Advantages of digital contracts
What is the purpose of a contract? And the technology you can use to make them highly effective
What is a digital signature?
Businesses worldwide seem to be finally settling on what the "new normal" of work means and how it looks. As such, technologies and tools they may have previously only used sporadically are increasingly becoming part of day-to-day operations.
Digital signatures are one such technology. How are digital signatures being used today, and what is their role in the future of work?
What is a digital signature?
In simple terms, a digital signature is the equivalent of physically signing a document or stamping it with your business seal – do those things even still exist?!
A digital signature is a mathematical technique that can verify digital assets such as a message, document, or even software.
A valid digital signature tells the recipient of a digital asset:
- The asset was created and sent by a known, verified sender, thus authenticating the asset.
- The asset was not altered during transit to the recipient, thus verifying the integrity of the asset.
As such, digital signatures are a vital security tool in fighting against the tampering and impersonation of digital assets.
Given the role of digital signatures and the data they provide, it is possible to use them for various things, including:
- Creating an audit trail throughout digital processes.
- Within workflows to create automation and enhance operational efficiency.
- To acknowledge informed consent, accept a set of terms and conditions, or agree to a contract.
In many places, including the United States, United Kingdom, Australia, and most of the European Union, digital signatures are legally binding, with the same status as a handwritten signature.
The use cases of digital signatures mean they are commonplace in industries like software distribution, contract management, as well as across financial transactions.
How do digital signatures work?
Digital signatures use public-key cryptography. Various public-key algorithms can be used, although you generally do not need to be too concerned with these as a user. If you are using something like contract management software, for example, the vendor will have chosen the best algorithm to use to deliver its service. As a result, you can spend less time worrying about the tech and more time enjoying the benefits!
The generation of a digital signature typically utilizes three algorithms, leading to the creation of two keys.
The process looks something like this:
- A key generation algorithm selects a private key, outputting this as well as a corresponding public key.
- A signing algorithm produces the digital signature itself, using the digital asset in question and the private key.
- A signature verifying algorithm then accepts or rejects the asset as authentic by analyzing the asset, the public key, and the digital signature.
The process is similar to that of encrypting an email. If the recipient cannot open a message or use an asset, this signifies a problem with the asset or the digital signature itself, as it hasn’t been authenticated and verified.
One of the critical foundations of using digital signatures is trust.
For example, the individual or software creating a digital signature must keep the private key secret. Failure to do so, either by negligence or for malicious reasons, could allow someone who has access to the private key to create fraudulent digital signatures that appear genuine. Such a scenario could lead to significant data security and integrity issues and severely undermine your business!
What are the benefits of digital signatures?
The most significant benefit of digital signatures is security.
While different types of digital signature will use different methods and security features, the following are a typical "baseline":
- Personal identification numbers, passwords, and authentication codes. These are a brilliant example of digital signatures you use every day without realizing it. Using these verifies your identity and acts as your signature; everything a digital signature should do!
- The use of public-key cryptography ensures the encryption of both the private and public keys, providing a basis for authenticating digital assets.
- Checksum, which is a data fingerprint. A Checksum is a string of characters representing the sum of digits within a digital dataset. The verification process of a digital signature compares this data to detect errors and changes to authenticate the asset.
- A cyclic redundancy check (CRC) detects changes in raw data using code verification techniques. CRCs are typically used across digital networks and storage devices.
- Certificate authority (CA) validation effectively creates a trusted third party within the digital signature process. A CA can issue digital signatures and accept, authenticate, issue, and maintain digital certificates. Using CA validation can help enhance security by preventing the creation and deployment of fake digital certificates. Many confuse digital signatures and digital certificates, but they are not the same thing.
- Trust service provider (TSP) validation is a person or legal entity that verifies digital signatures on behalf of a business and provides validation reports.
Non-security benefits of digital signatures
While security is the foundation of digital signatures, the chances are that you will feel the benefits of using them in various ways.
- Digital signatures ensure you automatically have an audit trail around what you're doing. As a result, you can keep records easier. The chances of something getting lost or human error creeping into your authentication and verification processes reduces to as good as zero.
- You can complete processes and sign contracts without ever meeting in person or even jumping on a Zoom call! As a result, everyone can work remotely without disrupting operations.
- Digital signatures provide a timestamp, which may be helpful in various scenarios. For example, a timestamp may be needed to verify a financial transaction if there has been an issue at any stage of the process. Timestamps may also be necessary for automation processes if digital signatures are used as triggers or during legal disputes around the execution of a contract or the provision of services.
- The presence of international standards around public-key cryptography and public-key infrastructure means digital signatures are increasingly accepted, legally compliant, and legally enforceable. As a result, you can say you will work with digital signatures to an increasing extent, rather than relying on others utilizing similar systems. From a legal perspective, the presence of a digital signature means it would be tough for someone to deny having signed or agreed to something, as the signature is unique to the asset sent and the party that acknowledged receipt or signed it.
- Using digital signatures can save your business a considerable volume of time. Think about the old way of doing business. You email a document – or maybe even send it via snail mail if you are super-retro! – then wait for it to be signed and returned. If you need to retain physical copies of documents, you have to organize a storage solution, which puts pressure on space practicalities and creates security concerns. With a digital signature, none of that is needed!
- As always, time is money. When you use digital signatures and remove everything from the process of storing, securing, managing and retrieving physical documents, you will massively reduce your business expenses.
- A big part of modern business is social responsibility. Getting documents signed digitally means you can go paperless, which also saves money!
- As digital signatures can integrate into workflows and business processes, you can use them to build process automations that will help your business to run more efficiently, all while providing a much more positive user experience for your customers.
With so many benefits around both security and operations to be had from digital signatures, can your business afford not to be using them across as many processes as possible?
How are digital signatures created?
Earlier, we touched on how digital signatures work. Why you typically will not actually create a digital signature yourself – why would you when there is so much amazing tech out there that will do it for you? – it is worth digging a little deeper, so you understand more about the process. After all, if anything goes wrong, it is your business "on the hook"!
Before we can create a digital signature, we need the data that will be signed. Once we have the data, the software we are using, which may be an email program or contract management software, creates a "one-way hash" of the data. This hash is a fixed-length character string outputted by an algorithm. If you are sending the data, your private key encrypts the hash. The encrypted hash, the algorithm, and any other data included collectively comprise the digital signature.
Each hash is unique to the data to which it is attached. Therefore, even a single change to the data would result in the creation of a different hash. This feature means a recipient or signee's public key can decrypt the hash and verify the data you have sent them.
A decrypted hash that matches the second hash proves the data has not changed since the digital signature was sent, thus verifying the digital asset in question.
If the hashes do not match, this means:
- The data may have been tampered with and could be compromised.
- The digital signature was created with a private key that does not match the public key of the signee, meaning the signature cannot be authenticated.
It is not necessary for a message or digital asset itself to be encrypted to use a digital signature. In this respect, the use of a digital signature is relatively simple, verifying the sender's identity and notifying the recipient they received the message as it was sent.
What’s the difference between a digital signature and an electronic signature?
You might have come across the terms digital signature and electronic signature used interchangeably. However, while a digital signature is a type of electronic signature – or e-signature – there can be significant differences between them depending on the context in which they are being used.
While different legal jurisdictions have different definitions of what constitutes an electronic signature of any type and what makes them legally binding, the basics of what they are remain the same. Some jurisdictions do not specifically define digital signatures. However, they will likely do in the future as their use becomes more widespread, understood, and embedded into how we live our lives. Most definitions of e-signatures mean that digital signatures fit into this category, thus making them legally binding.
The easiest way to think about a digital signature is to consider the definitions and processes we have outlined so far. If the process uses cryptography processes or mathematical algorithms to authenticate data sequences, we can consider it a digital signature. In contrast, signatures applied manually or in a non-data-driven way can be regarded as electronic signatures. The most primal form of the electronic signature would be pasting your actual signature onto a document as an image, which is what many businesses still do!
Digital signatures are considered more secure and a more favorable solution as they provide proof of authenticity and signing. In contrast, an electronic signature can confirm intent to sign, but not all electronic signatures verify the identity of an asset or signee or its integrity.
Why you need to get away from using PDF formats for digital and electronic signatures
You are probably familiar with the notion of electronically signing a PDF. However, there is no getting away from the fact that PDFs are bad for business, especially if you are operating at scale.
There are many reasons why you should be looking to move your business away from using PDFs for signing things, including:
- While PDFs are a universal and familiar format, devices and software do not handle them well at all. This is on the PDF, not the software! How many hours have you wasted through the years trying to edit a PDF but dealing with formatting errors as soon as you move a line?!
- Simply ticking a box on a PDF, applying a signature via an app, or pasting an image of a scanned signature are not a robust means of creating an audit trail or authenticating anything.
- Likewise, simply writing your name in a PDF is not the same as providing a digital signature and acknowledging you (or the signee) is liable for whatever it is you are signing.
- You can get an electronic signature slapped onto a PDF, but what else can you do with it? If we are thinking about using digital signatures to aid automation and enhance our business processes, PDFs do not facilitate any of this. A PDF cannot notify the other party once you sign a contract, it cannot send it to them, and you cannot automate notifications around renewal dates.
- The unstructured nature of PDFs means you will struggle to search within them. Furthermore, if you want to work in a data-driven way, the metadata wrapped up around PDFs makes them an almost useless format.
- Finally, if you are using PDFs, you still need to save the contract somewhere and know where it is!
What role will digital signatures play in the future of work? How are they used already?
Digital signatures are already a vital pillar of various industries and processes worldwide. Many of us probably do not realize the extent to which digital signatures play a part in our lives, but if we do anything like pay our taxes, file business returns, or verify our healthcare entitlement online, then we will be using digital signatures.
The tech is also in use across things like manufacturing, is prevalent in financial services to do things like sign a loan agreement online, and is a vital component in making cryptocurrency work by authenticating the blockchain and verifying transactions.
As remote work becomes ever more prevalent and businesses use the gig economy to their benefit, digital signatures will become a central component of agreeing terms of work, verifying projects have been completed to an acceptable standard, and ensuring workers are paid correctly.
All these things are in place and happening now, and their use is only set to grow.
Digital signatures: The future is now!
When talking about the use of tech and things like digital signatures in our work and personal lives, it is easy to fall into the trap of thinking in the context of what is coming in the future.
However, when it comes to digital signatures, the future is very much now! If your business is not using digital signatures for everything from automating and integrating processes to executing contracts with outsourced teams, you are getting left behind! Make the change and embrace the benefits of using digital signatures now, before you find yourself losing a contract or a great person decides not to work with you because you sent a PDF and highlighted how behind the times you are!