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Law Firms and Cryptocurrencies

In the past, we have looked at blockchain, the technology that underlies cryptocurrencies, and at how blockchain is relevant to law firms. In this article, we have a closer look at the relationship between law firms and cryptocurrencies. We explain what they are and explore the challenges regarding law firms and cryptocurrencies. We also look at the legal services law firms can offer.

What are cryptocurrencies?

Wikipedia defines a cryptocurrency as “a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.”

Cryptocurrencies are decentralized digital currencies. They use blockchain technology to secure transactions and control the creation of new units. Unlike traditional currencies issued by governments, cryptocurrencies operate on a peer-to-peer network. This allows users to transfer ownership of cryptographic units without the need for a trusted third party, such as a bank. Transactions made with cryptocurrencies are recorded on a public ledger called the blockchain, which ensures transparency and security.

The first and most well-known cryptocurrency is Bitcoin, launched in 2009. It paved the way for thousands of alternative cryptocurrencies, known as altcoins, each with unique features and purposes. The most used cryptocurrency is Ethereum. It is popular in the legal and commercial world because it is being used in smart contracts.

Wikipedia lists six conditions to qualify as a cryptocurrency:

  1. The system does not require a central authority; its state is maintained through distributed consensus.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

Challenges regarding law firms and cryptocurrencies

Law firms wanting to deal with cryptocurrencies face several challenges. These may apply to the law firms themselves as well as to their clients. Let us have a closer look.

A first challenge is regulatory uncertainty.  The legal and regulatory environment surrounding cryptocurrencies is quite intricate. Law firms can advise on compliance with securities, commodities, tax, anti-money laundering, and banking laws and regulations. The challenge is that the regulations for cryptocurrencies vary widely from one jurisdiction to another. In some countries, cryptocurrencies are embraced and regulated like any other financial asset, while in others, they face severe restrictions or outright bans. (Wikipedia provides an overview of the legality of cryptocurrencies in different countries and territories). On top of that, the legal landscape is also continually evolving. Law firms must therefore stay abreast of these shifting regulatory landscapes to provide accurate advice to their clients.

A second challenge has to do with compliance with anti-money laundering requirements. Cryptocurrencies are often associated with anonymity. This has raised concerns about their potential use in illegal activities such as money laundering and terrorism financing. Law firms must assist clients in navigating anti-money laundering requirements to ensure compliance with local and international laws.

Next, there are taxation Issues. The tax treatment of cryptocurrencies can be complex and varies significantly by jurisdiction. Law firms can help clients understand and comply with tax obligations, whether it involves capital gains tax, income tax, or value-added tax (VAT) on cryptocurrency transactions.

There also are Intellectual Property (IP) rights to consider. The blockchain technology has led to the creation of numerous innovations, many of which may be subject to intellectual property protection. Law firms play a crucial role in helping clients secure and enforce IP rights in the crypto space.

Another challenging area that is of specific interest for lawyers is dispute resolution. As with any financial asset, disputes can arise in the cryptocurrency space. These can be related, e.g., to transactions, smart contracts, or initial coin offerings (ICOs). Law firms must be equipped to handle these disputes, which may involve complex issues of jurisdiction, contract law, and technology.

Finally, there are ethical considerations. Law firms must comply with the ethical requirements of their bar associations. Specific rules may apply as to what is allowed and what isn’t.

Legal services regarding cryptocurrencies

With all the challenges listed above, it should come as no surprise that there are corresponding services lawyers can offer. Let’s have a closer look.

Law firms can provide compliance and regulatory advice to ensure that cryptocurrency-related activities comply with applicable laws. This includes advising on the compliance of tokens and coins with securities laws, exchange licensing, and the creation and management of smart contracts. Firms also assist with the formation of cryptocurrency-focused funds, reviewing fund offering materials, and advising on tax implications.

An obvious service law firms can offer is dispute resolution and litigation. This includes resolving disputes between customers and cryptocurrency exchanges, as well as issues like locked accounts and frozen assets. Law firms also handle litigation and fraud cases, including recovering stolen digital assets and addressing business and investment fraud. When disputes arise in the cryptocurrency space, law firms provide representation in court or through alternative dispute resolution mechanisms such as arbitration or mediation. They can also represent clients in investigations by various government agencies and provide defence in civil disputes.

Law firms can offer advisory services for innovators and investors. This can include advice on intellectual property protection, company formation, and tax planning. As mentioned above, they can also help with compliance with regulatory and licensing obligations and security and privacy reviews. For investors, law firms can develop tax-effective ownership structures and advise on the taxation of trading gains and income from activities like staking and lending.

Another area consists of specialized services for Digital Assets and Web3. Law firms are at the forefront of advising on new digital assets, cryptocurrencies, NFTs, and blockchain-based protocols. They work with venture capital and investment funds, tech companies, exchanges, and decentralized autonomous organizations (DAOs). This includes engaging with regulatory bodies worldwide to advocate for clients in the digital asset and Web3 ecosystem.

Whether it’s an ICO, a cryptocurrency exchange, or a blockchain-based startup, law firms can help structure transactions to ensure they comply with legal requirements.

A service that is quite commonly offered these days is drafting and reviewing contracts. Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They are a cornerstone of blockchain technology. Law firms are instrumental in drafting and reviewing these contracts.

Law firms can also help facilitate technical integration. Law firms are increasingly using blockchain technology to enhance efficiency and verify transactions. The use of smart contracts is growing. Law firms can advise on their implementation and legal bindingness. Distributed ledger technologies (DLTs) offer potential cost and time savings, which makes them attractive for various legal applications.

Beyond compliance and transactions, law firms offer strategic advice to clients on how to navigate the rapidly evolving landscape of digital assets. This includes advising on risk management, investment strategies, and potential regulatory changes.

Law firms and cryptocurrencies: conclusion

Like many new technologies, cryptocurrencies come with a wide range of challenges and opportunities. Law firms that start focusing on cryptocurrencies can gain a competitive edge through specialization, thought leadership, cross-border work, and collaboration with Technology Experts.

 

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Legal Technology Predictions for 2023

Towards the end of every calendar year, the American Bar Association publishes the results of its annual legal technology survey. Several legal service providers, experts, and reporters, too, analyse existing trends and subsequently make their own legal technology predictions for 2023. Some items stand out that most pay attention to. In this article, we will look at automation, artificial intelligence, cloud-native solutions, virtual legal assistants, data privacy and cybersecurity, crypto technologies, blockchain, and smart contracts. We will briefly pay attention to some other trends, as well.

Automation

Automation keeps being a major driver of change in many industries. The legal sector is no exception, even though it lags compared to many other sectors. Lawyers seem to take longer to catch up that automation is beneficial. It is making many processes in the legal industry faster, more efficient, and less expensive. Automation has proven to be successful in fields like legal research, e-discovery and document review and management. In 2023, we can expect to see this trend continue, with a renewed focus on automating the law firm administration and on the creation and review of legal documents. Automated workflows can be used to streamline legal processes, such as litigation support, e-discovery, and case management. Automation can also assist in organizing and tracking progress and regulatory changes, data collection, reporting, and communication. An increase in automation will help to improve the accuracy of legal processes, reducing the risk of errors, and increasing efficiency.

Artificial Intelligence

Artificial Intelligence is becoming ubiquitous. In many aspects of our lives, there now are AI solutions available that make life easier. In the legal sector, too, AI is starting to make waves. In all the above-mentioned examples of automation, AI is playing a crucial role. As mentioned above, AI has already been successfully assisting lawyers with legal research, with process and workflow automation, with the generation of legal documents, as well as with e-discovery. But those are still fairly simple applications of AI. It can do far more. These days, AI is also being used to digest vast volumes of text and voice conversations, identify patterns, or carry out impressive feats of predictive modelling. The virtual legal assistants that we’ll discuss below, too, are all AI applications. If properly used, AI can save law firms much time and money. In 2023, we can expect to see a more widespread adoption of AI in the legal sector. (More on Artificial Intelligence and the Law).

Cloud-Native Solutions

Cloud computing has been a game-changer for many industries. Previous reports had already revealed that lawyers, too, are more and more relying on cloud solutions. This should not come as a surprise, as Cloud-based solutions provide many benefits, including reduced costs, increased scalability, and improved data security. They help lawyers and clients share files and data across disparate platforms rather than relying solely on emails. Additionally, cloud-based solutions are more accessible, allowing legal firms to work from anywhere and collaborate more effectively with clients and other stakeholders. In 2023, we can expect this trend to continue. (In the past, we have published articles on cloud solutions for lawyers, on managing your law firm in the cloud, an on lawyers in the cloud).

Virtual Legal Assistants (VLAs)

In the past, we have talked on several occasions about legal chatbots. Chatbots have sufficiently matured to now start playing the role of virtual legal assistants. VLAs are AI-powered chatbots that build on basic neural network computing models to harness the power of deep learning. They use artificial intelligence algorithms to assist law firms with various tasks. Gartner predicts VLAs can answer one-quarter of internal requests made to legal departments. They extend the operational capacity of law firms as well as of in-house corporate legal teams. As a result, they assist in reducing lawyers’ average response time and producing distinct service delivery efficiencies. Furthermore, as VLAs are a form of automation, all the benefits of automation apply here too: virtual legal assistants can help to improve the accuracy of legal work, reduce the risk of errors and increase efficiency. At present, virtual legal assistants are still primarily being used in uncomplicated and repetitive operations. Recent breakthroughs, however, indicate that they are already able to take on more complex tasks and will continue to do so.

Data Privacy and Cybersecurity

Ever since the GDPR, data privacy and cybersecurity have become increasingly important. In 2023, we can expect to see an ongoing emphasis on data privacy and as well as an increase in attention to cybersecurity in the legal sector. (The examples of high-profile Big Tech corporations receiving massive fines seem to be a good incentive). Law firms have understood that they too need to make sure that they have robust data privacy and cybersecurity measures in place to protect their clients’ confidential information. Several law firms also provide their clients assistance with the legal aspects of data protection.

Crypto technologies, Blockchain, and smart contracts

The market of cryptocurrencies was volatile in 2022. That did not stop an increase in interest in the underlying crypto technologies. Experts predict rises in a) regulation of cryptocurrencies and crypto technologies, in b) the adoption of cryptocurrency, c) a growing interest in decentralized finance (DeFi), and d) an increase in attempts at cryptocurrency taxation. We are already witnessing an intensification in litigation with regard to cryptocurrency and crypto technologies. This trend is expected to continue. Litigation about NFTs, e.g., is one of the areas where litigation is expected to rapidly increase.

Experts also expect an ongoing interest in and an increased adoption of Blockchain technology. Blockchain can be used to securely store and manage legal data, reducing the risk of data breaches and ensuring the integrity of legal records. Additionally, blockchain can be used to automate many legal processes, such as contract management and dispute resolution, by enabling the creation of smart contracts. As we mentioned in previous articles, smart contracts can streamline many legal processes, reducing the time and cost associated with contract management and dispute resolution. They can also help to increase the transparency and accountability of legal transactions, reducing the risk of fraud and improving the overall efficiency of legal processes.

Other Trends

The ABA survey report noticed that law firms are spending more money on legal technology than ever before. In many cases, this involved investing more in tightening cybersecurity.

The trend to work remotely and to use video conferencing for virtual meetings that started during the pandemic is ongoing.

More than ever before lawyers pay attention to their own work experience, as well as to the user experience for their clients by making their law firms more client centred. There is an ongoing focus on work-life balance, not only for the lawyers but also for the employees of law firms. Law firms are finally starting to consider things like employee satisfaction.

While billable hours remain the most used fee model, there has been a noticeable increase in lawyers using a subscription fee model.

Finally, the trend that law firms are increasingly hiring people with hybrid profiles is continuing. By increasing cognitive diversity, law firms want to close the gap between professionals with knowledge of legal matters and those with enough legal tech expertise to manage the digitization and automation of workflows. Gartner predicts that by the end of 2023, one third of corporate legal departments will have a legal tech expert in charge of managing the digital transformation and automation of internal processes. Large law firms are also increasingly hiring lawyers that are familiar with business administration.

 

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Legal aspects of Non-Fungible Tokens

Non-fungible tokens (NFTs) made world headlines in March 2021 when a digital artwork NFT was auctioned for nearly 70 million USD. NFTs represent a market that is growing fast: in the second quarter of 2021, NFT transactions already were worth 2.4 billion USD. So, what are Non-Fungible Tokens, and what are some of the legal issues when dealing with them?

The Wikipedia defines a non-fungible token as “a unique and non-interchangeable unit of data stored on a digital ledger (blockchain). NFTs can be used to represent easily-reproducible items such as photos, videos, audio, and other types of digital files as unique items (analogous to a certificate of authenticity) and use blockchain technology to establish a verified and public proof of ownership. Copies of the original file are not restricted to the owner of the NFT and can be copied and shared like any file. The lack of interchangeability (fungibility) distinguishes NFTs from blockchain cryptocurrencies, such as Bitcoin.”

So, key items to remember are that an NFT is a digital asset. It is a piece of software code that is entirely unique, yet transferable. That software code usually is a form of smart contract, and it is stored in a blockchain. NFTs typically have to do with digital media.

Let us use an analogy. Imagine a very famous photograph, taken back in the days before digital photography, where photos were still taken on celluloid film. Next, imagine that the original first print of the photograph or the original negative is being auctioned by the original photographer or somebody who acts on their behalf. You get an authentic piece of art, even authenticated by the artist. You can hang it in your house, or you can sell it. But that does not mean you get the copyrights on that piece of art. The original photographer still keeps the rights to reproduce, license, etc.

NFTs are something similar, but specifically created for digital media rather than physical media. The problem with digital media is that they can be infinitely copied and distributed without any loss of quality. NFTs were created as a way to make sure the original artists can benefit from their artwork. When you buy an NFT, you get an authenticated replica of a digital medium that is unique. It is a smart contract that contains certain terms and condition, e.g., to make sure that the original artists, e.g., gets a royalty when the NFT is sold. The smart contract is executed automatically each time there is a transaction that is registered in the blockchain, e.g., when an NFT is sold to a new owner. In other words, an NFT is a non-replicable digital certificate of ownership of a copy of a digital creative work.

It is worth repeating that while the NFT gives you ownership of a copy of a digital artwork, it does not transfer any intellectual property on the original digital artwork to the owner of the NFT, other than the license to own a copy of it. So, why do people by them? Because they are collector’s items that are authenticated and unique, that cannot be modified or amended, yet are transferable. As such, they can also be used as investments.

NFTs are fairly new, and legislation worldwide still has to catch up with the phenomenon. There are several legal issues that have to be considered.

Are NFTs legal? The answer to this question will vary from country to country. But, generally speaking, if there are no laws in place, they should be considered legal. Some countries have already enacted some legislation. Other are likely to follow, which may change what about NFTs is legal and what is not. But there are several caveats, discussed below.

Proof of ownership happens through the Blockchain. The combination of a public key and a private key allows the NFT to be decrypted and provide the necessary information.

Data hosting and storage: the NFT functions as a certificate of ownership of copy of a digital artwork that is stored somewhere, and typically the code of the NFT links to the stored copy. Problems can arise if the storage ends or the link to the storage changes because it is not possible to update a blockchain entry. So, the smart contract code has to explicitly allow transactions to modify the location of the digital artwork.

Smart Contracts: NFTs are smart contracts. The caveat here is that smart contracts usually only work on a specific platform. What about sales on a different platform?

Royalties: since an NFT is a smart contract, it is possible to include code that a fee is automatically paid to the original artist each time the NFT is sold. But, as mentioned above, what about sales on a different platform than the one where the smart contract originated?

Data Protection Laws: Exercising the personal rights to be erased or to modify or correct personal information appear to be incompatible with the immutable nature of the blockchain. In other words, NFTs that contain personal information may violate data protection laws. It may be wise to include non-executable code in the smart contract that clarifies that the people involved have agreed to have their personal information included as it is.

Intellectual Property Laws: as mentioned above, the buyer of an NFT by default does not acquire the intellectual property rights that are associated with the digital artwork. The buyer may not be fully aware of this or its implications. They may, e.g., not be aware that they are not allowed to make copies of the digital artwork or to use it in a publication, which may then constitute a potential intellectual property infringement liability.

Money Laundering: NFTs can be sold for exorbitant amounts of money. Add to that, that they may be sold using cryptocurrencies. There are valid concerns that the transactions of NFTs are being used to circumvent money laundering legislation.

Estate & succession: NFTs are typically linked to specific individuals. What happens to the NFT when the owner of the NFT dies? The immutable nature of the blockchain will not allow to recognize the heirs as new owners.

Unregistered securities: NFTs can be used as investments and there already are NFT marketplaces that allow several traders to take part simultaneously in the acquisition of NFTs. In other words, the new owners all get a share of the NFT. Some argue that in these circumstances, NFTs could be regarded as unregistered securities.

Taxation: the market for NFTs is worldwide. The artist may be in one country, the transaction may happen in another country, while the buyer may reside in yet another one. Transactions of NFTs may therefore be subject to double taxation.

The market of NFTs is expanding faster than anybody predicted. NFTs offer great opportunities, both for the creators of digital artwork, as well as for collectors and investors. But clearly, there still are multiple legal issues that need to be addressed.

 

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More on Smart Contracts

In a previous article on smart contracts, we explained in detail what smart contracts are, and gave some examples. In today’s article we will focus on some of the challenges, and on recent evolutions that addressed those challenges.

Let us first quickly recap what smart contracts are. Michael Matthews defines a smart contract as “a software program that automates the execution of contract terms. It applies to only the performance of executable terms of a contract. Smart contracts do not replace natural language contracts but instead function as a program that connects to a natural language contract through an addendum that establishes an inviolable link between the program and a natural language contract.” Additionally, while smart contracts are automated contracts, what sets them apart from other automated contracts is the usage of Blockchain technology, which registers the contract and its transactions in distributed ledger.

Traditional contracts have certain disadvantages, which often leads to them being contested in court. They are open to interpretation. They are not machine-readable, and e.g., do not have any meta-data that could provide unambiguous clear data. They are also not self-executable, which quite often would make things more efficient. So, the solution seems simple: create machine readable contracts that can self-execute. The whole process can be automated, and the transactions are trusted and registered. The results is higher efficiency and fewer disputes.

Smart contracts, however, come with their own set of challenges. A first challenge is that imprecise data don’t compute. Typically, smart contracts contain conditions that must be met before certain actions are automatically executed. Those conditions must be sufficiently specific and verifiable for the program to evaluate whether they are met.

A related challenge lies in contradictory language. Just as the data must be specific enough, so must the language that specifies the conditions and actions be unambiguously clear. “When stocks are low”, is not sufficiently clear. But it can’t be defined as “below 20%” on one occasion in the contract, and as “below 15%” on another one.

A third challenge has to do with creating logic parameters. When using a Blockchain ledger, transactions are usually registered in real-time. The problem is that the processing of the data by the parties involved doesn’t always happen in real time. The data could be processed, e.g., once a day, or once an hour… This has to be taken in account, which means parameters have to be determined on how and when to process the data to avoid incongruent data sets, which can’t generate a consensus for a contractual condition.

A fourth challenge consists of anticipating data glitches and gaps. Programs contains bugs, and they also cannot anticipate all conditions that might arise. (A lockdown because of the Coronavirus, e.g., may prevent certain tasks from being executed, even if all previously existing necessary conditions are met).

A fifth challenge had to do with scalability. Processing Blockchain transactions requires considerable computing power, as well as sufficient network speed. More complex transactions require more processing power, and much higher network speed to which only some large entities have access.

An inherent risk with all Blockchain-based technologies is the centralization risk. The strength of Blockchain technology lies in its decentralized ledgers. Tsui S. Ng, in an article for the American Bar Association, rightfully points out that there is a risk “if power is concentrated into a small number of hands. Such concentration means that a group of bad actors may conspire together to approve malicious transactions.”

A last challenge has to do with usability. Just as traditional contracts are written in natural language that machines have difficulties interpreting, smart contracts are primarily written in code and therefore not easily readable by the average lawyer. Tools are needed to bridge the usability gap.

Since we wrote our previous article, nearly two years ago, a lot of progress has been made in addressing these challenges. As a result, the use of smart contracts is constantly and rapidly rising. In his article, Eduard Kotysh points out that the technology is maturing, that new and improved tools are becoming available, and that because the problems are systematically being addressed, trust is building. He concludes that “the ecosystem has gathered enough momentum with the media and events worldwide to hit a critical mass to go viral.” Another important evolution is that the technology has become more accessible.

These evolutions are largely due to the creation of several consortia that collaborate on establishing international platforms, protocols and frameworks for smart contracts and Blockchain backed transactions. Once such platform, e.g., is OpenLaw (www.openlaw.io) which started as a joint US and Swiss open source project that allows lawyers to make legally binding and self-executing agreements on the Ethereum blockchain.

Ethereum is one of the leading platforms for smart contracts and was specifically designed for that purpose. Tsui S. Ng: “Although traditional cryptocurrencies, such as Bitcoin, can store and transfer value, Ethereum is also capable of carrying data in the form of arguments, which means that the platform can be programmed to take a specific action once certain conditions are met. Thus, contracts can be programmed to be self-executing because the platform can send money once the specified conditions are satisfied. Theoretically, given enough time, the platform will eventually be able to solve any computable problem. However, in practice, how well the platform runs depends upon network speed and memory.”

Smart contracts have become so popular, that they even have their own programming languages, of which Solidity is most popular. Another sign of how much the technology has matured is that platforms are being created, such as Solidified, that focus on auditing smart contracts.

In summary, smart contracts are changing how legal matters and contracts are drafted. Michael Matthews points out that this inherently implies that we are finding new ways of working: instead of focusing on risk and liability, like traditional contracts do, with smart contracts we focus on the outcome parties desire. He predicts that in the future, smart contracts will force a new methodology, that of outcome-based thinking.

 

 

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An introduction to smart contracts

In a previous article, we have written about Artificial Intelligence (AI) and contracts. AI is having an impact in three areas when it comes to contracts: 1. contract review, 2. contract management and automation, and 3. smart contracts. While smart contracts are automated contracts, what sets them apart from other automated contracts is the usage of Blockchain technology.

What are smart contracts? We’ll combine elements from the definitions Tech Republic and the Investopedia to explain: A smart contract is a software-based contract between a buyer and a seller. The software automates the business processes and the conditions of fulfilment contained within the contract. The code programmed into the contract actually makes the contract self-executing so that it takes action whenever a specific condition is triggered within the contract. The code and the agreements contained therein exist across a distributed, decentralized Blockchain network. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible. Because the smart contract is software capable of automating business processes and contract fulfilment automatically, it eliminates the need for managers and middlemen supervision.

Let’s give an example: A is a supplier of products for B. Every month, B places an order with A. It makes sense to automate this process. The smart contract is a piece of software that, e.g., would contain the code that says if an order is received by A from B, and B is not in arrears, then that order must be executed. Now, with smart contracts these transactions are typically registered in a distributed, decentralized Blockchain network of ledgers. In a previous article we explained that Blockchain is a technology that registers transactions in a ledger, where everybody in the network has a copy of that ledger. Transactions are secured by using a verification code that is calculated based on all previous transactions in the ledger. In essence, to forge a transaction, one would therefore have to forge all registrations of all transactions in all ledgers.

The benefits of smart contracts are clear: the whole process of transactions between parties can be automated, and by using Blockchain technology one has virtually irrefutable proof of the transactions. Add to that that programming code tends to be less ambiguous than the generic legalese of traditional contracts, so the chances of disputes about the interpretation of smart contracts are smaller.

The usage of smart contracts is expected to grow fast. A survey published in Forbes Magazine predicts that by 2022, 25% of all companies will be using them. Basically in any market where Blockchain technology is useful, one can expect smart contracts to be useful, too.  Smart contracts can also be the perfect complement to E.D.I. At present, smart contract applications are already being used in – or developed for – supply chains and logistics, in finance and securities, real estate, management and operations, healthcare, insurance, etc.

Still, one has to be aware of the limitations of smart contracts, as there are a number of legal issues to take into account. The name ‘smart contracts’ is misleading in that they aren’t really contracts but software. As such, there are legal concerns with regard to:

  • Offer and acceptance: is there even a binding contract, if there is no human interaction or supervision, and the transaction is completely executed automatically?
  • The evidentiary value: smart contracts are not written evidence of agreed rights and obligations because they encapsulate only a portion of any rights and obligations that is related to contractual performance
  • Jurisdiction: is the area of jurisdiction clearly defined in case of a conflict or dispute?
  • Dispute Resolution: are there any dispute resolution mechanisms in place?

When considering working with smart contracts, it is therefore a good idea to first come to a framework agreement in which these issues are addressed. And those will preferably still be written by lawyers.

 

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