Following the creation and sale of the now popular nonfungible token, more commonly referred to as NFTs, more and more retail investors and consumers, alike, have been interacting with various autonomous blockchain programs, known as smart contracts, rather than the typical peer-to-peer interactions that are commonly found on blockchains. To define smart contracts in layman's terms, smart contracts are self-executing contracts where the terms of the agreement between the agreeing parties are directly written into lines of programming to be implemented autonomously on a blockchain whenever predetermined conditions are met. Accordingly, the theoretical implementation of smart contracts should make blockchain transactions traceable, publicly transparent, and irreversible. Despite this underpinning, and as the implementation of smart contracts becomes more mainstream, legal disputes surrounding smart contracts are not only inevitable, but they are likely to arise.
On paper, the good-faith implementation of a smart contract ideally replaces the need for the traditional contract by eliminating contractual ambiguities through its reliance on the transparent nature of blockchains; however, the technology itself does little to mitigate the plethora of legal challenges that may arise out of the mere, novel use of smart contracts. According to the U.K.-based Law Society’s publication, Blockchain: Legal and Regulatory Guidance Report, the "novel nature of [smart contracts] … may themselves be the source of dispute, increasing legal costs and risks for both parties".
Furthermore, in addition to needing computer programing skills to read the terms of the smart contract, like all other computer programs, smart contracts are vulnerable to alterations through hacks, viruses, and other various forms of program breaches; therefore, a decent understanding of computer programming is necessary to ensure that the smart contract is not vulnerable to third-party tampering. However, the issue of smart contract disputes expands far beyond such simple practical complications, presenting many traditional legal obstacles as well.
One major recurring legal obstacle that continues to arise with most legal disputes involving the blockchain is the issue of jurisdiction because most blockchains are international structures, crossing many borders and, thus, many jurisdictions. Accordingly, victims of a breach of a smart contract, who live in country A, have little to no legal recourse to hold the breaching party who lives in country B, accountable especially in cases where the smart contract’s creator is anonymous.
Moreover, even when courts do deem themselves to have the appropriate jurisdiction to preside over a blockchain dispute, courts struggle to exert personal jurisdiction over the defendants. Thus, blockchain disputes in general often have little legal recourse in the form of enforeement. According to Michale Hewitt of Law360, not a single U.S. court has specifically addressed the issue of jurisdiction of a smart contract dispute where the smart contract had no expressed jurisdictional language; however, the U.S. District Court for the Southern District of New York, in Barron v. Helbiz Inc., did reject the argument that the federal court had personal jurisdiction over a foreign entity as a result of that foreign entity conducting its business on a blockchain that was predominantly housed in the U.S., stating that “machinery for generating, administering, and delivering [crypto assets does] not affect or change the legal relationship between the parties and the location where the offer and acceptance occurred”.
Therefore, before relying on a smart contract, it is essential to ensure that there exists an ancillary traditional written version of that smart contract, and that both the smart contract and the traditional written version of that smart contract explicitly, unambiguously, and accurately states jurisdictional language dictating where legal disputes can or cannot be adjudicated.
Notwithstanding these concerns, investors in blockchain technology are not letting such obstacles dissuade them from entering into smart contracts. As crypto currency and blockchain technology (such as smart contracts) steam rolls ahead into the mainstream, blockchain investors and developers seek to implement alternative resolutions to the legal system, such as blockchain-based dispute resolution schemes. Under such alternative administrative schemes, protocols that mimic the U.S.' judicial structure are implemented to allow for a decentralized body of third-party “jurors” to apply that blockchain’s governing rules to a set of facts to determine the correct outcome for that case.
As investors begin to pump even more money into crypto currencies and the corresponding blockchain technology, and as more consumers become more familiar and comfortable interacting with blockchain technology, the adoption of smart contracts will only accelerate; and thus, the number of legal issues regarding the novel use of such technology will also accelerate. As the laws and information concerning crypto currency and blockchain technology continues to evolve, we will continue to provide guidance regarding how such changes may impact you, your place of business, and/or employment. Please do not hesitate to reach out to us for additional guidance regarding any concerns you may have relating to the legal implications of crypto currency and the legal implications of the development of various blockchain technologies.
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