Blockchain, AI, and the Law: The Intersection of Disruptive Innovations

Over the past decade, two emerging technologies have attracted an enormous amount of attention from institutions, financial markets, the media, and the public:

• Blockchain, the distributed ledger protocol behind cryptocurrencies such as bitcoin
• Artificial intelligence, an umbrella term for computational methods that are designed to mimic human behaviors such as learning, problem-solving, and decision-making

The public is mostly familiar with these technologies in the forms of cryptocurrency, which many people hold as a speculative investment asset, and consumer-facing AI chatbots. However, both technologies have additional applications that are much discussed, though in some cases less well developed, in the legal industry.

What’s more, these technologies’ very different designs lead them to have different strengths that can complement each other. For legal advice on using these technologies within your industry, speak with a technology transactions lawyer.

Blockchain: Transparent, Decentralized, and Auditable

Blockchain technology, which emerged from cryptography, is a public, decentralized ledger system. Transactions are recorded in a redundant, transparent manner across a network of computers under no central control.

This design gives blockchains traceability and makes records extremely resistant to tampering. Attempting to tamper with a record would introduce inconsistencies that would turn up in automated audits conducted across the network.

Transparency may not be the first thing the public would associate with blockchain, given that cryptocurrencies are widely used in money laundering, tax evasion, and other illicit activities. This is because the transparency of blockchain is limited to information that is recorded on the ledger. Specific applications of blockchain can be designed to provide transparency where needed to ensure confidence in the system.

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Artificial Intelligence: Indeterminate, Pattern-Based, and Predictive

In contrast to blockchain’s determinacy and transparency, systems based on artificial intelligence are typically opaque by design. It is often said that AI is a “black box” that nobody really understands since the system uses machine learning and applies its learning in novel ways. One element common to most AI systems has even been named an “artificial neural network,” implying that it simulates the behavior of the human brain.

None of this is exactly accurate. AI algorithms, like those behind all other software tools, are code programmed into computers by humans, and they follow the rules programmed into them. However, these systems are designed with elements of complexity and randomization that means that users of AI – even institutional users with specialized staff – cannot necessarily audit or reproduce how a system arrived at a given conclusion from a given prompt.

As a general rule, AI tools are programmed to incorporate information from very large datasets, accept prompts given by users, and return outputs that are statistically likely to satisfy the intent of the prompt. That makes properly programmed and prompted AI systems useful for applications such as pattern recognition and prediction.

Real-World Legal Applications of Blockchain Technologies

The most commonly discussed legal application of blockchain technology is the so-called “smart contract.” This term describes contracts that are executed and documented on the blockchain.

Smart contracts may also contain automated features such as payments being issued when certain conditions — verifiable on the blockchain itself, from some accepted third-party source of information, or based on human input — are met.

While smart contracts are in their infancy, several states — including Arizona, Arkansas, Iowa, North Dakota, Ohio, Oklahoma, and Tennessee — have passed laws allowing contracts to be executed via blockchain technology.

Other potential applications of blockchain-based technology in the law could include:

• Authentication of documents such as wills, trusts, and titles
• Immutable records to be used for regulatory compliance and audits
• Records of intellectual property rights

Real-World Legal Applications of AI Technologies

As for artificial intelligence, lawyers have already started using AI tools to streamline workflows and assist with research, drafting, predictive analytics, and other tasks.

Unsurprisingly given that this is new and rapidly changing technology, attorneys are also encountering some pitfalls from AI’s indeterminacy. These include the challenges it creates for data privacy and its ability to generate legitimate-looking but inaccurate results, such as citations to nonexistent cases and arguments with no basis in established law.

More sophisticated uses of AI-driven tools in legal practice, specifically making use of the advantages of indeterminacy, could include:

• Real-time issue-spotting, based on public or private datasets, in areas such as intellectual property infringement, regulatory compliance, and fraud prevention
• Identification of inconsistencies, anomalies in transactions and other behaviors, and other material relevant to the pretrial discovery stage of litigation

As is the case with smart contracts, AI tools designed to assist attorneys and other legal professionals are still in the early stages of development. It remains to be seen whether and how these more sophisticated use cases will be built out.

How Can Blockchain and AI Complement Each Other in Legal Practice?

As the blockchain and artificial intelligence industries mature, attorneys will want to use the tools in ways that complement the transparency and immutability of blockchain with the pattern-recognition and issue-spotting capabilities of AI.

Hypothetical uses could include:

• Designing a smart contract such that an AI system will be used to monitor whether a condition has been met to trigger a payment or other obligation, possibly incorporating human review
• Recording activities subject to regulatory compliance on the blockchain and using an AI-based tool to audit the record for any abnormalities requiring further review
• Using the blockchain to record the version history of legal documents so that any use of AI to draft a document or modify a template, as well as subsequent human review and revisions, are fully transparent

Getting Legal Guidance for AI and Blockchain

Given the amount of sales and marketing hype surrounding these emerging technologies, it will remain important for decision-makers at law firms, legal departments, and regulated industries to familiarize themselves with the underlying technologies of blockchain and AI.

Industry leaders should understand the strengths and weaknesses of these tools, and carefully scrutinize any products they are offered to ensure that they are effective, secure, compliant, and deployed for suitable purposes. For legal guidance, contact an experienced technology transactions lawyer.