The ground of the smart contract is the transaction that is being committed via the Internet, and can be qualified, in accordance with the item 1 of Article 212 of the Civil Code of Ukraine (further – Civil Code), as an act of a person, aimed at acquiring, changing or stopping civil rights and obligations. The similar types of transactions can be attributed to the item 1 of Part I, Article 31 of the Civil Code, as a petty household deal, as well as to the deals to be concluded at the time of their execution, and according to paragraph 1 of Article 206 of the Civil Code, to be attributed to oral.
SMART CONTRACTS – WHETHER THEY ARE CONTRACTS AND ARE THEY REALLY CLEVER?
Confessio extrajudicialis in se nulla est; et quod nullum est, nоn potest adminiculari
Extrajudicial confessions in themselves are worthless; something that worth nothing, cannot be a support.
Designations, such as Blockchain, cryptocurrency, bitcoin, etc. have rapidly and surely being penetrated to nowadays. Among a great varieties of a new terms and definitions related to the digital technologies use, you can confidently highlight "smart contracts", or as they are called, based on literal meaning, - intelligent contracts. According to recent news release about the first known a smart contract usage for purchase Kiev real estate, there is, obviously, a practical interest to smart contracts in Ukraine.
Without going into widely advertised, tens of times translated and distributed via the Internet stamps about reliability, transparency, economy and security of these contracts, we will try to analyze a legal nature of such contracts, in view of Ukrainian legislation. Whereas we live in the conditions of the existence of states, governments and, therefore, acting in frame of a certain system of law, certain legislation, notwithstanding whether we like it or dislike. No matter how much we have disputing about the issue of trust, decentralization of cash flows, civil society, etc., the system of state bodies and institutions, in whole, has not been canceled. Despite the fact that the unanimous policy of a cryptocurrency’s nature, as a mean of payment, has not been developed yet and is not legally established, in Ukraine, as well as in most other countries of the world. However, it is reasonable to be ready to use digital payment systems right now. Therefore, to determine the legal nature of contracts - smart contracts (as the inevitable derivative of cryptocurrencies), in view of the legislation of the country, under jurisdiction of which the contract will act and enforce a particular contract (whether a standard contract or a smart contract), it seems, absolutely necessary.
For the beginning, briefly about the basic definitions, which have already been recognized: Blockchain is a distributed database. It contains a list of ordered entries called blocks. Each block is linked to the previous block and has a mark on the time of the transaction. As soon as the users of the system enter into transaction, every time it is to be written down with a unique time mark and will be constantly displayed in every subsequent transaction. Individual blocks can not be deleted and are always visible to anyone who has access to the system.
The data stored in the block chain are cryptographically safe. Any attempt to modify the contents of the block results in the invalidity of the unique links pointing to its location in the chain. Although, with regard to reliability and security, one can not agree, since only one example of the hacking breakdown in 2014 of the Tokyo Exchange of Digital Currency, as a result, of Mt Gox Co Ltd. was forced to declare bankruptcy, resulting in a hacker attack of $ 460 million (https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=dd394ab4-b3d7-4f79-9888-67fba0a1cfe7 leads to serious doubts regarding to the Blockchain system’s safty.
Smart contracts are agreements being written in code, automatically executing program functions in response to certain conditions to be performed by the parties of a transaction. The idea of smart contracts the first time was announced by the American scientist and cryptographer Nick Sabo in 1996, as a computer protocol that, based on mathematical algorithm is being transferred into a computer code, independently conducts transactions with full control over their execution. The simplest sample of the smart contract that he had given, and which very clearly shows the function of such contracts, is a vending machine. When you drop money into vending machine and choose a product, it launches the issue of this product. If you do not put enough money, the product will not be issued, and its transferring to the original window will be interrupted. This is the most widespread simplified scheme underlying the idea of smart contracts.
Referring to the bases of the legislation, one can agree that the ground of the smart contract is the transaction that is being committed via the Internet, and can be qualified, in accordance with the item 1 of Article 212 of the Civil Code of Ukraine (further – Civil Code), as an act of a person, aimed at acquiring, changing or stopping civil rights and obligations. The similar types of transactions can be attributed to the item 1 of Part I, Article 31 of the Civil Code, as a petty household deal, as well as to the deals to be concluded at the time of their execution, and according to paragraph 1 of Article 206 of the Civil Code, to be attributed to oral. Therefore, they, surely, can be described by an algorithm, being coded and is being entered into Blockchain, in frame of which the contract proposing to be performed. Presently, smart contracts usage is proposed in a wide range of legal relationships, such as insurance, corporate property purchase, or automatic payment in delivery goods or services. They are also especially recommended for stock exchanges, bonds and options, as well as for micro financial services.
Such types of contracts are completely different matter when more complex form of deals with variability of terms and conditions are required. Those conditions are difficult to transform into the language of the algorithm and encode. Here is the famous Latin saying goes, Non omnipotent, quod nitet, aurum est - Not all the glittering is gold.
In spite of its name, smart contract is not always sufficiently "intelligent" to anticipate to all subjective and objective factors of the parties’ real will.
Thus, according to the item 1 of Article 638 of the Civil Code, the contract is concluded when parties in the proper form have reached an agreement on all essential conditions. The key points of the contract, from a legal point of view, are the actual intentions of individuals expressed in terms and conditions. For instance, a contract with real estate, the validity of which requires their notarization, registration, etc.
Thus, the recognition of smart contracts as legally binding is crucial to ensuring that the results of the personal performance of a smart contract are legally effective and will be supported by the parties in the court. If, a smart contract cannot, as instance, legally transfer the ownership to the property that it intends to handle over or if it does not have all the essential terms of a delivery contract, insurance, so most of the potential quality of the smart contract will actually be lost.
Let's take the same resent sample of the capital real estate sale, which was settled in crypto currency with a smart contract use. Nevertheless, all subsequent parties' agreements had been put into form of a traditional contract before the payments were effected. Previously, contract was certified by the notary and was registered in the relevant State Registers of immovables.
So, in this case, the smart contract, from a legal point of view, can only be considered as an additional provision, contract enforcement that corresponds to the item 2 of Art. 546 of the Civil Code, as another type of enforcement obligations.
Having read the opinion of so reputable people, as Marco Jansitti and Karim Lahan - Business Administration Professors at Harvard Business School, Boston: "Mediators such as lawyers, brokers and bankers will no longer be needed" are, a desire to explore the matter deeply, is arisen.
It does not seem feasibly to say that in frame of current State and Law system, is possible to abandon completely of the traditional treaties, and to switch to crypto coded algorithms regarding several kind of transactions. Also, in any case, the contract always involves people, even though it is anonymous, though openly acting through a notary, a lawyer, or a programmer, in fact, the intermediary, who writes a computer code, always has the same an unpredictable human factor that can nullify any of the most predictable, accurate, logical conditions. Taking into account some of the subjective stages of the treaties, such as their interpretation and execution. No one, even the most “clever” contract cannot “anticipate” when one of the party will turn up unforeseen situation. The party fulfills the conditions of the contract; for instance, handle over the property, but with a ban, which has recently occurred. Moreover, we live in unideal world and nobody is insured against unfair attitude to a contractual obligations. What to do, when unfair tenant further does not pay the rent, but is using the rent property? How to evict if the contract has been concluded bypass of the intermediaries – advocates, notaries, registrars, hence, being concluded outside of a legal system?
The list of unpredictable cases of non-fulfillment, ambiguous interpretation of "reasonable" treaties, will be long. Hereupon, the following conclusion implies. Whatever "intelligent" was not a contract, concluded in the form of a computer code, it can not prevent the influence of the human factor.
In this context, it is worthwhile to take into account recent researches of the Institute of Global Risk in Financial Services (http://globalriskinstitute.org/publications/quantum-computing-cybersecurity/), which substantiated fears that with 1/7 probability, the key measures of cryptography that presently impede to hackers, will be hacked by 2026, and with probability of 50 percent, this will happen by 2031. The resulting may be the Internet without encryption of data and Blockchain, which can be broken in a few minutes.
Obviously, withdrawing so-called intermediaries, notaries, lawyers from the account, in the issues of concluding as reasonable, so traditional agreements, is very rash. Another thing is that lawyers with notaries have to be preparing in advance to the clients’ needs, which have expressed a desire to use self-regulated smart agreements, as well as to automate their business in general. Automatization of the legal profession extends, first of all, to those massive tasks that are often is being repeated and time consuming (typing of texts, making copies of documents). Soon, attorneys will be able to undertake large volumes of work, using software algorithms that can effectively perform large volumes of low-risk tasks. Similarly, earlier costly work can be profitable. For example, large-scale, low-value tasks (for typical and minor cases), or automatization of the registration process of notarized transactions in the Blockchain system.
On the other hand, the process of introducing smart contracts into nowadays, of course, requires the mastery of the lawyers having new knowledge in simple programming and coding skills.
Even today, there are means already exist, by which the everyone, who has created the algorithm of the new process, runs it in the system of automatic coding, and the systrem will transcodes it into the program. These systems are written on the artificial intelligence means. They generate an object code that expresses the managing algorithm. If automatic coding systems is used in the legal profession, each lawyer, a notary, an advocate, will be able to independently create for his\her own use a unique program that will fully suit and serve the type of activity, specialization, needs of customers. It will, surely, minimize the low-performing part of the lawyers work (such as filling forms, writing texts, making copies, analyzing court decisions, etc.), and will allow you to spend your entire working time on effective analysis and productive solutions. It will allow to be concentrated on obtaining relevant results (settling a dispute, getting a positive court decision, or approving an agreement), rather than on supporting processes, which often waste time so much, that reaching the goal becomes only harder.
The described process of essentially new work of the lawyer, without exaggeration, is already nowadays. Although, as Intel Corporation, the world's largest manufacturer of semiconductors and devices, promises in the nearest future, a fundamentally new system. Where not object code will be generated, but direct hardware implementation of this developed process.
Today's technological mainstream is the transition from the focus on the universal computers’ and programs’ production, into the production of microcircuit programs. Each program, each managing process will be implemented at the hardware level. The process of chips’ designing is replacing of the programming process in the production of the complex equipment. Yet, we will create our own unique microchip program for every process we have to manage. Therefore, it seems that as soon as it becomes possible to automatize the process of such chips’ designing, the process of automatic coding, not mentioning about manual one, and, consequently, professions are derived from it, also will automatically disappear. Quite obviously, such professions are going out of being, and, certainly, these are not legal professions at all.