Smart contracts are an important element of the blockchain revolution, although they predate the blockchain.According to most sources, this is Nick Sabo WHO Creative The term “smart contract” in the 1990s. Since then, the mechanism of vending machines is often used as an example of basic smart contracts based on if-then logic. Payments to vending machines trigger irrevocable automatic actions, from retaining funds to providing goods.
The emergence of blockchain technology enables this if-then logic to be implemented on a decentralized network to promote autonomous and self-executing smart contracts, also known as computerized scripts, smart codes, computerized protocols or decentralized Business logic. Since their popularity, people have been arguing and questioning whether they are smart or contract.
The basis of smart contracts
Set aside this debate for now, smart contracts provide many benefits. One of them is the efficiency mainly brought by automation, their streamlined structure, clear explanation and efficient performance. By removing the middle layer and reducing ambiguity and opportunistic behavior, efficiency improvements bring cost savings.
The transparency of smart contracts provides auditability and enhances trust. Technically guaranteed performance not only facilitates transactions between parties that do not know each other, but also facilitates transactions between parties who are unwilling to trade with each other without guaranteed performance. Pre-guaranteeing performance through the automation and automatic execution of smart contracts can also help avoid institutional enforcement and costly contract breaches. Smart contracts can achieve more efficient and cheaper business processes, supply chain management, corporate governance, and so on. We are just beginning to explore their potential uses.
However, it has to be said that smart contracts also require certain technical literacy to code, implement and understand them, and this skill is still relatively low outside the blockchain community. Smart contracts are not without technical challenges and loopholes in all stages of their life cycle, from creation to deployment, execution and completion. There are also the prior cost of smart contract implementation and the cost of switching to the smart contract network. These costs should not exceed the benefits of achieving any efficiency gains.
Technology and Law
Smart contracts represent the intersection of technology and law, and therefore pose challenges to practitioners, scholars and legislators-many legal issues have been debated. Smart contracts are said to be neither smart contracts nor contracts. First of all, for smart contracts, there is neither a recognized definition, nor a unified, structured, and systematic classification. There is no common consensus or understanding about the relationship between smart contracts and traditional legal contracts. Some scholars question the ability to create effective and binding legal contracts through smart contracts.
Discussions on the applicable legal framework and how to reconcile the immutability of blockchain records with contract errors or contract deficiencies are ongoing. Similar concerns have been raised about modifying the terms of smart contracts recorded on the immutable ledger. For borderless, decentralized blockchain networks where smart contracts are being deployed, governing laws and applicable jurisdictions are also particularly relevant issues. Consumer protection and information obligations are also being raised.
Anti-money laundering (AML)/combating the financing of terrorism (CFT) requirements and privacy and confidentiality issues are also receiving increasing attention. Immutability and automated, unstoppable execution are also potential legal traps for the use of smart contracts.
Since smart contracts have different types and models, depending on their legal relevance (if any), context, and technical attributes, this analysis becomes more difficult. They range from simple, direct and standardized payment instructions to complex tools capable of autonomously executing complex sequences of actions. The emergence of blockchain-based smart contracts has also brought new dimensions to the concept of cyberspace self-discipline. In addition, discussions about “Code is Law” and “Lex Cryptographia” followed.
However, when it comes to legislators and regulators, they are basically silent about smart contracts. Although academia has conducted fierce academic debates on the legal status, recognition and enforceability of smart contracts, its regulatory legitimacy and legal meaning, the legislators do not seem to panic, nor are they eager to take any prohibitive actions. Although there is some legislative activity in selected jurisdictions, so far only a few countries have formulated regulatory responses and enacted legislation, which is usually moderate.
Smart contracts and the United States
For example, most legislative measures on smart contracts in the United States are relatively narrow and only manage a specific number of issues. They are mainly limited to defining smart contracts, recognizing their electronic forms and signatures, and sometimes restricting their admissibility as evidence.This includes things like Arizona, Tennessee, North Dakota, Nevada, Wyoming with IllinoisSome critics claim that such legislative measures are premature and incomplete, and are merely a promotion of specific jurisdictions. This creates the risk of regulatory fragmentation and fragmented smart contract legislation between states in the United States, which may complicate future federal-level coordination.
U.S. federal regulatory and supervisory agencies, such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), through their investigations, statements and guidance to solve smart contract issues, clarified smart contracts in the United States.Commodity Futures Trading Commission release The smart contract introductory book, which states that smart contracts may be binding legal contracts, depending on the facts and circumstances, and may be bound by various existing legal frameworks. The CFTC also highlighted a number of risks arising from the use of smart contracts, including operational risks, technical risks, network security risks, fraud and manipulation risks, and risks arising from governance agreements.
Similar to the CFTC, the SEC applies the existing legal framework in its enforcement actions related to blockchain and smart contracts.As a sign of increasingly stringent regulatory review, the US Securities and Exchange Commission recently Announce Procurement of smart contract analysis tools to analyze and detail codes in blockchains and other distributed ledgers to support their efforts to monitor risks, improve compliance, and provide the SEC with policies on digital assets.
Smart contracts and the world
In other parts of the world, countries like this Belarus, Italy with Russia Smart contracts have been resolved within a limited scope.British Judicial Working Group release An important legal statement that concluded that smart contracts can form effective, binding and enforceable contracts between parties, emphasizes the adaptability and flexibility of common law, and can cater to technological advancements such as smart contracts. The EU has also expressed consumer protection concerns related to the use of smart contracts, but so far, no regulatory actions have been taken at the EU level.
When smart contracts are recognized within the existing legal framework, the existing legislative measures seem to be consistent; however, they have differences in the definition of smart contracts. It is only a matter of time before the issues related to smart contracts reach the courts, allowing the judiciary to resolve legal issues, especially in common law jurisdictions.
At the same time, the proliferation of different definitions of smart contracts and potential legal treatment may lead to legal uncertainty and regulatory arbitrage. Therefore, legislators should pay close attention to the development of smart contracts and only intervene when necessary to provide legal certainty, reduce risks, and protect vulnerable parties. This measurement and risk-based regulatory approach will support innovation, capitalize on opportunities, and integrate smart contract innovation into the existing legal system. Adequate regulatory guidance will also help eliminate legal uncertainty and enhance the market confidence of the industry, investors and consumers.
The global smart contract market is growing rapidly.this is Expected During the forecast period from 2020 to 2025, the market compound annual growth rate will reach 17.4%, and it is expected to reach 208.3 million US dollars by 2025. , Supply chain management and automotive, real estate, insurance and healthcare industries. They are also the backbone of the growing decentralized finance (DeFi) space. Regulators will face increasing challenges in responding to and solving smart contracts, but the legislative initiatives so far show that there are no major obstacles to the use of smart contracts; it seems that no substantial legal reforms are needed to accept them.
The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph, Warsaw University of Technology or its affiliates.
This article is for general reference only, and should not and should not be regarded as legal advice.
Agata Ferreira He is an assistant professor at Warsaw University of Technology and a guest professor at many other academic institutions. She studied law in four different jurisdictions in common law and civil law systems. Agata has worked in the UK financial sector for more than ten years in a leading law firm and an investment bank. She is a member of the EU Blockchain Observatory and Forum Expert Group and a member of the European Blockchain Advisory Committee.