For business, fundamental administrative processes are big investments. The way your organization chooses to run its invoicing, for example, can have an impact that reverberates throughout the company. This is also true of your Contract Management. These agreements, and the documentation that goes with them, intersect with every department – from accounts and sales, to human resources and maintenance – so their effective management is a vital part of the success of your enterprise.
In choosing any administrative management method or system, it is important to do your due diligence. Since these processes represent an investment in your success, you need to know that your choice is the right one and that it will remain effective for the time to come. You want to invest in cutting edge technologies, rather than imminent obsolescence. For that reason, it is imperative to understand the impact that Blockchain is having on the wider Contract Management conversation.
What is Blockchain?
Blockchain is ‘digital ledger’ technology that was first deployed in 2008 by an unknown person or organization known as ‘Satoshi Nakatomi,’ for the purpose of supporting the cryptocurrency, Bitcoin. Since then, Bitcoin and Blockchain have been perpetually linked in the public consciousness, but they are, in fact, different things. Blockchain is simply the technology used to keep track of transactions and, in that sense, can potentially be applied as a solution to various administrative requirements across different industries.
As the name suggests, Blockchain records transactions in data blocks that form a chain. This type of database creates a connected peer-to-peer network of records that cannot be retroactively altered. Such a high level of data integrity is maintained through a digital signature feature that uses cryptographic keys. Every individual given access to the Blockchain in question has two unique cryptographic keys that combine to produce a reference for secure digital identity. In addition to the use of hash encryption, these keys then allow for different types of transactions to be carried out securely over the peer-to-peer network.
How does Blockchain relate to contracts?
In some ways, with its structure designed to record transactions, Blockchain naturally lends itself to Contract Management strategies. To that end, we have seen the development of ‘smart contracts,’ in the context of Blockchain development – most specifically on the open-source platform for decentralized applications, Ethereum.
The concept of smart contracts was first proposed in the early 1990s, as a digital record of promises, including the specifics of the protocols through which the parties involved keep those promises. This deconstruction of the nature of a traditional contract – the digitization of its component parts – allows for the essential functions of the agreement to be conducted through Blockchain, with third parties removed.
It is even possible to negotiate simple contract terms through Blockchain, by distributing drafts across connected parties on the network. The incorruptible chain format then makes it easy to review changes in chronological order, instantly, even when those involved are in various locations. When used in this way, Blockchain can allow for the negotiation and drafting of new agreements.
The most notable power of the Blockchain structure, in terms of contracts, is two-fold. Firstly, it lies in the potential for mass collaboration across the peer-to-peer network, without damaging the integrity of data, nor endangering its security. Smart contracts feature the terms and conditions of an agreement contained in programmable lines of code, making them predefined and automated. The collaboration occurs directly between the interested parties, without the involvement of legal representatives, or official bodies. In theory, this makes a great deal of savings in time and money.
Secondly, its power lies in its high level of security. With its use of cryptographic keys, hash encryption, and data blockchain formation, Blockchain essentially guarantees that transactions are immediately verified, authenticated, and safeguarded against tampering. Previous records are incorruptible. This feature, combined with the removal of third parties, means that transactions are secure and, in theory, faster. As a decentralized chain of information, it helps to keep data secure by separating each data block in terms of peer-to-peer access.
What are the issues?
While Blockchain technology has great potential and helps to address many of the issues surrounding data security that have arisen in the past decade, it is not without its problems. With regard to Contract Management in particular, there are a number of reasons why the business world is hesitant to fully embrace the system for Contract Management purposes.
- Smart contracts are not yet accepted as universally legally binding agreements. They were legalized in Belarus in 2017, and some U.S states have passed legislation pertaining to their use, but the legal application – and therefore enforceability - of smart contracts continues to be debated.
- The suitability of Blockchain for contracts of a more complex nature has yet to be fully tested. While it is a proven solution for agreements involving simple terms and repetitive transactions, its performance with regard to managing documents such as employment contracts, non-disclosure agreements, or tenancies is less well established. This is because Blockchain works through self-performing code, so terms that are not easily reduced to lines of code could be beyond its scope. Blockchain is specifically not suited to cases in which a legal determination or legal analysis is required, such as in cases of a data breach, liability, arbitration, conflict resolution, or the infringement of intellectual property.
With contracts and agreements being a foundational part of the process of any type of business, these issues are the biggest obstacles when it comes to Blockchain for Contract Management. While technology is an increasing part of the conversation, it is not currently an option for adoption as a complete Contract Management System.
Will Blockchain redefine Contract Management in the future?
Contract Management Systems have evolved significantly over the course of the past decade, with more and more businesses moving from a manual, paper-based model, to browser-based software platforms that provide a facility for the creation, storage, and archiving of contracts and their supporting documentation. While there are arguments to be made about the possibility of security breaches of such systems, and of the efficiencies they provide, it is the case that current Contract Management Software systems are the tried, tested, and trusted methodology for all types of contract – from those with simple terms and conditions to the more complex and challenging legal agreements.
Blockchain has already been refined and adapted to be applicable to simple contract transactions in every industry, so it is quite possible that this technology will eventually be developed into a solution for all contract types. It is equally possible that, in the future, a hybrid approach may be developed to account for both smart and traditional contracts. However, this type of development will require a shift in thinking on a grand scale across the business world, moving with full confidence from the traditional contract model to the deconstruction of contracts into lines of code.
Today, in business, Contract Management Software – such as Symfact – continues to be the gold standard in Contract Management methodologies. With features including configured reporting, notifications and alerts, template libraries, and permission-based access, this software package provides everything that is needed to turn your contract library into a revenue-generating resource.