While it is true that blockchain technology has allowed innovators to create solutions that were previously thought impossible or implausible, there are legitimate concerns that these innovations are unlikely to reach their full potential if they are not recognized by the law.
Do Smart Contracts need legal recognition?
The term ‘smart contract’ was originally coined by cryptographer Nick Szabo in 1996 in his paper titled “Smart Contracts: Building Blocks for Digital Markets”. He defined smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”
With the launch of the Ethereum network in 2015, smart contract technology became a reality and readily available to the blockchain community. Using the tools native to the network, people were able to create agreements with complex data sets attached to them. These agreements were able to self-enforce once set in motion much like Szabo envisioned two decades earlier.
In the last two years, computing platforms offering smart contract capabilities have made some inroads beyond the niche crypto community — with a growing number of projects such as NEO, EOS, and Cardano working on creating smart contract solutions.
Smart contracts have gained popularity because they come with several inherent advantages. For businesses, they reduce operational costs while increasing the speed of execution. Costs fall because there is a reduced need for middlemen while speed is influenced by the fact that the time-consuming steps associated with middlemen are eliminated as well. Additionally, smart contracts reduce conflicts through enhanced transparency as all parties are privy to all parts of the agreement.
While many agree that smart contracts can improve business productivity, there is widespread concern about the legality of smart contracts and whether they really qualify in the eyes of the law as enforceable agreements.
Smart contracts are ‘if, then’ statements that are executed by code. While a human does create the code, the software operates independently once it is started. In the light of the law, this currently creates an ambiguous gray area.
Law firm Norton Rose Fulbright explains: “In many common law jurisdictions, a contract can only be valid if it is entered into by a person (i.e. a human or legal person, such as a corporation) with legal capacity to do so. There is also common law authority (for example, in English law) that a contract cannot arise unless there is sufficient certainty over who the contracting parties are. Some civil law jurisdictions lay down other legal requirements for the formation of a legally binding contract.”
While some believe that the law, like Norton Rose Fulbright, must be updated to include agreements such as smart contracts, others are of the opinion that contracts as currently defined by law already cover this. In light of new legislation passed by the state of Tennessee and Arizona, which recognize smart contracts, some express concern that this may possibly stifle innovation and slow down growth. Warning, in essence, that in attempting to help, legislators might actually make things worse.
A professor at New York University’s Stern School of Business, Andrew Hinkes, recently articulated these fears stating: “Laws should not attempt to define technologies that do not have a widely held definition in their relevant technical communities.” Additionally, the relative youth of the space means that legislators are likely to get some terms wrong and use outdated terms that may further compound the issue.
Anybody who watched US senators interviewing Facebook founder Mark Zuckerberg, recently, will likely have been concerned with the limited understanding the legislators had with regards to basic internet use and business models — so its unlikely blockchain and cryptocurrency is on their radar.
Identities on the blockchain
Given concerns about the ever-present threat of identity theft and privacy infringement, a number of blockchain projects are utilizing the technology to create digital identities. The argument is that the technology allows an individual to have greater control over their data. This is referred to as ‘self-sovereign’ identity. Moreover, blockchain-based identities — in theory — should be accessible from anywhere in the world and be easily verifiable. This has a wide range of business and humainitarapplications such as for the global refugee crisis where identification papers are often lost or damaged.
Projects such as Sphere Identity and Uport, for example, are working on blockchain-based identity management systems. However, projects like this require support from identification papers issued by governments (passports, drivers licenses etc) in order to verify the identities on their networks.
This is actually the case for all blockchain-based identity management projects except Spain’s’ national system. That is because its network, Alastria, is backed by the government and operates as a recognized system as a result. The Alastria ID issued by the system is legally valid and can be used to transact, enter into agreements as well as verify identity.
Land registries across the world are mired in inconsistencies and irregularities that sometimes make it difficult if not impossible to determine with legal certainty who is the real owner of a piece of land is. This is further compounded in developing countries and countries where a natural disaster has destroyed records.
Land registry-on-the-blockchain startups, such as Ghana-based Bitland, for example, are attempting to use blockchain technology to verify land ownership. Additionally, a state in India is also using the blockchain to secure land records. However, both these projects and similar ones in other countries, require government-issued title deeds and its recorded land titles must be legally recognized otherwise they will not fulfill their purpose.
The need for legislative support
The applications of blockchain technology are far-reaching. However, it is becoming increasingly obvious that for these solutions to deliver on their potential, there must be a supportive legislative environment.
For instance, both blockchain-issued identities and blockchain-based title deeds will struggle to be legally recognized without the relevant government issued backing documents while smart contracts exist in a legal gray area which could actually be made worse by ineffective or poorly written laws.
Moreover, different classes of blockchain-based solutions require different legislation in order to function effectively. Therefore, law-makers across the world need to consider how to create a legal environment where innovation and growth are encouraged otherwise it is likely these solutions will struggle to succeed.