Jurists and smart contracts

Jurists tend to come up against two large obstacles when it comes to dealing with smart contracts:

– The first problem is coming to grips with the technology; both the specific technology involved in the architecture and mechanics of a blockchain, and general computing technology. On the first subject, what exactly is a peer-to-peer network? How does asymmetric or double key cryptography work,? What are hashes or proof of work? How is node consensus achieved? What is a fork? And so on; and on the second, what is an algorithm? Or a bit string?, What is programming? What is a “code” in computing? What is involved in “compiling” or “editing”, or “executing” a program? Without a minimum amount of familiar with all these definitions, any effort to analyze or form a legal opinion on smart contracts is in vain, because, put simply, we have no idea what we are talking about.

So, when we define a smart contract as a “self-executing” contract, are we considering that the only thing a computer program does, in principle, is handle information, perform operations with data by following rules or instructions to produce new data? The relationship this has with the compliance, performance or practical enforcement of a contract is not immediately obvious.

The putting into practice of the idea of a smart contact is linked to the creation of those curious “assets” known as cryptocoins, which are simply made of digital information, meaning that the “placing into circulation” of these assets is programmable, able to be fully controlled by a computer program whose output (who is the current holder of a given bitcoin sum) is simply being recorded on a digital database. In relation to other assets made purely of digital matter (a sound or image file containing a work subject to intellectual property rights), it is easy to see how buying and executing the work may be computer-programmed (because a purely digital asset can be made available on remote media). But if our smart contract relates to other types of assets such as the ownership or use of tangible property, collection rights against a given party, or corporate rights or interests in a company, it will first be necessary to “tokenize” these assets or rights, meaning represent them through programmable digital files. This obviously poses the problem (now essentially a legal one) of how far our legal system is able to recognize the legal validity of that form of placing those tokenized assets or rights into circulation where those rights need to be made enforceable in practice in the real world outside the memory of the device or devices (or network, in some cases) executing a given program. Put another way, to what extent is the “authentication” provided by the code executed on the blockchain also legally valid outside the network (a problem that does not arise with cryptocoins, which only exist, operate and display all their effects on the network).

Insofar as the development of the internet of things has flooded the market with a whole range of articles equipped with electronic devices enabling them to be connected and communicate with the internet, and also be automatically controlled and programmed, the smart contract may achieve more effective and self-sufficient automatic self-execution of these articles, less in need of the support of the traditional legal enforcement mechanisms, and therefore less dependent (in principle, at least) on recognition of their legal authentication.

This first remark is designed to draw your attention to the fact that in matters related to smart contracts, knowledge and an understanding of technology, of what it is able or not able to do in practice, must come before any legal judgment.

– This brings me to the second major problem, concerning not so much knowledge as approach: we come to the subject armed with all our legal prejudices, and this could seriously distort our perception. Basically we are confused by the unclear meaning of the term “smart contract”, which immediately brings to mind our legal concept of a contract and everything associated with it. So we leap too soon into wondering about legal validity or invalidity, legal enforceability or unenforceability, about whether or not the requirements for obtaining legal recognition are satisfied, or even about evidence or its use in litigation; and we fail to realize that this is not really the crux of the matter. At the heart of the matter there is a deeper question, which cannot go unnoticed as a result of that legal preconception of ours. The question is not whether it is a greater or lesser defined new concept that seeks to be accommodated in our legal system, but rather something originally conceived in an attempt to make it an alternative to the whole of our legal system.

A smart contract, purely speaking, is not intended to be a legal contract, because it does not need to be one, in the same way as Bitcoin (in the mind of its creators) is not intended to be legally recognized money, or legal tender, but rather money for a society that has already left far behind, as unnecessary, the notions of national state, of laws and of national jurisdictions.

We need the support of a jurisdiction, of the courts of a given country, and as a precondition for this, recognition of the legal meaning and value of a given arrangement or understanding by the legislation of that country, to the extent that, de facto, compliance with, or practical performance of, the agreed terms depends on the intention of a human being. So, when that intention fails, or becomes inaccessible or hard to implement, we will seek help from state forces. If, however, technology provides us with the ability for that agreed arrangement to be implemented mechanically or automatically with complete independence from the intentions of an “obliged” party, then both the concept of contract, along with the whole legislative and institutional apparatus belonging to what we know as “contractual law” become irrelevant.

Clearly, this approach belongs to the intellectuals and ideologues who were the forerunners of this whole system –the crypto-anarchists-: a technological utopia according to which certain problems related to economic exchange and cooperation, which until now have been organized in a very unsatisfactory way (slow, expensive, complicated, unsafe) through the traditional legal systems, may be handled much more efficiently through the simple intervention of technological tools which are already within our reach.

From this starting point, the real issue that warrants our attention as jurists is: first, whether what is being sought is actually possible, simply in practical terms, and to what extent –in all areas of human relationships which until now were covered by contractual law or only some of those areas-, and how it may be possible; and secondly, whether this alternative way of doing things proves, from the standpoint of forming a judgment and bearing in mind all the potential interests at play (not just pure economic efficiency, the speed and safety of transactions, but also the need for protection of the weaker parties in economic relationships, particularly vulnerable property or vital interests, social solidarity interests which are supposed to form the basis of taxation, etc.), to be something acceptable and advisable, and in which areas it may be and in which areas it may not. While remaining very much aware at all times that we are confronting a phenomenon that largely goes beyond our forces, the forces of a national state, which may easily be overtaken by events in its attempt to gate the field.