Talking Tech episode four: Reacting to new technologies: Blockchain (Transcript)


 

David Fowlis: Hello and welcome to Talking Tech, a podcast that considers the regulatory implications of new technologies for the legal services sector. I’m David Fowlis a regulatory policy manager at the Legal Services Board and Today I’m joined by joined by Dr Anna Donovan of University College London’s faculty of laws. We’ll be talking about the potential benefits and challenges that the use of distributed ledger technologies such as Blockchain present for consumers and providers of legal services and how legal services regulators might respond to these challenges. Anna welcome to the podcast if you’d like to say a few words about your background and your work on legal services technology

Anna Donovan: thanks David and first thank you very much for inviting me into this programme of work. So, I’m the inaugural vice dean of innovation here at the UCL Faculty of Laws where I’m also a member of the UCL centre for Blockchain technologies. Outside of UCL I’m a member of the UK LawTech delivery panel where I chair the education task force. Prior to my move into academia I was a corporate solicitor here in London, but it was really my move into the academy that generated my interest in Blockchain technologies and its implications for the sector.

David Fowlis: Okay great. I think first of for our audience it would be useful just to have a brief discussion of what distributed ledger technologies and Blockchain are and aren’t.

Anna Donovan: it is a great first question and actually one that is not necessarily by any means settled (and we go into the detail of the technology in the corresponding paper). But, in brief, DLT or Blockchain technology is a form of ledger. Something that we’re familiar with across all sectors from banking and finance to registries. But it has some very special characteristics which is why this technology has captured the attention of the market. It’s an append only ledger – we can only add to it, we can’t take away from it. It’s time stamped so it’s a reliable record of account and it’s distributed across the computers (or nodes) in the network so there’s no single central authority, which is a key feature of the ledger itself. It also adopts a consensus mechanism, which is very particular to the function of the ledger, and this consensus mechanism operates in a way to validate the data on the ledger that makes it very difficult to tamper with. And so, these are the characteristics that we see coalesce for people to say well this type of ledger is a new kind of form and record of account. It’s reliable and really we talk about it being secure by design. The technology itself builds in protections to the records that it holds.

David Fowlis: okay, and just to understand the difference between specifically Blockchain and DLT…. a general type of distributed ledger…

Anna Donovan: Yes, because the two terms are often conflated. So Blockchains are all DLTs but not all DLTs are Blockchains. So distributed ledger technologies are the general technology that supports a shared, distributed ledger of account. Where the bitcoin Blockchain differs slightly (and it’s by far at this stage really one of the most well-known forms of DLT) is how the data is added to that ledger. Data is added in blocks which are added to the ledger every ten minutes (so really a key difference is how we collate, add and link the data on the ledger). And Blockchain, just for further clarification is, the DLT that came to the fore really with the cryptocurrency ‘bitcoin’ and that’s why it’s the term that has become really quite familiar.

David Fowlis: so, what are the benefits of using a distributed ledger technology – let’s just say Blockchain from now on for shorthand – What are the benefits of that as opposed to using a traditional method of exchanging payment for a good or a service?

Anna Donovan: yes. Before I get into that, it’s probably helpful to answer the question to distinguish between permissionless and permissioned ledgers, if you wish. So, a permissionless ledger is an open type of ledger that we associated with Bitcoin – anyone can join anyone can verify. And a permissioned ledger is, as the name suggests, more of a closed ledger. You need to be approved to actually join and transact on the database. And I mention that in response to your question because that distinction goes to answer some of the benefits – or otherwise. So, the benefits broadly of using DLT [in comparison to off-chain transactions] is it’s fast, it’s efficient, it’s transparent. It’s a reliable record of account due to the so-called immutability of the ledger. That is, it’s quite difficult to tamper with. Also, ledgers don’t just store digital cash (we mentioned bitcoin earlier). They can be used to store any type of digital information. So, they can be used to innovate in the way that we interact with each other. We’ll probably come on to a bit later on smart contracts for example. So, one benefit of the ledger is that we can automate these contractual relationships. Really though at their core one of the primary benefits that DLT introduced to the world is this notion of trust. The technology itself manufactures trust between us. We don’t have a centralised third party, we’re not trusting a bank or other gatekeeper. What we’re doing is trusting the maths, the computational trust in the system and so that opens up a wealth of opportunity in terms of innovating relationships and creating reliable ledgers, trustworthy ledgers. That’s also the reason I thought I’d answer this question by distinguishing between the permissionless and permissioned ledger, because that trust is infinitely more important in a permissionless environment where we don’t know each other, we don’t have trust. In a permissioned environment, there’s trust that exists between us off the chain because we know each other. We’ve probably signed an on-boarding agreement and so the distinction between using a ledger and a regular database in a permissioned environment might be less clear cut.

David Fowlis: Okay so just to sum it up a bit. We’ve got…we can have faster transactions; we can have more efficient transactions. There’s a degree of transparency that’s maybe greater and there’s this idea that you, particularly with permissionless ledger it manufactures by the very nature of it manufactures trust as you put it. The permissioned ledger you’ve already been vetted presumably you get to sign on to it and go on to it. Just about the transparency, I just wanted to clarify a bit there. What does that entail, if I’m doing …. what would be …. how would it be more transparent if I was say transferring an asset and using Blockchain than if I was using another more traditional….

Anna Donovan: certainly, so there’s a couple of ways we could look at the transparency question actually. On let’s say a permissionless ledger, the ledger is open to everyone. Its public, everyone can see the ledger so we can see the transactions that are occurring, whereas on a traditional database that might not always be the case – it could be a closed system. But we also have the transparency of the transaction history if you like. We can go back and we can witness the transfer of an asset from A to B, from B to C, which whilst certainly possible in some off chain databases there might be greater permissions around that so there’s a limited group of people who can see this data.

 

David Fowlis: Okay, so for what sort of asset would that be useful, if we wanted to think about the things that lawyers usually deal with, whether its property, real property or other kinds of assets? Stocks shares I guess, these kinds of things. Where would that be employed?

Anna Donovan: Yes, so we’re seeing it a lot in supply chain management as well as the examples you give, so we certainly have an example in the land registry in this jurisdiction which is going to be very ground-breaking actually, but supply chain management is a key area. Maersk for example have their trade lens platform that they use. We actually saw one of the earlier applications of blockchain with a company called Everledger, which is diamond tracking. And so, where transparency is valuable with supply chains is, we can track the transfer of the goods throughout the whole lifecycle and transaction cycle. This is where the shipping example’s particularly useful as it not only helps verify the ownership of the asset but, coming back to your earlier comment around speed and efficiency, it dramatically reduces the time and the risk involved in terms of transportation documents, bills of lading, which can be digitised and put on the ledger. All parties on the chain can access that – it’s tamper proof, relatively. There’s a whole suite of domains for which this is valuable; IP management being another key example which I’m sure a lot of legal services providers are involved with.

David Fowlis: Okay. So, I think just one thing that I had at the start of this was is this really a solution in search of a problem? Do we have any idea of what the quantifiable benefits of this may be in terms of how much cost this might save in particular transactions? Do we have any examples of where this has been put in place and then we …the people who using it are seeing that it’s greatly reducing their costs or it’s making… actually achieving these efficiencies?

Anna Donovan: I think that is to a degree a fair criticism, but I also think that’s part of the innovation cycle. We need to engage with these type of activities to understand where the real value lies, to understand where the opportunities are, where some of the problems are. Ben Horowitz, who’s very active in this space, had a really nice example of talking about that and saying ‘well, whenever you have a new disruptive technology, it never performs as well as the incumbents but it has these capabilities and characteristics that they don’t,’ and he shares the example of the smartphone. When we first experienced smartphones, people said well you know it’s just a personal computer with a too small screen. But it had GPS tracking, it had a camera so we could have innovation like Lyft, like Uber and so over time it allows that innovation. And I think that’s where we are to a large degree with DLT. Yes, it still has its flaws, particularly around scalability and the time taken for certain transactions, but it has this trust mechanism which really is going to facilitate innovation. In terms of quantifying the costs, it’s difficult to say because it is such a nascent technology, although estimates that are provided are significant. So, tens and tens of millions per year, even in automobile insurance alone. So, the view is once we reach scale, which could be some way away, the cost savings are going to be significant.  Partly because of the reduction in time and transaction costs, also because it is envisaged there will be a reduction in disputes between parties.  Also, for a whole host of innovations which we can’t envisage now. So, it is expected to be significant and therefore worth the investment but it’s difficult to quantify with accuracy at this stage.

David Fowlis: And just thinking about…you talked about contracts, disputes between people, and that’s obviously one of the bread and butter things of legal services. So perhaps if we now moved on to how the technology might be specifically used in legal services. And one of things we’ve already talked about is smart contracts, and if perhaps you’d just like to explain a little bit about what smart contracts are and perhaps what they’re not – some of the terminology can be a bit confusing – and how Blockchain can work with …how that works.

Anna Donovan: and I think what smart contracts are not is a particularly important point certainly for legal services consumers. So smart contracts were the brainchild if you will of Nick Szabo who was a lawyer and a computer scientist and who wrote about this back in 96-97, but it wasn’t until the bitcoin whitepaper in 2008 that we had the Blockchain technology to make them happen. Because what Nick Szabo did was he brought together his computer science knowledge and his legal knowledge – he was a polymath in that respect – to say how can we automate the contracting process? How can we make contracting between the parties more efficient? To reduce not only the financial transaction costs and frictions in the system, but also what he described as the mental transaction costs of anticipating a breach of contract, drafting to mitigate the breach of contract but then it inevitably happening at some point to and then having to…

David Fowlis: and also having to check that there’s been a breach of contract and those things….

Anna Donovan: exactly so we’ve got the monitoring costs and he wanted to see how can we use technology to reduce that. So, in brief smart contracts are computer code or protocols that automate performance. So, once a certain condition has been met…if x then y…then performance will be automated. So, an example using a real-life example, AXA has its insurance for delayed flights smart contract – you take out the insurance, the code is uploaded, if the flight is delayed by a set period of time you automatically receive the payment. It is trite to say, but I shall say it nonetheless, they are neither smart nor contracts although they are certainly capable of being both. The smart element is likely to emerge with considerations around artificial intelligence.  But, for this conversation, I think where the risk can come for consumers is you hear the phrases ‘smart contract’ ‘automated performance’ and you think I have a legally binding contract for which I have no right of remedy – once it’s performed, that’s the end of the relationship. And certainly, you see people in the non-legal space talking about smart contracts meaning ‘there will never be a need for litigation. There will never be a dispute because performance will be automated’. Whereas legal services providers have hundreds of years of common law experience to know that there will be ongoing risks.  That we can enter into leases to hire music halls and they can burn down before completion, so what do we do in those scenarios? So what smart contracts are not, depending on how they’re structured, is automatically legally binding contracts.

David Fowlis: Right so we talked a little bit about flight insurance. Are there other examples where we’re seeing it? Perhaps shipping, earlier you mentioned those kinds of areas?

Anna Donovan: yes shipping, file storage, leases of properties, so you know one potential avenue for consumers and one of the benefits we perhaps didn’t touch on) is greater agency and autonomy over the use of your assets. So, for example property rental business: do I want to have a digital lock to my property and enter into a short-term lease with a third party who I don’t know?  They pay me the requisite amount of money and then automatically get sent the number lock to access the property.  We don’t need to know each other; we don’t need to meet. If they don’t pay me then they don’t get the number lock.

David Fowlis: you can see it for an Air B & B sort of thing, can’t you?

Anna Donovan: exactly, exactly. And again, we’re using a decentralised system to further decentralise an existing off-chain system. So ISDA do a lot of work in this space (derivatives trading). There’s a huge wealth of opportunity in financial services. Where smart contracts are most useful is where we have that conditional logic: If a, then b. What we’re currently not able to do, although this will depend on development of language, is where provisions have discretion. So, it would be nigh on impossible at this stage practically to say I’m going to put into a smart contract an obligation to use my reasonable endeavours. What does reasonable mean? What’s a material adverse change? So, this is where we come onto a distinction, we quite often see amongst smart contract codes classification. To what extent is a smart contract just code that automates performance of an off chain traditional legal contract, or to what extent does the code itself form legally binding obligations? Does it satisfy tests of offer acceptance, consideration? What we’re seeing at this stage although we’re rapidly moving from there, is this hybrid approach. So, the parties enter into an off-chain contract, certain provisions of which are capable of performance by a smart contract, but there is a lot of activity moving towards a more complete on chain smart contract capability.

David Fowlis: So what we’ve got there is a way of doing …if like you said…if a then b, and…but where somebody says…if you had to think about whether a contract was satisfied, whether performance had been completed, the contract’s not really there yet, because that’s still going to require a human being to think if something’s been achieved, and whether it’s been achieved to a sufficient degree.

I suppose we’ve talked a little bit about assets there and property, so if we just want to maybe speak a little bit about ownership and registration and maybe how that can be used as perhaps the land registry’s work in this area.

Anna Donovan: ownership and registration I think is a really important case study for DLT because it excels on those two aspects: ownership – we’ve got this reliable time-stamped record of account, and registration – which picks up the automation aspect of the technology. So, we can have a smart contract that automatically updates the register in a reliable way and in a timestamped way. So, the land registry example you refer to happened earlier this year, in April 2019. The Land Registry has been running its digital streets programme for some while now, looking at the use of technology. And earlier this year it ran parallel to the underlying transaction, a digital transfer of a freehold property. For the transfer they used ‘Corda’ – so that is a private, but publicly viewable ledger, and they worked importantly (because I think this is something we’ll probably come onto later), to enhance the user experience around that. They developed a mobile prototype, so the buyers and sellers could use their mobile phones to comply with identification requirements, signing, transfer documents and I think the estimate was it took ten minutes to run from having agreed the documentation to the transfer taking place and updating the registry. So, we can see in that example how we’ve got speed, efficiency, trust in the system, legitimacy of the system I think is something we’ll also come on to. The buyer and the seller didn’t have to go into their solicitors’ office with certified copies of identification that they’d provided three weeks earlier for another purpose to another third party. The ledger is automatically updated, so we’re removing user error, we’re removing ‘can we understand the number on this document, was there a slip, was there a mishap?’ And so, it’s very exciting. It should be clear – as the Land Registry’s very clear – we’re not about to shift the land registry onto DLT. But what it does do is show the art of the possible. It shows the support certainly in this jurisdiction for using this technology in a way that delivers consumer benefit. And so, it does lay the foundation to think about scale now on this approach.

David Fowlis: Okay that’s helpful thanks. Again just very briefly talking about identity and I think again we talked about it a little bit there because you were talking about how people could upload documents so they could make sure they were the right person who was selling the property and that sort of thing and they were having to provide copies without having to provide multiple copies of multiple things. But again perhaps, how using it to prove identity, or so would we all end up with a digital ID?

Anna Donovan: Identity is a really important and exciting area for the technology for a couple of reasons. One for the one we’ve just explained – identity verification.  How do I prove my identity, how do I store my identity documents so that they are verified by third parties (such as Government) and so on and so forth but then I can provide a hash or certificate to the service provider confirming I am who I am. So, you’ve got the identity verification piece, which is very important to unlock the potential of the ledger in terms of contracts, smart contracts being legally binding and in terms of enforcement concern.  But you also have the other aspect of identification which is self-sovereign identity. So, how do I control my identity more? At the moment, if I want to, I don’t know, prove my age to buy alcohol, I might end up showing the retailer a document which not only proves my age but shows my address, my gender and so on and so forth, whereas this technology is…is offering potential to say well actually, if all you need to know is how old I am, I only need to show you that bit of my identity, I don’t need to show you anything else.

David Fowlis: In fact, they don’t even have to know your name….

Anna Donovan: exactly, so there are two really important things around identity and that’s why there’s a lot of work on both the verification and the self-sovereign piece going on across the board, and it has a huge unlocking potential, so I think that’s going to be a really interesting tipping point for adoption more generally. And obviously AML, KYCs, critical for legal services….

David Fowlis: anti money laundering….

Anna Donovan: yes…

David Fowlis: So Just wanting to bring it pack perhaps onto legal services, and how the legal system …. how legal service providers, consumers, can benefit from say the use of blockchain in what they do. And then maybe we’ll just talk a bit about how the impact will be on regulation. So just starting off with how it will help consumers do we think? Will it be easier to access legal services? Will it make it cheaper for them?

Anna Donovan: yes, both of those things. So blockchain should make it much easier – once we get to adoption levels – for consumers to access legal services or legal transactions. So, for example you have talked about smart contracts and we see Legal Zoom and Rocket Lawyer for example, they are now both offering, or getting toward offering smart contract technology directly to their consumers. We can see there’s a development – I think Bootstrap Legal does it— for developing smart contract dispute resolution services. So those types of activities will mean that consumers can have their legal needs met in a more direct, quicker, arguably cheaper manner. We talked about the registration and record-keeping function of DLT, and we talked about the Land Registry and how quick that process was. So again, consumers have that speed and transparency as well. So, it should be a significant benefit to consumers once some of the challenges on adoption have been realised.

David Fowlis: okay and so from the legal services provider point of view – is it that those advantages are essentially reflected, or is it that there’s a flipside for the legal services provider? Are they going to be able to make it be cheaper, provide a service that’s more profitable for them, or more straightforward, do more work?

Anna Donovan: in due course, so at the moment what we’re seeing of the impact for legal services providers is mainly the need to advise clients operating in this space. We’re not seeing – and I think the LSB’s own report shows this – we’re not seeing a huge uptake in the deployment of DLT by legal services providers, certainly not traditional providers. But we are seeing a lot of activity, particularly by a number of firms, in terms of supporting their clients through this process. However, in due course, particularly around the record-keeping and automation, we’ll see conveyancing work for example, automation should make it quicker, should make it cheaper so there will be a corresponding impact. There’s likely to be a lag I would say before we see them used for the delivery of legal services, and it’s much more an advisory role at this stage. But certainly, the benefits will accrue.

David Fowlis: I mean, do we think this is something where it’s going to be taking place in larger firms dealing with big commercial contracts rather than something initially that you’re going to see on the high street….Maybe conveyancing will be the route in, but….?

Anna Donovan: I think so and it’s for the reasons that you say. At the moment the investment is coming from financial services, both because the capital is there to invest, but also financial services transactions – coming back to one of our earlier comments – lend themselves to this kind of conditional program.  So that’s where the investment is, that’s where a lot of the work is happening. So yes, we are tending to see this work in your larger law firms. When the trickledown effect comes, it’ll be as you say around fields including conveyancing. I’m sure there’s going to be a lot of work around probate – particularly around recording assets. And so that impact will potentially be quite significant in terms of day to day work, but certainly at the moment we’re seeing it more concentrated around the larger financial services style transactions.

David Fowlis: Okay. And are there things that are really preventing the uptake of blockchain, and are any of those things regulatory or is it more just trying to find uses for the system and the technology and building of trust in it?

Anna Donovan: yes, there’s a real mix. So, from a practical perspective, we need to engage and deal with the question of interoperability. So how do we get different ledgers to be able to speak to each other? So how do we get the scale? We’ve got the question of return on investment. If you speak to most industry participants, a lot of people are interested in this. Can they invest the money in developing the system, dealing with legacy systems and so on and so forth? But we then do move into a really key barrier to uptake and adoption and pick any report on this, and it always identifies regulatory uncertainty is one of the key barriers to mainstream adoption. A lot of people are interested in smart contracts and I know we’re talking a lot about smart contracts, but really that is where we’re seeing most activity with DLT. But questions abound we’ve touched on some of them. When is a smart contract a contract? How do we interpret the contact? What about implied terms? What is the characterisation of a crypto asset? Is it a security? Can we transfer it to party A, B, C? Until we get these fundamental questions settled, there is going to be a nervousness about the types of environments we’re willing to deploy the technology. Now, many lawyers will have a view on all those questions, but its having an authoritative review and view. And what we’re seeing in this jurisdiction is a really important piece of work undertaken by the jurisdiction taskforce of the UK LawTech Delivery Panel that’s led by Sir Geoffrey Vos.  They held a very detailed consultation on some of these questions over the summer, and they are going to release an authoritative note in response, hopefully the intention is by the end of the year.

David Fowlis: So, if we look at how regulators in the UK – England and Wales particularly –are approaching legal services regulator are approaching it. What are we seeing so far from them and are they…and particularly you in your paper note that there needs to be a coherent and principled and consistent approach to this… to technology…why do you think that’s important….and….are we seeing that so far?

Anna Donovan: I think to the extent possible a principled approach is important, because it allows the development of this space. And we’ve seen that in our common law, where if we have clear principles then the courts can respond, regulators can respond in a principled way, and we have this consistent body of knowledge which provides the market with certainty and comfort, that allows regulators to also respond in the way they need to ensure consumer protection, institutional protection. Particularly at a time where we’re seeing the emergence a wide range of disruptive technologies –hence your series! – It’s important to the extent possible that we don’t respond to one in a very mandatory command and control style approach – unless that’s appropriate obviously – and another in ‘well we’re going to have a more laissez-faire permissive approach and we’ll see how that goes.’ So that principled foundation allows a reliable development of regulation around this space. And so, what we’re seeing in this jurisdiction is actually we’re seeing that emerge. So, you know the Law Society has been active in terms of its Horizon Scanning reports, providing information and education as others have. The FCA and financial services sector has been particularly active, and that’s understandable because they are having to deal with an application called an ICO – an initial coin offering – which we’ve not talked about thus far, but briefly, is a way of raising funds by issuing tokens on the Blockchain. Very directly impacting on consumer risk and consumer harm, so they’ve had to act earlier. But again, we’re seeing this thoughtful approach, this wait-and-see approach of the FCA has issued guidance warnings several years ago saying this isn’t separately regulated, this is not an IPO, it’s something different.  And we’re seeing them move now – they have their crypto asset task force to help the characterisation of crypto assets. So again, we are seeing this very thoughtful approach by regulators in this jurisdiction waiting for that tipping point as we often hear discussed of: when do we need to be more proactive, either to encourage innovation or protect against consumer harm?

David Fowlis: That’s useful because it leads into my next question which was: should regulators really approach this from a technology perspective, and say ‘Oh this is DLT, it’s Blockchain, we have to deal with this.’ Or should they think about what its being used for….and then look at it and say ‘well how do we already …what would we then need to do to apply to just using it, doing it via Blockchain?

Anna Donovan: to the extent possible, my approach would be the latter. We’ve seen the FCA’s very clear. It adopts a technology neutral approach. But the reason for that is …what are we concerned with? We’re concerned with the harm that can be caused between the parties. Today we’re talking about Blockchain, tomorrow it’s going to be the next big technology, and we risk two things if we have Blockchain specific regulation (and to be clear we might need that in time). Not only do we risk coming back to our very first point – how do we even define this in a way that is not unduly restrictive or inaccurate or inflexible? But what happens when that regulation quickly becomes outdated …which it will. What happens when we get more comfortable with this regulation? So the fears that we have today – and this is something Roger Brownsword talks about who I know has been on a previous podcast – right now we’re all very concerned about certain aspects of this technology, but in six months as our knowledge increases we’re probably going to be quite comfortable with that, and if we regulate too early, too prescriptively, then we have very quickly outdated requirements. So, to the extent that we can govern on a principles based, relationship-based approach, we avoid all of those issues and I think that’s how we best achieve, if it’s not entirely possible, that balance between how do we support innovation whilst ensuring consumer protection? What are the harms we’re concerned about and how can we address those while not stultifying development in the space?

David Fowlis: So, if we just take that back a bit and we talk about consumer harm. Now we obviously have consumer law and we have consumer regulation…general that applies to all sorts of transactions, then you have specific regulations in the legal sector and financial sector for example. Do you think there will need to be a general layer of regulation for blockchain technology? A sort of… general piece of regulation that applies to every sector? And then if there is if there was such a thing, would there then need to be specific pieces of regulation for say legal services, financial services to address those issues, or do you think you could more or less cover it through a general….?

Anna Donovan: Yes, there could well be a need at some point for more general regulation, particularly around this classification point that we’re talking about earlier. I think a best-case scenario certainly in the early days of the technology is: how can we understand the interaction of the technology with existing frameworks, existing principles, for the reasons we’ve talked about? And it might be that to aid that understanding, we need regulation that clarifies what is a crypto asset? What are the principles around smart contracts and enforceability? Again, I would counsel against an overly prescriptive regime at this stage. We see in other jurisdictions, we might come onto this a bit later: there is a value or an interest in the expressive function of law. Of saying ‘we’re a jurisdiction that’s open to business. Look at all of our DLT regulation.’ But you’ve got to be very wary of the risks that that attracts and I think that the UK as a common law system is very well placed – as it always has been – to respond to new technology; be it a car park ticket machine or the internet or all of these iterations, because we have this principles based approach. So, I can see a role for clarifying regulation around classification so that the market and other providers can have the comfort and certainty we need for investment. Bringing that now down to the legal services level: well obviously we are operating in a kind of principles-based environment. And I think it would be incumbent to say well ‘what would the general regulation be? To what extent do we need to specifically respond to that or to what extent can we provide – as sector specific regulators – guidance as to how do we interpret these objectives, these principles in light of this technology?’ I think we have seen elsewhere amendments to impose an obligation to keep abreast of technological advances for example. But in this jurisdiction, we do have professional principles that say you need to perform your work to the requisite standard and interests of your clients. Do we need to change that, or do we need to confirm and provide guidance saying, ‘well that does mean obviously keeping abreast of innovation and technology developments.’?

David Fowlis: or whether it’s you say that in the way of…ensuring you deliver your, try and deliver services to your clients in the most efficient or cheapest or you know acceptable, generally accepted way possible or something like that.

Anna Donovan: yes exactly, because again otherwise you don’t want the unintended consequences of regulation. Good or bad sometimes, but we want to allow the innovation to emerge. We want to understand what the real capabilities and risks of the technology are.  And also, we want to be able to move as regulators in an agile way to respond to risks as they occur. And the FCA – we talked about earlier – was a good example of that. They could issue guidance notes and consumer warnings very very quickly …and that serves the market rather than the longer process that would be required otherwise.

David Fowlis: Do you think that the legal services regulators….and of course there are several…. unlike …in say financial services where largely the FCA is the main one….so if we for example just take conveyancing. Obviously, you have solicitors doing conveyancing, you have conveyancers doing it. You have potentially legal executives and maybe some others…. currently they’re all separately regulated, they all have their own codes. If you want to…they have to cooperate if you’re going to have some sort of standardised regulation across the sector – which ideally you would if they’re all performing the same activity – do you think that the way the framework is structured currently is more challenging? Does it make it tougher for legal services regulators to regulate in a way that’s beneficial for consumers because you have that split of responsibility? As oppose to say when you look at the FCA and it’s one big regulator?

Anna Donovan: I’ve not been involved in the question from that side but I can see the challenges that certainly gives rise to, and I can see the challenges from a consumer perspective who says, taking conveyancing: ‘I’m just selling my house and I want it done properly!’. you know, and I can see that creates its own challenges although obviously you know benefits from that focused view. I think this area in technology in general at this time provides an opportunity to ask these questions, to explore ways of working and cooperation, and to really get regulation right from the outset. To say well: what’s in the best interest of the consumer, what’s in the best interest of the legal system and how can we share our experiences and knowledge to get the right result from those objectives?

David Fowlis: You also mention that in your paper that some of the regulatory objectives in the legal services act 2007 might actually conflict with each other when you apply it to Blockchain. Could you just sort of expand on that a bit?

Anna Donovan: Yes certainly. I think it’s a really interesting development from that perspective, because you look at objectives around public interest, consumer interest, protecting the rule of law, a diverse profession, access to justice … using technology in a way that makes legal services cheaper, more efficient so on and so forth, it’s obviously in our consumer interest, obviously in our public interest to say ‘well, let’s bring the legal services profession and provision of legal services into the modern era. You can tweet people on the other side of the world. You can do all your banking on your phone. But I think there will be a view by some consumers that the legal profession is lagging a little behind and ….having a regulatory regime or support that says ‘we recognise this technology and we’re going to enhance services’ I think really serves some of those regulatory objectives well. On the flipside, there is significant consumer harm around a narrative that’s developing around DLT of ‘Oh it’s completely immutable. Oh, it’s completely tamper proof. This is a contract.’ Where consumers could be forgiven for thinking they’re either using the services of a lawyer when they’re not, a regulated provider…. or they could be forgiven for thinking they’ve entered into a legally binding contract when they haven’t. So, there’s a real education piece around there as well. So, you can see how within the objectives, there’s a potential tension between achieving innovation, diversity, access to justice, and maintaining trust in the system and ensuring consumer protection.

David Fowlis: okay so if you were setting up a regulator and you had the blockchain brief there let’s say, what would be the things you would do? What would be your sort of major actions you would take or things you would keep an eye on?

Anna Donovan: …in terms of approach or applications?

David Fowlis: Let’s do approach first and then think about applications….

Anna Donovan: yes …there is a significant question and opportunity around the legitimacy of response. This is not just legal services but across the board. And we’ve seen this elsewhere. We need to properly understand the detailed application of the technology to understand how it impacts our regulatory objectives, consumer risk. And so if I was sitting in that room, one of the first actions would be to understand ‘How do we get the right community of stakeholders together, and in what way?’ to ensure the legitimacy of the response both in terms of ensuring we have an accurate technical understanding, but also to ensure that we’re bringing our stakeholders with us through every stage of the regulatory process. And that’s not saying having our response dictated, but just making sure that we have the right people in the room. And that has an oblique function of actually using the regulators’ convening power of creating this community of interested multi-disciplinary parties to think about these questions and to innovate. So, I would be looking at supporting collaboration, research projects, what are the existing activities in this space? Do we want to get involved with incubators? We’ve seen other regulators do that for example. And really have that as the foundation, which then builds the community of people which allows us to do what would be one of my other early jobs, which is education and training. You know how do we educate our community? And that goes from the full panoply of law students, trainees, newly qualified, partners, New law firms, but also… what about the computer scientists and engineers generating and developing these products which are going to be working within the legal sphere? And you can’t build a robust legitimate education programme without engaging the right people to provide the information. That then also allows the regulator to understand where the real risks are, to then start to issue in a timely and authoritative way, the guidance notes and best practice notes that we were talking about earlier.

David Fowlis: Do you think there’s a need for regulators to really build up…to have a group of people inside…say the SRA …who are just , technological specialists, who will be the blockchain specialist team, who will – if there’s an issue and blockchain is involved – they can go in, they can look it and take it apart, and understand the codes and all of these kind of things. Is that something you think legal regulators will need, or do you think it’s more ‘we understand what the application does, and the actual technology underlying it, they won’t need to worry so much about?

Anna Donovan: Whether you put it as strong as a need, I’m not sure. But I think there does need to be a really robust understanding of the underlying technology. One example being, ‘well, what if you’re looking at the question of control in a transaction?’ Well if you don’t’ know the difference between multi-sig relationship where there three parties and a single-sig…. then you can’t fully appreciate how that might manifest. If you’re looking at allocation of rights and responsibilities for example, and wallet providers so on and so forth, these are all concepts that you need to really have a handle on. You might not necessarily have to go and build it, but certainly having a group of people you can draw upon to provide that insight, helps us get the regulatory response right, right first time. It creates that confidence, and then, as a jurisdiction, it demonstrates our capability in this space as well.

David Fowlis: and I suppose that when they are…when you are dealing with technological tech developers as a regulator, you sound a bit more like you know what you’re talking about and you’re able to communicate with them in a language that they’ll understand. Because I …you know…I think one of the things that you see is…the tech developer…the technology people talk and they speak about in their way of speaking, and lawyers obviously have their way of speaking and regulators perhaps have a slightly different way of speaking again. And you can get this erm…. we’re talking past perhaps rather than talking to or understanding really….

Anna Donovan: absolutely and I’ve often said that as the first instance you…what we’re looking at… because you have the perennial ‘should lawyers code’, we’re talking about a communication piece. Traditionally, lawyers have had to take their clients’ business strategy and convert it into legalese. They’re now having to take legalese and help convert it into computer code, or at least communicate to the people who are going to do that. Similarly, with regulators. And if you get a computer scientist and a lawyer in the room talking about ‘execute’ let alone ‘obligation’, you’re going to have very different views and, like you say, very different understandings of what you’re talking about. And I was involved in something recently where we had about ten or fifteen people in the room; lawyers, computer scientists, and we had fifty things we were going to talk about and I don’t think we got past the first one pretty much, because, because of that very point. We’re all wanting to get to the same place, but it was a really useful exercise to truly appreciate the short cuts and short hands that we have in our respective professions. And that’s where that education piece can come in, because,  whilst we’re not saying you have to become a computer scientist if you’re a lawyer, or a lawyer if you’re a computer scientist, you certainly need to understand ‘these are concepts I need to be factoring in, these are concepts I need to reach out to another expert to assist with’. And, like you say, if you’re a regulator in that space, bringing your community along with you in achieving your regulatory objectives and purpose is going to be much easier if you’re speaking the same language.

David Fowlis: So just to bring it back to blockchain specifically and how regulators might want to respond. So, if we take a look at …We’ve talked a lot about conveyancing today, erm and obviously the Land Registry have been doing their work with digital registers. If you’re the conveyors regulator…the legal services regulator who’s regulating conveyancing, what are the sort of things you might want to do as far as blockchain is concerned in the sort of short, medium, longer term, in order to ensure that you’re provider….your conveyancers can use blockchain – or will be able to –and that consumers are protected?

Anna Donovan: yes perfect, and great example, very topical example. I think in the first instance, this transactions received a lot of publicity. It could generate a lot of concern. So, I think it’s reaching out to your stakeholders to be clear either with a short bulletin ‘this is what it means, this is what it doesn’t mean, this is our intended programme of work’. It’s really to help bring the community together, demonstrate there’s ongoing work so that stakeholders can contact the regulator if needs be, but also to allay some fears. There’s a narrative around this, ‘Is it the end of lawyers?’ So that would be my first short term bulletin. This is where we’re at, this is the state of play. There will be a programme of work.

David Fowlis: yeah

Anna Donovan: mid-term we’re looking at that education piece, but in a very clear and direct way. Maybe consulting with members, where are your issues? Where do you envisage there’s a gap in your knowledge? What type of tech systems do you have? Are you planning on investing in this? And then we can start to develop education and best practice guidance, and really look at how we deliver that. So, use of online training, targeted training depending on background, seniority, that type of thing. I think one thing that regulators can really help with is using their convening power to distil some of the critical, on the ground, day to day issues that can arise. So, what about bringing together a group, a multidisciplinary group providing a case study for early consideration? And really from on boarding the client to engaging with legacy systems in the office, to interacting with land registry, what if there’s a problem? What if there’s a power cut? You know, all of these issues, using that case-study to really try and drive granular thinking about: where are the issues and therefore where can the regulator provide support and guidance? And then in the longer term, it is keeping that watchful eye on do we need to take more direct action? Is there a greater education piece? Can we support research projects, sandboxes, incubators, those kinds of activities? But I think it’s that continuum of comforting and initial guidance to community, developing case studies and knowledge, and then responding to new issues as they arise in the longer term.

David Fowlis: Okay, and as far as say engaging with other regulators or regulatory bodies, I don’t know if it’s so much consistent in this issue, but for example say something like the information commissioner or feels like we’re going to have this Centre for Data Ethics and Innovation, these kind of bodies, sort of overarching bodies….I mean that’s obviously…presumably that’ll be a very important relationship for sectoral regulators to maintain and ….

Anna Donovan:  Very important for a couple of reasons I’d say and maybe particularly important for legal services. One is obviously ensuring our voice is heard and we’re, we’re …contributing, inputting into that activity. Two, to ensure that we tried to the extent possible to avoid this patchwork of activity. But three: I think there’s a really important point around narrative of legal services and the legal profession as enabler of innovation, not a blocker to innovation – which sometimes the narrative around this technology can unfortunately fall foul of. So, I think it’s really important that we’re seen to be supporting and encouraging innovation, and that legal services are an important part of realising …the potential of technology, and it’s not just there as a barrier to tech.

David Fowlis: okay. Is there anything else that you think could be done in this jurisdiction particularly to…to improve it, in order to make it more welcoming or more ….to better foster innovation in that sort of thing?

Anna Donovan: I think it’s an interesting question because this jurisdiction is exceptionally well-placed to support innovation. We have, as we’ve talked about, a principles based common law system which has proven itself time and time again well placed to adapt. We have an independent and technologically aware judiciary; we have some of the best legal services and computer scientist minds in the world. We’ve got the universities’ sector; we’ve got the infrastructure. I think what we can do – and certainly this is some of the work that the UK LawTech delivery panel is doing – is bringing together and communicating that activity. We see other jurisdictions – Singapore being a common example – doing a very good job of saying: ‘this is our activity in this space. This is how we’re supporting’. This jurisdiction is doing all of that as well, and perhaps presenting that work in a joined-up way will help really reinforce the reality of the situation, which is the jurisdiction remains one of the best in the world for commercial activity and innovation.

David Fowlis: Thank you very much for your time today Anna. It’s been a pleasure to speak to you. And for new listeners, please do listen to the first three episodes of Talking Tech. We expect the podcast to return later this year, and thanks very much for listening.