Smart Contracts Are Not Smart Contracts?

Queen Mary, London, and Cambridge Universities have published a collaborative paper that suggests lawmakers will need to face a number of legal issues that impact blockchain technology if it is to become a part of the private sector in the future. The study, entitled “Blockchain Demystified: A Technical and Legal Introduction to Distributed and Centralized Ledgers” discusses the legal standpoint of centralized and distributed ledgers.

Those who are interested in learning about blockchain technology, how it works, and so forth, may want to take a look at the study. The study also addresses the legal aspects of blockchain and its compliance with various laws. The authors of the study determined that for blockchain to be complaint, it needs to follow laws in several areas, such as data protection, property, security, company, and intellectual property. Upon compliance, the technology may be better suited to function in a global space.

The study also discussed a significant challenge in the commercial and public sector that prevents blockchain adoption. The issue arises primarily when there are smart contracts involved – right now, there is no system that makes smart contracts legal validity. Even though smart contracts seem to be an interesting and catchy term, it is misleading. The contracts are not legally binding in most jurisdiction, but rather, are established on a self-executing code. Vitalik Buterin, Ethereum’s founder, recognized this issue and tweeted that the contracts “should have called them something more boring and technical, perhaps something like ‘persistent scripts.’”

The paper further stated that,

“One could argue that a smart contract is not a legally enforceable promise, but an automated mechanical process. The creator of smart contract will ordinarily need to explain his offer to human counter-parties in human intelligible language. This explanation can form the basis of the agreement between the parties and thereby determine the terms of the contract.”

There are also other legal challenges preventing the adoption of blockchain, such as data protection and privacy laws. This is in light of the fact that blockchain networks may include personal information that third parties should not obtain. The issue is that blockchain networks make it difficult to prevent the public from viewing the data.

The European Union’s General Data Protection Regulation, which focuses on “processing of personal data that falls within the regime’s territorial scope,” it is possible to argue that public blockchain data may fall within the scope of the new regulation. As a result, wallet providers may be impacted.

Right now, there is no indication that privacy laws will provide any guidance when it comes to global blockchain networks like Ethereum and Bitcoin. The EU’s data protection laws may be unable to provide guidance either. The good news is that there are public and private entities that are looking to enhance operations by ensuring that they are complaint with the EU’s laws.

Further, once the ICO market took off in 2017, there has been an avid discussion as to whether they should be considered a security. Several startups have taken the approach of calling them utility tokens so that they would be exempt from securities laws. The roadblock is that these tokens are purchased with the intent to provide an investment, which is what may cause them to come under the purview of securities laws. The paper pointed out that,

“The difficulty in determining whether an ICO token is a security or not lies in the fact that the ICOs often combine elements of investment and utility tokens. While the tokens can be used to access the service, ICOs may also offer investors the opportunity to profit form a market company’s success by selling tokens at a profit on secondary markets.”

Lastly, the paper identifies that there are still many other legal questions that must be addressed. Without clear definitions, technology companies will have a harder time navigating the industry. As the paper states,

“Given the diversity of possible blockchain platform designs, no one-size-fits-all legal analysis is possible. Instead, each application of blockchain technology will need to be considered on its facts.”

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