Working in the fast-paced, demanding legal sector can often mean buzzwords and jargon are commonplace, especially when it comes to legal expenses insurance (LEI)! To help simplify these terms for you, our brief guides give you the know-how, so next time a colleague asks about the latest talk, you’ve got it covered.
With the increasingly frequent use of techy terms such as blockchain and smart contracts, we take a deeper look at what they are and what they could mean for legal insurance.
LET'S START WITH THE BASICS. BLOCKCHAIN?
In its simplest form, think of blockchain as a central record (or ledger) of all the transactions taking place within a network. Each transaction is a ‘block’ and the ledger builds as more transactions take place. As the ledger expands with new blocks, it’s shared continuously as each transaction needs to be validated by multiple users and locations on the network. Once validated, the block links to the previous transaction, linking them together in a ‘chain’, hence ‘blockchain’.
It’s widely purported that blockchain’s real benefit lies in offering both security and access to multiple users. As it’s not reliant on one server and each block has to be validated by multiple users on the network, it eliminates any single point of failure and control. Records are, to all intents and purposes, incorruptible as entries and changes are visible, explainable and traceable to all. What’s more, as each record is time and date stamped, records can’t be changed retrospectively without detection. This offers full transparency on transaction history, which in turn allows smart contracts to be executed.
RIGHT THEN, TELL ME WHAT'S SO SMART ABOUT SMART CONTRACTS?
A smart contract is effectively an electronic or digital expression of contract terms. These terms are autonomously executed digitally when the pre-defined requirements of the contract are fulfilled or received in the blockchain. Take the example of buying or selling a house; a smart contract could be designed to execute each stage of the sale. Once relevant data is received in the blockchain, for example favourable survey reports, validation from the Land Registry, or a receipt of the consideration, the relevant next step is carried out digitally and almost immediately.
OK, SO THEY CAN EFFECTIVELY REMOVE THE MIDDLE MAN?
Exactly. Thanks to being built on blockchain, smart contracts remove the need for a trusted middleman in a transaction. There’s clearly a need for professional input in developing the content of the smart contract, but once in place, it operates every time the appropriate data is received.
HOW COULD THIS BENEFIT LEI?
The speed, accuracy and efficiency of smart contracts built on blockchain equates to real potential benefits for many areas of LEI. These include validating and authenticating records to reduce fraud, gathering and auditing data that is relevant to underwriting or automating claims payments. However, as with any emerging technology, the long-term security against new types of attacks is unknown. Plus there is a current lack of standardisation, regulation and governance in this area, meaning it’ll be a few years yet before smart contracts are the business norm.