The future of litigation funding: crypto and AI?

AI is starting to become more and more of a feature in everyday life – read more about how it’s impacting the litigation funding industry.

The future of litigation funding: crypto and AI?

Artificial Intelligence (AI) is starting to become more and more of a feature in everyday life – with consumer-facing technologies like Chat GPT and AI-based art applications prompting discussion about the future of many modern industries.

The future of AI-driven technologies will certainly be disruptive – a 2017 report by McKinsey predicted that by 2030, 400 to 800 million jobs could be displaced by automation, with those displaced needing to learn new skills to stay in the job market. A utopian view of this disruption would be that automating processes frees humans up to pursue more enriching aspects of their careers, and while that’s up for debate, what we are seeing is an explosion in AI-powered applications that seek to change the way that we do business.

An industry ripe for digital transformation

The litigation funding industry has already embraced a wide range of new technologies. Case outcome prediction is one area that has seen huge growth in terms of AI-driven applications – from established players like Lexis Nexis with their Lex Machina product, to startups like Ex Parte, which last year secured $7.5m in series A funding for its case forecasting engine, which claims to predict the outcome of cases with 85% accuracy.

Despite these leaps forward, there has been some reluctance in the industry to embrace case prediction algorithms wholesale. The much hyped startup CourtQuant, which was one of the first to offer AI-driven case prediction services to litigation funding firms, shuttered in 2020, citing concerns about firms’ inclinations to trust new technologies to do the tasks traditionally carried out by teams of litigation specialists. When announcing the closure, former co-founder, Josef Maruscak, said:

“There is a place for predictive analytics in the litigation funding space, but the right business model and mindset needs to be adopted by the funders. I think that reaching the market of lower value, smaller claims is possible only through technology.”

So it isn’t just a matter of build it and they will come, but also making sure that the technology is matched with firms that are prepared to embrace it and see it as an asset, rather than something to be regarded with caution.

Another technology having a huge impact on all industries is crypto. It has the ability to significantly change the funding model for litigation finance – potentially opening up the market to many more investors, and supporting more niche causes.


How can AI help drive innovation in litigation funding?

A hugely important aspect of litigation funding is identifying the right cases to pursue – and AI can streamline and speed up this process. Variables such as the type of case, individual involved, or judges’ case history can be used to predict how likely it is that a case will be successful, and at a much faster rate than doing this process manually.

SuperLegal, a US-based AI tool that deals with contract law, found that not only was AI much faster than a team of lawyers in reviewing contracts, but also more accurate:

“On average, the lawyers took 92 minutes to finish reviewing the contracts compared to the AI taking 26 seconds.

The AI finished the test with an average accuracy rating of 94%, while the lawyers achieved an average of 85%.”

When AI-powered algorithms are both speeding up and executing tasks with greater accuracy, this ultimately means that case prediction is more efficient, ensuring a better return on investment.

At VWM Capital, we use this type of technology to generate quick decisions for litigators and ensure highly accurate case preselection for our portfolio, with our algorithms assessing which cases will have a likelihood of success.

There’s also the potential for using the technology even earlier in the process – to match a litigator with different sources of funding. Sentry Funding uses algorithm-based technology to connect clients with many different sources of funding – diversifying the potential for receiving funding as well as providing the client with a variety of options.

You can see that the implementation of AI-based solutions can have a distinct, measurable impact on the litigation funding process, from start to finish. Firms that embrace this technology will undoubtedly reap the benefits if they balance it with existing human processes.


Crypto: a way to further democratise funding?

The increasing prominence and legitimacy of cryptocurrency has had a significant impact on all industries, and litigation funding is no different. The traditional third-party financing model has the potential to be disrupted by crypto, providing a more accessible and efficient way to invest in cases.

One way this can be done is through tokenisation – the practice of converting assets into digital tokens that can be traded on a blockchain network.

“Tokenization cracks the field of litigation funding wide open. Plaintiffs have a much wider pool of potential funding,” says Ron Lasorsa, managing general partner of Pennsylvania-based Victory Litigation Fund. “Everyday unaccredited investors can choose to fund cases based not just on the potential payout, but also on moral beliefs or to promote a particular cause.”

Tokenisation brings the typical benefits typical of blockchain technology – increased transparency, liquidity and democratisation of access. For litigators, it’s possible to effectively crowdsource funding. For investors, while, traditionally, litigation funding requires significant capital, making it largely inaccessible to smaller investors tokenisation solves this problem by offering fractional ownership over funding cases, allowing more to participate in the process and target investment towards funding cases they are passionate about.

 However, there are still significant bumps in the road to navigate. Mark Chen, portfolio counsel at US litigation funder Validity Finance, identifies three main issues to contend with: lack of flexibility, difficulty in resolving funding disputes, and misalignment risks. He writes:

“The application of blockchain technology to litigation funding extends new opportunities to retail investors and opens a new funding avenue to litigants. But it also restricts investors’ ability to evaluate the strength of a case while simultaneously allowing investors to profit from litigation in ways that are unrelated to the merits of the claim. It remains to be seen whether this nascent, crypto-based litigation funding strategy truly gains traction, but investors and litigants would be wise to consider the above challenges before testing those waters.”


How we work at VWM Capital

At VWM Capital, we strongly believe new technology can streamline and spur innovation in litigation funding. It’s thanks to algorithm-based automation technology that we’re able to open up funding to a greater number of cases – and at the same time offer investors risk diversification benefits.

James Scragg, director and portfolio manager of VWM Capital, says:

“At VWM Capital, algorithms play a key part in our case preselection process, and we’re constantly on the hunt for new ways to improve the funding process for litigators. Democratisation of litigation funding is vital – so often those pursuing justice can be up against adversaries with deeper pockets – so anything that helps us select better cases and diversify funding sources can only be a good thing.”


Find out more about our innovative approach here, and invest in an asset class at the forefront of today’s technology.