The Law and Legality of Smart Contracts

The Law and Legality of Smart Contracts


Blockchain is a new way that computer technologies, including encryption algorithms, consensus mechanisms, distributed data storage, and point-to-point transmission, can be applied. One of the key ideas behind Bitcoin is blockchain. The data block, which is used to create the subsequent block and confirm the accuracy of its information, includes details about a group of Bitcoin network transactions. The essential technology for enabling data circulation in the Blockchain’s higher layer is smart contracts. They automatically finish and carry out the contract’s instructions while executing intricate operations on a variety of chain data.


One of the trendiest topics in blockchain technology study right now is smart contracts. In essence, a smart contract is a computer program. Through the computer, the trader can translate the terms of the contract they have entered into recognizable program code. The system will cause the associated code to run automatically when the criteria specified by the program are satisfied. This demonstrates how the control of human will remains crucial to the outcome of smart contracts.

Smart Contracts

The idea of smart contracts originated as early as 1994 when Nick Szabo first coined the term, using it to refer to “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”[1] Szabo’s original idea of smart contracts was broad enough that some smart contracts will fulfil the requirements of a legally enforceable contract while others will not.[2] Szabo’s idea lay dormant for many years because the technology did not yet exist to support the implementation of smart contracts.[3]

Law and Regulations

In every significant area of the operations that fall within their purview, traditional contracts have a plain, unambiguous, and enforceable legal foundation. However, there is no legal oversight for smart contracts that are used with Blockchain technology. Laws that provide a framework as well as particular legal, regulatory, and system-level agreements should form the legal foundation of a smart contract. Each party to the transaction must be aware of their own contractual rights and obligations in addition to concentrating on the system as a whole.

Because Blockchain technology is used as a data transaction platform, no single entity can alter the agreement in the smart contract, so there is no centralized regulator that can force changes and processing of the agreement, regardless of whether it is a transaction party or a third-party organization. This, however, is fundamentally different from the typical contract, where the supervisory authority is in charge and has the power to modify the contract’s terms. A smart contract’s agreement does not specify any of its participants’ legal rights or responsibilities. The protocol substitutes the current legal framework and regulatory body’s implementation procedure in a decentralized, distributed, intelligent contract system, which is the foundation of the payment ecosystem. These frameworks do not adequately manage the risks associated with contract execution since the existing regulatory agencies do not offer a legal foundation for the use of blockchain-enabled smart contracts.

Legal Effect of Smart Contracts

The underlying architecture of decentralized distributed smart contracts, which makes use of Blockchain technology, has the ability to actually alleviate many of the hazards that present rules are trying to address. For instance, by processing atomic transactions in real time, Blockchain cross-border payment systems significantly lower settlement and transaction risk. Those who are able to comply with the system’s specific requirements, however, will be able to decrease many risks and increase efficiency by limiting access to financial market utilities. More market players will be able to get real-time payment settlement as a result of their recognition of the system’s capacity to reduce counterparty and settlement risk. As a result, the fundamental understanding of a smart contract has greater legal force than the terms of a conventional contract. Traditional contracts and current legal provisions, on the other hand, are verbally expressed. There is a risk of conflicting meanings of the same word when there is unclear legislative interpretation or unclear party interpretation. Consequently, the stipulations and dealings in common contracts. The content is not translated into code right away; there is space for interpretation. It is challenging to come to a decision and carry out the smart contract successfully if it is not completely understood. Consequently, in order to guarantee the enforceability of the terms of the contract, the smart contract must be concluded with high legal certainty by using the code as the representation of the agreement of all parties.


In conclusion, the technology of smart contracts will continue to advance, and the legal concerns that surround it will also, since they include new and creative considerations that go outside the purview of contract law. We anticipate that supply chain management, government and smart city operations, digital asset sales, venture capital and capital markets, real estate registries, self-sovereign identity, and other as-yet-unimagined use cases will all be significantly impacted by smart contracts, both technologically and legally. While legal risk is always present in any technology platform, we find that businesses who prepare ahead can and can successfully reduce these risks while providing smart contract-enabled goods and services.

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Written  by Nimisha Sunny


[1] Nick Szabo, Smart Contracts: Building Blocks for Digital Markets (1996), http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html; Nick Szabo, Formalizing and Securing Relationships on Public Networks, FIRST MONDAY (Sept. 1, 1997), http://firstmonday.org/ojs/index.php/fm/article/view/548/469

[2] Carla L. Reyes, Conceptualizing Cryptolaw, 96 NEB. L. REV. 384, 396 (2017).

[3] William Mougayar, 9 Myths Surrounding Blockchain Smart Contracts, COINDESK (Mar. 23, 2016), www.coindesk.com/smart-contract-myths-blockchain/

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