Blockchain technology has spawned a number of innovative solutions, such as those introduced in the Global Legal Hackathon – a worldwide competition of groups collaborating on technologies for the legal profession.

Smart contracts or “digital contracts” is one of those areas. Leveraging the power of Blockchain’s trusted ledger technology, smart contracts promise to revolutionize the legal industry by offering payment systems that are fast, trustworthy and self-executing.

However, smart contracts are often difficult to understand for both lawyers and lay people.

Let’s look at some of the key issues.

What is a Smart Contract?

The closest thing to a widely accepted definition is that a smart contract is “an automatable and enforceable agreement.” The automation happens digitally, and enforcement takes place either through the contemporary legal system or the execution of digital coding.

In many ways, the concept behind a smart contract isn’t new. For instance, the automated program charging interest to your credit card through an agreed upon algorithm is a smart contract.

How Can Smart Contracts be Used?

The future of smart contracts is where things get interesting. It’s conceivable that in the future you could use the printer at a co-working space and have each sheet of paper billed to your monthly account through an automated system.

One significant challenge emerges when an agreement is a viable smart contract, but not necessarily a legal contract. While there is often statute to back it up, the agreements that we gladly sign as End-User License Agreements arguably fall outside some of the core tenants of contract law, such as the parties both understanding what they’re agreeing to.

In many ways, smart contracts are the next step in this evolution. Blockchain technology allows them to automatically handle the billing and the payment for a variety of services. Smart contracts are already being used in rental agreements, where parties pay for the various rooms and utilities they use according to specific rates, as well as for licensing agreements, where rates and fees changing and based upon many factors.

Risks? Yes, Of Course.

Blockchain technology aims to be tamper-proof. Nevertheless, there have been incidents that challenge this objective. For example, in June 2016, the smart contract that was used for The DAO (decentralized autonomous organization; a sort of digital venture capital fund) was exploited to allow a user to siphon funds away from the organization.

When representing organizations using or developing smart contracts, lawyers must be experts in determining the types of liability their clients are taking on. The law is not yet settled, but the writer of a piece of code that can be exploited to deprive a party of millions of dollars may find themselves liable the eyes of the law. The legal profession currently ensures lawyers can be insured for certain limitations in their execution of their profession, but it may not be available for those developing smart contracts.

Who Should Use Smart Contracts?

While smart contracts continue to be developed, their current uses are relatively narrow.

In many ways, smart contracts are best used where one party makes a “general offer” they are willing to accept either infinitely or a specified number of times. For example, a company may agree to sell its product to all customers until their inventory reaches a certain level, at which point they will continue selling to certain types of clients or those in particular region.

Similarly, the financial services sector can use smart contracts for its regular, complex business. Where a loan is extended, for example, a smart contract can allow a much higher level of granularity than would be possible without automation. Calculating interest at daily or even hourly rates pulled from an outside source is another example of how this technology can be used.

Smart Contracts into the Future

There is a great deal of excitement about Blockchain and smart contracts, but their real potential has yet to come.

Legal professionals need to remain abreast of these developments, for at least two reasons.

First, your clients may jump at the opportunity to use a smart contracts while the technology stays in its legally questionable state, and rely on lawyers to clean up messes through litigation and other forms of resolution.

The second reason relates to the underlying philosophy behind these instruments. Some proponents of smart contracts and blockchain argue that our legal system could be replaced by the world of smart contracts. It seems far-fetched, but that’s the argument.

Technology and the Law

Staying abreast of these ideas will help lawyers take advantage of the opportunities while protecting clients from the downsides.

Stay tuned to Lalonde Muller to read more about the impact of technology on the legal sector, including Blockchain and Artificial Intelligence (AI).