Below is an excerpt from Nick Oberheiden's latest book, "The Law of Tomorrow: Bitcoin, Tokens, Blockchain - An Introduction for Lawyers"

Blockchain is the next technology that lawyers shouldn’t ignore. Mainstream acceptance of blockchain is pending, and the opportunities to expand a lawyer’s practice are rich. This section summarizes Part 2 and reiterates some feasible blockchain innovations in transactional law, litigation, corporate advice, regulatory compliance, and white-collar defense. While some ideas may be too futuristic, other ideas are already ripe for implementation.

1. SMART CONTRACTS

At its most basic, a smart contract is a self-executing computer program contained within a decentralized blockchain network. The key features of smart contracts are transparency, immutability, and efficiency.

With more industries integrating smart contracts into their operations, lawyers should educate themselves on the workings and risks of these new applications. Two schools of thought exist.

Some suggest that smart contracts could replace traditional contracts and with it, lawyers. Although the code of a smart contract could hypothetically contain the terms of a legally binding contract, most instances of smart contracts still require a traditional contract that incorporates the smart contract.

Thus, it is more likely that smart contracts will operate in tandem with written contracts. For example, ICOs often use a smart contract to facilitate the collection of virtual currency and the distribution of the new digital token. This process is complemented by a written agreement that sets out the risks assumed by the purchasers and any rights they may have against the vendor. Modern transactional lawyers must understand how to combine traditional and smart contracts in a legally binding document.

In the context of transactional law, clients will also need advice on regulatory compliance and enforceability. Smart contracts may become a factor in existing industries, such as data storage and e-commerce that operates within existing regulatory frameworks. For clients’ business proposals to work, they must be structured correctly. Projects that rely on smart contracts will require lawyers’ help to ensure the business proposal stays within the confines of existing or evolving regulations.

Lawyers may find smart contracts useful for their own organizations. For example, a firm may hold funds in escrow in connection with a client’s business transaction or as part of a settlement negotiation. By using a smart contract, a firm may automate, or even eliminate, the escrow process by deploying a program that transfers funds to the appropriate parties once the obligations under the agreement are performed. If one side fails to perform, the smart contract could return funds to the other party.

Similarly, smart contracts may facilitate client invoicing by transferring funds from a linked client trust account to the firm’s operating account. While other firms spend valuable time and resources processing invoices and chasing down clients, a firm that integrates smart contracts into this process can reduce fee disputes. Additionally, most law firms need to track and maintain a variety of data, such as client information, case files, and transaction histories. Smart contracts and blockchain technology allow firms to record data securely. A firm could use a data-management system integrated with smart contracts to keep these records in an immutable, transparent, and secure manner. This would strengthen the protection of sensitive client information.

2. INTELLECTUAL PROPERTY

Blockchain technology is a natural fit for intellectual-property connoisseurs. Because blockchains create unalterable data, intellectual-property owners can establish the authenticity of ownership rights, combat counterfeiting, license property through smart contracts, and efficiently register trademarks by using blockchain technology.

Intellectual-property holders often find it difficult to establish ownership of a copyrighted work or show that another party has infringed their work. Similarly, third parties may struggle to know from whom to seek a license.

Blockchain technology can serve as an intellectual-property registry that catalogs and stores original works. This registry could provide creators with secure digital certificates that verify the nature of a work and the origination time. These digital certificates could establish that a particular work was created by the artist at a specific time and simultaneously allow for authentication and validation of an intellectual-property asset, exposing any infringement on the copyright.

A ledger that shows the ownership of a given piece of intellectual property can distinguish counterfeit or unlicensed works from the original, which is even more significant because of the widespread digitization of copyrighted material. By registering newly created intellectual property, such as a piece of music, a work of art, or a design on a blockchain-based registry, an owner can establish unimpeachable ownership of the work’s copyright.

Replacing traditional centralized registration systems with decentralized systems will make it easier to register new intellectual property, update filings, and transfer ownership in a secure manner at any time. Future inventors may integrate their intellectual property into a blockchain for patenting purposes. If a dispute arises, the patenting authority can track the ownership of the patented object by examining the blockchain.

Blockchain and smart contracts can be used in tandem to efficiently license intellectual property, allowing authors and licensees to interface directly without needing an intermediary. Additionally, the smart contract could be self-executing upon the use of the work, thereby ensuring prompt payment to the author for any use of the licensed asset.

One example of this application is the blockchain-based platform Mycelia, which provides a decentralized musical database for artists to share music and receive payment for the use of their works. Another example, although ultimately unsuccessful, was Kodak’s attempt to launch a blockchain-based image rights-management platform for photographers called KODAKOne in 2018.³²¹

The platform sought to provide an encrypted, digital ledger of rights ownership for photographers to register works and license them within the platform. The platform also intended to provide continual web crawling to monitor and protect images that were registered on the system. While KODAKOne may have failed, it is likely just a matter of time until someone makes a more successful attempt at a blockchain-based image-rights platform.

The integration of blockchain and intellectual property may be closer to reality than you think. Governments around the world are engaging in pilot projects to test how blockchain technologies might assist their intellectual-property functions.

In March 2020, the U.S. Customs and Border Protection (CBP) announced that it had completed a proof-of-concept of a blockchain platform to protect American businesses from intellectual-property theft.³²²

The platform could enable communication between manufacturers, retailers, rights holders, and importers to help prevent the importation of counterfeit products into the United States. According to the CBP, the platform allowed it to identify and link a product to its license, requiring fewer physical examinations.

Previously, the European Union Intellectual Property Office announced the launch of Europe’s first-ever blockchain platform for the secure delivery of intellectual-property-rights documentation in real time.³²³

This platform will allow creators to register their intellectual property onto a blockchain and combat counterfeiting. Again, blockchain technology may be so integrated into intellectual property that IP lawyers will need, at minimum, a basic understanding of its functions to properly advise clients.

3. CORPORATE FILINGS

Corporate filings and other records may soon be maintained on blockchain platforms. In a sense, a corporation is just its records. It is possible to have every corporate document and transaction recorded on a blockchain so that there is an immutable record of all corporate acts.

In 2017, Delaware amended its law to allow companies to maintain their corporate records using blockchain technology. Given that Delaware is one of the nation’s prime corporate situs, this amendment is a significant step toward widespread use of blockchain for corporate records.

Governments may eventually provide blockchain platforms for companies to submit their corporate registrations and documents. This will create a permanent, immutable, and transparent record of any changes. Corporate lawyers may need to learn about blockchain technology to advise their clients on the logistics, benefits, and risks of corporate record keeping through blockchain.

4. CRIMINAL CASES

The criminal justice system stands to benefit from blockchain. Criminal cases involve voluminous documents and records, all of which must be authenticated, recorded, and stored securely. Sometimes, it is also vital that the chain of custody for documents or items can be accurately tracked. Hypothetically, from the moment a defendant is cited or arrested, case information could be recorded onto a blockchain. Former Justice Department lawyer Lynette Byrd explains:

Historically, the legal profession is constantly playing “catch up” to technology. Even more so, the government - particularly through its regulatory and enforcement framework - is always trying to catch up with innovations of business and even more so, of criminal enterprise. For example, as part of criminal investigations, federal agencies monitored phone and email traffic through normative platforms for years. So instead, people turned to using alternatives like WhatsApp or Signal. Similarly, entrepreneurs and others ventured into the unknown realm of the crypto space before the government was ready for it. But the government is catching on quickly; we have already begun to see examples of cases in which federal agents in connection with DOJ are seizing digital wallets and other non-traditional currency in criminal cases.

As the case proceeds through the judicial system, each participant updates the single blockchain record with their actions, for example, the initial arrest record, indictment, and plea. These blockchain-based records can be shared with defense counsel, government attorneys, law-enforcement officers, parole officers, the court, and even victims or witnesses when appropriate. Changes show instantly and to all relevant parties.

Logging cases and their records onto a blockchain would enhance public access to information while ensuring secure and reliable record keeping. The reliability of blockchain-based records may become the standard for determining whether critical evidence is admissible at trial. Both criminal defense attorneys and prosecutors may need to be familiar with the technology, its capabilities, and its limitations to do their jobs effectively.

5. PROOF OF SERVICE

Lawyers have traditionally relied on process servers to deliver court documents. While most process servers are honest and trustworthy individuals, a few are not. In 2008, for example, a scandal shook the process-serving industry in New York.324

New York City’s Department of Consumer Affairs found that certain process-serving companies were filing false affidavits of service. The so-called “sewer service” scandal led to stricter rules for service of process in New York.

Blockchain may make service abuse impossible. Hypothetically, blockchain technology could provide courts, lawyers, and parties access to verifiable, tamper-proof information about service of process. When the server makes or attempts service, the server uploads mobile data including GPS coordinates, a timestamp, and certain other metadata, such as the device used. That record, which may include images of the papers served and how they were delivered, would be given a unique blockchain ID that can subsequently be viewed by anyone with access to the blockchain platform. Ultimately, it is conceivable for blockchain technology to eliminate human proof and manual delivery of service.

6. LITIGATION AND SETTLEMENT

Civil litigation is notorious for the number of documents exchanged and records created. It includes the various activities before, during, and after a lawsuit is filed, such as investigation, negotiation, trial, and post-judgment procedures.

Why not record the entire litigation process, including discovery, on a blockchain platform? It could become standard practice for lawyers to register themselves onto a blockchain platform with their personal information, license number, and details about their experience or area of practice.

The platform may allow a client to search for and select an attorney. Lawyers may file complaints directly onto the blockchain, from which defense counsel could then access the complaint. Every subsequent document, from court orders to a jury verdict, could be recorded onto the same blockchain.

Such a platform would have to be established by the courts or other governmental bodies, like the PACER and the CM/ECF systems. Expect the first versions of these blockchain-based platforms to emerge in private dispute resolution settings, likely international arbitration.

7. BLOCKCHAIN-BASED ARBITRATION

In the twentieth century, arbitration became a popular method for businesses to resolve disputes without engaging in litigation. Arbitration promised to be a faster, easier process that would permit the parties to select expert adjudicators in their field rather than trusting the luck of the draw for a general civil judge or jury to resolve their dispute. The combination of blockchain and arbitration might offer several advantages.

A blockchain system provides an organized record of all filed items. Many aspects of the arbitration process, such as documentary evidence, transmittal of correspondence, and satisfaction of awards, could be automated with smart contracts. Even the appointment of the arbitrator could be done through blockchain when the parties agree on a process and a smart contract executes the selection. Blockchain-based arbitration could also offer enhanced confidentiality. Even in an arbitration proceeding intended to be confidential, there is always a risk that documents may be leaked or stolen by hackers. Blockchain can alleviate such concerns.

Blockchain-based arbitration could also pave the way for automated dispute resolution, especially in the context of smart contracts. An arbitral method and decision could be agreed upon by the parties and deployed directly onto the blockchain, permitting a self-executing and automatic arbitral award. Or the disputed smart contract could have an arbitral algorithm integrated directly into the agreement so that it can resolve the dispute itself, within the parameters of the agreement. Admittedly, many questions remain before blockchain-based arbitration becomes commonplace, not the least of which is whether such an arbitral award is even enforceable.

8. E-DISCOVERY

Whether in the form of smart contracts, blockchain-based record keeping, supply-chain management, or licensing, the mere fact that clients are using this technology means that, once a dispute arises, blockchain-based information will become discoverable as electronically stored information.

Lawyers must be prepared for this possibility by developing their understanding of blockchain-based data storage and designing protocols for handling this data. In general, data stored on a blockchain has several attractive features for litigators, including permanence and a record of changes over time. Yet the fact that blockchain transactions are pseudonymous can make it difficult to prove the identity of participants in a transaction. Lawyers may need to spend time and resources consulting the proper custodians to establish identities and decode blockchain transactions. Additionally, while there are tools to track blockchain activities, they may not translate well to evidence that is viewable on most e-discovery software platforms.

Although data stored on a blockchain is reliable, it must be transferred from the blockchain to make it accessible and usable as evidence. Parties will therefore need to authenticate how they are providing blockchain-based data in discovery. To avoid unnecessary expenses later, lawyers should discuss information-governance considerations with their corporate clients early on to help them develop policies for their blockchain-based data systems that facilitate disclosure in the event of discoverability in a later dispute. Lawyers should also stay updated on how courts handle future blockchain e-discovery issues, as these decisions will provide critical guidance on clients’ duties in terms of their blockchain data.

9. PROPERTY RIGHTS

Just like IP rights, physical-property rights could also be stored digitally on a blockchain platform.

In the United States, land ownership is recorded at the local level, usually by a county recorder’s office or a tax assessor’s office. This process often relies on paper documentation vulnerable to loss, fraud, or mismanagement. Because the process for registering ownership of property differs between states and involves small localities, it is unlikely that a unified, digital, nationwide land registry will be adopted any time soon.

Yet some forward-thinking states or counties may perceive the advantages of such a land registry and begin implementing this technology in the coming years. Blockchain is well suited to track the sale of real estate because its data-storage records transfers and transactions over time, simplifying ownership searches and title checks.

By using a distributed ledger, governments can also more easily publish data transparently, which will help parties track property-related legal matters such as encumbrances, liens, and easements. Ultimately, blockchain-based land registries could facilitate market transactions and promote economic growth. The adoption of blockchain-based land registries may alter the way real-estate attorneys assist clients.

10. FINANCIAL TRANSACTIONS

Blockchain adds transparency in the financial-services industry. By performing transactions on a public ledger, inefficiencies and fraud are easier to detect and address.

One primary concern with digital transactions is the risk of hacking or scams. Blockchain technology can increase the security of transactions. Transfers made on the blockchain are faster and more traceable than traditional banking transactions. The elimination of intermediaries can also lower costs, making it easier to transfer funds around the world. New platforms that facilitate transactions via blockchain technology are already emerging and present a credible alternative to existing financial services.

The DeFi industry, for example, seeks to supplant existing financial services by providing decentralized exchanges and lending platforms. That said, it appears more likely that existing financial institutions will integrate and capitalize on blockchain technology rather than allow start-up DeFi platforms to replace them entirely. Still, the implementation of blockchain technology into the financial services industries will present new legal challenges for lawyers to navigate.

11. ACCEPTING LEGAL FEES IN CRYPTOCURRENCY

Some law firms are already accepting payment in cryptocurrency. If you haven’t already, you may soon encounter clients who wish to pay you in cryptocurrency instead of traditional currency. Although cryptocurrency is not the only application of blockchain technology, it has achieved a lot of notoriety. As of January 10, 2022, the total value of all cryptocurrencies was about $1.9 trillion, a decline from $2.9 trillion at its peak in 2021.325

Before accepting cryptocurrency as payment, you must understand the legal implications of such transfers. Although cryptocurrencies can store value, they do not usually meet the definition of money. Cryptocurrencies are more like valuable forms of property like gold, art, stock certificates, and other assets. As a result, you should think of cryptocurrency as stored valuable assets rather than money.

Because cryptocurrency is not money, it cannot be stored at an ordinary bank. To process cryptocurrency transactions within your law firm, you will need to obtain a wallet for the cryptocurrencies that you plan to accept, such as Bitcoin or Ethereum. There are two primary types of cryptocurrency wallets: hardware wallets and web wallets.³²⁶

A hardware wallet collects your transaction information from the internet and stores it on a local device. When such a wallet is disconnected from the network, it is usually known as a “cold” wallet. The benefit of a cold wallet is that because it is disconnected, it cannot be accessed by unauthorized users. A cold wallet becomes “hot” when it is connected to the network to process a transaction, after which it can again be safely disconnected.

The benefit of keeping a wallet hot is that it is usually more accessible and easier to use in internet transactions. To buy something or receive payment in cryptocurrency, using a hot wallet makes the process simpler. Yet because the wallet is hot, both the private and public keys for the wallet are stored online or on a device that is connected to the internet. This means that the keys might be vulnerable to hackers, so you should take special precautions to ensure your information cannot be stolen. As a security measure, you may consider maintaining both hot and cold wallets. The bulk of your assets should be stored on the cold wallet, and only the portion needed to process transactions should be kept in the hot wallet.

As an alternative to a hardware wallet, you may wish to use a web wallet, also known as an online wallet. Web wallets are cloud-based wallets often hosted by a third-party platform like a cryptocurrency exchange. Web wallets are always hot, with the advantages and disadvantages mentioned above. The main advantage of web wallets is that they can be accessed anywhere and from any device. They also tend to be very user-friendly and can rapidly transfer funds between different types of cryptocurrency or different exchanges. Web wallets have even more security vulnerabilities than standard hot wallets. For example, web wallets may fall victim to malware, phishing scams, DDoS attacks, and other forms of hacking. Some popular web wallet providers include Coinbase, Gemini, Robinhood, Blockchain, and Crypto.com.

Whether you use a web wallet, a hardware wallet, or some combination of the two, most clients will transfer cryptocurrency to you quickly. The most important thing for your firm is to choose a wallet that complies with any applicable state or federal regulations. That is why it is important to do your due diligence and select a reputable wallet with a solid compliance record.

Ethical requirements can also thwart accepting cryptocurrency for fees. Lawyers cannot charge unreasonable fees. Since the value of a cryptocurrency can change over short periods, holding a client’s cryptocurrency could result in an unreasonably large fee. The simplest way to avoid this possibility is to convert any cryptocurrencies you receive into fiat. After receiving a transfer of cryptocurrency into your wallet, you will need to use a payment processer, such as a cryptocurrency exchange, to convert your assets into traditional currency. At this stage, it is important to again do your due diligence and ensure that the service you use complies with any applicable regulations. Only after you have converted the cryptocurrency into money can you deposit the funds into your business account.

Money laundering is another concern. Be careful with unknown or suspicious sources of funds—even more so in the context of cryptocurrency payments. Apply extra caution with funds from third parties. Follow procedures from your engagement letter along these lines:

The Client represents that all funds payable or paid to the Firm originate from lawful income or lawful U.S. sources and are not subject to garnishment, forfeiture, seizure, money laundering, or bankruptcy proceedings. Client represents that Client is not aware at the time of any transfer that any government agency has asserted that the specific funds transferred to Firm are subject to, among others, forfeiture. By and through Client’s signature below, Client acknowledges that Client has discussed this provision with Firm, that Firm has an obligation to conduct reasonable due diligence under Section 9-120.100 et seq. of the U.S. Attorney’s Manual to determine whether there are any reasonable grounds that would prohibit the receipt of legal funds from Client at the time of transfer, and that Client has sufficient uncontested resources with which to pay Firm’s fees and expenses in the Matter.

Finally, you may be asked to hold cryptocurrency in trust for your clients. Unfortunately, unlike traditional money, you cannot transfer digital currency into your traditional trust account. In this circumstance, you should avoid converting the cryptocurrency into fiat currency because there is a chance one might be helping launder illegal proceeds or diminishing your client’s fees through conversion.

Instead, notify your client that you will not be converting their assets and explain that it may lose value while you are holding it in trust. Your client must understand that the value of the cryptocurrency may change while it is in your possession and that you are not responsible for any loss in value, which may be grounds for discipline or even disbarment.

You must also take appropriate security measures to protect your client’s cryptocurrency. This might include using a cold wallet to store assets, using multi-signature accounts, or further encrypting the private key used to transfer the cryptocurrency. Additionally, you should review your local bar rules and any applicable state or federal regulations to ensure that your cryptocurrency-storage procedures follow relevant law.

321 Kodak Press Release, KODAK and WENN Digital Partner to Launch Major Blockchain Initiative and Cryptocurrency, kodak.com, (Jan. 9, 2018).

322 LEDGER INSIGHTS, U.S. Customs Tests Blockchain for Intellectual Property Protection, ledgerinsights.com, (March 3, 2020).

323 EUIPO, EUIPO Connects to TMview and DesignView Through Blockchain, euipo.europa.eu, (April 27, 2021).

324 ROBERT AMBROGI, Wondering How Blockchain Can Be Used in Legal? Here’s One: Service of Process, lawsitesblog.com, (Feb. 9, 2018).

325 KEVIN VOIGT & ANDY ROSEN, Cryptocurrency: What It Is and How It Works, nerdwallet.com, (Jun. 13, 2022).

326 TERESA MATICH, How to Accept Bitcoin at Your Law Firm, clio.com, (Nov. 10, 2021).