Law firms quickly found a lucrative line of business advising clients on the legal and regulatory issues surrounding blockchain and the Web3 ecosystem. But are they too slow to adopt these technologies for their own operations? 

Blockchain and other distributed ledger technologies (DLTs) underpinning crytpoassets are being adopted across the business world for a variety of purposes. In the finance sector, DLT is being used to create decentralized organizations to provide financial services without centralized intermediaries, bypassing banks, traditional exchanges, and brokers in a development known as decentralized finance (DeFi). In agriculture, Japanese technology firm Fujitsu helped set up Rice Exchange, the world’s first global blockchain-based rice trading platform. In fact, Forbes magazine has identified 15 industries that could significantly benefit from blockchain technology.

It is a trend that has become known as Web3, or Web 3.0, the latest version of the world wide web that is based on DLT. Even law firms, often slow to adapt to innovative technology, are embracing Web3. Most are finding out how it works and the legal and regulatory implications so they can advise clients operating in this new environment.

Some law firms are adopting it themselves to streamline their operations and make them more secure and transparent. To facilitate this, some have joined the Global Legal Blockchain Consortium to develop standards that will govern the use of blockchain technology in law. However, using DLT in one’s own operations is quite different from simply advising clients on DLT. Generally speaking, the legal profession appears to be in the slow lane of the Web3 ecosystem. Is there any likelihood of them speeding up adoption for their own use?

What is Web3?

First, some background. Web 1.0 was the initial phase of the world wide web that was characterized by static websites with little or no user interaction. Web 2.0 was the second phase which started about 20 years ago as websites evolved allowing users to interact with website owners and other users on social networking platforms like Facebook. Web 2.0’s data is highly centralized and controlled by a relatively small number of big technology companies, like Alphabet, Amazon, Apple, Meta, and Microsoft.

Web3 is based on blockchain technologies, decentralization of control and data, and cryptoassets. Its proponents argue that it is less influenced by Big Tech and that it provides better security, privacy, and scalability. Web 2.0 still dominates, but Web3 is gaining ground.

Web3 has its critics. Under the headline “Web3 is just a fresh serving of the same old crypto nonsense”, FT columnist Jemima Kelly writes: “In truth, Web3 has become just the latest marketing term used to try to prop up and repackage the overlapping ideas of crypto, non-fungible tokens, and ‘decentralized finance’, which all seemed brilliant innovations until the whole market started to tank.”

Law firms as providers of legal advice on Web3

Even if Web3 is just a marketing term, there is no denying that DLT is on the rise. One example of the knowledge law firms are acquiring and disseminating in this arena is provided by Clifford Chance, one of the UK’s top five law firms. The 400 lawyers in its global Tech Group – among them specialists on blockchain and cryptocurrencies – “deliver strategic tech law advice to help clients stay ahead of the curve and outstrip the pace of change”.

“There is no doubt that blockchain offers numerous benefits to business including decentralization of transaction validation, transparency and trust, immutability, high availability, high security, model simplification, faster deals and cost savings,” says the group. “But it also raises a wide-range of new legal issues and as such multidisciplinary legal expertise is required to fully map the design challenges that a commercially viable blockchain solution must address.”

Clifford Chance’s Tech Group advised a global bank on the implementation of a blockchain-enabled remittance platform, using cryptocurrency-like functionality to perform efficient cross-border transfers. It advised a British banking association on its policy work on blockchain, including preparing its response to a European Securities and Markets Authority’s discussion paper on the application of DLT to the securities markets. And it advised an international insurance industry consortium on setting up a reinsurance platform using blockchain and smart contracts.

To get a broader idea of how the legal industry is informing itself about Web3 to enable it to advise clients on these matters, look no further than the Law Society’s second edition of Blockchain: Legal and Regulatory Guidance, published earlier this year. The 236-page report tells lawyers what they need to know about blockchain, cryptoassets, DLT-based platforms and products, decentralization and smart contracts. It explains how these technologies are changing the way legal, financial and property services are carried out and their impact on litigation.

Sir Geoffrey Vos, Master of The Rolls, writes in the foreword that “every lawyer will require familiarity with the blockchain, smart legal contracts and cryptoassets – both conceptually and functionally”. These requirements come at a time when central banks are close to launching their own digital currencies “that will put cryptoassets into mainstream use”, when there is “widespread adoption of digital transferable documentation”, and when we are seeing a transition from traditional software programs such as MicroSoft Word to smart machine-readable documents.

The Law Society is the professional association representing solicitors in England & Wales, but the report was largely written by the Blockchain Legal and Regulatory Group in Tech London Advocates. TLA is a collection of technology leaders whose blockchain group comprises lawyers and technologists from the UK’s leading law firms, legal consulting firms, and academic institutions.

Law firms as adopters of Web3 for their own operations

While it is clear that law firms know enough about Web3 to give their clients valuable legal and regulatory advice on the matter, and to assist with litigation, it is less clear how many law firms have actually adopted Web3 technologies themselves to run their own businesses. There is plenty of evidence to show that some firms are well-advanced down this route. Yet law firms have been slow to adopt leading-edge technologies in the past. The suspicion is they are behind the curve again with blockchain adoption.

There is no shortage of advice to law firms on how to use this new technology. The second part of the Law Society report highlights how they can use blockchain-based processes in areas such as data governance and protection, smart contracts, intellectual property rights, tax, ESG (environmental, social, and governance), and dispute resolution. For example, it gives an in-depth analysis of the advantages and disadvantages of smart legal contracts (SLCs), examples of successful SLC projects to date, and the impact of decentralized autonomous organizations (DAO) on the legal profession. A DAO is an open-source interface functioning through smart contracts for users to interact with their own digital assets; in most jurisdictions, a DAO is therefore just software, not a company or other legal entity, and that creates uncertainty for lawyers.

There are plenty of technology companies ready to help law firms build blockchain-based infrastructure and applications. ConsenSys, based in New York City, is one of them. “Lawyers can leverage blockchain technology to streamline and simplify their transactional work, digitally sign and immutably store legal agreements,” it says in its explanatory paper Blockchain in the legal industry.

“Using scripted text, smart contracts, and automated contract management reduces excessive time spent preparing, personalising and maintaining standard law documents,” it adds. “These cost savings are passed on to the customer. Additionally, blockchain democratises access to the justice system by cutting down on consumer complexity and lowering hefty legal fees.”

Because many manual tasks can be carried out automatically, the hours spent drafting and amending legal documents are significantly reduced, which in turn can push down the hourly fees lawyers charge clients. Lower fees could increase demand for legal services.

One of the best indications of blockchain intent from the legal profession is the Global Legal Blockchain Consortium, mentioned earlier. It comprises 300 law firms, large companies, technology firms, and universities. Major law firms among its members include Baker McKenzie, DLA Piper, Dentons Canada, Hogan Lovells and Freshfields.

The consortium was created to develop standards to govern the use of blockchain technology in law, in relation to things like data integrity, data security, and data privacy in contracts, documents, and communications; interoperability between large corporate legal departments and law firms; and using blockchain to augment legacy systems to extend their useful life.

Law firms slow to adopt Web3?

All is well and good. But many law firms are not convinced they should rush to adopt Web3. They are unlikely to admit they are technological laggards, but plenty of industry commentators are highlighting that this is the case. “The legal industry has been slow to modernise”, is how ConsenSys sums up the sector’s take-up of blockchain.

Notarize, a U.S. company that provides online notarization as a “simpler, smarter and safer” alternative to notarising documents on paper, says there is often an unwillingness to change. Although Notarize has won plenty of business – it was placed 24th out of 500 in the Financial Times’ list of “The Americas Fastest Growing Companies of 2022” –  it says “some law firms are resistant to blockchain technology”.

These firms are fearful of obsolescence but hopeful that a significant sector of the population will prefer doing business as they have always done it. “If Web 1.0 and Web 2.0 are any indication, avoiding the implications of new tech is a recipe for reluctant adoption at best, and a loss of millions (or in some cases, billions) at worst,” warns Notarize.

Jonny Fry, CEO of consultancy firm TeamBlockchain, says the introduction and use of any technology in the legal sector is at risk of being a slow process “since lawyers are inherently cautious and reluctant to change – they know only too well the potential legal and financial implications involved”.

Writing for the London business newspaper CityAM, Fry outlines the benefits that blockchain technology can bring to the legal sector, but lists four obstacles standing in the way:

• Technological indifference. “Historically there has been a lack of investment in technology in the legal industry,” says Fry.

• The importance of evidence and documentation. Most documents are still in hard copy so lawyers focus on using those rather than trying to create or find blockchain-based alternatives.

• Blockchain is not accepted or trusted in many countries because of legal concerns about the lack of central governance the decentralized approach.

• Blockchain is difficult to scale up. It is limited by the speed at which a peer-to-peer network of participants are able to come to a consensus on the state of a digital ledger of transactions, and this is a reason why the technology is not being used more widely.

The barriers are lifting

There’s no denying that the third point, about legal uncertainty, has been holding back law firms. But things are changing. It was only a year ago, in November 2021, that the Law Commission for England and Wales published advice for the government concluding that the current legal framework is “clearly able to facilitate and support the use of smart legal contracts without the need for statutory law reform”.

It added: “Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law in specific contexts. Although some types of smart legal contract may give rise to novel legal issues and factual scenarios, existing legal principles can accommodate them.”

So to conclude, it is only a matter of when, not if, law firms will start using smart legal contracts and other Web3 technologies in a major way.