DLA Piper: The future of public distributed ledgers in law and why we joined the Hedera Governing Council
May 05, 2020
by Scott Thiel
Partner at DLA Piper, Technology and Cybersecurity Lawyer

My name is Scott Thiel and I'm a technology lawyer, partner, and head of the technology practice at DLA Piper in Asia. I've worked within the business in Australia, United Kingdom, and am now based in Hong Kong, focusing on technology related work. We’re working with a lot of traditional technologies and on a range of digital evolution projects. We have also been growing rapidly in the FinTech space. Hong Kong and China are some of the most dynamic FinTech markets in the world right now.

Blockchain and other distributed ledger technologies are increasingly being adopted in FinTech solutions. This is a fundamental new technology that we believe is going to open never before seen digital markets and create a democratization of digital assets.

DLA Piper’s interest in public distributed ledger & blockchain technology

At DLA Piper, we started with the premise that distributed ledger technologies are going to be a game-changer for our clients and their solutions. In diving into how we might want to utilize this technology, we recognized that early “first and second generation” networks and services, such as Bitcoin’s blockchain and Ethereum, have limitations that could prevent us and our clients from adopting or relying on this infrastructure for mission-critical services and offerings.

The issues we found in these older technologies included slow transaction speeds and throughput, lack of scalability, slow consensus finality, no verifiable timestamps or ordering, storage costs of an endless retention public blockchain history, and some other issues around data flows combined with immutability. These limitations are partially why we wanted to learn more about Hedera Hashgraph and saw it as the right tool for enterprise-grade applications.

We are building a multi-disciplinary startup within DLA Piper, which incorporates distributed ledger technologies. I'm one of the leaders in this organization, as part of our own internal “radical change” program, to help progress the way we do business. It's been very exciting — I am effectively acting as an intrapreneur driving product development and service innovation, with a view to mass adoption by our larger organization and our clients.

Some of the projects we’re working on include building our own solution for tokenization of assets, with a proprietary tokenization engine that allows us to translate legal contracts into code. We have engaged a smart contract and blockchain developer to help us, and are looking to engage a systems integrator to help us with the heavy lifting around the initial build-out of these projects.

Why DLA Piper joined the Hedera Governing Council

DLA Piper was very early in joining the Hedera Governing Council, relative to the gauntlet of members today. It was around fall of 2018 when we had signed the LLC agreement and were in the midst of a number of discussions internally when we came to the decision to join.

Hedera was appealing because it gave us an opportunity not only to understand and learn more about public distributed ledger technology, but also participate in the decision-making processes, growth, and the future of a network we believe in. The governance model is unique (and one that Zuckerberg appears to be trying to replicate with Libra) — we appreciate the idea of fully decentralized off-chain governance and control of network decisions being handled by an expert council of independent entities. Not only that, but each member is deliberately chosen from diverse geographic regions, industry sectors, skill-sets, and across time (term limited). In a brand new market with a new product, formulating solutions which weigh different perspectives is proving to be powerful.

Assessing the risks and liabilities, node operation, and cryptocurrency management

In the beginning, I had to report to the DLA Piper board with an explanation of what public blockchain / distributed ledger technology was and why we need to view it as a long-term investment. It wasn’t a straightforward “yes” or “no” question, and many of our board members have backgrounds in various disciplines — as accountants, risk analysts, HR managers, and more. Their varying perspectives made my job of explaining this technology a challenge, with persistent questions around risks and liability. When I first floated the idea of joining, I fully expected the risks and liabilities to be a deal breaker.

Ownership of Hedera Hashgraph LLC and operating a Hedera mainnet node

As a law firm, joining the Hedera Governing Council meant taking on the liability of being part owner in the Hedera Hashgraph LLC, alongside Google, IBM, Swisscom Blockchain, Magalu, Boeing, Deutsche Telekom, Nomura, FIS, Tata Communications, and all future members. In addition, we were concerned about risks associated with owning and operating a Hedera mainnet node. The mainnet node is running the hashgraph consensus algorithm, processes transactions, and contributes bandwidth, compute, and storage to the network. In return, as node operators, we’re compensated in the network’s native HBAR cryptocurrency. That isn’t something we are incredibly familiar with, and I expected a degree of pushback.

In our first conversation with DLA Piper’s general counsel, she said the prospect of joining the Hedera Governing Council made them “uncomfortable” (which I expected her to say). The very next thing she said was, “But that's great, because we need to get uncomfortable as a business. This is the nature of the need for disruption and the need for digital transformation. Not just for our firm, but for the legal industry as a whole, which is still somewhat rooted in the 1950s.”

As lawyers, we’re exceptional at looking at what could go wrong and what problems may lie ahead. Hedera looked like an amazing new technology — a leap in evolution from anything else out there in the market — but what could go wrong by participating in it? One of the biggest risks was around hosting our own node. As a law firm, we don't traditionally own and operate public internet infrastructure.

We explored, initially, if we could opt out of hosting and operating a node, but the answer was no. We realized how important it was as part of our council membership: enabling decentralization of both governance and public network from the outset. It’s essential that council members run a node themselves. We explored the issue in great detail by asking questions around liability of our node going down, the event of a cyberattack, and our reputation as a globally recognized law firm.

In the end, from a contractual liability and risk standpoint, we started to become very comfortable — the LLC agreement has limitations of liability and rent exclusions. We were also able to confidently answer more technical questions around the risk of mainnet node operation, as cited below.

What happens if our Hedera node goes down?

The answer to this question was “nothing” — you cease to earn hbars and any network traffic goes to other nodes available on the network. There is no real consequence because of the decentralized nature of the Hedera network.

What happens if the entire Hedera network is corrupted by a cyberattack?

In diving into the hashgraph technology, we became increasingly confident in its ability to mitigate network-wide cyber attacks due to hashgraph’s asynchronous byzantine fault tolerant property. With the Hedera network being proof-of-stake (with a coin distribution model that plans for one-third of the native cryptocurrency to not be in circulation for many years) the likelihood of a network-wide attack was negligible. A good explanation of Hedera Hashgraph’s security and proof-of-stake system can be found here.

What about reputational risk?

The one residual risk, which couldn't be managed through practicalities or contracts, was reputational risk. After having just joined, I had long conversations with prospective Governing Council members who would ask these same reputational questions that we had to overcome ourselves. At the end of the day, the rewards of being at the forefront of a major technological shift trumped that of the reputational risks which we could identify. When we joined, we were one of the first — there was far more risk. If the decision were to be made today, with IBM, Google, Tata Communications, and others having validated this technology and company, it would be a far easier decision.

Hedera Governing Council structure explained

In the Hedera Governing Council, there are a range of subcommittees — ones for regulatory compliance, pricing, marketing, commercialization, and more. The council members as a whole divide and conquer across these committees. DLA Piper is on the Legal and Regulatory Advisory Committee, which is Co-Chaired by Mark Radcliffe, Senior Partner, and I’m on the Board of Managers.

Each of the committees are deliberately required to report back to the council during regular meetings with proposals and recommendations. When the council meets, it has a structured governance process whereby decision making and voting occurs. A quorum is required to ensure that the voting is done effectively and in a fully decentralized way. Minutes from every meeting are public and can be found at https://www.hedera.com/council/minutes; They’re typically approved and posted within 30 days from the subsequent quarterly Council meeting.

Building applications with Hedera Hashgraph at DLA Piper

A major benefit for DLA Piper joining the Hedera Governing Council is the clear opportunity for council member collaboration. It’s a relatively unique opportunity for all of these leading, global businesses (that otherwise wouldn't be talking about this technology, at this level) to be sitting around the table asking: “What do we want to build together? What do we want to build for the future?”. For example, I just returned from the Middle East where we were partnering with Swisscom Blockchain. Together, we formulated a joint solution for a prominent real estate development company utilizing Hedera Hashgraph.

It’s also been useful chatting with our clients about what they want to build, and providing our recommendations. I've spoken in-depth with clients about various use cases and technical requirements; one example we’re exploring is an HBAR micropayments solution linked to intellectual property rights portfolios. In this use case, transaction throughput and speed of finality is essential, as it’s expected to be an extremely high-volume use case when running at scale. And it also happens to be one (of many) where Hedera Hasghraph excels.

We’ve uncovered substantial differences in the ways in which various distributed ledger algorithms achieve consensus. We think it’s important to think about this aspect critically when building applications on any network. After our own technical evaluation (as well as deliberation with other council members) we can look at what our clients are trying to achieve and say: “Okay, based on the technical attributes you’ll need, we think building on this network would be most successful for your service or application.”

The most recent thing I’ve been working on is drafting up a business requirements document to support a tokenization solution we're building today with Hedera Hashgraph. I really enjoy thinking through what we should build, how it will impact our future, how we deploy things for clients while bringing together technologists, economists, marketers, lawyers, financiers, and investors with this game-changing technology.

We continue to see more and more validation with every new council member that joins. The opportunity to take part in such a substantive capacity is incredibly unique to Hedera’s governing model. We've obviously drunk the Kool-aid for Hedera Hashgraph after extensive due diligence. We're on the Governing Council, we believe in the Hedera project, and we think it's going to be very successful.