Smart contracts
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This article is written by John N. Haramalis, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

The advent of computers and the digital era has brought us the ability to efficiently collect and store information. The “blockchain” is basically an advanced record keeping technology as it connects transactions in a manner that provides a historical overview of an item or asset and streamlines complicated processes for the end user.[1] A “smart contract” is a spin-off from this development; it uses this technological advancement to insert lines of code in the blockchain that causes the contract to “self-execute” (or run automatically) whereby the transactions are subject to tracking, are transparent, and irreversible across the distribution network.[2]  This technology permits “trusted transactions and agreements” to occur among the various parties in the network without the need for centralized verifications or mechanisms of enforcement external to the system.[3] Smart contracts can therefore enable transactions of value, including those involving money, real estate, and services, among others.[4] They are intended to be user friendly, efficient, and eliminate unnecessary redundancies in the system, among other benefits. They may also be able to play a greater role in the contract management and enforcement process, particularly when dealing with digital assets that can be more easily copied and distributed. For example, smart contracts can facilitate the establishment and self-enforcement of copyright agreements.[5] This new approach of using code as self-enforcement is part of the movement toward a new “Digital Rights Management” system.[6]

What does copyright protect?

Black’s Law Dictionary calls copyright protection as “the right of literary property as recognized and sanctioned by positive law.”[7] In a nutshell, copyright is a legal protection afforded to the creators of original work; it does not matter if the work was published or unpublished, as both are protected.[8]  The U.S. Copyright Office states that this includes “literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture,” but does not protect “facts, ideas, systems, or methods of operations…” (though the method of expression may be protected).[9] These works are required to be in a “tangible form of expression,” are created independently by the author with “minimal creativity” and contained within a “permanent medium” that allows the work to be reproduced or communicated for “more than short time.”[10] If a work meets the criteria, it can be copyrighted.  Copyright is a legal protection that is designed to apply to a broad range of intellectual property, and recently has included even websites and online content.[11] Copyright protection is an important tool for protecting the creativity of an author and ensuring that others cannot copy, use or disseminate the work without permission, or incorrectly attribute its origins. It permits the arts and sciences to progress while ensuring an exclusive right to benefit the creator of the work.

Smart contracts and copyrights

Smart contracts and copyrights are forming a new relationship.  As copyright is a protection that is enforceable under the law, utilizing a smart contract to form an agreement between the parties may be the natural extension of the use of this technology into the legal enforcement realm. The automated process of a smart contract helps to increase certainty, and the widespread automation that is prevalent in most of our global society offers important benefits and efficiencies when using a smart contract that cannot be ignored.[12]  The intersection of smart contracts and copyright protection executed as part of distributed ledger chain remains a novelty item in many jurisdictions, as they eliminate the need for human interaction and completely alter the traditional contracting scheme.  Nevertheless, this disruptive technology has the potential to be a “game changer” for legal frameworks in copyright if it is widely adopted.

Can smart contracts be used to protect copyright?

Whether smart contracts may be used to protect copyright is an interesting question, and subject to much debate, particularly since the concept of smart contracts remains in its infancy. If a jurisdiction has a statutory scheme that supports recognition and enforcement of smart contracts for copyright protection, and has case law precedent, the answer is more likely to be yes; but since this is an area of law that is still developing in most jurisdictions, the answer is not so clear (even when viewed within the legal frameworks in existence for electronic contracts it may be completely certain).  If a jurisdiction views contractual matters in the traditional sense where a writing is required and where the terms and conditions must be verified by human interaction, then a smart contract may not prove to be an effective method of protecting copyright. Given the current environment, various issues and challenges using smart contracts exist that parties to a contract should be aware of.

Issues and challenges

  • Technical capabilities may not exist:

Smart contracting technology may not be available to the parties, or the parties may not be “tech oriented,” and attempts to work modifications on a standard template could result in programmatic errors that could void the contract or result in unintended liability.[13] The ability to understand code and how a smart contract works is a unique skill that is not widely known to many, and unlikely to be for some time.

  • The exercise of discretion by the parties may not be possible:

Contractual discretion between parties to a contract is often exercised, especially when one or both decide it is in the best interests to waive certain provisions of a contract, accept partial fulfillment, or to invoke clauses such as force majeure; because the smart contract is a preprogrammed event, it is unlikely to be capable of allowing discretion into the “logic of the system” and therefore important tools that are traditionally used by the parties are likely to be lost in a smart contract.[14]

  • Modifications to the contract may not be possible:

Traditional contracts are easily modified, amended or terminated by subsequent written agreement by the parties. Not so with smart contracts. The inflexibility of the blockchain makes any subsequent modification a very complicated procedure that has the potential to increase the costs of the transaction disproportionately; this could easily render the traditional contract more cost effective and responsive to the needs of the parties, completely voiding the need for smart contract.[15]

  • Risk of hacking and cybersecurity issues:

In the ever rapidly evolving world of cybercriminals, anything that is completely automated is at risk for cyber-hacking.  Investopedia recently released a report on how Ethereum smart contracts worth $4.4 million in ether were at risk because of “poor coding that contains bugs.”[16] Blockchains used for cryptocurrency were once described as being “unhackable,” but cyberthieves have disproved that, stealing close to $2 billion dollars in cryptocurrency in a short period from 2017 to 2019.[17] Smart contracts for copyright will have similar risks and vulnerabilities, and parties should have contingencies planned in the event of a cyber security breach event.

Conclusion

Smart contracts may be able to protect copyright and do it in a way that enhances the current legal enforcement regime in effect. But widespread use of smart contracts is still on the horizon. This new technology is still evolving, making forecasting a bit premature as to whether smart contracting will be a) effective in replacing or enhancing traditional enforcement mechanisms, b) whether it will be ineffective and unenforceable, or c) ultimately prove a detriment to existing enforcement mechanisms.  To mitigate some of these potential issues, governing law and venue must be chosen carefully, and for now, this component remains a very important aspect of a smart contract.

To shore up any deficiencies in the legal regime, jurisdictions will have to enact specific statutes and regulatory codes that pertain to these kinds of transactions in order to provide clear guidance and ensure enforceability.  Once that occurs, case law will develop to further interpret the law and provide additional guidance. This process will evolve, but unfortunately, not nearly as fast as the technology. If the contracting parties are uncertain as to the benefit of using a smart contract, then a traditional contract should be strongly considered instead.

References

[1] Nigel Gopie, Phd., “What are smart contracts on blockchain?” IBM, July 2, 2018 at https://www.ibm.com/blogs/blockchain/2018/07/what-are-smart-contracts-on-blockchain/. Accessed on September 13, 2020.

[2] Jake Frankenfeld, “Smart Contracts,” Investopedia, October 8, 2019, at https://www.investopedia.com/terms/s/smart-contracts.asp.  Accessed on September 13, 2020.

[3] Frankenfeld, “Smart Contracts.”

[4] “What are Smart Contracts? Guide for Beginners,” Cointelegraph, at https://cointelegraph.com/ethereum-for-beginners/what-are-smart-contracts-guide-for-beginners. Accessed on September 13, 2020.

[5] Finck, M., Moscon, V. Copyright Law on Blockchains: Between New Forms of Rights Administration and Digital Rights Management 2.0. IIC 50, 77–108 (2019). https://doi.org/10.1007/s40319-018-00776-8.

[6] Finck, “Copyright Law on Blockchains.”

[7] As cited in Core Copyright at https://corecopyright.org/2009/12/10/defining-copyright/#:~:text=Black’s%20Law%20Dictionary%3A%20The%20right,and%20sanctioned%20by%20positive%20law.&text=These%20rights%20include%20the%20right,work%2C%20and%20perform%20the%20work. Accessed on September 13, 2020.

[8] Core Copyright.

[9] U.S. Copyright Office at https://www.copyright.gov/help/faq/faq-protect.html#:~:text=Copyright%2C%20a%20form%20of%20intellectual,%2C%20computer%20software%2C%20and%20architecture. Accessed on September 13, 2020.

[10] U.S. Copyright Office

[11] “Copyright Definition,” TechTerms, https://techterms.com/definition/copyright/ Accessed on September 13, 2020.

[12] “Blockchain & Cryptocurrency Regulation 2020” at https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/13-legal-issues-surrounding-the-use-of-smart-contracts.  Accessed on September 16, 2020.

[13] Blockchain & Cryptocurrency Regulation 2020.

[14] Blockchain & Cryptocurrency Regulation 2020.

[15] Blockchain & Cryptocurrency Regulation 2020.

[16] Samantha Chang, “Ethereum Smart Contracts Vulnerable to Hacks: $4 Million in Ether at Risk,” in Investopedia, June 25, 2019 at https://www.investopedia.com/news/ethereum-smart-contracts-vulnerable-hacks-4-million-ether-risk/. Accessed on September 17, 2020.

[17] Mike Orcutt, “Once hailed as unhackable, blockchains are now getting hacked,” MIT Technology Review, February 19, 2019 at https://www.technologyreview.com/2019/02/19/239592/once-hailed-as-unhackable-blockchains-are-now-getting-hacked/. Accessed on September 18, 2020.

 


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