blockchain& ai: legal impacts of the most‐ hyped emerging ......thomas watson, ibm chairman,...
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Blockchain & AI: Legal Impacts of the Most‐Hyped Emerging TechnologiesBenjamin Tietgen, PartnerJosh Covey, Attorney
June 20, 2018
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2 Common Beliefs
•Belief #1: “AI will replace all human lawyers in the next couple of years.”
•Belief #2: “A machine will never be able to do the kind of work that I do.”
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What is AI?
• Spectrum: Westworld/Matrix to ho‐hum software (NLP)• Perform tasks historically limited to humans; simulate human thought in computerized model
• Umbrella Term• Machine learning• Algorithms• Natural Language Processing• Neural Networks• Expert Systems• "Big Data"• Computing power
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Machine LearningHuman Computer Programming
• Machine mechanically implements human‐made code
• Bad outcomes are attributable to bad code by human programmer
• Human programmer can explain why machine did what it did
Machine Learning
• Humans provide data & specify overall goal for machine
• Machine self‐learns & adapts its approach to maximize specified goal
• Limited explanation for why machine did what it did
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Nexus of Technologies (many are old)
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So Why is AI Everywhere Now?
“Big data” +
Current Computing Abilities =
GAME CHANGER
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Moore’s Law• # of transistors per square inch of a computer chip will double every 18 months• Has generally come true; expected to continue for at least the next 2 decades• Now refers generally to computing power doubling every 2 years
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Ray Kurzweil: Exponential Change
• “An analysis of the history of technology shows that technological change is exponential, contrary to the common‐sense ‘intuitive linear’ view. So we won’t experience 100 years of progress in the 21st century – it will be more like 20,000 years of progress (at today’s rate).”
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Big Data Era• “Every 2 days we create as much info. as we did from the dawn of civilization up until 2003.” ‐ Eric Schmidt, CEO Google, from 2010
• Every day 2.5 quintillion bytes of data is created
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Internet of Things
http://www.brookings.edu/blogs/techtank/posts/2015/06/9‐future‐of‐iot‐part‐2
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Summing It Up
• Explosion of digital data + exponentially increasing computing abilities =unprecedented data analytics
• Those data analytics yield insights to meaningful trends in historical (and increasingly real‐time) data
• Those insights "feed" into machine learning• Better machine learning accelerates AI’s evolution, which speeds up the development of AI’s practical applications
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AI's Evolution• 1997 – Chess ‐ AI (Deep Blue) defeats Garry Kasparov• 2011 – Jeopardy – AI (Watson) defeats Ken Jennings & Brad Rutter• 2013 – 7 Atari Games – AI (DeepMind) uses same learning algorithm • 2016 – Go – AI (AlphaGo) defeats Lee Sedol• 2017 – Go – AlphaGo Zero, after 3 days, defeats Alpha Go
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Challenging Belief #1: AI Replaces Lawyers Soon• AI Limitations:
• Lack of common sense• Bias in algorithms• Impact of bad data on AI's outputs
• Fact: Currently lots of highly‐touted AI stuff isn't that useful right now
• Humans are superior in critical thinking• Effective client interaction, oral advocacy, negotiation, etc. = beyond scope of current AI
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Gartner Hype Cycle
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Bias Problems with Algorithms
1. Inaccurate bias – algorithms may contain inaccurate biases based on historical data reflecting historical bias• e.g., historical data suggesting most successful engineers are white males
2. Accurate bias – algorithms may contain empirically valid distinctions that we may not want to accept for fairness reasons• e.g., young men are a higher car insurance risk than young women
• Main point = bad data affects AI's outputs
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Algorithmic Bias
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Long‐term AI Considerations•Risks of Predicting Future Technologies
• "The telephone has too many shortcomings to be seriously considered as a means of communication." ‐ Western Union internal memo, 1876
• “I think there is a world market for maybe five computers.” ‐Thomas Watson, IBM Chairman, 1943
• "It's tough to make predictions, especially about the future.” ‐Yogi Berra
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A Quote to Linger
"If you're looking ahead long‐term, and what you see looks like science fiction, it might be wrong. But if it doesn't look like science fiction, it's definitely wrong." — Christine Peterson
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Challenging Belief #2: AI Can't Do Legal Work
• Simply doesn't align with current facts
•AI is already impacting the legal practice
• This trend will continue
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AI & Legal Practice
“Artificial intelligence is changing the way lawyers think, the way they do business & the way they interact with clients. Artificial intelligence is more than legal technology. It is the next great hope that will revolutionize the legal profession…. What makes artificial intelligence stand out is the potential for a paradigm shift in how legal work is done.”
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Why the Trend Will Continue
1. McKinsey – 23%, Deloitte – 39% = can be automated; we are nowhere near those numbers
2. Economic pressures & increased competition will incentivize legal professionals to become more efficient
3. We've seen this before: once machines can compete, they quickly evolve to become superior in performance, reliability, & associated costs
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AI and Law: Two Main Areas
I. Substance of Law ‐ What Law Regulates
II. Process of Law ‐ How Law Is Practiced
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I. Substance of Law ‐ What Law Regulates
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Legal Regulation of AI Applications
•Autonomous Cars•Medical Robots•Digital Assistants • Internet of Things•Algorithms• Etc...
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“If facts are changing, law cannot be static."Felix Frankfurter, The Zeitgeist & the Judiciary, Address at the Harvard Law Review Twenty‐fifth Anniversary Dinner (Mar. 30, 1912)
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II. Process of Law
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#legaltech
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Benchmarking & Comparative Analyses
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Electronic Discovery; Locating ESI
“Studies have shown that technology‐assisted review is at least 50 times more efficient than human‐review, or manual, review.”
Maura Grossman & Gordon McCormack, Efficient E‐Discovery, ABA J. (April 2012).
TECHNOLOGY-ASSISTED
REVIEW (TAR)34
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Legal Research
Can read over a million legal pages per minute
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Document Drafting
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Case Outcome Prediction
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Jury Screening
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Judicial Sentencing
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Wisconsin v. Loomis• Loomis pleaded guilty to two charges for his role in a drive‐by shooting
• In sentencing, the trial judge relied (in part) on an AI‐powered risk assessment tool:
• COMPAS uses a proprietary algorithm to predict risk of recidivism based on (1) age at first offense, (2) current age, & (3) criminal history
• Trial court, appellate court, & Wisconsin Supreme Court all rejected Loomis’ argument that reliance on proprietary algorithm violated due process
• U.S. Supreme Court denied cert in June 2017
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Legal Bots
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Online Dispute Resolution
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Civic Resolution Tribunal
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So Who Will Win – Humans or Machines?
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Human Lawyers?
X
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Machine Lawyers?
X
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Correct Answer
+
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The Good & the Bad (hopefully no Ugly)“Good News”• Adoption of AI in legal will be evolutionary, not revolutionary;
• Most lawyer functions won't be performed by AI in foreseeable future
• Adoption of AI offers opportunities to lead in efficiency, cost savings & accuracy
• New legal specialties
“Bad News”• Automation
• Disparate impact on young lawyers?
• AI will require knowledge/abilities outside the existing skill set of most current practicing attorneys
• Incorporation of AI into practice will soon be a matter of keeping up rather than being a leader
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Main Takeaways
• Exponentially evolving technology will significantly change the practice & subject matter of law in the coming years
• It's important to take a dynamic, forward‐looking vs. static view of technology & law
• Lawyers & organizations that anticipate & stay on the leading cusp of changes will be the most successful
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Advice from “The Great One”
“I skate to where the puck is going to be, not where it has been.” - Wayne Gretzky
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What is Blockchain Technology?And What Will It Do To Us All?
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A Blockchain Is...
• a distributed ledger wherein entries are asset transactions• and each entry is encrypted to provide a unique address;• the transactions are organized into sequenced blocks• and the blocks are validated by the ledger nodes,• such that a digital asset can be made exhaustible.
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Puis‐je vous peindre une image?Source: Ask Media, © 2016
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Example Digital Asset (Coin) Transfer
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No intermediary!
Centralized
Decentralized
BANK ABANK B
BLOCKCHAIN
Christine (User A) wants to senda digital coin to Julian (User B)
The request is encrypted, preserving anonymity, and then added with others to a block of ledger entries
The transactions of the block are verified by computation of member systems in the network
The validated block is added to the chain of sequential blocks of validated ledger entries (transactions) User B directly receives User A’s coin
The operation history is retained in an anonymous, encrypted ledger synced across all member computers
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dApps: How To Access a Blockchain
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DLT Framework
Blockchain as a Service
Distributed Applications (dApps)
Distributed Database
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3 Dimensions for Viewing the BlockchainTechnical
• Distributed database maintaining immutable verified ledger
Business• Network cooperating to move assets between members
Legal• Digital transaction tool that validates without intermediary
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RisksTechnical Malfeasance• Hacking• Overriding consensus• Fraud
Trust /Reputation
Privacy on Open Networks
Obsolescence• Picking wrong platform• Underdevelopment• Failed partners
Ease of Use Scalability /Throughput
Losing your keys Regulation Energy Footprint
Barriers to Adoption
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Real‐life, Disruptive Blockchains – They Exist!• Fraud reduction for luxury goods• Probed (and plundered?) by DeBeers
• Attribution and licensing for artists/creators• Bought by Spotify
• Recordation of land title/real property rights• Started by founder of Overstock
• GDPR‐compliant consumer privacy platform• Partnered with Intel, Microsoft, and BDO
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What is Cryptocurrency?And How Does It dApp Your Blockchain in the Ether?
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A Cryptocurrency Is...a payment instrument ‐ exchangeable, with a (generally) agreed‐upon value that is:
• Digital/Virtual – exists entirely in computer memory• Decentralized – "minted" onto a distributed ledger• Peer‐to‐peer – transmitted without an intermediary• Secure – encrypted PLUS validated by consensus• Exhaustible – limited in supply, held in a "wallet"
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Coins and Tokens: A User Guide
Source: William Mougayar, © 2017
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FinTech's Crypto / DLT Ecosystem
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FinTech Real‐World ImpactsFiat currencies vs. cryptocurrencies
• Decentralized instruments know no borders• Pros: no conversion, no intermediary, harder to steal, anonymity
• Cons: uncertain value, uncertain regulatory framework
Token‐based transaction networks• Unique units of value to incentivize and track platform usage
Trading – market cap 1/18: $825B; 4/18: $250B
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Blockchain / Crypto [Potential] Impacts on the Practice of LawThe Most‐Hyped Effects on Your Work and the Legal Industry
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Practical and Cross‐Disciplinary Issues
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Data Security
Data Privacy
IoT
Chain of Title/Custody
IntellectualProperty
DigitalExhaustion
BlockchainTechnology
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Disruptors of Any Intermediary BusinessAuthenticators• Title Insurance• Certification/Notarization• Data Security
Record Keepers• Billing / Accounting• Legal Docketing• CRM Software
Transaction Processors• Payment Networks• Escrow
Disambiguators• Transactional Law• Dispute Resolution
"Blockchain can provide a mechanism to combine the act of conveyance and the act of providing notice (recordation) of the conveyance into one event." Cook County Recorder of Deeds, Blockchain Pilot Program Final Report, May 30, 2017
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Disruption By "Smart Contract" Applications in the BlockchainSmart contract – an agreement between parties, written to the ledger as program code that executes in response to a triggering event
• Finance – conditional (If‐Then) transactions, e.g. derivatives• Insurance – life insurance policies; parametric insurance• Logistics – supply chain; employee workflow management• Energy – smart meters; micro‐grids• Legal – immutable contracts self‐executing validated transactions
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Industry Study: Disruption in HealthcareMaster Patient Index
• Chain naturally contains standardized records for each patient• Timestamping, restricted data entry improve accuracy• Hash patient data, not identity, to ledger, patient holds keys
EHRs• Interoperable – provider, insurer, patient dApps/APIs into ledger• Longitudinal – complete data (inpatient, specialist, wearables)• Secure – encrypted, consensus‐verified, immutable
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Industry Study: Disruption in HealthcareTransactions and Claims
• Secure, chronological ordering of transactions in ledger• Smart contracts (e.g., comparing claims to coverage)• Add IoT devices to monitor entire lifecycles
Personal Genomics (copyright your DNA)R&D with Ledger Data
• Non‐PII, giving clinical trial recruits anonymity• Verified, standardized, timestamped, transparent, and persistent
• Streamlines data sharing, fosters collaboration
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Adoption Challenges
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Adoption Challenges
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• Data Security vs. Data Insights
• How do we get analytics on encrypted ledger data?
• Privacy vs. Decentralization
• Is there a GDPR‐compliant blockchain?
• Data Privacy vs. Permissionless Networks
• Wait, anyone can have a copy of the ledger?
• Regulatory Issues• Where's the field and what are the rules?
• Fear and Inertia• What about X hack?
• How do we get everybody else onto our platform?
• Perceived and Actual Fraud
• WSJ on "Bitcoin Wannabes"
• What about Bitcoin's rep?
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In Your House:
• Corporate Records Management and Retention• Smart shareholder agreements, tracked transactions• Smart employment agreements (e.g. IP assignments)
• Compliance• Internal policies (e.g., record retention)• Regulatory compliance, reporting
• Employee Workflow Management• Blockchain analytics
• Decisions on Legal Matters• Smart outside counsel• Dispute resolution• Docketing
Blockchain for Corporate Activity and Counsel
• Transaction Records
• Project Partnerships
• Data Security
• Integration with IoT Devices
• Vendor Agreements• Authentication• Smart contracts – legalese to code
• Product Provenance, Tracking, and Monitoring• Triggering events for smart contracts
Blockchain for Your Products, Services, and Logistics
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In Your House:
• Internal Development
• Data Security• Permissioned networks
• Blockchain Service Providers
• Data Security• Permissionless networks• Permissioned networks on open platforms
Working with Blockchain Builders
• Accepting Crypto Payments
• Making Crypto Payments• Paying legal fees with Bitcoin
• Offering Crypto Products• dApps on a network that uses crypto• Project partnerships• Your own coin/token and network• Software for managing/exchanging crypto
Issues with Cryptocurrency
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In Your House:
• FinCEN – crypto as a currency• Know Your Customer & Anti‐Money Laundering reqs• "Money transmitter" issue under Bank Secrecy Act• Actual guidelines in 2013/2016
• CFTC – crypto as a commodity• Enabling spot & futures markets• Spoofing and wash trading targeted but not resolved
• SEC – crypto as a security (sometimes, maybe)• Howey test for what is an investment security• Guidance from "ICO as security" enforcement actions• Filing games: SAFT vs. Form D vs. Section A
• IRS – crypto as property, not currency• Ordinary income for merchants, capital gains for investors• Mined coins are gross income with value at time mined
Shifting Regulatory Framework – U.S. Federal regulators are all over the place on crypto. So far:
International Disparities Cause Jurisdictional Issues, Other Uncertainty• Switzerland: utility tokens do not require AML protections and are not securities• Bermuda: ICO Act of 2018 formally permits capital raises through digital asset offerings• Formal crackdowns in China, Korea, Thailand disrupted exchanges, increasing volatility
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In Your House:
• Arizona• Blockchain signatures and smart contracts are legally valid• FinTech regulatory sandbox
• Delaware – first state to allow corporate recordkeeping on blockchain
• New York – "bit license" for crypto exchangers that deal in fiat
• Illinois – 2016 blockchain initiative• Included test of land title on blockchain – successful but
not deployed
• Wyoming – five blockchain/crypto bills recently passed• Exempting certain token activities from state securities
and money transmitter laws• Corp records and shareholder verification on blockchain• Exempting virtual currencies from state property tax
Shifting Regulatory Framework ‐ State legislative activity ‐ examples
Civil and Criminal Precedents• Upcoming decision on investor suit against Ripple may have ripple effect (right of rescission?)• Criminal fraud case against founder of ReCoin & DRC may give future developers pause
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Questions?© 2018 Quarles & BradyLLP ‐ This document provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.
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THANK YOUBenjamin TietgenPartner(602) 229‐[email protected]
Joshua CoveyPartner
(602) 229‐[email protected]
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