Do the existing laws cover smart contracts or do we need a new set of laws to deal with them?

Abstract

The rise of the Digital Ledger Technology has paved the way for a new generation of contracts called ‘smart contracts’. The paper examines the technology behind them, their place in existing contract law and whether they are capable of forming legally binding agreements. The innovative aspect of smart contracts is that they are capable of ensuring that the terms will be performed in an irreversible manner without the input of third parties. The main research question is whether the law covers smart contracts or whether a new set of laws is required to deal with them. The findings show that the law is largely satisfactory and does in fact cater for smart contracts, which are capable of forming legally binding agreements under existing laws. Difficulties arise with respect to contractual formalities, which may necessitate minor amendments or additions to the law. The role of the courts may also see a shift from that of enforcers of obligations to that of having to remedy obligations which have already been executed. Described as a form of self-help, the paper also concludes that smart contracts do not amount to a violation of the criminal offence of ragion fattasi, which, in a nutshell, prohibits persons from taking the law into their own hands. Smart contracts are likely to appear mostly in the form of ‘hybrids’, containing standard legal prose that refers to smart contracts as a tool to memorialise part of the agreement. Hybrid smart contracts are more capable of satisfying legal requirements and can help ease their integration into the legal system. Overall, courts and legislators should welcome, and not fear smart contracts, which have the potential to foster many new benefits to society.