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Bitcoin, blockchain and smart contracts: consequences for family law in the not too distant future

Byron James barrister, Expatriate Law (United Arab Emirates) considers the possible implications of bitcoin, bitchain and other developments on financial remedy cases.


Byron James barrister, Expatriate Law (United Arab Emirates)


It is hard to escape the fact that despite the hard work of reformers including most notably, the President of the Family Division, Sir James Munby, much of family law remains firmly rooted in the past, with some practitioners and judges clinging on to a traditional way of doing things rather than embracing the benefits of new technology and harnessing it to the greater benefit of our clients. This is by contrast to other areas of law and some other jurisdictions, but also, and importantly, to clients. This manifests in numerous ways that stand as bizarre relics to a time gone by, from the need to apply for permission to serve by email (when pretty much every other document in the case is sent by the same method) to proceedings being manually recorded in some instances by non-expert typists, not to mention the lack of proper Wi-Fi in many courts. Clients often look on bemused as we practitioners explain to them the arcane rituals we routinely trudge through, wondering why they should be the ones to pay the additional amounts required to adhere to the same. Having collated a bundle online into PDF form is there any good reason, why thousands of pages are printed off, paginated, put into physical binders, then couriered to chambers and courts around the country, only to be disposed of a few days later?

Whilst other jurisdictions and industries stand on the frontier pushing forward in hugely innovative ways, we remain at the printer and the hole puncher, fiddling about with and constantly filling up ring binders; it as quaint or charming as a Morris dance in a village square. The way we practice and interact with each other and the court will have to change dramatically in the very near future. Those that continue to refuse to adapt will simply be left behind because in the end client service will dictate that we look forward bravely and not worriedly behind.

As part of the way in which we adapt and learn about the ways in which technology will inevitably change our daily practice, so to we must be aware of the ways in which the world is evolving in terms of asset categorisation. Cryptocurrencies are becoming increasingly popular and important. Most recent estimates indicate that there are 2.9million to 5.8million unique users. The concept of blockchain is also something of increasing utility and that beyond just the servicing of bitcoin. The decentralised transparency is attractive and is being considered and used as a long term operating model across a variety of applications, from peer to peer insurance even to online voting

Bitcoin

Currently, we rely on owning a number of assets in different ways across a variety of third parties. This requires us to confirm with each of the third parties what assets are held by them, usually by documentary confirmation such as bank statements. Sometimes assets are held within a centralised system such as Companies House or the Land Registry and can be publicly accessed, other times they are held privately, such as within a trust, and determined by reference only to an originating document. The future is likely to be very different.

Bitcoin, or 'digital gold' as it is known colloquially, has changed a great deal in the currency world. There are key aspects to what makes bitcoin unique. It is digital, a cryptocurrency, without any central bank or repository. The blockchain is the mechanism by which the bitcoin is maintained. The blockchain operates as a distributed database that self regulates the entire currency. It is a public ledger that records all bitcoin transactions, updated roughly every 10 minutes when a new block of accepted transactions is created and added to the chain. This allows for, inter alia, the prevention of double-spending and determination of currency value as against other currencies without centralised control. The record keeping process is known as 'mining', whereby a new block can only be added to the chain once the proof of work therein establishes the integrity of the transactions recorded. As the currency is digital, the blockchain ledger does not record actions in chose or promissory notes but rather it is where the currency actually exists as unspent transactions.

The decentralisation of asset holding will make determining the wealth of individuals much harder. Bitcoin is held, as above, literally in the public ledger. Every piece of cryptocurrency has a public and private key: the public key is used to verify to the outside world that the paired private key has given the currency instruction and the private key is used to monitor or alter that instruction. These keys, providing access to the bitcoin entitlement, are held within a 'wallet' and then depending on the provider of this wallet depends on who has access to the various keys. Without the key or the wallet, it is not possible to know what level of bitcoin is held by any given person.

Decentralising assets will make determining an individual's wealth much harder

This will have implications for things such as the payment of tax and completion of tax returns as it will become increasingly difficult to objectively confirm the information recorded within those documents; consequently, their utility in proceedings, and specifically in matters such as the calculation of child maintenance, will diminish. One might declare that no cryptocurrency is owned at all, but have a wallet with a key that accesses the equivalent of million GBP. One might be able to trace to that amount if there is a trail through centralised organisations (say if I purchased £1,000,000 worth of bitcoin from my traditional bank account) but not, for example, if the services I provide are paid to me in bitcoin via the blockchain. It will also have severe consequences for bankruptcy, where one can declare to the world that you have no assets and therefore your debts extinguished, whilst holding your decentralised wallet with one million GBP stored therein.

Just as for tax, for insolvency and other areas where the objective confirmation through third parties is an integral part of the process, so for financial remedies it will become increasingly difficult. The process will have to change, almost certainly within the blockchain. There will need to be some form of regulation, that is beyond the level of current sophistication. There is a possibility that the digitalisation of asset holding will make determining an individual's wealth easier but only if the current system is remodelled to allow matching between assets within the blockchain and individuals. Whether that happens or not depends on the level of control governments are able to exert over an otherwise decentralised system.   

With no centralised system of control, how does one preserve a decentralised asset?

It is also worth noting that the preservation of assets is extremely difficult under this system. Once one has identified an asset, in the absence of a centralised authority to enforce a freezing injunction such orders are essentially worthless. An in personam order is still available, but without an overreaching third party to ensure compliance, coupled with the difficulty in asset tracing as above, one might think it is of limited value.  

One could take active steps such as an Anton Piller order to physically obtain the hardware on which wallets are held but this has limitations because one still needs to access the software therein; a further order from the Court would be required to access such content within the seized hardware as well as sufficient technology/expertise to break in.

This could perhaps one day be solved by a coding issue, perhaps inherent within the block chain, but this just returns to the difficulty of achieving regulation beyond the self-regulating aspect currently enjoyed let alone determining the identity of who such a regulator should be.

Blockchain

For family lawyers, the blockchain can perhaps best be explained by use of a metaphor. If one was to have a draft order that required perfecting, the standard methodology would be to email that draft order as a Word document to the other side and invite their tracked changes. On receipt, the changes would be made by the other side and the original author would be locked out from the same. The changes made would only be capable of observation and amendment after they have been made and once permission had been given for the original author to be let back in, i.e. when the Word document is emailed back to you. This is similar to the mechanism by which banks currently manage transfers and spending: they lock the account whilst they make alterations, decrease the balance, update the other side and then reopen access.

The blockchain is entirely different. Imagine, instead of the above method, there was one online document to which both parties have access and that the single version is always accessible and available to them with changes being visible in real time. This is how the blockchain works and thereby achieves transparency. It is a shared, public ledger, always being amended and updated in real time. 

In Sweden currently, they are trialling putting the country's land registry on the blockchain: "the plan is to put real estate transactions on blockchain once the buyer and seller agree on a deal and a contract is made. From there all the parties involved in the transactions -- the banks, the government, brokers, buyers, and sellers -- are able to track the progress of the deal once it is completed"1 . Not only will this make the process quicker, less reliant on completion of documents and the returning of the same in a timely manner, but also more secure and more transparent. It is envisaged that this will lead in turn to fewer real estate disputes, mortgage and identity fraud.

The blockchain may well be transported into the English legal system. As well as the Land Registry, it could be used to replace the current register of births, deaths and marriages. There could then be some form of integration between the registries for land, births, deaths and marriages and perhaps also a wills blockchain as well. The three could update and interact with each other, providing a self-regulating, transparent public ledger of property ownership and the basis of the same following death, marriage, divorce or otherwise.

There is also scope for the blockchain to be used as a means of storing HMCTS data. If one moves away from the concept of retaining hard copies of information in a building, the process of storing files on a hard drive in a HMCTS server might be considered the next level but it is in fact just a step towards there being no centralised repository of information. The blockchain would provide an easily accessible place for case information to be stored, updated and amended as required, and there would be no need to destroy files more than 6 years old.

Smart contracts

Blockchains provide a faster, more secure means of paying a party without the need to use an intermediary. The decentralised ledger has led to the creation of 'smart contracts' which are essentially self-executing and would essentially be the conversion of contract terms into computer code which would then be stored and replicated within the blockchain. This would then lead to the automatic implementation of the terms of the contract, such as the consequential transfer of money. They operate on the "If-Then" premise of contracts/coding, which one might consider is perfect for the implementation of financial remedy orders.

Could the future involve self-implementing financial remedy orders?

Imagine where the terms of a financial remedy order are converted into code and then placed within the blockchain. This would then enable the contract to execute itself once the triggering date is reached. On the triggering date of a Mesher order the property could be placed on the open market for sale, with the potential terms of the sale contract written into the initial code, the money would then be allocated to the parties in accordance with the terms of the financial remedies order, as per the order translated into code instruction.

If there is a blockchain land registry, then the code could also be used to update this ledger at the same time providing an automatic reconciliation of property ownership. The cost of implementing non-contentious issues would be reduced to the drafting of a code and the amount of form filling, reliance on the compliance of third parties and the other side with inevitable consequential delay would all be eliminated or at the very least, reduced.

Smart contracts as a vehicle for maintenance orders: automatic payment via the blockchain
There would also be a potential use when it comes to the payment of maintenance. An automatic instruction could be provided via the written code to ensure that the payment from party A to party B in accordance with the terms of the financial remedies order.

In the event of default, either there could  be inbuilt penalties, such as fines, or a notification issued to the relevant Court. The blockchain itself could then be reviewed to understand the activity in the market in the event of default, if such remedy is required following the automatic clauses available within the coding as set out above.

The future

The practice of family law will be very different in the near future. We already lag behind dramatically even as we come to grips with things being online and not on paper, whereas the level of sophistication being deployed in other fields moves on apace.

Progress and change is inevitable, and all too often the main opposition to it is based on nostalgia and lack of funding, which are poor reasons to remain fixed to the past: whilst some family lawyers are out there complaining that the iPod will never catch on, the rest of the world is out buying their iPhone X.

1 https://www.reuters.com/article/us-sweden-blockchain/sweden-tests-blockchain-technology-for-land-registry-idUSKCN0Z22KV

7.12.17