This article has been written by Rik Mukherji pursuing Diploma in Corporate Litigation and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
A smart contract is considered to be a self-executing program that is underlined with the principle of automation consisting of actions that are required in an agreement or contract. Once the process is completed, the transaction becomes trackable and irreversible. Smart contracts allow transactions and agreements that are trusted and are to be carried out among disparate or parties who are anonymous, that are not being governed by any ruling authority or a legal regime and the enforcement of such contracts is not a necessity. Smart contracts are governed by blockchain technology which in itself is a foundation for the newly introduced Bitcoin, a type of cryptocurrency, which has evolved as a significant virtual currency. Transaction of such currencies from one person to another is a solid example of a smart contract. This article gives a detailed insight about the newly introduced contract which is no more the future but is our present.
Rise of legal technology in the legal field
Legal tech refers to software and technology used by firms to be more efficient. It is a powerful research tool that permits quicker and more accurate legal services to clients. An example of legal research is artificial intelligence, which is used to scan, proof documents, and assist with legal research. It allows the lawyer to focus on a specific area of law and more complex issues. It also helps smaller firms compete with new and improved client service. Many law students are familiar with Westlaw and LexisNexis, which use legal technology by digitalising cases and natural language reviewing. These are productive and time-efficient for legal research.
Legal tech is progressively becoming more popular because of its utility. As more lawyers are transitioning to a work-from-home environment, reliance on technology to connect with others is increasing more than ever. In March 2020, Singapore’s government allocated $11 million towards legal tech and focused on developing smart contracts and statutes.
Legal tech is booming, and recent investing demonstrates its importance in the global environment. Legal technology had already existed, but the benefits are seen more clearly in the current situation, as lawyers have to use technology they were hesitant to trust beforehand. Legal tech might stick around once the restrictions are lifted. One of the valuable tools for a lawyer in the post-pandemic period are smart contracts, which in itself is a product of legal technology.
An insight to smart contracts
The US National Institute of Standards & Technology describes ‘smart contract’ as a contract that is coded and data deployed using cryptographically signed transactions on the blockchain network. Smart Contracts are computer code that helps individuals exchange anything of value without the assistance of a third party. They are not legal contracts as legal contracts are traditional natural language, a legally binding agreement with specific terms expressed and implemented in machine-readable code. Smart contracts can also be regarded as a secured stored procedure. The execution and codified effects like the transfer of value between parties are strictly enforced and cannot be manipulated, after a transaction with a specific contract, details are stored in a blockchain or distributed ledger.
Illustration of how an intelligent contract works
An individual withdraws ₹10,000 from his bank account at an ATM. The machine reads the card and asks the individual to select the desired amount for withdrawal. Once the amount is chosen, the ATM gives out the money. This transaction occurs without the requirement of a bank teller and allows the individual to obtain money transparently and securely. The transaction includes the compiled code for the smart contract as well as a specific receiver address. The transaction must then be included in a block added to the blockchain, at which point the smart contract’s code will establish the initial state of the smart contract. Byzantine fault-tolerant algorithms secure the smart contract in a decentralised way from attempts to meddle with it. Once a smart contract is installed, it cannot be updated.
Objective of smart contracts
The objective of smart contracts is to reduce the need for trusted intermediates, arbitrations and enforcement costs. Vending machines are the oldest piece of technology equivalent to intelligent contract implementation. The intelligent contract often operates through a blockchain known as ‘Ethereum’. This identifies the fulfillment of contractual obligations, which then triggers the transfer of assets at decided terms, and then registers them.
Nick Szabo was the first to use the term ‘smart contract’ (1990) and referred to it as a set of promises, restricted in digital form, including practices within which the parties perform on their promises.
Legal status of smart contracts
Some legal academics argue that smart contracts are not legal contracts but rather means of performing commitments deriving from other agreements. However, since the launch of the Ethereum blockchain, the term ‘smart contract’; has been applied explicitly toward the notion of general-purpose calculation that takes place on a blockchain or distributed ledger. Put simply, smart contracts are said to be enforceable as long as they abide by the basic rules of contractual agreements. The rules include the presence of an offer, an acceptance of that offer and consideration.
Landmark decisions relating to the implementation of smart contracts
- In 2017, Belarus became the first-ever country to legalise intelligent contracts by implementing the development of the digital economy.
- In 2018, a US Senate report stated that while intelligent contracts might be a new concept altogether, the fundamental contract law that serves as the bedrock of smart contracts, remains unchanged. In addition, several US states such as Arizona, Nevada, Tennessee and Wyoming have passed legislation on smart contracts.
- In April 2020, Iowa’s House of Representatives passed a bill legally recognising intelligent contracts in the state.
- In April 2021, the UK Jurisdiction Taskforce (UKJT) issued the Digital Dispute Resolution Rules to help rapidly resolve blockchain and crypto legal disputes.
- In 2015, UBS Group AG (a Swiss Multinational investment bank) experimented with smart bonds, that use the Bitcoin blockchain. As a result, payment streams could hypothetically be fully automated, creating a self-paying tool.
Advantages of using smart contracts
- These contracts can be used in any industry. E.g., Real estate and healthcare.
- They are cost-effective as no intermediaries are required in the process.
- They are much faster and more precise than traditional contracts.
Disadvantages of using smart contracts
- There is a high dependency on programmers to do all the work.
- Could fall vulnerable to bugs, security holes, and problematic constructs.
- They are difficult to adjust and almost impossible to rescind (as typically done in court).
- They are not very well-regulated
- It requires much maintenance in terms of the engineering expertise necessary to get them working.
Future of smart contracts
It is necessary to understand that the concept of ‘smart contracts’ is not a future probability but a present happening. In the coming years and decades, all we can experience is a complete transition from traditional to that of smart contracts with regulation that is currently lacking, also coming into place. Smart contracts, whilst very effective, are not the go-to option for contract execution. Once they become more automated, and less human intervention is necessary, they will probably become a lot more widespread. Many wonder whether smart contracts could put lawyers out of business, though this is unlikely the case since lawyers would then focus on more complex areas of work, and smart contracts will then reduce their workload.
Currently, the idea that the average consumer assumes about smart contracts is that these are contracts that are completely regulated by the usage of blockchain transactions, such as the dealings involved in cases of digital assets like non-fungible tokens (NFTs) and cryptocurrency, as we have talked about previously as well. Another idea that can be added to this is that smart contracts serve a role wherever automation is possible.
Conclusion
As we come to the end of the discussion about smart contracts, it is ideal to mention that the concept is relatively young. Because of the same, there is a pool of things that are left to be explored when it comes to smart contracts. As we can see in the coming times, accumulation of the readily available information about the same will help us carry out more efficient digital transactions thereby completely going paperless. As the field of smart contracts takes heights, assistance in terms of governance and regulation becomes easier thereby making laymen understand the concept better so that they can put the same into effective usage. With the growth in this concept, there will also be an acceleration of the associated challenges and risks in regard to data protection and privacy that evolves. Addressing such challenges with sui generis means leading us to a better future. It is intended that the industry would reduce the potential security risks of smart contracts and create best practises with the help of combined programming and legal expertise.
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