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What are smart contracts?
6 septembre 2017

Blockchain is a diverse and flexible system. Innovative uses of blockchain technology seem to emerge frequently such as smart contracts. They have been the subject of heated debates regarding the legal issues they raise. To name just a few of these issues, what would be the applicable law? What flexibility do smart contracts offer? Is it possible to amend them? These issues have namely been addressed in an article on Mathias Avocats’ blog.

However, smart contracts offer several advantages namely regarding automatic and regular payments such as royalties or insurance. They offer security and efficiency. Moreover, the issues raised are not new to blockchain technology. Indeed, the question of the applicable law arose when the Blockchain was first created.  With a few changes in the law, just as with electronic contracts, solutions could be found.

Mathias Avocats provides a comprehensive view of the ways in which smart contracts have started to modify contractual practices.

How do smart contracts work?

A smart contract is an encoded contract. The terms of an agreement between two or more parties are programmed into code (a set of instructions) that are stored on a blockchain technology. When certain conditions described in the code are met, specific actions, which are also defined in the code, are automatically triggered. As such, smart contracts are said to be self-executing. They operate in a comparable way to any transaction on the Blockchain.

In its analysis entitled “How Blockchain could change our lives”, the European Parliamentary Research Service (EPRS) evoked the possibility of using smart contracts in the voting process. If we consider this possibility, a separate smart contract would have to be created for each election. Casting a vote would be a specific condition leading to specific actions: counting the votes and determining the election results. The instructions would determine the method for counting the votes, the limit of vote per person and so forth. It must be said that Blockchain-enabled e-voting has already taken place in Denmark and in Estonia.

Furthermore, smart contracts have also been used by the German startup slock.it which allows people to find, locate, control and rent any object through the Ethereum Computer (an open source project). If a person wants to rent an empty apartment for the holidays, he or she only has to open the application, find the apartment, pay for its use and, if the owner accepts, he or she will have access to it. The agreement between the owner and the person will be stored on the Ethereum Blockchain. The application is similar to an electronic contract.

These illustrations prove the sustainability of smart contracts and the various applications they hold in today’s society. They help comprehend how they function and the future purposes they hold.

What issues arise?

In general, when referring to blockchain based technologies or Artificial Intelligence (AI), an issue commonly arises: is code prevailing on the law? Does it replace it? These questions namely refer to the “Rule of Law” doctrine developed by John Locke under which no one is above the law and the law must not be arbitrary or unpredictable.

They also refer to Professor Lessig’s article “Code is Law”. He develops the idea that code is the regulator of our cyberspace age. However, this regulator can change. The code is not fixed. He stresses the importance of understanding this regulation and the ways in which it is and may change.

When considering the Blockchain and AI, the code may seem inflexible, because it cannot easily be changed, and could appear to be “ruling” the technology it is applied to. In some ways, the code is the law of the technology.

However, when it comes to comparing code and the law, the latter holds a key place which cannot be diminished by smart contracts, the Blockchain and AI. Indeed, the law of the land sits above the so-called law of code. Despite the difficulties of enforceability and legal proceeding, the law is the ground on which decisions, interpretations and rules are made. Manufacturers as well as parties to a contract are subject to them. The law cannot be evaded.

This implies that smart contracts will most likely not replace traditional paper contracts but offer other an alternative such as they do today. Parties to a smart contract should include particular provisions namely regarding jurisdiction and applicability.

What are the next steps?

The primacy of national law may need to be asserted in new ways to adapt to technological evolutions. Traditional contract law namely record keeping and evidentiary rules may need to be modified so as to take into account the automated nature of smart contracts. The Lord Chief of Justice for England and Wales underlined the probable need to update the United-Kingdom’s legislation regarding these issues.

Mathias avocats will keep you informed on any new developments.