Bitcoin has become so popular in the past decade that those two pizzas would now be worth $44.1 million. That's an impressive investment - well, perhaps if he hadn't eaten them.
Why is Bitcoin relevant?
Besides its impressive increase in value, Bitcoin is relevant because it relies on blockchain technology to give security in financial transactions. Security isn't our top consideration when buying pizza, but it's absolutely essential for the sometimes multimillion pound transactions of our global financial world.
How Bitcoin works
To pay your local pizza place in bitcoin, first you would need to set up what is known as a 'wallet' for your digital currency. You install your wallet as a program on your computer.
Every wallet is unique, and it's the wallet that generates your all-important bitcoin address. You'd give this to someone you wanted to pay you, and you'd need to get the bitcoin address of your pizza place so you could pay them. The wallet generates a new address for you every time you need to make or receive a payment, otherwise someone could in theory track your entire payment history by following your address. Every bitcoin wallet has this function.
Once you have your pizza place's bitcoin address, you can submit your bitcoin payment. At this point security is crucial, and Bitcoin use mathematical and cryptographic mechanisms to make the process practically unhackable.
Every wallet has a unique, secret piece of cryptographic data known as a private key which is used in several ways when you make a Bitcoin payment. When you enter your pizza place's bitcoin address and the payment leaves your wallet, your wallet uses its private key to mathematically 'sign' the payment as it leaves. This provides mathematical proof that the bitcoin came from your wallet. It also stops the payment details being altered after it's been made.
What is a blockchain?
When it's left your wallet, the bitcoin payment is added to the public record of bitcoin transactions, known as the blockchain. However, first it has to go through a process known as confirmation, which means it is processed by the network through mathematical calculations.
The payment is then added to a block of several payments, and it becomes 'confirmed'. Your payment is now part of the blockchain, and for every new block of payments that is added, it is confirmed again and again for added security. As each block is added, it cannot be changed. It is locked in chronological order in the blockchain from that moment on.
Unusually for financial transactions, blockchains are actually public; they don't exist just on computers or systems. Like the internet, they are decentralized and their data is safe from any freak IT malfunction. Anyone can see the existence of a blockchain. Watch 'blocks' being added to a bitcoin blockchain.
The information in blockchain isn't available to all curious eyes. Only you have the private key that lets you make and see the details of a payment from or to your wallet. As you can see on the Bitcoin blockchain, you can't see what the transaction is for: it could be for buying pizza or a penthouse suite.
The data is encrypted as soon as it leaves your personal wallet. All other users can see is the 'hash': a meaningless combination of letters and numbers. Have a look at the 'hash' column for the entries on this bitcoin blockchain.
The security of the process is encouraging for such a new technology. Building on its famed 'unhackable' security, blockchain is already known for encouraging a greater sense of trust and transparency between people involved in a transaction because:
- you deal directly and securely with the person you're paying, or who is paying you
- there is no need for a third party like a bank to authenticate your transaction
- you can see the transfer take place in real time as the blockchain automatically updates when another block is added.
Where bigger sums of money are involved, it would be reassuring for any corporation to see their transaction completing in front of their very eyes.
How blockchain is being used in the real world
The potential use of blockchain is not restricted to financial transactions. Blockchains can store many different types of information including computer code. This allows any kind of data to be stored in a blockchain, which gives it many potential uses beyond exchanging Bitcoin.
In a society and a global market experiencing the ever-growing risks of cybercrime, the use of blockchain technology is increasingly relevant.
The Illinois state government are testing a system where the doctor and parents can register a birth on a blockchain. The record is automatically time-stamped, providing the date and time of birth. The healthcare system can add blood group and any relevant health and genetic information and this record would be totally secure. In the wider pilot scheme, Illinois State's Blockchain Initiative is considering widening the scope of this idea to create a 'comprehensive identity tool-set', to which third parties could request encrypted access.
Blockchain has important implications for digital security and preventing fraud, from politics to the entertainment industry. In 2014, the Danish political party Liberal Alliance became the first to use a blockchain voting system, recognising the potential of the technology to prevent voting fraud or election rigging. Closer to home, a London startup Aventus have created a blockchain-based ticketing system to cut out unregulated ticket touting and counterfeiting.
Particularly in the US, the financial world is already realising the potential for blockchain technology. Larger companies such as JPMorgan want to team up with small fintech startups to develop powerful transactional tools.
We are lawyers and we don't eat much pizza. Why should we care?
Financial institutions and other industry sectors have shown surprising agility and competitive creativity in using blockchain. The legal profession does need to keep pace. Even if law firms are not yet using block chain technology themselves they will have to deal with clients who do, or who are exploring its capabilities and implications.
It is significant that Allen and Overy appointed fintech specialists Nivuara as their entrepeneurs-in-residence in July 2017 to target legaltech (helping in-house lawyers and law firms to operate and deliver their services in smarter, more efficient ways). Nivaura, founded in 2015, has developed a platform which automates the primary issuance and administration of financial assets through a centralised system or a blockchain infrastructure. The company was a participant in the Financial Conduct Authority's regulatory sandbox – which allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers – where it successfully completed a test issuance of bonds on its platform.
It seems it's going to be essential for firms with corporate clients to keep ahead of the curve as the financial world comes to terms with the changes heading its way. Blockchain could have an even greater impact on our whole legal approach across all practice areas.
Information and its transfer such as property ownership is valuable
Head of the IMF Christine Lagarde recently stated that cryptocurrency will eventually remove the need for banks altogether, and her argument raises some important issues for the legal profession. Aside from removing the need for the lengthy process of getting onto bank panels, this would undoubtedly encourage a shift in our thinking about any transfer of any digital valuables, not just currency.
Information is just as valuable, if not even more valuable to our clients, and we treat transfers of information in much the same way as we treat monetary transfers. Companies file for intellectual property rights and patents to protect their original ideas. New home owners have the ownership of their houses registered at the Land Registry. Even our control over our own personal affairs can be transferred: we give these rights to our trusted loved ones when we create legal powers of attorney.
When these rights of ownership are passed to someone else, lawyers step in to help. Of course, it's essential that crucial information like property ownership or legal powers of attorney is recorded correctly and kept safe, but we know that this doesn't always happen. The frustrating search that follows means time and money wasted for lawyers and their clients.
Blockchain could offer a more reliable solution. What could the future of the legal profession look like if the recording of crucial information, like property ownership or legal powers of attorney, was made completely error proof?
And could the potential of blockchain stretch even further to accomplish the most complex transfer of information of all: a legal agreement.
There is much anticipation that one area for exploration by legaltech initiatives such as Fuse will be the much-touted "smart contract". In a blockchain smart contract, it would be discussed and agreed in a way we would recognise, but its appearance and the process of execution would change radically. The contract would be computer code, not paper, and it wouldn't need to be sent to each party and signed: it can self-execute when certain criteria have been fulfilled or a certain event has occurred.
Taken to the extreme, smart contracts support the concept known as Decentralised Autonomous Organisations (DAOs) where almost no human involvement would be necessary to do business. These organisations would act through sets of pre-coded instructions and self-executing smart contracts, and all these records would be added to a blockchain.
The idea of a DAO is an extreme example of the application of blockchain technology, but it illustrates how blockchain can streamline a remarkably complex process. Blockchain seems ideally positioned to offer the legal profession a new platform to launch a more streamlined, efficient and cost effective service, and possibly more.
The applications of blockchain are very appropriate for the legal profession, if it chooses to embrace them. Christine Lagarde wasn't wrong when she recognised that blockchain technologies such as cryptocurrency could offer all of us a 'brave new world' of both economic freedom and interpersonal exchange, though her suggestion it may replace banks will undoubtedly have had a mixed reception.
However we need not worry that technology will replace lawyers as well. As human beings, arguably we need the unique combination of empathy and dedication that we admire in the legal professionals we ask to help us with our affairs.
So when can I draft my first smart contract?
Although the applications of blockchain are developing at a promising rate, is difficult to know when it will become a real part of our professional future. When regulators start to grapple with the implications of the technology, we will start to see blockchain develop a more tangible future.
In the meantime, the creative application of blockchain technology can undoubtedly add value to any industry and, eventually, any legal practice.
The significant opportunities to add value to clients in both the security and efficiency of legal process will be seized upon by the more technology-informed and creative legal practices. Blockchain could not only add value to our clients' and our own professional lives but in time will be used to streamline the essential public services that affect us personally too.
Without doubt, blockchain is poised to become a very real part of our legal future, and perhaps even our daily life. (And not just for getting pizza).
Catch up with Becky at Legal Cheek's seminar on legaltech at Osborne Clarke Thursday evening 26 October 2017 London: How technology and innovation will change the role of lawyers
Read how The Law Society is partnering with Seedrs to support the UK's thriving lawtech ecosystem
Further reading about Bitcoin