s account.”
According to a report by Mark Walport, the U.K. government’s chief scientific adviser, the distributed ledger technology offers the potential to reduce the cost of paper-intensive processes, including contracts. These contracts, Walport stated, can provide “cryptographic certainty that the agreement has been honoured in the ledgers, databases or accounts of all parties.”
No surprise, then, is Tapscotts’ observation that expertise in smart contracts “could be a big opportunity for law firms that want to lead innovation in contract law.” The opportunity could be just as fruitful for law departments. Timothy Hill, technology policy adviser at the Law Society of England and Wales told media that blockchains “are a powerful innovation that could have a profound impact on both the law and the provision of legal services.”
As the Daimler transaction demonstrates, standing still is not an option.