Blockchain: What does it mean for the legal world?
July 26, 2016
Blockchain, and the emergence of smart contracts – code that automatically executes a contractual term - raises some interesting legal questions. Once blockchain enters the mainstream, a transaction will still be a transaction. But the way in which we do business will become a lot faster and, potentially, many more processes will be automated. So where does that leave us, legally?
During this series of blogs about blockchain we’ve introduced the idea of a fictional – but not unlikely – global online marketplace, which we’ve called Blocksell.com. An important feature of Blocksell.com is that anyone signing up to the website to buy, barter or sell goods or services will use the company’s off-the-shelf ‘smart contracts’ (computer code which automates the ‘if this happens, then do that’ element of written contracts) to manage and execute their transactions.
Smart contracts are already being considered for use in some financial markets, notably the bond market, as a means of creating a self-paying instrument. The smart contracts that Blocksell.com would need are relatively straightforward by comparison – a simple, everyday contract between individuals and businesses. But it would need to work efficiently and reliably if Blocksell.com is going to succeed.
The contracts would also need to be enforceable, and this is where the law around smart contracts is as yet unclear in a commercial context such as Blocksell.com. What would happen, for example, if a transaction run by a smart contract, resulted in a different outcome than someone expected, or if the buyer or seller wanted to vary its terms?
Smart contracts are, essentially, just another way of delivering the law and the practice and precedent around them will develop over time. As we pointed out when we introduced the idea of Blocksell.com, tax rules were developed for the physical world and will have to be adapted to deal with the virtual, digital environment of blockchain; the same argument applies for the legal questions around smart contracts. Sorting out the legal standing and treatment of smart contracts will take thought and international consensus – it’s not often we get to see a legal framework evolve before our eyes so it’s going to be an exciting time for anyone with an interest in business or the law.
Companies, too, will learn the best way to deal with smart contracts. Blockchain technology means that more contracts will be automatically completed and it all will happen much faster. The benefits it can bring are huge; it could, for example, to significantly streamline the regulatory demands – such as Know Your Customer and anti-money laundering requirements – that Blocksell.com will be required to meet. Blocksell.com could also use it to manage trade credit, by triggering automatic payment from suppliers after a certain time.
There’s plenty of potential, in other words, so we need to be ready for it. We’ll all need to be far more comfortable with the blockchain world – a world where execution of a contract happens instantaneously and there’s no time to change your mind. That’s a blessing, but it’s also a curse.