Paper questions the legality of smart contracts

September 28, 2018
Chris Wheal

Smart contracts, like many blockchain-enabled applications, have the potential to transform certain industries by speeding up actions that require multiple signatories and transactions, often across borders.

Is the law ready to make smart contracts legally binding?

But a new paper by Washington DC-based lobby group the Chamber of Digital Commerce, questions the legality of such contracts, given the differing legal and regulatory frameworks across multi-jurisdictions.

Questions raised

A smart contract is essentially computer code that, once certain specified conditions are met, can run automatically and be stored on a distributed ledger, and write any resulting changes to that blockchain ledger.

But does it constitute a legal contract? Indeed, can computer code constitute a legal document? And, most importantly for a contract – if it is contested, can its terms be enforced in traditional legal systems?

The paper finds that while most elements of a contract are similar under most legal jurisdictions, the terminology in most is distinct.

Findings

However, there are precedents: the paper finds that a blockchain is similar to any other IT-based message platform and courts have already accepted that email messages can constitute legally-binding contracts. Furthermore, automated actions, common in equity market transactions, are also legal.

“Existing contract laws, therefore, in many instances suffice in the case of the formation of smart legal contracts,” says Miren Aparicio, one of the paper’s authors.

The report also raises the issue of enforceability and efforts in the US by individual states to create their own smart contract laws.

It concludes, however, that as more jurisdictions explore the use of smart contracts on blockchain it can be expected that additional issues will be raised where old paradigms must be replaced with new thinking.

Post written by Chris Wheal
Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.

Related News

OL DEX is closing all activities April 25, 2020
USDT (ERC-20) Gateway Enabled April 17, 2020