The Law Commission has launched a review of the English legal framework as it applies to smart contracts. The aim is to ensure English law is sufficiently certain and flexible to apply in a global, digital context and to highlight any topics which lack clarity or certainty.
Impetus for law reform
The review was announced in the Commission’s annual report for 2017/2018. The report follows the publication of the Law Commission’s 13th Programme of Law Reform which identified smart contracts as one of the 14 areas for which there has been “an acknowledgment from Government that there is a serious intention to reform the law”.
What is a smart contract? There are competing definitions of a smart contract. The term is often used to refer to a contract where the terms of the agreement between the parties are (at least in part) written in computer code that is automated or self-executing, often on a blockchain. The Commission refers to smart contracts as “the technology which runs on blockchain and by which legal contracts may be executed automatically, at least in part”.
Focus on financial services and competitiveness of English law
There is significant interest in smart contracts from financial services, regulators, the press and other commercial stakeholders who are grappling with the fast-evolving technology as they investigate new use cases and applications.
The announcement of the smart contracts project follows the first meeting of the Government’s new Cryptoassets Task Force in May 2018. The Task Force is looking into “the potential benefits and challenges of the application of distributed ledger technology in financial services”. The Commission’s report notes the particular focus from the financial services sector in the context of the increasing interest in smart contracts.
The attraction of increased efficiency in financial transactions and increased trust and certainty, however, needs to be balanced against current legal uncertainties associated with smart contracts. See our publication Smart Contracts – What do you need to know? for more details of the benefits and potential challenges posed by smart contracts.
By seeking to address potential legal uncertainties, the Law Commission hopes to ensure that English law and courts remain a “competitive choice for business”.
Keeping up with disruptive technology
The Commission notes that the purpose of the project is to:
“ensure that the law is sufficiently certain and flexible to apply in a global, digital context and to highlight any topics which lack clarity or certainty”. The report also reveals a wider desire for law reform to keep up with the rapid development of disruptive technology. Given the speed of technological developments, there are a number of other initiatives focusing on the development of corresponding legal and regulatory frameworks. For example, the Commission has since March 2018 also been working on another project, considering the regulatory framework for road-based autonomous vehicles.
What’s happening next?
The Commission has started its initial research on smart contracts and will begin its main work in summer 2018. There is a focus on the potential use-cases for smart contract technology, with the Commission’s project intending to make sure that the English law is certain and flexible, and ultimately, fit for purpose in a time of rapid innovation.