Should Smart Contracts be legally-enforceable?

What are smart contracts?

Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. Smart contracts allow trusted transactions and agreements to be carried out among anonymous parties without a need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible.
Just because “smart contract” includes the word “contract”, it doesn’t necessarily mean that it’s legally-enforceable. This is a complex issue that needs further discussions. Can code really be treated as a law? Can smart contracts put lawyers out of job? Smart contract technology shows how new technology clashes with traditional frameworks.

The case for smart contracts

The advantages which smart contracts provide for businesses and consumers are obvious. At this point, we are witnessing a blockchain revolution. The development of new technologies causes the beginning of a transformation from traditional files to agreements enforced with code.
Can smart contracts be classified as formal agreements? Yes, it can - at least, most people think this way: a traditional contract is, at its most basic level, an agreement that all parties are legally bound to. Smart contracts are similar, except they have few different characteristics that make them unique.
Tamper-proof – Thanks to blockchain technology, we can create permanent records that can’t be altered or deleted. This removes middle-men, and ensures that no one can tamper with the contract. If transaction on the Ethereum blockchain is executed, the transaction is recorded autonomously, and remains in a constant state.

BUT…

Smart contracts seem to be more efficient than traditional contracts, but are they legally-enforceable? Despite the euphoria, this technology does have its issues, particularly how it works with the current industries.

Main issues:

  • No ‘traditional’ third-party signatures – Court has the ground to dismiss the case.
  • No central authority – Who resolves disputes?
  • Different language structures – Smart contracts don’t fall under our traditional legal framework.
  • Smart contracts aren’t agreements at all – They’re the technology that enforces the agreements.
  • Where was the smart contract executed? – It’s hard to determine the right venue.
Most people agree that blockchain technology will increase the efficiency of business and save money from by-passing the middle-man. However, the potential benefits can come at a cost… Will courts consider code as binding contracts?
Currently, there are no clear guidelines, and decisions are likely to be made on a case by case basis. In the traditional manner, contracts need to be signed and witnessed by third parties. If this is not the case, then the court would have grounds to dismiss the contract – This is a clear issue with smart contracts.
Counterparts are required – If there are disputes, who should be blamed? The miners? The block producers? Maybe the coder? The main purpose of these public blockchains is to decentralize authority. However, by not having a central authority, it makes really difficult to resolve any contractual disputes.
Are they contracts, or even agreements, at all? It can even be argued that smart contracts aren’t agreements at all, they’re the technology that enforces the agreements.

So, should smart contracts be legally-enforceable?

In the end, it all comes down to whether the court views smart contracts as legally binding or not. Smart contracts are not contracts, at least not yet. Rather, smart contracts act as a mechanism of enforcement. They can be legally enforceable indirectly, not under its own terms. So, do smart contracts have a place in today’s world? Yes and no. Smart contracts offer a huge opportunity for nearly every industry in the world. Blockchain technology grows and becomes more sophisticated, and the use of smart contracts will only increase as the time goes by.
Finally, whether smart contracts are legally binding or not, depends on its jurisdiction. Every country has different laws. However, the difficult question to answer is: where does the contract beсome binding? We notice a progress in some countries regarding the legality of electronic contracts – these countries are also likely to be progressive on a blockchain law.

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