A lawyer’s view: Smart contracts are currently neither smart nor contracts

There is no doubt that technological development has never been so fast, so complex, or so innovative as it is today. As with all change, one problem is that when things change quickly, you have to be careful to separate innovative ideas from the excitement of the new. As more and more new technologies are developed, we have to develop a sixth sense that allows us to separate the things that are useful to us from those that are absolutely useless to us.

Take financial technology as an example:

Financial technology is an area that commercial litigation firms are increasingly exposed to. Considering that we are currently in the midst of a digital revolution, the magnitude of which has never been seen before and likely will never be seen again, I think we can all agree that digital currencies and digital transactions are not only an advancement, but an inevitability.

Yes, there are many legal and accounting issues that need to be resolved, but the initial problems with digital currencies show that there are still many areas where improvements need to be made.

However, we are seeing some worrying developments on the fringes of the financial technology space, with some buzzwords turning out to be as destructive in the long term as they are misleading in the short term.

One digital market buzzword that is gaining traction is the term “smart contract.” It’s a pretty neat idea: a contract that can write itself based on the business environment around it, through a complex set of rules embedded in its code.

The idea behind such contracts also sounds logical in theory. Less input from the contracting parties means that smart contracts can be generated faster, therefore making transactions more expeditious to propose and complete. The fact that smart contracts require less involvement from the contracting parties and their lawyers will make business more streamlined and cost-effective in terms of time and legal fees.

The only potential problem is that if you look at the theory and examine the practice through a legal lens, you’ll find it difficult to consider smart contracts as smart or even a contract, and it would be more accurate to abandon the term smart contracts and instead designate them as a type of automated computer code.

Some people think that because I am a lawyer, I am taking the lawyer’s side because smart contracts could eat up lawyers’ livelihoods, so let me explain why smart contracts—at least in their current form—are not fit for purpose.

The first thing to consider is why a contract is needed in the first place: it is to protect the personal and/or business interests of the parties, which means relying on two key sources:

1. All the terms agreed upon by the parties are included in the contract.

2. There is a legal requirement to turn these clauses into a workable legal document.

Once a contract is in place, code can be written to provide support for that contract and similar contracts with similar terms for similar transactions. I even think the code could probably be taught to make small changes, as long as those changes are foreseeable and logical.

However, I highly doubt the ability of code to make more complex combinations, or to make sustainable legal decisions needed to build the foundation for a strong commercial contract, or to negotiate the best terms for all parties involved. This means that in the early days of smart contracts, lawyers will still be needed.

Again, the code runs on linear decision making and probabilities, but more often than not, finding the right answer to solve specific contract details is a more horizontal process that requires a kind of creativity and flexibility that can only come from real-life experience. Infusing this depth of practical experience into code is, I think, a nearly impossible task.

This may lead us to another possible failure: if only the two parties to the contract have problems, who will solve the problem? There is a common view that smart contracts cannot be sued, but I disagree. As long as the terms behind the smart contract are clear and clearly accepted by all parties. If the code is found to be unfit for purpose or affects the transactions it is supposed to support and/or the payments associated with those transactions, then it is within the scope of litigation.

However, things may be more complicated. Since there is currently no international Internet law, the initial contract will have to set out the jurisdiction of the parties and the national laws that the contract relies on. However, these are not decisions that can be made by code, so these definitions and agreements must be made by people, most likely professional legal advisors.

This is why I believe that smart contracts are neither smart nor contracts at this stage. As I said before, I do not want my opinion to be seen as a self-protective statement to avoid losing my job. As an experienced lawyer, I have spent many years ensuring that my clients always have the best protection in their business contracts. My concern is that an idea or even just a buzzword can cause many businesses to be in a difficult and potentially costly situation because they adopted a great innovation.