Blockchain and Cryptocurrencies continue to remain an unregulated area with many jurisdictions now in the process of forming, or looking to form, working groups to review and put forward potential regulations to govern this area. In Ireland, the Department of Finance has established a working group to monitor developments in the Blockchain and Cryptocurrency sphere with a view to being in a position to put forward recommendations on potential policies and regulations.
Once again we recommend that consumers note the alert issued by the Central Bank of Ireland in respect of initial coin offerings, which we discussed on our previous article. It is also recommended that companies operating in the Blockchain sphere take legal advice to ensure that they factor in the many areas of law that can apply, including but not limited to data protection and privacy and intellectual property.
One term that is becoming prevalent in the context of Cryptocurrencies, Bitcoin and Blockchain technology is “Smart Contracts”. Blockchain and Smart Contracts are hot topics in various industries.
What is a Smart Contract?
‘Smart Contracts’ is a computer protocol which digitally allows, verifies or enforces negotiation and or performance of a contract. This technology can be extended to credit transactions without the necessity of a third party. The transactions themselves are all trackable and irreversible. Smart Contracts enable the exchange of money, property, shares or anything of value, in a transparent, conflict-free way while avoiding the services of a third party. Smart Contracts aim to provide security which would be superior to traditional contract law and reduce transactional costs. This technology has been applied in many Cryptocurrencies.
Physical vending machines are a good example of a primitive ancestor of Smart Contracts in that they take coins and dispense a product and correct change according to the price displayed.
One of the most popular of the cryptocurrencies associated with Smart Contracts is Ethereum, as it allows developers to write their own contracts which detail the responsibilities of the contract parties and the self-executing payments.
Are Smart Contracts secure?
Blockchain itself is one of the most secure technologies, however, no system is 100 percent safe from being hacked or bugged. As a Blockchain-based technology, a Smart Contract is visable to all users of the said Blockchain. This can, however, lead to a scenario where bugs which can include security holes are still visible to all users but not quickly fixed.
Are Smart Contracts legally binding?
With the excitement surrounding Blockchain technologies and Smart Contracts, the question arises whether they are legally enforceable. The issue that arises with Smart Contracts is that, by their nature, they cannot deal with ambiguity. It also must be considered that their programmers cannot plan for every contingency nor is there the ability to translate all the real world data we might need (to include the human mind) to decide such things.
Contract law is there to decide the following:
- Who are the parties?
- What was the agreement?
- Was the offer/acceptance valid?
- Was value (“consideration”) flowing both ways?
- Were there good faith efforts, or excuses for breach? Part performance? Strategic breach?
However, there are times where a contract is not enforceable. For example, there may be a situation where there is duress, a lack of mutual consideration or mutual consent. A contract might also be void if it’s against public policy.
There is a misconception that a Smart Contract can replace a regular contract. The reason for this misconception is due to the fact that Smart Contracts perform automatically and performance cannot be stopped. Therefore, in theory, removing the potential for disputes. Despite the fact that Smart Contracts provide huge potential benefits in terms of reducing transaction costs and increasing security, disputes can and will arise. In fact, the crossover of contract law and Smart Contract coding creates new areas of potential dispute.
It can be said therefore that a Smart Contract could potentially be legally enforceable. However, they can also pose issues with regard to enforcement. If a Smart Contract executes incorrectly or is bugged this can pose a problem. Smart Contracts are fantastic when they work but contract law is about what happens when things don’t work. If an error occurs in a Smart Contract or a dispute arises in respect of its execution, it may be then for a court to adjudicate whether it is valid or not. The court might infer the agreement from the documentation, advertising or content of the code (the Smart Contract) was legally-enforceable but not necessarily by its own terms.
A note of caution when contemplating entering a Smart Contract, as this technology is still unregulated and untested in this jurisdiction in respect of its enforceability. This uncertainty cannot be overlooked.
As previously noted, Blockchain is currently not subject to specific laws or regulations. Many jurisdictions continue to adopt a ‘wait and see’ approach as the technology develops. Therefore, caution should be taken with regard to both Blockchain and Smart Contracts until further guidance is available.