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What Legal Issues Affect Smart Contracts?

Blockchain attorney Dr. Nick Oberheiden

Attorney Nick Oberheiden
Smart Contracts Legal Issues Team Lead
Blockchain attorney Alina Veneziano

Attorney Alina Veneziano
Smart Contracts Legal Issues Team Lead

Experienced Smart Contract Lawyers and Consultants

Smart contracts have many benefits for businesses, from increased transaction speed to increased accuracy and transparency. However, smart contracts come with unique legal issues.

If you want to use smart contracts for business, it is important to consult an experienced smart contract lawyer to explain any underlying issues as well as help with other issues like smart contract formation, smart contract execution, smart contract interpretation, and more.

Federal agencies have intensified their efforts on blockchain technology and related applications. There are regulations underway for smart contract applications. Federal agencies can also decide to investigate entities and individuals based on unique interpretations of existing laws.

Understand what the stakes are and avoid smart contracts legal issues like federal investigations. Blockchain Lawyer has a team of blockchain lawyers and consultants who can advise you on smart contract applications issues, from compliance to handling current federal investigations.

Quick Guide to Smart Contracts

A smart contract is simply a predefined computer code that is transferred to the blockchain. A smart contract is designed to automatically execute itself as per the underlying conditions written in the code.

The contract can execute itself if the trigger event occurs or fails to occur. Most importantly, execution is automatic and not dependent on a third party. There’s no need for banks, escrow, or other intermediaries in smart contracts and once the terms are agreed upon, written in code, and transferred to the blockchain, they can’t be reversed or altered.

This unique aspect of smart contracts offers unique benefits and challenges. While smart contracts guarantee that contracts are executed as per the original terms, there can be challenges in negotiations, interpretation, modifying terms, and execution.

Smart Contract vs. Traditional Contract Issues

Negotiation

Smart contracts have notable differences from traditional contracts. Generally, traditional contracts involve intense negotiations, and parties to the contract may proceed without having all answers. In fact, many traditional contract details have provisions for the future. What’s more, there is a general desire to solve problems when and if they occur.

Smart contracts don’t allow this. Since the contracts aren’t changeable once they are written in code and moved to the blockchain, the terms must be precise. Smart contracts don’t have room for vagueness since computer code can’t handle negotiations. The importance of involving experts in smart contracts when drafting terms can’t be overlooked.

Interpretation

Smart contracts and traditional contracts also differ in interpretation. In traditional contracts, different parties can interpret contract terms differently. In most cases, attorneys or courts must intervene and resolve differences in contractual interpretations. Courts apply multiple tests and conduct analysis before determining which interpretation applies.

With smart contracts, terms can’t be vague since they are written in code. Interpretation issues are nonexistent in smart contracts because they are confirmed before being written in code and moved to the blockchain. Since terms can’t be vague, expertise is also required when drafting smart contracts.

Modification

As mentioned, smart contracts can’t be modified once they are written in code and transferred to the blockchain. Traditional contracts allow modifications many times, provided all parties agree. This isn’t the case for smart contracts. Modification isn’t possible.

Once a contract is active, it will execute automatically according to predefined conditions. Modification is only possible in the initial phase when agreeing on the contract terms. A smart contract can also be modified by making a new contract that has new terms.

Execution

There are also differences in execution. For traditional contracts to be executed, some action must be taken by one/both parties. If the executor of the contract refuses to execute, the contract is breached. Traditional contract breaches can be minor to material breaches. Aggrieved parties can exercise some rights if the contract is breached and may be compensated in most cases.

Smart contracts are executed automatically by a “trigger" event. Contractual breaches are therefore nonexistent.

Understanding execution, modification, interpretation, and negotiation differences between traditional and smart contracts is critical to planning accordingly. Since there’s more to both types of contracts, it’s recommendable to talk to a lawyer experienced in legal issues relating to smart contracts.

Talk to our team of smart contracts consultants and attorneys today and prepare yourself for any eventualities.

Legislation on Electronic Contracts: E-SIGN ACT & UETA

The E-SIGN Act has important provisions for electronic contracts and electronic signatures. The federal law dates back to 2000. It gives electronic signatures and records used for interstate and global commerce validity and a legal effect. In simple terms, electronic contracts such as smart contracts are legal.

Another law, UETA (Uniform Electronic Transactions Act), gives electronic signatures and records the same legal effect as manual signatures and paper documents. The E-SIGN Act and UETA both support smart contracts as legally enforceable contracts since the electronic records and signatures that are part of the contracts have legal status.

To understand smart contracts coverage in these acts, you should ask yourself if the blockchain technology that stores smart contract details qualifies as electronic records. Considering electronic records constitute anything that is stored via electronic means, and electronic signatures are electronic symbols or processes linked to records and adopted by persons intending to sign, the laws are applicable to smart contracts.

What’s more, smart contracts utilize electronic code which executes automatically when a triggering event occurs or fails to occur, making them highly likely to be subjected to provisions in the UETA and E-SIGN Acts.

Legal Help with Smart Contracts

Smart contracts have many benefits. However, they come with legal uncertainties. There are issues revolving around their formation to negotiations, interpretation, modification, and execution that distinguish them from traditional contracts.

The contracts also appear to be subject to provisions in existing regulations (UETA and E-SIGN Acts). You need expert help to know the exact provisions and other applicable regulations that apply.

If you need expert help on smart contract legal issues, talk to experienced smart contract lawyers. Blockchainlaywer.com has experienced smart contract attorneys capable of advising on the most complex legal matters pertaining to smart contracts, blockchain, and federal agency approaches regarding smart contract regulations.

Contact us today. Don’t wait for legal issues or federal investigations. Claim your free and confidential consultation.