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Smart Contracts and why lawyers should care.

Are the legal and software development worlds converging?

In the same way that the underlying technology behind bitcoin, the blockchain, is revolutionising the finance sector, the entrance of Ethereum is set to bring the same game changing impact to the legal industry through the introduction of the Smart Contract.

Over the last year, the blockchain has been fundamentally reshaping the banking/finance industry. The blockchain is a peer to peer, decentralised ledger that provides way to store and transfer value without the need for a trusted middleman, aka a bank or other third party. You can find an easy to digest, deeper dive on bitcoin and the blockchain here.

The success of this system led to exploring other potential applications of the blockchain technology, moving past storing purely transactions and into the ability to store a set of rules or conditions alongside them. Since bitcoin’s function as cryptocurrency rather than a platform for creating and storing these conditions meant this wasn’t possible, a new kind of blockchain called Ethereum was built to try to solve the problem.

Ethereum is based off the same decentralised ledger concept, but incorporates a full featured (known as Turing-complete) programming language that would allow the complexities of an ‘if X then Y’ set of rules or conditions to be encoded, forming what is known as a Smart Contract. Smart contracts mean that instead of being able to simply complete a transaction on the blockchain, users can define rules around when and how the transaction would take place; ie setting a certain time frame or requiring multiple signatures in order for the transaction to go through. The agreement is then implemented by a computer – given the conditions of the contract, and a set of defined inputs, the smart contract enforces its own terms.

Smart contracts create a huge raft of applications outside of just the finance space, with law being a natural next step given the potential for a smart contract to provide a reliable, automatically enforced alternative to an agreement that would otherwise need to be settled in court.

It is important to point out here the difference in ‘contract’ terminology - while a contract from a legal point of view is an agreement that creates obligations enforceable by law, a smart contract can refer to other scenarios as well - acting more like a smart process or a smart agent in certain scenarios.

That being said there are certainly plenty of examples where smart contracts fall within the scope of the legal definition. Mediations, trusts, insurance contracts, mortgages or rental agreements for example, could all be created as a smart contracts that fulfil all requirements of contract law through their set of conditions, while increasing efficiency and reducing cost via a system that automates the ‘if this happens then do that’ part of the contract.

With all this in mind, there are a few things to consider, as per Bill Marino’s talk on the Law/SmartContract intersect at an Ethereum conference last year:

  • Smart Contracts need to embrace and learn from contract law (and other laws) rather than reject them, in order to protect ourselves should the auto enforcement fail. This could happen one of two ways; either people not accepting a Smart Contract as a ‘real’ in terms of being legally binding, and going to court anyway, or the technology itself malfunctioning and failing to auto enforce, in which case you would need to go to court to enforce the agreement as per the current format.
  • One of the challenges that lie ahead for Ethereum’s rise in the legal sector will be how smart contracts find a way to deal with rescissions, modifications and reformations, given the nature of smart contracts are what Marino refers to as an “unstoppable force”, unable to be altered or tampered with in order to create a trustless system. At present there are a few workarounds to contend with – ‘suicide’ or starting again, programming the ability to turn certain clauses on and off within a contract are two current examples, and how this continues to evolve remains to be seen.
  • The ability to bridge the space between code and law will become a core function of future law practise in order for blockchain technology like Ethereum to become widely adopted. As Marino states, we will need more engineers who know law, and lawyers who can code, in order to create a blend of code and contract language that can be read by both parties, especially in these early stages (this article gives some great examples of what legalese vs smart contract actually looks like).

There are also certainly limits to what a smart contract can and can’t do, and parts of the law that don’t present an immediately apparent crossover. Noah Waisberg, a former corporate lawyer and the founder of Kira Systems, points out that “many times, a dispute arises because of an unforeseen or unanticipated event”, something that translating a legal contract into smart contract wouldn’t solve. Smart contracts shouldn’t be seen as a silver bullet, but rather a tool to increase efficiency and reliability where relevant, acknowledging that the impact of these improvements could well reshape the role of the legal profession.

What is clear, is that the law sector is being presented with an opportunity to evolve with technology or potentially be left behind. Law firms of the future will do well to build in-house capability around coding smart contracts in order to spot and leverage clear crossovers. More importantly still, the legal sector need to educate themselves on the levelling potential of blockchain technology and what impact this may have on the role of lawyers in the future if Joe public is able to write his own smart contracts, which is entirely feasible. Those that are able to recognise and implement smart contract applications within current legal agreement making will be highly sought after in the near future, as will be those that are able to identify where they can continue to add value amongst the changing legal landscape.

In Auckland and Wellington on the 17th & 19th of May we have a unique event designed to help non-technical people understand the basics of the blockchain, smart contracts and Ethereum.  Details at www.ethereum.nz

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