Blockchain technology is here to promote p2p networks and get rid off intermediaries, mainly those in the financial system. At least it was the initial idea. However, the current situation shows something different. Financial institutions are among the pioneers and top investors of the Blockchain technology. They have not been replaced, instead they found ways to play along.
Like the financial intermediaries, lawyers are put on the target of the Blockchain technology, mainly due to its capability of running smart contracts, which are commonly defined as computer codes running on a Blockchain and execute automatically upon the satisfaction of pre-determined conditions. Well, as a lawyer studying on the intersection of the law and blockchain, I do not think smart contracts will ever replace lawyers. Instead, they will transform how lawyers work in some fields and, more importantly, they will open the doors of the IT world to the lawyers’ invasion, which is actually the opposite of what is hoped by the Blockchain enthusiasts.
Let me explain why and how.
1)Smart Contracts are not ‘contracts’ that are ‘smart’
The term ‘smart contract’ is coined by Nick Szabo in 1994, long before the invention of the Bitcoin. In his article Szabo has written as follows:
I call these new contracts “smart”, because they are far more functional than their inanimate paper-based ancestors
Then Szabo defines smart contracts as:
a set of promises, specified in digital form, including protocols within which the parties perform on these promises
Now this does not sound very smart, does it? This is not about being ‘smart’ but about ‘being’ automated. Indeed it depends on how the digital form Szabo mentioned is constructed. Now smart contracts are written in the form of computer codes, capable of making simple calculations that can be formed in the form of if(x) then do (y).
Szabo’s famous example of smart contracts is the vending machine. You put in a coin and instantly get a drink out of the machine. No worries that the counter-party -the machine- will not satisfy its part on the contract as your action automatically started the execution. As it is automatically executed, there is no reason for enforcement agencies to be involved as well.
But a vending machine? Really? It still does not sound that smart but automated. Ok, let’s take a look at a different and improved example. You ordered your favourite drink online when you are on your way home. Your phone reminded you that you actually had two cans of that beer in your fridge at home. Then you decided to have pizza for the dinner and ordered pizza from your digital assistant. She contacted your favourite pizzeria and ordered your pizza, used your credit card to pay for it, started tracking the delivery. When you arrived home, your door opened automatically. You entered and sit on the coach across the TV. Your TV was turned-on automatically and the TV show you were watching the night before started playing. Once your pizza arrived, the TV stopped playing so that you could get your pizza without missing anything.
Now, does it sound smart enough? I guess that most of us would say ‘yes’ as we call houses much more stupid than the one in the example ‘smart’. But what is the difference between the vending machine and our smart house? In fact, both are formed of automated conditions. However, when too many “if x then do y” conditions came together, they created an experience resembling to the behaviour we attribute to humans. It feels like our smart phones, smart houses, smart TVs recognise us, it feels like that they are ‘smart’.
What about being a contract? Contract in the legal sense is briefly defined as an agreement between the parties that is recognised by the law. Now, this part is where things get messy. Because you can call something smart even though it is not. But you cannot call something contract and enjoy protections granted by the contract law if it is not. Similarly, you cannot evade from the restrictions of the contract law just by naming your agreement as “something else” if it is, in essence, a contract.
2) How does the law affect the smart contracts?
Why does it matter whether the smart contracts are contracts in the legal sense or not? The law, unlike the code, is not deterministic and although it has a very established and traditional approach regarding the formalities, it is interested in the essence. You might have a contract that contains only two sentences but the fact that it is a legal contract automatically incorporates a set of supplementary rules that are prepared to fill the blanks either intentionally left or unforeseen by the parties. When you buy a cup of coffee or a newspaper, you actually form and realise a sales contract, which means that, despite the fact that there is no written agreement at all, there are rules waiting to be applied behind the doors in case of a dispute.
We have two scenarios here: Smart contracts can be classified as legal contracts, which is the case in some US States such as Arizona and, a quite recent example, Ohio. Or, they might float in a legal uncertainty, meaning that the rules will be determined when a dispute comes up. There is not an option of not being subjected to the law as the nexus of national laws apply throughout the country.
In either case, you will need someone with the legal knowledge for the compliance issues. Here you go, lawyers again. What smart contracts do here is not replacing the lawyers but changing the skillset and knowledge required for lawyers to practice.
3) There is no escape from lawyers then?
Yes, and no. There is no escape from lawyers if there are ambiguous rules required compliance or unforeseen scenarios where the rules to be applied are not clearly determined. In other words, it is possible to get rid of lawyers in a world you can foresee every possibility and introduce clear rules for every single one of them.
This is the point where bugs and hacking come in. Ironically, in a world where everything is deterministic, it is still possible to come across unforeseen scenarios caused by the so-called bugs. This is not because the world of computers is not deterministic as we think it is but because the people who create computer programs, that is to say humans, are not capable of every single input that could be used for a given computer code.
4) Don’t you think you exaggerate a bit?
Yes, thinking that lawyers will step in or people will refer to lawyers in every single case regardless of the size would be exaggeration. In fact, it is the other way around. There will be too many small cases that are ignored by the lawyers and regulators. After all smart contracts is a product of a distributed worlds where the intermediaries are not wanted. However, one big case would be enough to put them under the radar of the legal system and regulators. A case such as the DAO hack or the NEW Coin hack would do the trick, and they have already done so.
When the DAO was hacked and approximately $70 million-valued Ether was transferred to a child DAO created by the ‘attacker’, an interesting discussion was triggered among the Ethereum community. Some argued that the actions of the ‘attacker’ was permitted by the code, even though he had exploited a bug, and, therefore, they were legitimate. The code was the law according to these people. In a world where this argument is accepted, you can indeed get rid of lawyers.
However, things turned out differently in our world. People wanted their money back, they wanted someone to blame and some investors referred to courts and regulatory authorities all around the world. They demanded the help of the entities backed by the ultimate intermediary, the government. They decided to trust not to the code but to the law to compensate their loss arisen from actions committed on a ‘trustless’ network. Even more ironically, the majority decided to reverse the so-called immutable transactions and turned their backs to the values they rigorously advertised during the campaign.
At the end of the day, the system built in order to exclude human judgment from the transaction process was beaten by the human judgment. The reason why we call smart contracts ‘smart’ in the first place turned out to be a weakness that prevents them from keeping up with the realities. Now the editable or interruptable smart contracts are being discussed as options.
Thanks to the DAO heist and following hacks, not only people are more sceptical towards the world of smart contracts but also the field is monitored by law-makers and regulators all around the world.
5) Where do lawyers stand right now?
From the lawyers’ perspective, two important things happened so far. First, they were told that they would be replaced by smart contracts, which incentivised them to learn about this new technology and its applications. Now lawyers are probably the best-informed group among social scientist when it comes to the Blockchain technology. Secondly, they saw the gap between the smart contracts and the law. The Blockchain firms working with smart contracts do not want to violate laws whereas the potential customers and investors want to know the legal framework before getting into the business. The result is that the both need lawyers. Now, lawyers, who have been traditionally old-school so far, are much more involved with emerging technologies. They will not be replaced but, just like financial institutions, they will find ways to play along.