In depth Analysis
“ 5. Smart Contracts:If law were Code
Blockchain ledgers present several interesting and novel features over centralised ledgers. However, beyond recording the time and details of transactions, they can also play a more active, potentially autonomous role in the management and implementation of transactions. By embedding code in the blockchain, transactions can be executed automatically in response to certain conditions being met, providing a ‘guarantee of execution’. Self-executing smart contracts based upon this functionality are developing rapidly. Questions arise however when code and law become one….
There are several areas of law that could be vulnerable to exploitation where the contract is not considered to be part of a traditional legal jurisdiction. Examples include taxation (e.g. on income, sales, inheritance and capital gains), exploitation (e.g. on rental and employment contracts) and corporate crime (e.g. price fixing and insider trading). It may be necessary to find new ways of asserting the primacy of national law in the event that the automation involved in smart contracts makes it difficult to enforce. New government responsibilities could emerge in the process of applying traditional judicial processes to smart contracts, such as arbitration when bugs are found in contract-code. As programmers start to translate agreements into executable code, they are effectively making decisions about how they will be implemented in practice, which may mean they carry greater legal responsibilities.
Smart contracts can be inflexible and unable to adapt to changing circumstances or the preferences of parties. Not all possible questions can be answered in advance, and there will always be unforeseen circumstances that require interpretation of how contract clauses should be applied. Code is simply too rigid to allow all contracts to be algorithmically determined. The adjudication of contractual disputes and enforcement of contractual clauses may present challenges as the field develops.
Traditional contract law, particularly the record-keeping requirements and evidentiary rules, may need to be modified so as take account of the automated and deterministic nature of smart contracts, as well as issues to do with their validity and enforceability. The law is expected to face challenging questions concerning the need to establish a link with the physical, perform the necessary validation procedures and ensure compliance of blockchain applications with the applicable law. Should the technical code approached through Lessig’s lens be the most significant form of law? Criteria are clearly needed to ensure the legal validity and enforceability of smart contracts under the law.”