Is the smart contract a key innovation that will change the way we arbitrate agreements? Today on the show we have Jacob Enoch, a partner at M. Firon & Co., to talk to us about smart contracts and the implications for both lawyers and the compliance profession.
What is a smart contract?
A smart contract is a computer protocol or program intended to facilitate, verify, or enforce the negotiations or performance of the contract. There is an emphasis on the automatic performance attributes of a smart contract and the fact that it no longer requires a leap of faith or an element of trust when it comes to dealing with the performance of such a contract. Jacob states that this introduces a shift in the way that contracts usually work.
What’s the difference between a smart contract and blockchain?
Blockchain is a technology that may be used as a platform for smart contracts, and it’s known for its reliable control of cryptocurrency and attributes that contribute to the certainty of automatic execution, which is at the heart of the smart contract concept. So a smart contract can be established with blockchain technology but, in theory, can run on a different platform.
Do you think smart contracts are going to change the practice of law?
The short answer is: Who knows? The tool is still new and we can’t tell how extreme of an impact it’s going to have. At the very least, this new form of contract will become another acceptable type of contract, which means it will change the practice of law as it pertains to its existing legal rules, and the application and enforcement of such agreements.
Will lawyers need to learn to code going forward?
Anyone who would have anything to do with smart contracts will need to understand how the program works. Even if the concept of smart contracts is that it works automatically, someone will still have to translate that code into human language, as the parties to these contracts are human beings.
That begs the question: Which version of the smart contract should prevail? The human language version or the code version?
Can you walk us through the example of a smart contract from your article?
The article refers to a copyright scenario, where, for example, you own the rights to a song or video. You can have a smart contract in place controlling the downloads and payments, where a payment in cryptocurrency is to be made automatically upon completion of a download. This can ideally run without immediate complications, because the deliverable lives on a digital platform and is 100% online.
But how far can you go? Can you really detach this system entirely from the outside world? Probably not, but you can implement much more complicated transactions online. Though it should be noted that the more complicated the transaction, the weaker the code; it allows for more potential loopholes and issues. There IS a tradeoff.
If this contract were between two parties who are not part of the outside world, will this arrangement lend itself to greater transparency and auditability?
In a closed system, there’s nothing one party can do to defraud the other because no party has control of the blockchain. But the universe of transactions in which smart contracts can become the ultimate solution is not vast, because most transactions are a little more complicated and require interfacing with the real world. But it’s definitely a starting point for both law and compliance.
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