The Existential Threat of Blockchain and Cryptocurrencies to AmLaw 100 Attorneys
Blockchain and cryptocurrencies could pose an existential threat to AmLaw 100 attorneys.Many firms and practice groups could find their business models severely undermined by the rise of blockchain technology and cryptocurrencies as programmable money.It's not that lawyers won't be needed, it's that the work will be simplified by an order of magnitude. Furthermore, it will be done by in-house attorneys and coders from the parties negotiating the deal terms directly, at 20 percent of the costs, possibly less.This is a classic case of the elimination of a market friction and simultaneous disintermediation of an expensive third party that was necessitated by the friction.
The Case of a New York City Monopoly – Taxi Medallions
AmLaw 100 firms have had an exclusive franchise on transaction intermediation between large corporate firms, their competitors, and their investors.These franchises have resulted in profits per partner in excess of $3M at many firms.There is absolutely no economic reason for this to continue.NYC taxi medallions were also a monopoly. Competitors could enter the market, but medallions were expensive, the business was capital and labor intense (each revenue producing unit required one car and one driver, plus gas, oil, maintenance, etc.).Programmable ride hailing replaced the inefficient and sub-optimal street hailing and labor intensive and unreliable scheduling of car services, almost overnight. Suddenly there was a competitor who didn’t have any capital or labor issues (they already owned a car and didn’t have to pay themselves or provide benefits).Also, the experience was vastly superior. The filthy and stinking old yellow cabs with cramped back seats and thick partitions were replaced by clean new cars with ample room and no partition. The drivers were friendly and even spoke English. Oh yeah, you could also spin one up on your phone in about two minutes and you didn’t have to worry about paying cash and getting change.Game over.In 2013 taxi medallions in NYC were trading at $1.3 million. They now trade at $160,00. According to the New York Post, in 2011 when Uber launched in New York City, there were 50,000 for-hire vehicles serving the market. There are around 130,000 today.Chart One: Medallion Financial Corp. Stock Chart
This feels a lot like where Biglaw could be headed. Right now, a lot of AmLaw 100 firms have a glittering list of clients who need a brand name firm on their documents. The law firm’s imprimatur is an economic signal to investors and competitors. The unspoken pitch is Darwinian and the brand name of the law firm is additional plumage.If this AmLaw 100 firm will have me as a client, you should mate with me and consummate the investment/merger/acquisition.However, if the parties to a transaction can find each other directly using the ancient technology of call and response (think bullfrogs), and then program a smart contract into a currency, the expensive accoutrements can be dispensed with.
One of the lesser known aspects of many cryptocurrencies, such as Ethereum, is their ability to function as programmable currency. The way it works is simple, once the terms are agreed to, the coders program the currency. If the terms are met by the agreed upon date, the currency transfers.As programmable currency, cryptocurrencies could essentially embed self-enforcing contracts within real property. For instance, a contract could be embedded in a car. If timely payments were not made on the car, it could be automatically disabled remotely until the account was brought current.This would enable people with no credit or bad credit to get a car. It would also reduce the price of the car because much of the frictions, middlemen, and repossession costs would have been eliminated.It's a small leap to see how these kinds of smart contracts could be used in trusts and estate work as well. For instance, a settlor of a trust could program a smart contract into a currency to make a distribution to a beneficiary. When a beneficiary reaches a certain age, a contingent trust payment would automatically execute.Copyright is another area that could be disrupted by blockchain technology. Documents could be added to the blockchain for a trivial fee and there would be a real time record of their creation.
How to Manage Blockchain and Cryptocurrency Risk
AmLaw 100 Firms
Law firms face the innovator’s dilemma, where there is little current threat (or opportunity) from blockchain technologies or cryptocurrencies. However, by the time blockchain technologies and cryptocurrencies become viable, it will be too late for them to react. At that point, firms will find the disruptors in their kitchen, not eating, but wearing a hockey mask and wielding an axe.There are at least two alternatives for firms facing this threat:
- Start their own blockchain and cryptocurrency smart contract firms and look to put themselves out of business before someone else does;
- Start blockchain and crypocurrency practice groups to advise startups and ICOs in the space.
According to Chambers and Partners, some firms are already taking the second option, including:
- Goodwin (Grant P. Fondo);
- ISOLAS LLP (Joey Garcia);
- Perkins Coie LLP (Dax Hansen);
- Morrison & Foerster LLP (Joshua Ashley Klayman);
- Baker Marquart, LLP (Brian Klein);
- Polsinelli PC (Richard B. Levin);
- MME Legal | Tax | Compliance (Dr. Luka Müller-Studer);
- Cooley LLP (Patrick Murck), and;
- LeClairRyan (Carol Van Cleef).
AmLaw 100 Attorneys
AmLaw 100 attorneys face a more difficult path, especially those in transactional practice groups. As these technologies develop, partners could find their firms making business decisions to downsize or cut their group entirely.Because of this (and many other reasons) they should diversify away from their firm as much as possible. This is true regardless of how the threat from blockchain and cryptocurrencies evolves.I have discussed my de-risking approach for law firm partners in my Company Town Risk® blog posts series here.
If You Can’t Beat ‘Em…
Partners could also invest in a basket of blockchain and cryptocurrencies firms and startups. In effect, this would short-circuit at least some of the industry exposure to disruption by placing a hedging bet on the disruptor.Of course, these investments are highly speculative and, for most partners, should only comprise a few percent of their risk investment allocation. For example, if a partner had a 50/50 allocation (stocks/bonds), a two percent allocation of their risk assets (the stocks) would only be one percent of their total investment assets.I believe the basket approach is warranted because concentrated bets in a nascent technology almost always have binary outcomes: complete loss or returns many multiples in excess of the investment. Usually most of the investments will be complete losses. However, as in the venture capital model, a few winners can pay for all the losers and produce an overall profit as well.
Financial Planning for Attorneys
Please visit our financial planning for attorneys page for more details.
__________Notes: The American Lawyer; The AmLaw 100 Profits Per Partner 2015; Available at: https://www.law.com/americanlawyer/almID/1202755653273/; Accessed June 13, 2018. Danielle Furfato, New York Post, “Taxi medallions reach lowest value of 21st century”; April 5, 2017; Available at: https://nypost.com/2017/04/05/taxi-medallions-reach-lowest-value-of-21st-century/; Accessed June 13, 2018. John Aidan Byrne, New York Post, “139 taxi medallions will be offered at bankruptcy auction”; June 9, 2018; Available at: https://nypost.com/2018/06/09/139-taxi-medallions-will-be-offered-at-bankruptcy-auction/; Accessed June 13, 2018.Id.Id. Source: Bloomberg. Medallion Financial Corp. is a specialty finance company that primarily finances taxi medallion purchases. You can read more on this from Nick Szabo, who was remarkably writing on these topics in 1996. See “Smart Contracts: Building Blocks for Digital Markets”; Available at: http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html; Accessed June 12, 2018. Chambers and Partners: Blockchain & Cryptocurrencies – Global-Wide; Available at: https://www.chambersandpartners.com/15649/2804/editorial/49/1; Accessed June 12, 2018.
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