In America, cash is centralized, meaning it is in the control of a single authority: the Federal Reserve. The Federal Reserve prints money and oversees the reserves of banks throughout the country. Because of this, any transaction a person makes directly or indirectly goes through the centralized banking system. Many feel this structure is outdated, and as technology and business expands on a global scale, a new method has been created to decentralize the business process: blockchain technology.
Blockchain technology utilizes a decentralized method that verifies and records the exchange of currency directly between two parties, all without the involvement of a centralized banking structure.
The most prominent movement towards decentralization in business and technology is cryptocurrency, such as Bitcoin, which is a form of blockchain technology. Cryptocurrency is essentially electronic money that is created through “mining.” Miners utilize high-powered computer processing to solve complex equations in exchange for a small amount of crypto. Every type of cryptocurrency such as Bitcoin or Litecoin is stored and traded on its own blockchain. Blockchains are made up of blocks that contain information concerning specific transactions, and the chain is the history of all transactions that have taken place involving the specific type of cryptocurrency.
But what are these blocks that make up a blockchain? Each block has 3 parts: the data on the block, the hash of the block, and the hash of the previous block. The data that is stored on the block depends on the type of blockchain. For example, the data on a block in the Bitcoin blockchain stores the details of an individual transaction involving Bitcoin such as the sender, the receiver, and the amount of coins involved in the transaction.
A block also has a hash; a hash identifies a block and all of its contents. Hashes are like fingerprints, because they are always unique. Once a block is created a hash is calculated and changing anything about the data in the block, changes the hash of the block. If the fingerprint, or “hash”, of the block changes, it is no longer the same block.
The hash of the previous block is what creates the “chain” part of blockchain technology and is what makes blockchain technology so secure. For example, block number 5 contains a previous hash element which points to block number 4, so if you tamper with block number 4, it will change the hash. Then, block number 5 and all subsequent blocks would become invalid because there is no longer a verifiable point of reference to a preceding block in the chain.
Another way that blockchain secures itself is through distribution. Blockchains are publicly distributed through a peer-2-peer network, meaning everyone involved in the blockchain receives information on the history of that blockchain. When a person joins the peer-2-peer network they get a full copy of the chain and join the community that verifies new blocks once they check to make sure each added block has not been tampered with. This creates immutability and consensus about which blocks are valid, and which are not.
Blockchain Technology in Nevada
Nevada is a pioneer in the blockchain movement. Recently, SB 398 was signed into law under the Uniform Electronic Transactions Act, which prevents the county and local jurisdictions from imposing tax and licensing requirements on blockchain and smart contracts, making Nevada the first state to do so. SB 398 provides that the city council or other local governing bodies may not:
- Impose any tax or fee on the use of a blockchain by an person or business
- Require any person or business to obtain a license or permit or
- Impose any other requirement relating to the use of a blockchain by any person or business or business
In conjunction, this amendment to the Uniform Electronic Transactions Act defines a blockchain as an electronic record of transactions or other date which is:
- Uniformly rendered
- Redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and
- Validity by the use of cryptography
Additionally, written record requirements now allow for blockchains that contain electronic records. This new addition paves the way for smart contracts, contracts that employ blockchain technology.
Nevada’s departure from other states on blockchain technology comes from an attempt to stay in the forefront of the tech industry and attract tech companies. Nevada Senator Ben Kieckhefer was largely responsible for the passage of SB 398. Senator Kieckhefer stated that the purpose was “to ensure Nevada has an environment of welcoming and inclusive startups.” And “instead of just incentivizing large companies to relocate to the state, we have policies incentivizing them and smaller companies to start and grow here.” Blockchain technology has already begun to change the way people conduct transactions, business, and contracts. Nevada’s adoption of blockchain technology is an endorsement to modern business and technological expansion in the state. But what does this mean for the legal industry?
Blockchain Technology and Contract Law
With the structure in place for blockchain technology based businesses to flourish in Nevada, the next question is what are the repercussions? Blockchain technology has the potential to disrupt numerous industries, the banking and financial sectors being the most obvious. However, the impact on the legal industry remains to be seen. One way blockchain technology may impact the legal industry is through smart contracts.
A smart contract is a tiny computer program that is stored inside of a blockchain that can be programmed by anyone. Smart contracts are self-executing agreements between two parties. Specifically, smart contracts automatically execute when certain pre-established terms or conditions are met, eliminating the possibility of fraud or long time lapses in the performance of the contract.
Because smart contracts are stored on a blockchain they are immutable and distributed. Smart contracts are designed to eliminate the need for an intermediary, such as a lawyer, and limit the potential litigation arising from ambiguity in a contract or a potential breach of contract. Consequently, if smart contract use becomes the norm, demand for legal services may decline.
On the other hand, there is a bright side for attorneys. With the expansion of blockchain technology many industries will be disrupted. These businesses will look to attorneys with specialized knowledge to resolve the regulatory and operational challenges blockchain disruption presents. Additionally, businesses that wish to become involved with blockchain technology will need attorneys to help form companies consistent with the proper legal and regulatory structures that govern blockchain technology. Due to the complexities associated with blockchain technology, there will be need for experts who understand both the technology and the law to resolve issues that may arise.
With the recent fluctuations and unpredictability of the value of cryptocurrencies, it remains unknown whether blockchain technology will attain prevalent acceptance. Though, if it continues to expand, it will result in increased decentralization, more efficient contracts, and new areas of practice for attorneys. The public and tech insiders remain confident blockchain technology will have a positive impact overall.