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'Who can we go after?': Lawyers explore implications of smart contracts

Lawyers and tech thought leaders met to discuss the implications of smart contracts for the legal profession at the 2017 Blockchain Summit in Sydney.

Originally posted on Lawyers Weekly

The summit, hosted by Ashurst late last week, explored a broad range of issues related to blockchain technology. In the panel discussion Smart Contracts: From Theory to Application, senior lawyers and fintech leaders shared their insights on smart contracts and what they mean for the profession.

The panel consisted of Ashurst partners Tim Brookes (TMT, IT and privacy) and Philip Trinca (financial regulation and licensing), PwC director and Vulcan lead Robert Allen, and R3 associate director, APAC, Niki Ariyasinghe.

Mr Brookes opened the discussion by criticising the scope of the public debate on smart contracts that had taken place so far.

“One of the key problems, at least from a lawyer’s perspective, about smart contracts is actually the title, because what it’s done has actually framed the debate between the technology industry and the legal profession [around] whether a smart contract is a contract or not, and that’s actually led to a fairly sterile, binary type of debate,” he said.

Smart contracts are not necessarily meant to be legally enforceable, and their formation varies depending on the nature of the agreement between the parties, Mr Trinca added.

“The point about smart contracts is that they’re not actually ‘smart’ because they just do what they’re programmed to do, and not necessarily ‘contracts’ because people may not intend them to be legally enforceable in court,” he said.

“So if you’re just using a program, you may not want that to be legally binding. You may want it to be anonymous. You may want it just to be part of something that’s a contract that’s binding.”

However, in the event that a smart contract does result in a party taking legal action, the dichotomy between programming language and legal language can raise issues relating to interpretation.

“If a court was confronted with just what they call ‘programming language’, as opposed to an actual language, and [the applicant] said, ‘Here’s an arrangement between two parties, all the other requirements of the contract were satisfied’. Would a court actually accept that the programming language constituted some form of contract between the parties?” asked Mr Brookes.

“Our view is that it probably would. There’s no reason a programming language, which is logic-driven, can’t be interpreted.”

Arguably, the most notable smart contract dispute to date was last year’s controversy over the DAO, which raised significant questions about the legal ramifications of blockchain. The DAO was a distributed autonomous organisation (or decentralised autonomous organisation) on the Ethereum blockchain that raised US$150 million in crowdfunding to invest in various projects, until hackers found a loophole in the code and exploited it to siphon millions of dollars into another account.

Mr Allen attributed the hack to the “laws of unintended consequences”. He said the blockchain community split over whether the exploitation of the unintentional loophole in the code should be upheld as a legitimate outcome.

“Because one of the core principles of blockchain is that it cannot be changed – a huge debate raged about whether or not [the] blockchain should be reset to the point before this happened,” he said.

Mr Brookes noted the similarity between smart contracts and traditional contracts in terms of unintended consequences.

“It’s an interesting point that everything that happened in the DAO [with the code] was exactly what can and does happen with legal contracts, and in fact it probably happens more often because natural language is a lot more uncertain than computer code,” he said.

“In a contract you might find that someone frankly exploits it, and there is effectively an unintended consequence, and generally the courts will uphold that unintended consequence.”

The DAO hack attributed a sense of urgency to the question of blockchain regulation. Mr Trinca said the key difference between a regulated managed investment scheme and the DAO was that the DAO was anonymous and spread around the world, making it challenging to regulate.

“So when it went wrong, lawyers started to think about, well, could we prosecute? Could we treat this as a managed investment scheme? Is it a joint venture? How can we apply legal concepts to what’s going on here in order to rethink how we might dig everybody out of the hole?” he said.

As smart contract technology is in its early stages, he added, it is crucial to consider the potential outcomes before engaging in one.

“Once you understand that a smart contract is what you want, and may only be a small part of what you want, you then have to think about how you can use it,” he said.

When asked by Mr Ariyasinghe what movement is taking place in the legislative space to address the challenges of blockchain, Mr Trinca replied that he was “not aware of any legislation or legislative efforts being moved directly to look at cryptocurrencies or smart contracts, other than perhaps taxation”.

“A lot of legislation is written in what’s termed to be ‘technology-neutral terms’,” he said, so that it will be applicable regardless of technological developments. However, the decentralised, global nature of blockchain poses a significant difficulty in the enforcement of the relevant laws.

“It’s a great question, and one that exercised a lot of lawyers’ minds with the DAO: who can we go after? The people that set it up? The advisers, the advisory board?” Mr Trinca said.

“The answer is that each case is going to have to be looked at individually. At the end of the day, the law only works if it’s got a square block that fits into the right hole, so if someone has instructed something that doesn’t fit into a current legal concept – a contract or a statutory thing that’s been created or imagined – then the law has to become much more adaptable, and the law can adapt.”

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