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You are here: Home / Smart Contracts / Are Smart Contracts Legal?

March 8, 2018 By RGSchrader

Are Smart Contracts Legal?

smart contracts
Photo by Aaron Burden on Unsplash

With all the buzz about Smart Contracts and Distributed Ledger technology, are they legit?

Yes, smart contracts are legal and enforceable!

Two laws paved the way for e-commerce and ensure smart contracts are legal and enforceable:

  • In 1999, 47 states adopted the Uniform Electronic Transactions Act (UETA), while NY, IL and WA enacted separate laws recognizing electronic signatures and agreements.  UETA ensures that electronic transactions and consequently smart contracts are equally enforceable as written contracts.  The law did NOT change existing contract law.  Rather, UETA validates contracts formed by electronic agents – computer programs used to conduct business electronically.  If you use an electronic agent (software, etc.) to form a contract you are legally bound by that contract.  Therefore, smart contracts are enforceable under UETA.
  • The US Electronic Signatures in Global and National Commerce (ESIGN) Act (2000) confirmed that electronic signatures were legally binding.  Again, IL, NY and WA opted out but enacted similar laws.  There are a few exceptions related to family law, court documents, termination of utilities, insurance, and foreclosures and evictions.
Therefore, UETA and ESIGN guarantee the validity of smart contracts. Most noteworthy, existing contract law still applies regarding formation, validity, and enforcement.
Arizona recently enacted laws recognizing smart contract.  Six more states (NY, NE, FL, TN, CA & IL)  introduced legislation to specifically recognize smart contracts.  These laws are redundant and NOT needed.

What makes a contract smart?

The ability to program some or the entire aspect of formation, performance, or enforcement provisions of an agreement, and then it occurs.  It does NOT have to include block chain.  Auto payment for bills and auto renewal of subscriptions are examples of smart contracts not using blockchain.
In simple terms, smart contracts consist of electronic information written in a database.  The blockchain is the electronic record of the transaction allowing all parties access – how you access or share the data.  The underlying distributed ledger is the data base.  When an agreed event in the transaction occurs the smart contract executes a process.  The distributed ledger provides added security because of built in storage redundancy through numerous nodes, encryption, and immutability.  The parties verifying each block in the blockchain immediately see any change to information or a transaction.  In addition, you can designate a blockchain as permission or non-permission (public or private) to accommodate all stakeholders in a transaction.
Furthermore, not all information must be digital.  ‘Hybrid’ smart contracts can incorporate written agreements while some aspects are automated, such as payment, authorization to release goods, etc.

Benefits of smart contracts:

  • Reduced costs by dealing directly with customers
  • Remove need for intermediaries “middlemen”
  • Reduce/eliminate bank fees and charges
  • Distributed ledger ensures no data loss or transaction delays in the event of computer failure, natural or man made disaster.

How can I start using smart contracts?

You probably will start by incorporating a smart contract to automate payments of the written contract. Similar to an escrow agent or Letter of Credit process but without the associated costs and fees.  For example, a smart contract would automate payment once the prerequisite is met.  Of course like any automated system or computer, Garbage In Garbage Out (GIGO) applies, so its important to ensure the data provided is accurate.  Furthermore, automation does not eliminate the risk of fraud by a party.

Transactions most suitable to smart contracts

If the agreement is based on an if – then scenario, then a smart contract is more efficient.

  • Most consumer and commercial transactions
  • Selling shares of stock
  • Paying dividends
  • Insurance contracts (loss payouts)
  • Supply chain and distribution

Smart contracts don’t work (at least for now) for:

  • Transactions where manual signatures or specific written notice legally required
  • Unilateral transactions
  • Wills
  • Trusts
  • Divorce & family law
  • Court documents
  • Termination of utilities, insurance
  • Evictions
  • Foreclosures

A hybrid smart contract may be address some parts of these transactions.

Blockchain, distributed ledgers and smart contracts will significantly change commerce.  This is a big, if not bigger than the internet.  And, it already has cats! (hint: Cyberkitties)

If you want more in depth insight about legal issues effecting your business, sign up for our free newsletter.

Until then, Keep it Legit!

Bob

Filed Under: Smart Contracts Tagged With: agreement, blockchain, Blockchains, contract, Contract Forms, Contracts, Cryptocurrencies, DApp, distributed ledger, e-commerce, Electronic Signature, Electronic Transactions, Law, License Agreement, Smart Contract, smart contracts, Uniform Electronic Transactions Act

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