Technology where legal firms are investing

Source: PwC

As PwC has reported: “Tech needs now cost the partners almost as much as half of what a firm’s premises cost. This just shows how central tech is now to the functioning of law firms.” Law firms rank Improve use of technology as their top priority for business support. Furthermore, blockchain software technology company, ConsenSys, believes: “Lawyers can leverage blockchain technology to streamline and simplify their transactional work, digitally sign and immutably store legal agreements”. Back in 2017, the 26th PwC annual Law Firms’ Survey revealed that 70% of surveyed law firms would utilise smart contracts for transactional legal services, 41% would use blockchain for transactional legal services, 21% for legal support and 31% for high-value legal services.

Benefits of blockchain technology in the legal sector

• accessibility - by leveraging blockchain technology, lawyers can streamline and simplify their transactional work, and digitally sign and permanently store legal agreements. With the use of smart contracts, scripted texts and automated contract management, the time spent preparing, personalising and maintaining standard law documents is reduced. This is cost-saving for both the legal industry and the customers.

• transparency - blockchain-based contracts have baked-in compliance thereby providing no room for ambiguity. Being a distributed ledger technology, blockchains create a shared ledger which is accessible by all relevant parties.

• automation - according to CLIO’s Legal Tends Report 2018, lawyers spend about 48% of their time on administrative work. Utilising pre-designed smart contracts will automate non-billable administrative tasks and transactional work whereby offering greater efficiency in legal proceedings.

• cost reduction - automating manual tasks significantly reduces the time spent on drafting and amending legal documents. Since clients pay the documentation cost, introducing smart contracts will cause a reduction in transaction costs for both parties.

• efficiency - blockchain can streamline and automate many processes in the legal industry without losing any of the judicial authority. Also, cost and friction can be reduced by optimising administrative and critical tasks.

• data integrity - legal documents are vulnerable to ill-intentioned hackers who seek to steal, destroy or manipulate critical information. However, to preserve data integrity, data can be stored in decentralised locations. If there is an alteration of evidence the associated hash value will not match, making it obvious that a change has occurred. Also, given that data is held on a blockchain in a cryptograph manner and on multiple servers, the use of blockchain-powered platforms offers improved cyber security and potentially better disaster recovery properties. 

Different uses for blockchain technology in the legal sector 

• document management system (DMS) - DMS is specialised software for storing, accessing and managing files. This first step towards digitised documentation was created to simplify and accelerate office processes. It has great security with customisable access rights, data backup, and maintains regulatory compliances by simplifying data classification. DocFlow is just one example of a blockchain-powered DMS platform available for lawyers to improve the ability to track documentation, be more trustworthy and accelerate the whole document management process.  Although DMS has several advantages in the legal industry, some drawbacks have necessitated the need for a more efficient technology - i.e. blockchain. DMS is a methodology proven to be insufficient in handling legal documentation due to its inability to track changes and vulnerability to document duplication. The legal industry functions on the principle of integrity, security and confidentiality and so blockchain, being a distributed ledger with attributes such as immutability, precision, transparency and security, can uphold the values of the legal industry. 

• smart contracts - the current legal contracts are written with physical signatures. This manual processing is both time-consuming and vulnerable to human error. Blockchain technology can solve this by making legal documentation accessible and transparent. The cost and friction of generating and securing legal agreements are reduced by creating a contract that can automatically execute based on pre-specified criteria.

• intellectual property (IP) - in 2017, the US Patent and Trademark Office (USPTO) filed 440,000 new applications. As revealed by the annual report of that year, it took USPTO about 16.3 months to complete one patent registration procedure. The approval process is lengthy, making it challenging to examine who created an intellectual property first. Blockchain brings solutions to this by creating ledgers for IP owners; these ledgers can be smart contracts, setting up terms and conditions and types of remuneration. Through this, copyright cases ought to be able to be processed more quickly as data can be made available in almost real-time so that, in theory, disputes can be settled faster.

• document notarisation - firms such as Stampd, Blocksign and Stampery have developed blockchain technology to provide notary services to prove the existence of a document at a particular point in time that can be verified independently. Blockchain technology can facilitate proof of existence through hashing the document and storing the value in the blockchain. It also enables proof of ownership by hashing the record retrieved by the transaction ID and this enables seamless transfer of document ownership, security to stored documents and deeds, and creates open transactions for the data network.

• property rights - blockchain technology enables real estate transactions to use fewer intermediaries, thereby the selling and buying property in a transparent and immutable way can be more efficient. Blockchain-based ledgers offer a new form of property rights management by being able to both time and date stamp and record when the intellectual property (IP) has been lodged/ sent to a third party. Fileprotected, based in California, is a good example of a blockchain platform where owners of IP can register their IP and a history of how, when and with whom it was shared.

• chain of custody - gathering evidence is the core of any investigation; validating the findings and proper documentation is essential, particularly when a case lasts for many years, and along the line of a case evidence gathered at the beginning may become critical in the later stages. Correct and regular documentation (paper-based or electronic) of the chain of custody will make it easier for the legal authorities to identify the vital information whenever required. Paper-based documentation is cumbersome but equally security concerns have been raised about electronic evidence because it is stored in a centralised database. Blockchain brings auditability and traceability to the system by allowing time-stamped cryptographic records.

Challenges of blockchain technology in the legal sector   

• the legal industry is complex - because of the importance of evidence and documentation, hard copies can take precedence over digital copies and this may create a barrier for greater use of blockchain.

• technological indifference - historically, there has been a lack of investment in technology in the legal industry. In 2019, the law society’s LawTech report showed that interest remained low even with the increase in the use of technology in many sectors. Moreover, legal stakeholders are not in a hurry to adopt any change with their apprehension appearing to stem from the drawn-out legal proceedings. Although they seem not willing to let this pass, these attitudes would appear to be changing (as highlighted by the PwC 2021 survey mentioned above).

• legal issues - blockchain is a widely accepted technology in many countries but some are still finding it hard to trust it. The lack of central governance and the fact that the legal aspect of the decentralised approach both present a challenge in some jurisdictions.

• scalability - this has been cited as a reason why blockchains cannot be used in the legal industry, although as blockchain technology develops this is becoming less of an issue.

So, blockchain technology offers the legal industry both opportunities and threats. There is certainly considerable work for lawyers involved in advising those firms which are now using blockchain technology and, to do so, the lawyers often need to have a sound appreciation of not only the legal issues, but the technology itself. Furthermore, with their ability to automate processes, the advent of smart contracts is likely to mean many industries will be using these contracts and, as Forbes has reported: “In general, smart contracts are enforceable as long as they follow the basic rules of contractual agreements”. Accordingly, it is important to understand how the blockchain works and the risks and challenges associated with its incorporation. In spite of this, further advances to blockchain-powered platforms potentially offer the legal industry even greater benefits by improving both capabilities and workflow and the potential litigation of organisations miss use of  blockchains or the digital assets this technology can create has not even been mentioned here ….

The second type of blockchain funds are mutual funds - the type that you, as a reader, have historically invested your savings and pension funds into but are using blockchain technology to create digital/tokenised funds. These digital funds will employ the same fund managers but, instead of only being able to be bought or sold once a day, will enable investors to potentially trade 24/7 and have independent market makers to price the funds - as opposed to the price being set by the asset management firm.

Historically, there are very few blockchain-mutual funds as mutual funds mainly because, for retail mutual funds specifically, they have to hold the majority of their portfolio in those assets which are quoted on recognised exchanges. This means investments such as shares in unquoted blockchain start-ups or cryptos are generally not allowed for traditional mutual funds. Whilst there are quoted specialist companies, e.g. Kasei Holdings *(which invests in a portfolio of cryptos), there are also a variety of other ways to offer exposure to blockchain-related assets, including blockchain ETFs. These are typically ETFs which own shares in companies that use or develop blockchains and will often have no exposure to cryptocurrencies. For example, Walmart uses a blockchain-powered platform to create an automated system for managing invoices and payments for its logistics partners, and Saudi Aramco which invested $5million into Vakt, itself helping to make the petrochemical industry supply chains more efficient using blockchain technology. Furthermore, ETFs can be broken down into the following categories:

• companies that own cryptocurrency - MicroStrategy and Tesla

• crypto exchanges and crypto miners - Coinbase is a cryptocurrency exchange and Riot Blockchain, Core Scientific and Marathon Digital are all Bitcoin mining companies

• financial services firms - Galaxy Digital Holdings (a crypto asset manager), and Société Générale, HSBC and BNP Paribas are all working on blockchain-powered platforms

• tech companies - NVIDIA (a microchip manufacturer) and Advanced Micro Devices supply hardware to support blockchain systems 

Launching in 2018, the Amplify Transformational Data Sharing ETF (BLOK), with its focus on blockchain technology, was the first blockchain ETF approved by the SEC and invests in companies developing and utilising blockchain technologies. Forbes has compiled a list of other blockchain ETFs one can invest in.

Increasingly, the asset management industry and service providers (i.e. custodians and administrators) are looking to create a digital version of a standard mutual fund. BNY Mellon, which is one of the leading fund administrators and providers of custody services, has been a strong advocate of how blockchain technology is going to impact the asset management industry: “Blockchain’s ability to lend transparency and speed to once cumbersome and opaque workflows can revolutionize the way custody banks serve their clients…. Real-time knowledge of incoming trades would be particularly helpful for fund managers during times of extreme market volatility. If money managers have immediate transparency into the creation and redemption of funds, they would be able to react to the market more quickly”.

Digital/tokenised mutual funds

Source: Tokeny

As reported in the FT, Timothy Spangler from the law firm, Dechert, believes: "A mutual fund powered by blockchain can trade 24 hours a day, 365 days a year, so “you don’t have to wait 24 hours to have a human being shuffle the paper around”. It will also result in a more secure system and a “highly significant decrease in fees. A number of my clients believe that . . . in a small number of years the near entirety of transactions in financial assets will either occur on the blockchain or be blockchain facilitated.” The first mutual fund to employ blockchain technology has been from Franklin Templeton which has created a digital/tokenised Franklin On-Chain US Government Money market fund. As reported by FT Adviser, the Investment Association (the UK trade body for fund managers collectively looking after £9.4trillion of funds) has stated: “The funds industry was on the verge of a major technological transformation, at the centre of which was the “investment fund 3.0”…..known as a tokenised or digital fund, will be traded and recorded on a distributed ledger using blockchain technology, and shares or units will be distributed could allow for more engagement and customisation, while maintaining important consumer protections. This could include the provision of a greater variety of portfolios tailored to the specific needs of individual investors and a wider range of financial advice services to address the current advice gap in the UK.” 

But it is not only Franklin Templeton and the Investment Association which are seeing the potential of digital mutual funds - AllianceBernstein and JP Morgan Chase have also announced they are to digitise some of their funds and the scope to digitise mutual funds has certainly not been lost on digital platforms and exchanges. FundAdminChain is working with the London Stock Exchange and four global asset managers to be made available for UK investors in the next few months. When asked, Simon Barnby, CMO at Archax (the FCA-regulated digital asset, exchange, broker and custodian), said: “We are currently working with a large asset manager looking to tokenise its funds.” Furthermore, according to Daniel Couheur at Tokeny: “Euronext, the largest stock exchange in Europe, and Apex, one of the largest fund managers in the world, jointly invested in Tokeny, which has its headquarters in Luxembourg. Tokeny is in the midst of adding assets worth $1 trillion in the form of private and real estate funds to its platform.”

Added to this, there are also other firms working in the DeFi space such as Enzyme Finance and Avantgarde Finance.