20th Nov 2017

Blockchain and contracts - licit, illicit or smart?

We’re just back from our latest Baltic initiative - this time adding Helsinki and Finland to our Estonian itinerary.   As ever, the welcome was warm and we’ve got some great relationships building – and it’s great to be part of a two way flow, with the Nordics/Baltics FinTech visit to Leeds (and another place over the hills. Muncaster?) following immediately after. 

Here, what everyone wants to know is – what about Blockchain? We wrote about blockchain and the law in February 2017 and it’s worth a revisit and a fresh perspective.  Apparently, the trick if you want investment is to mumble “blockchain”, “AI” and “ICO” – meaning initial coin offering, not the Information Commissioner’s Office. Though GDPR is another talking topic in the region – somehow, we think there needs to be more substance than that. 

Blockchain explained 

Blockchain – the distributed ledger technology, the most well-known expression of which is Bitcoin – is increasingly being used by businesses and public bodies looking beyond cryptocurrencies as a route for secure, accessible and cost-effective solutions. In short, Blockchain is moving from buzzword to mainstream.

In blockchain, the blocks of data making up the ledger are intended to be encrypted and immutable - attempts to change a block will create an inconsistency with distributed versions of that block, and be rejected. 

Blockchain is increasingly being used by businesses and public bodies looking beyond cryptocurrencies. 

It is, though, an unregulated and self-policed environment, and that creates its own issues. There is always the suspicion, when blockchain is used for cryptocurrencies, that the technology becomes a cloak for illicit activity; as indeed it does and has done. That’s damaging for the standing of blockchain solutions, and of course if it’s beyond the reach of proper law enforcement, it’s a problem for government and society.

In the UK, the Financial Conduct Authority, who through their regulatory sandbox concept, are keen not to slam the door on innovation, but instead to guide it on a path which provides for responsible and transparent use in the area of its supervision. 

The legal response 

How does the legal system respond to this, or any emerging and disruptive technologies; and indeed, can it or should it?  Blockchain is by no means the first disruptive technology – did we rewrite the rule book in the response to the emergence of the world-wide web, electronic communications or the rise of social media?

In general, trying to change the law in response to changes in technology, or changes in society, doesn’t work and isn’t necessary. It would be a never ending chase, and technology moves a lot faster than legislation.

In general, trying to change the law in response to changes in technology, or changes in society, doesn’t work and isn’t necessary

When legislators do legislate, they try to do so in technology-neutral ways. It’s not always  possible – some technologies of course create issues around jurisdiction and location which earlier generations didn’t have as an issue,  so these need to be addressed and those issues might apply to blockchain whose distributed nature  is necessarily location-independent. But there are similar issues with other technologies, and legislators prefer to set tests for the determination of the right jurisdiction. In a different way, this is the case for data protection, and even taxation (not, perhaps, the happiest example).   What lawyers and courts tend to do is apply legal principles to new issues, and the benefit of that is to ensure that principles remain consistently applied.

We know, from our extensive experience in the technology sector, that if we are asked to advise or draft documents to deal with a different technology or different usage, we start off with developing a real understanding of the principle of the technology, its delivery, outcomes, risks and commercial proposition, and then analysing how the  law applies.  This has helped us deal with, for instance, the documenting of agile software development in contractual form.  We were told it couldn’t be done, but we did it.   We don’t expect the principles to be different.

The rise of smart contracts

One of the aspects of blockchain which gets some airtime is around smart contracts.  The name gives hope that there’s an opportunity to get rid of those obstructive lawyers, who only complicate things. All you need is code. 

But as we understand smart contracts, they’re not contracts at all, in the sense that lawyers understand them. They are trigger mechanisms – if this happens, then that follows.  In that context, the basic concepts of contracts in the legal sense are absent, and whilst the initial reaction may be to welcome that, this misunderstands what contracts achieve. 

Contracts create a binding relationship, which deal with a range of issues. These include a reflection of the commercial deal between the parties to the contract – lawyers refer to the need for offer and acceptance, to an intent to create a legal relationship, and to “consideration” (not actually needed in Estonian law, which is German–based) i.e. the passing of some value.  But what contracts also regulate, and smart contracts don’t, are the obligations which the parties enter into, not about what they will do (which smart contracts can, perhaps, capture) but what liabilities they take on to each other, how those liabilities are described and limited.

There is a difference between the structure of contracts in the “common law” world – the UK, US, Australia, Canada etc – and those in Europe, which are generally based on civic codes.  Common law contracts tend to be fully comprehensive – every obligation is contained within them, so they can be lengthy. In the Baltic States and most of the rest of Europe, this detail is absent because it is in the codes.  This difference doesn’t, though, overcome the point about the essence of contracts, and the distinction between a legal contract, and a blockchain-fuelled smart contract. 

Blockchain, though, is a technology of which we will see more and more

Blockchain, though, is a technology of which we will see more and more.  Even though – like the world wide web – an understanding of its detail may remain with a tech-fuelled few, that  hasn’t prevented the world walking round with smart phones with vast computing power, and in most cases zero understanding of the technology.  It is a technology, and it is likely to be a revolutionary technology in its uses. Does it turn on its head the way the law has to work?  

For now, at least, we don’t think so, though as technology lawyers, we watch these things very closely; and with our international reach, we maintain dialogue both with lawyers and tech companies across borders, including of course Estonia, the aspirant digital nation without borders. 

We’ll keep working with the technologies as they develop so as they do, we have the necessary understanding to apply the law, advise on it and help technology businesses create contracts, smartly. 

Paul Berwin is a Commercial and Digital Law Specialist at Berwins Solicitors. He is an Accredited Member of the Society for Computers and Law and a commentator on digital law.

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