Are “smart contracts” the same thing as legal contracts? Depends on whom you ask.

Like any new technology, the widespread adoption of smart contracts depends on the creation of a common set of both technical and legal standards.
John Wu
CEO, Digital Assets Group

One term people are likely to hear as they learn about GLASS is “smart contract.” Simply put, a smart contract is code that automatically executes an action on the Blockchain when preset conditions are met.

For example, a smart contract releases a token to the buyer once the seller receives funds from that buyer.

That seems pretty straightforward. But like most of the crypto industry, smart contracts exist in a rather nebulous environment. Mainly, are smart contracts actually legal contracts?

Technically, no. Smart contracts are simply a digital means of carrying out a legal agreement, not the agreement itself. The smart contract lives on the Blockchain as immutable code (can’t be changed or altered) that carries out an action based on already agreed upon conditions. Therefore, there is no such thing as violating a smart contract.

But not everyone is convinced the situation is so clear cut. A programmer can introduce a flaw in the code that prevents the smart contract from executing the right action. And code can sometimes behave in unexpected ways.

“Even experienced programmers with a deep understanding (of the technology) can make mistakes when programming with smart contracts,” according to a white paper by Perkins Cole law firm. “In fact, because of the difficulty of coding smart contracts, leaders in the industry are advancing efforts to develop standard smart contract code audits.”

Legal interpretation of smart contracts varies by jurisdiction

Unfortunately, for an industry that craves certainty, the question of whether smart contracts are legal contracts really depends on the country or even state.

For instance, if the smart contract doesn’t execute what it is supposed to execute, which party posseses legal liability? How do courts determine human intent out of computer code? How does existing contract law apply to smart contracts in regards to key issues like notice, consent, and consumer protection?

A white paper by the Norton Rose Fulbright law firm concluded that the laws governing smart contracts will depend on individual jurisdictions.

Indeed, lawmakers in several states, including Arizona, California, New York, and Tennessee, have passed or introduced legislation that essentially provides smart contracts with the same legal authority as traditional contracts. Some critics, however, say such efforts are unnecessary since contract law already applies to smart contracts.

Establishing legal clarity for a promising technology

The idea for smart contracts first originated with computer scientist and legal scholar Nick Szabo. In 1994, Szabo envisioned smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

However, the Internet had not yet gained widespread usage at the time. The recent emergence of Blockchain and the Ethereum ERC-20 protocol has not only made smart contracts viable but potentially a game changing technology beyond just cryptocurrencies.

Smart contracts “can be a worthwhile option where frequent transactions occur among a network of parties, and manual or duplicative tasks are performed by counterparties for each transaction,” according to Deloitte. “The Blockchain acts as a shared database to provide a secure, single source of truth, and smart contracts automate approvals, calculations, and other transacting activities that are prone to lag and error.”

Automating contracts and eliminating paper documents seem to offer the most immediate benefits to financial services. Goldman Sachs recently estimated that using smart contracts to settle trades in the capital markets could save the global industry $6 billion, including $2 billion in the United States alone.

But also imagine healthcare (electronic medical records), media and entertainment (royalty payments) and energy (automated charging stations for electric vehicles).

Like any new technology, the widespread adoption of smart contracts depends on the creation of a common set of both technical and legal standards.

For example, The Accord Project is a consortium of legal and technology experts, led by the legal tech startup Clause, that is developing a template system that can automatically transform natural language contracts into smart contracts. Openlaw and Stanford University are also working on similar efforts.

And thanks to efforts like GLASS, smart contracts will gain more legal clarity as more investors trade tokens and more exchanges use the technology to execute trades.