Most financial institutions rely on complex infrastructures and lengthy processes to settle trades, send money abroad, reconcile records and secure transactions. But that could all change as blockchain revolutionizes the financial services sector and the legal teams that work within it.
As its name implies, blockchain is a series of connected blocks, each containing data from a specific transaction. Blockchain was designed so that transactions are immutable: They cannot be deleted or forged since each block is secured using cryptography and validated by every participant, thereby preventing changes without participant approval.
For consumers, the result is an indelible record—a single and secure version of the truth. For financial institutions and their legal teams, blockchain is a powerful digitized, decentralized ledger that offers key benefits, including:
Reduced fraud and increased security:
According to a PricewaterhouseCoopers survey, 45% of financial services companies suffer from economic crime every year compared with 34% of organizations across all other industries. Blockchain, however, has the potential to decrease that number. Since blockchain’s records are meddle-proof, and are visible to all participants, the technology can significantly improve data security and reduce the risk of fraud, helping general counsel sleep better at night.
Greater efficiency and cost savings:
Financial institutions and their legal teams spend an inordinate amount of time reconciling records and tracking transactions. In the case of blockchain, though, trust is established by cryptography and collaboration. “With its built-in regulation, clearing and settling, blockchain doesn’t need humans to make sure everything happens the way it’s supposed to,” says Tiana Laurence, a managing partner at Laurence Ventures and author of Blockchain for Dummies . “The software does it.”
By minimizing the need for intermediaries, blockchain can help financial institutions improve operational efficiencies and cut costs. In fact, a report from Santander InnoVentures estimates blockchain technologies could reduce banks’ infrastructural costs by nearly $20 billion a year by 2022.
Enhanced customer experience:
Unlike other types of funds, cryptocurrencies are available immediately for consumers and businesses to spend. By ensuring asset availability and enabling financial institutions to share information with clients more quickly, blockchain helps financial organizations deliver a better customer experience.
Despite these advantages, many in-house lawyers are divided over blockchain’s value. According to a Forbes Insights survey, conducted in partnership with K&L Gates, while 72% of financial services executives view blockchain as one of the most promising technologies, half of them believe it presents high legal risks. And for good reason.
Banking, money transfer, securities, communications, data privacy—they’re all governed by long-established and well-known laws. But with blockchain being such a relatively new technology, many legal professionals are uncertain which of these laws apply to blockchain and how.
Consider, for example, initial coin offerings or ICOs, in which startups looking to launch a new coin, app or service sell digital tokens in exchange for pre-existing cryptocurrencies. An increasingly popular and cost-effective way for startups to raise funds, ICOs raise difficult questions for general counsel around securities regulations and whether they apply.
“A lot of companies are looking at blockchain as a way of raising undiluted financing,” says Laurence. “But that doesn’t mean we don’t have securities laws. That’s one thing general counsel needs to think about. We’ve had these securities laws since the Great Depression. You can’t just pretend they don’t exist anymore.”
Another challenge for in-house legal teams: smart contracts. Blockchain platforms such as Ethereum were designed to create smart contracts. These digitally signed agreements are executed and enforced automatically by software code embedded in blockchain technology. But while these contracts are capable of automatically enforcing themselves, they challenge general counsel to rethink strategies around jurisdiction, and how to enforce smart contracts in court.
As blockchain gains mainstream acceptance, general counsel must identify the potential legal, regulatory and business risks that can arise. But they should also recognize the opportunities it presents, from supporting ICOs to developing new business models around smart contracts.