MICHELLE ADAMS—The recent rise in popularity of digital art, coupled with more industries accepting cryptocurrency as a valid form of payment, has led to increased interest and fear of how blockchain will eventually disrupt traditional industries that currently act as intermediaries in transactions. But what exactly is blockchain, and how will it affect the legal world?
Blockchain is an unchangeable record of transactions and assets that allows for efficient and protected dealings without intermediaries. Blockchain is immutable, which means it is unalterable and has a low risk of manipulation. All computers in the network must first approve any additions to the recorded data before a new “block” of information is added. This feature is what makes blockchain so valuable as a transactional tool—it allows parties to share a collection of transparent and consistent data without the need for third-party interference.
In addition to its trusted immutability, blockchain has programs called “smart contracts,” which run on a set of rules that aid in automated and effortless transactions. Smart contracts operate using “if/then” conditional statements coded into a blockchain. These conditions must be met in order for the said actions to be executed. The most familiar example of this phenomenon is a vending machine. A vending machine is pre-coded with a set of rules. Once the condition is met—for example, someone feeds a dollar into the machine—the machine then performs the desired actions—unlocks the keys and automatically releases the item requested. Many identify smart contracts as neither being smart nor a contract, but even at their most basic form, traditional contracts have features that are comparable to those previously described.
Smart contracts may be the cool-futuristic younger sister of traditional contracts, but the two are still related. People enter into traditional—albeit paperless—contracts when they call an Uber, order Doordash, and even use Instagram. Like the vending machine analogy: when a user accepts the application’s terms and conditions, the application then unlocks to allow the user to enjoy the product. Furthermore, similar to a smart contract, in a traditional contract when the duty to act is conditional and that condition later occurs, the party must act. For example, an employment contract states that employees will earn a bonus if they work an extra twenty hours by the end of the year. If the employee worked the stated extra hours, then the condition has been met, and the employer would be required to release the bonus funds. However, a problem with traditional contracts is that there is no guarantee that the employer will release the funds, which can result in a breach and lead to lengthy and expensive litigation. With a smart contract, the bonus funds would automatically release once the employee worked the extra twenty hours.
Smart contracts are a more efficient, secure, and accurate way of transacting, which begs the question, “Will smart contracts someday replace the traditional contract?” As various industries are starting to use blockchain more frequently, the market is answering. Paypal announced it is now accepting Bitcoin, Ethereum, and Litecoin as a form of payment, and Miami’s own Treehouse Nightclub is for sale and accepts cryptocurrency. Additionally, musicians like Kings of Leon, Ozuna, and Tory Lanez were among the first to sell non-fungible tokens (NFTs) of their new albums. NFTs are so valuable to consumers because each one has a unique, one-of-a-kind piece of code. This is comparable to purchasing to an original painting signed by the artist.
In the future, smart contracts, cryptocurrency, NFTs, and other blockchain features will undoubtedly have a significant role in transactions, but does this mean the need for lawyers as intermediaries in transactions will no longer exist?
Smart contracts may replace simple transactional contracts for goods. However, in more complicated contracts, especially those where the terms are not completely certain, contracting parties will have issues arising out of interpretation. Thus, additional questions surface: Who is liable for a mistake in the code? Which jurisdiction does the case fall under? What if the parties would like to quickly add or change terms? While these are all components that coders can write into the smart contract, the parties will likely need a lawyer to act as an intermediary and certify that these terms are suitable.
Some form of smart contracts or at least digitized paperless contracts may be the way of the future, but smart contracts in their current and true form—automated, immutable, and free from intermediaries—cannot replace the traditional contract document just yet. Experts predict that while people may use smart contracts to make agreements in the future, a backup contract document will exist as a security for both parties. Furthermore, most parties will need a lawyer to help them understand the implications of the contract’s terms and to certify that requirements needed to make a contract legally enforceable (mutual assent, consideration, and certainty of terms) are present in the agreement.
Nevertheless, one should not underestimate the influence that blockchain technology will have on the future. Lawyers and law students alike should become well versed in blockchain as they will likely have clients who want to use this technology. Whether it’s accepting cryptocurrency as a form of payment or advising a client that enters into a smart contract, there is a strong possibility that attorneys will actively use blockchain technology in the coming years. Smart contracts will still be used substantially for some agreements, even if they do not substitute traditional contracts entirely. Although blockchain sounds like a distant space-age technology that the hi-tech family “The Jetsons” might have used, its culmination as a regular medium for transactions is here. Therefore, the quicker lawyers can familiarize themselves with this technology, the better, as it will likely be a significant part of a lawyer’s life and practice in the not-so-distant future.