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Blockchain technology is still an unknown subject in legal practice. But it has many advantages

Blockchain technology brings with it a technological revolution of no small moment, so it is worth understanding what it is, how it works, where it is used and what benefits it can bring to the legal sector.

The term blockchain is perhaps one of the most overused terms in technology and beyond. Linked since its inception to the concept of bitcoin and cryptocurrencies in general, the blockchain has experienced rapid and exponential growth, proving to be a useful technology in various fields, including the legal one.

Having said that, given that this innovation brings with it a technological revolution of no small moment, it is useful to understand what it is, how it works, in which areas it is used and whether it can really bring benefits and make the work of lawyers more efficient.

Table of contents:

• Definition and architecture of blockchain

• Blockchain technology and its possible applications in the legal sector

• Blockchain in the Italian legal system

• Conclusions 

This article was originally published in Legaltech Italia.

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Blockchain and its possible applications in the legal sector

Definition and architecture of blockchain 

Although it is difficult to give an unambiguous definition of blockchain and the concept behind the term itself can be quite complicated, the basic idea behind this technology is really very simple. In general terms, the blockchain can be seen as a database, i.e., a collection of information stored electronically on a computer system. Indeed, the blockchain is a large database composed of a set of shared digital ledgers formed, in turn, by blocks containing data and information. In other words, the blockchain is nothing more than a technology based on a distributed ledger technology, capable of recording exchanges and information between its participants in a secure and permanent manner, through the sharing of a database that removes the need for intermediaries and a central authority.

The innovative character of this technology, which distinguishes it from any other registry or database, lies in the fact that once a piece of data or several pieces of data have been entered into the blocks, they become unchangeable and incontrovertible, while remaining transparent and knowable to all participants in the blockchain. The blockchain relies on a number of key concepts to guarantee such a result:

1. Distributed ledger technology. This term indicates that the blockchain is based on a decentralised architecture; in fact, blocks are not stored on one central ledger, but are copied onto the ledgers of all participants. The high number of registers makes the whole system more secure, since in order to modify the data contained in a block, anyone who wanted to would have to modify most of it (which is a very difficult task, since it is not stored on one central database).

2. Cryptography. The blockchain uses two different ways of encrypting the data it intends to store: the digital signature system and the hashing system. In the first case, each participant has a private and a public key; with the former, they are able to encrypt the data, while with the latter, they are able to decrypt it. Hash, on the other hand, can be assimilated to an encoder that transforms any data (more accurately, input) submitted to it into a message code. The hash code is a unique code belonging exclusively to a given block; in fact, precisely for this reason it can be defined as the fingerprint of the latter. Again, from the point of view of uniqueness and unambiguousness, it should be noted that it would be enough to change a comma within the block to have, as a result, a completely different hash code. In other words, just as the fingerprints of twins are not the same, despite their obvious similarity, so two inputs that are apparently the same but conceal some small differences will have a different hash. The hash code thus provides a guarantee that the data or the set of data enrolled in a given block will remain unchanged over time.

3. Persistence, transparency and immutability of data. As explained above, each block contains all the data relating to a given transaction. Therefore, every time the participants decide they want to carry out a new operation, they open a new block by entering new data and encrypting them to obtain a new hash code. Once this procedure is complete, the data is recorded, and the block is closed and registered in the various registers.

Blockchain technology and its possible applications in the legal sector

In the light of the above, a question arises: can blockchain technology bring improvements and efficiencies in the field of forensic professions? If so, which ones? On closer inspection, although the technology in question has undoubtedly enormous potential, it is appropriate to assess with caution what is the actual impact it has, to date, on the legal sector, carefully weighing its merits, flaws and limitations.

That said, the first, and perhaps best known, application of blockchain technology to the legal sector is that of smart contracts, i.e., digital contracts capable of being executed automatically upon the occurrence of pre-established conditions agreed upon by the parties. To better understand the functioning of a smart contract, let us think, for example, of the long procedures we undergo every time we want to ask for a refund for a delayed flight or train. The smart contract concluded between the passenger and the airline or train company means that when the "delay" condition is met, payment is made automatically. This example is one of the most useful applications of blockchain technology, but it is limited by more complicated negotiations and the use of abstract legal concepts. Indeed, smart contracts are based on the principle of "if this, then that", an assumption that proves to be rather rigid and inflexible both in the execution of the contract and in its interpretation. In addition, the binary language used by smart contracts is not suitable for translating abstract and broader legal concepts used in contracts or other documents precisely for the purpose of covering and regulating the most varied circumstances. Let us think, for example, of the concept of good faith, which recurs several times in our code system, a concept that could not be translated into a binary code, since in this case its intrinsic nuances and meanings would inevitably be lost. Consequently, smart contracts undoubtedly offer an intelligent application of blockchain technology, which aims at minimising exceptions and the need to interpose trusted intermediaries for their resolution, dispute resolution and execution and transaction costs.However, the application in question far from providing a "one fits all solution" but depends, in any case, on a work of confrontation and intermediation between the parties involved and cannot disregard a careful analysis of the factual situation and the legal issue to be settled.

In addition, blockchain technology makes it possible to certify and temporally validate data.  In particular, blockchain technology could be exploited for the secure certification and preservation of documents, guaranteeing them against tampering. Indeed, the fact that the blockchain is a decentralised ledger, based on an interconnection of nodes and on a peer-to-peer relationship between the various participants, could, with the right measures, make the figure of the third intermediary called upon to perform the function of guarantor no longer necessary. In this scenario, the trust engendered in the parties would no longer be linked to the third-party nature of the guarantor, but to the technology itself, which would guarantee the transparency and immutability of the data contained in its databases. As an example, let us imagine that we have deposited a trademark and that we have registered this operation on a block of our blockchain; the block does not only contain the data and the hash code, but also the date on which the block was closed. Therefore, if a third party registers the same trademark, it is enough to check the date of closure of the respective blocks to determine the seniority of the deposit. It goes without saying that such an optimal result could only be achieved once most parties rely on blockchain technology for time validation, and only if it is recognised as having legal value.

Ultimately, therefore, although blockchain technology, if well exploited, could speed up and automate some of the operations carried out by the lawyer, leaving the same time to devote himself to more complex issues, the work of the lawyer cannot ignore the use of logic, reasoning and creativity.

Blockchain in the Italian legal system

In seeking to regulate blockchain technology, our legislator focused on five points considered essential: legal validity, time stamps, user identity, contractual mechanisms and data protection. All these aspects, which stand out on the technological-legal ridge, have been reported within the "blockchain standard" contained in the Simplification Decree-Law (Decree-Law no. 135 of 14 December 2018 as converted by Law no. 12 of 19 February 2019).

With reference to smart contracts, the decree focuses on the issue of their execution but, in addition to this, attention must also be paid to other elements, such as the formation of consent, the adequate information provided to the weaker party, and the justiciability of the contract. In addition, the decree clarifies how smart contracts meet the requirement of written form after identification of the parties involved through a process established by the Agid (Digital Italy Agency) guidelines.

As regards, instead, temporal validation, the decree refers to the European eIDAS regulation, which establishes, in Article 41, that electronic temporal validation enjoys the presumption of accuracy of the date and time and of integrity, only if it is qualified. In the Italian legislation, Article 8-ter of the D.L. n. 76/2020 states that the validation carried out through blockchain has the value of a "simple" validation, since the qualified one needs other requirements, including the intervention of a qualified service provider.

It is clear that the legislation in question represents an initial approach to the blockchain issue, an approach that needs to be developed and expanded also with a multidisciplinary approach that sees as protagonists all stakeholders and not only the Agency for Digital Italy, to which the legislation reserves, however, a central role.

Conclusion

There is no doubt that this technology has innovative potential. However, it is doubtful, for the reasons set out above, that this technology will be able to replace the work done to date by physical persons. Indeed, it is more reasonable to assume that, as a result of these technological innovations, lawyers too must become 'smarter', i.e. able to master, at least in the most rudimentary elements, the technicalities underlying blockchain and its applications, in order to work synergistically with programmers, engineers and computer scientists to ensure that the client's needs are accurately translated and safeguarded.

Finally, the transformation of the profession must necessarily include a transformation of the legal language, which will have to borrow technical terms from other sectors, such as computer science and engineering, in order not only to translate client needs but also to regulate new phenomena in a timely and efficient manner. Moreover, it should be noted that the transformation in question is nothing new and disruptive, but it is a linguistic and professional evolution that the legal sector has repeatedly faced and overcome, for example by conforming to and learning the language and rules of venture capital or private equity. Ultimately, therefore, it is a matter of continuing with a slow but steady transformation that has always involved the legal sector.