Blockchain and Smart Contracts: The possible manifesto for legal personality and certainty

There are indications that the next chapter in the evolution of the Internet of Things will be affected by a new foundational technology similar to the inception of TCP/IP (e-mail, internet, the World Wide Web).

lex cryptographia an absolute hierarchical application for laws and regulation, but a more centric and circular one, catering for a decentralised digital economy.

New rights and laws might emerge and legacy ones become redundant and smart contracts can be the main lynchpin and true value changer we need to focus on. Apart from the self-execution, enforcement and automated elements which distinguish a smart contract, a smart contract can allow rights, can be traded, alienated and exchanged (and hence controlled) digitally. They can also evolve and become smart licences at the heart of future Regtech.

However right now, smart contracts are a bit in a state of flux and face some problems. These issues include consumer law, zero tolerance, clarity etc, which do not allow them to be used with consumer contracts. Their true potential is also not being exploited, and to cater for certain legal shortcomings they are being deployed as a mixed breed with electronic contracts (such as click and wrap etc). This may sometimes also augment the security risks for any underlying digital ledger technology.

A possible way forward we can maybe consider (although it is still in its rudimentary stages), is a solution based on the following lines:

Create an ad hoc Law and guidelines for smart contracts;

This Law should capture what is required for a smart contract to have equivalence and allow for its registration and validation, where required (example in instances where the areas of operation of the smart contract would be deemed to be critical or else in a regulated field of activity, or where there is voluntary accreditation);

The above registration and possibly accreditation would be based on elements including the ones mentioned hereunder and allow possibility of certification once ISO/TC 307 is finalised;

In a simple contractual relationship where the purpose will be as a one-off, the point of departure will always be Consumer Legislation and the E-Commerce Directive; however we will need a basic set of elements and clear provisions to bridge the applicable legislation in cases where we have consumers (as defined at law) who will be transacting and/or coded events in the smart contract itself which will make sure that the Consumer’s rights at Law are fully complied with;

If the purpose of the smart contract is more complex and aims to create a relationship between the members on a common economical objective, then the elements as listed in (6) hereunder would be wider and possibly consumer law might not be applicable here;

Elements which come to mind for (5) above, would be:

Members (nodes) need to be natural or legal persons and ascertained;

Transparent process on how members are chosen (in line with applicable AML where required), enrolled and how they can rescind their relationship;

Agreement (like the memorandum and articles of a company) on how they will transact with each other etc. with clear rights and obligations for each member;

An administrator who needs to be a natural person, might need to be appointed;

Obligation to choose and appoint a Data Protection Officer or MLRO or other specific function if required under any applicable Law;

Purpose of relationship in the smart contract needs to be clearly established;

There needs to be clear process flows of the technical mapping to achieve the purpose (the number of smart contracts there will be, interfaces with any click and wrap contracts or third party smart contracts etc) also showing a clear data protection by design principle (GDPR requirement) in plain and simple language and diagrams; this is what one can call the Smart Contract Manifesto;

An obligation to require that as a de minimis, before any smart contract interfaces with any third party smart contract, the latter will have a clear purpose, a Smart Contract Mani- festo as mentioned above and other elements mentioned hereunder which might be deemed essential;

Applicable criteria from Uncitral model (e-commerce) as well as eIDAS for electronic signatures;

Depending on the activity undertaken by the Smart Contract and the sector of operations, there would also need to be flexibility to allow for ad hoc requirements depending on the regulation or requirements in the target sector;

Obligation to have service level parameters in place;

Clear instances of when and how Oracles and Curators are appointed;

Clear instances of when and how Forking would apply and what happens to any assets, data and rights in such cases;

Criteria for suspension, termination and dispute resolution processes where required, embedded in the smart contract;

Agreement of waiver of any conflict of laws and provision for tacit approval of one Law which will apply. Any conflict should be resolved exclusively via an embedded dispute resolution process.

The above is just a brief concept; the elements and obligations relating to smart contracts can be further scoped and amplified. Instances applicable under Company Law could also serve as a guidance. By doing so for example, we can mimic what we already have under Company Law and distinguish between the responsibility of the members and the smart contract. This could lead to a lifting of this segregation (like the lifting of the corporate veil under Company Law).

Without delving into the five principal theories that are used to explain corporate personality, namely, the fiction theory, realist theory, the purpose theory, the bracket theory and the concession theory, going by the above description it would logically follow that every form of concerted activity within the smart contract (similar as well to Collegium under Roman Law), encapsulates the will of individuals aimed at a common end, which would lead to their acts coming to be known through the glass of incorporation which realises their combined operations as one single act, performed by a single personality and the characteristics of a single legal person.

This could also set us thinking on how to approach the liability issues more coherently as well as the actual proprietary rights within the smart contracts. Here concepts like universitas rerum (a group of simple and homogenous things, united by a conceptual but not material link, that satisfy an economical - social goal, and that the law considers it one unique “thing”) will also come into play and might also be applicable to the smart contract and its members.

By doing this, aside from capturing legal personality, it could possibly create more legal certainty and hopefully put more trust behind smart contracts to harness their full potential. Acknowledgments: Thanks to Mr Louis Mercieca, for his patience and for his enlightenment on the technical parts on the Smart Contract Manifesto.

he impending technology is a Distributed Ledger Technology known as Blockchain, which is a decentralised database with information stored in a network of computers across the globe. One of the many features provided by this revolutionary technology is...