Technical and legal aspects of smart contracts and application of blockchain technology in the legal domain

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Written by: Ms Akshata Pai

Introduction:

 A contract is a legal binding document between at least two parties that defines and governs the rights and duties of the parties to the agreement. This is a traditional definition for the contract but we as a society have advanced in technology which brought new features to the definition of the contract.

The contract was interpreted and developed differently for Software or computer programmes as they are complex in nature. The contract is essential for the protection of software which has intangible assets for its use and various value-added impacts. Thus, Contract with Intellectual Property rights is essential to secure value generated by the software.

What is smart contract?

A smart contract is a computer program or a transaction protocol intended for the automatic execution, control or document of legal events and courses of action in accordance with contract terms and conditions. 

The Software Industry is protected under copyright law as a computer programme in India. The ‘literal’ part for computer programmes as defined under the Copyright Act 1957 has limited scope and is not clearly settled for legal purposes.

The issue for ‘fair use’ rights and license rights are not protectable under the Patent Law. The scope is limited to mere protection as a trade secret under the law. Thus, software contracts are protected under common law such as Contract Act, Consumer Protection Act, Competition Law etc. 

A smart contract is required as it is subject to fierce competition with shorter life-cycle and easy copy aspects. The owner of such a smart contract is for payment and competition aspects.

What is blockchain technology?

Blockchain is a system of recording information in a way which makes it difficult or impossible to change, hack or cheat the system. It is essentially used as a digital ledger of transactions that is duplicated and disturbed across in the computer network system on the blockchain. Each node gets a copy of the blockchain, which is then automatically downloaded.

The blockchain is used in Bitcoin and Ethereum.

Advantages:

  • It is immutable which means it cannot be falsified.
  • It is time-stamped.
  • It is decentralized.
  • It is abundant as no limit to the creation of blockchains.
  • It is transparent in nature.
  • There is no intermediation any more.
  • It is based on the working protocol.

Disadvantages:

  • The mining consumes electricity.
  • Cybersecurity.
  • Privacy.

Functions:

Blockchain is currently used for cryptocurrencies purposes. The potential of blockchain is for subsequent replacement of the trusted party i.e., the bank, the notary, the auditor, the accountant etc.

Example- The notary could be replaced with a blockchain where all the acts are registered. The land registry can be placed by the blockchain system which will do all operations right from the sale and acquisition are registered on a chronological basis. With this configuration, the notary would be able to certificatory

Smart contract with the aspect of blockchain technology:

A smart contract is represented in code and executed by computers which are formed online only and its performance is enabled and guaranteed for a decentralized, computer node (a computer connected to the network) by the network which is called a blockchain.

A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.[1]

In the performance of the smart contract, the obligation is inserted in a code using a strict and formal programming language. There is no reliance on the trust of the person to perform the contract. The contract is based on an algorithm. The performance can be fuelled by data which is in the blockchain.[2]

Advantages of smart contract:

  • The cost and time of transaction are reduced.
  • It offers predictability and auditability.
  • It provides transparency.
  • It is safe due to automatic performance. 

Smart contract and Regulatory:

When the blockchain will act as a trusted party it will be disputes or area concern with the regulatory bodies due to value-add impact. The regulatory bodies will be required to ascertain who will be responsible, accountable or data usage aspects will require legal legislation as the data and privacy is involved and can have an impact on the citizen.

France recognised the use of blockchain technology as a registry in support of “minibonds” through the publication of an executive order. Also known as interest-bearing notes, minibonds are non-negotiable securities that contain a trader’s undertaking to effect payment on a specific maturity date in return for a loan. These are mostly relevant to crowdfunding and related to non-listed SMEs.[3]And in 2017, a second executive order was published, extending the list of financial instruments that can leverage blockchain technology as a registry.

In India, presently there is no law or policy to address blockchain technology. The Committee on Digital Payments, chaired by Mr Ratan P. Watal, and constituted by the Ministry of Finance, in its December 2016 report cited an earlier version of this paper and noted the benefits of blockchain technology[4]

The need is for the following steps for legal aspects of blockchain:

  • First step to recognise the blockchain as registries.
  • Territoriality needs be defined for jurisdiction with respects to national level and cross-national level.
  • Enforceability of law and legal remedy if any violation found.
  • Liability needs to be defined and compensation must be framed with nature of torts liability, civil and criminal depending on the offence committed and its impact.
  • Data protection laws and regulation needs to be in place.
  • Additionally, competition law will require amendments to ensure fair market is practiced for the welfare of the people.

Conclusion:

The article gives an aim to give a summary of what is a smart contract and what is a blockchain with its impact on legal aspects.

References:

[1] Nick SZABO, Smart Contracts: Building Blocks for Digital Markets, 1996

[2] https://www.interleges.com/wp-content/uploads/2019/02/BLOCKCHAIN-AND-SMART-CONTRACT-1.pdf

[3] https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000032465520/

[4] . http://finmin.nic.in/reports/watal_report271216.pdf


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