Material Citations from previous class and this class combined:
- Smart Contracts_ Implications on Liability and Competence (1).pdf (Law Review Miami)
- What happens when a Smart Contract is breached?
- A foreboding view of Smart Contract developer liability.
- Liability Challenges in the Blockchain Ecosystem.pdf (Law Review UC Davis)
- Smart legal contracts under English law – Part 1: Introduction!
Review from Last Time – See Last Handout here:
There are 4 key parties to any smart contract blockchain ecosystem:
- the core developers of the blockchain software;
- the miners that validate transactions;
- the developers/propogators of the smart contract applications; and
- users of the smart contracts.
Generally, it will be impossible to attribute any liability to 1 and 2, since these are not privy to the smart contract itself, merely the substrate on which contract development and performance occurs.
Some Liability Flashpoints we Looked at:
- Attorney Malpractise Liability;
- The Oracle Problem;
- Decentralized Contract Platforms;
- Jurisdictional Liabilities;
- Malfunctioning Code/Contractual Frustration;
- Regulatory Liability;
- Good Old Breach of Contract;
Rectifying Contractual Liability Issues:
Situations where claims for rectification could arise:
- where there is a prior natural language contract, which is subsequently converted or translated into code which one or both parties contend does not reflect their common intention;
- in cases where contractual obligations are only defined in code, and the standalone smart contract fails to accurately record the common intention of the parties (ie common mistake), or;
- a unilateral mistake, eg where the code is produced in draft, one party is labouring under a misunderstanding as to how the code will operate, and the other party is aware of that but does not raise it with the other party, perhaps because the error or misunderstanding works in their own favour. A claim for rectification could arise in that situation because it would be contrary to good faith for a party to enforce a contract which it knew was inconsistent with the bargain that the other party believed was being made at the time of entry into the contract.
How is a Smart Contract Defined?
There seems to be some clarity coalescing around the definitions for smart contract within the United States. These definitions are led by state legislatures for the most part, with the Lummis Bill being the only Federal contender on the docket.
The States Define as Follows:
Arizona: “SMART CONTRACT” MEANS AN EVENT-DRIVEN PROGRAM, WITH STATE, THAT RUNS ON A DISTRIBUTED, DECENTRALIZED, SHARED AND REPLICATED LEDGER AND THAT CAN TAKE CUSTODY OVER AND INSTRUCT TRANSFER OF ASSETS ON THAT LEDGER.
Tennessee: (10) “Smart contract” means an event-driven computer program, that executes on an electronic, distributed, decentralized, shared, and replicated ledger that is used to automate transactions, including, but not limited to, transactions that: (A) Take custody over and instruct transfer of assets on that ledger; (B) Create and distribute electronic assets; (C) Synchronize information; or (D) Manage identity and user access to software applications.
Utah: “Smart contract” means a transaction which is comprised of code, script, or the programming language that executes the terms of an agreement, and which may include taking custody of and transferring a digital asset, or issuing executable instructions for these actions, based on the occurrence or non-occurrence of specified conditions.
Wyoming: “Smart contract” means an automated transaction, as defined in W.S. 40‑21‑102(a)(ii), or any substantially similar analogue, which is comprised of or code, script or programming language that executes the terms of an agreement and relying on a blockchain which may include taking custody of and transferring an asset, administrating membership interest votes with respect to a decentralized autonomous organization or issuing executable instructions for these actions, based on the occurrence or non-occurrence of specified conditions.
Lummis-Gillibrand Bill: (8) SMART CONTRACT.—The term ‘smart contract’ “(A) means “(i) computer code deployed to a distributed ledger technology network that executes an instruction based on the occurrence or nonoccurrence of specified conditions; or “(ii) any similar analogue; and “(B) may include taking possession or control of a digital asset and transferring the asset or issuing executable instructions for these actions.
There are also attempts to define Smart Contract by the EU and the UK respectively:
- Smart Contract: Computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to prespecified functions.
- Smart legal contract: A legally binding contract in which some or all of the contractual terms are defined in and/or performed automatically by a computer program.
There are essentially three forms a smart legal contract can take, depending on the role played by the code. These are: • natural language contract with automated performance; • hybrid contract; or • solely code contract.
EU Data Act: These are computer programs on electronic ledgers that execute and settle transactions based on pre-determined conditions. They have the potential to provide data holders and data recipients with guarantees that conditions for sharing data are respected.
Gaps in Coverage in USA
Biden’s executive order has 0 mentions of the term ‘smart contract’, despite the order attempting to lay the conceptual groundwork for all things related to digital assets, including sections like:
- Policy – We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.
- Objectives –
(a) We must protect consumers, investors, and businesses in the United States.
(b) We must protect United States and global financial stability and mitigate systemic risk.
(c) We must mitigate the illicit finance and national security risks posed by misuse of digital assets.
(d) We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.
(e) We must promote access to safe and affordable financial services.
(f) We must support technological advances that promote responsible development and use of digital assets. The technological architecture of different digital assets has substantial implications for privacy, national security, the operational security and resilience of financial systems, climate change, the ability to exercise human rights, and other national goals.
- Coordination –
The Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) shall coordinate, through the interagency process described in National Security Memorandum 2 of February 4, 2021 (Renewing the National Security Council System), the executive branch actions necessary to implement this order.
- CBDCs Policy –
(i) Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth.
(ii) My Administration sees merit in showcasing United States leadership and participation in international fora related to CBDCs and in multi‑country conversations and pilot projects involving CBDCs.
(iii) A United States CBDC may have the potential to support efficient and low-cost transactions, particularly for cross‑border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets.
- Measures to Protect Consumers, Investors, and Businesses –
The increased use of digital assets and digital asset exchanges and trading platforms may increase the risks of crimes such as fraud and theft, other statutory and regulatory violations, privacy and data breaches, unfair and abusive acts or practices, and other cyber incidents faced by consumers, investors, and businesses.
- Actions to Promote Financial Stability, Mitigate Systemic Risk, and Strengthen Market Integrity. –
Financial regulators — including the SEC, the CFTC, and the CFPB and Federal banking agencies — play critical roles in establishing and overseeing protections across the financial system that safeguard its integrity and promote its stability. Since 2017, the Secretary of the Treasury has convened the Financial Stability Oversight Council (FSOC) to assess the financial stability risks and regulatory gaps posed by the ongoing adoption of digital assets. The United States must assess and take steps to address risks that digital assets pose to financial stability and financial market integrity.
- Actions to Limit Illicit Finance and Associated National Security Risks –
Digital assets have facilitated sophisticated cybercrime‑related financial networks and activity, including through ransomware activity. The growing use of digital assets in financial activity heightens risks of crimes such as money laundering, terrorist and proliferation financing, fraud and theft schemes, and corruption. These illicit activities highlight the need for ongoing scrutiny of the use of digital assets, the extent to which technological innovation may impact such activities, and exploration of opportunities to mitigate these risks through regulation, supervision, public‑private engagement, oversight, and law enforcement.
- Definitions –
(a) The term “blockchain” refers to distributed ledger technologies where data is shared across a network that creates a digital ledger of verified transactions or information among network participants and the data are typically linked using cryptography to maintain the integrity of the ledger and execute other functions, including transfer of ownership or value.
(b) The term “central bank digital currency” or “CBDC” refers to a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank.
(c) The term “cryptocurrencies” refers to a digital asset, which may be a medium of exchange, for which generation or ownership records are supported through a distributed ledger technology that relies on cryptography, such as a blockchain.
(d) The term “digital assets” refers to all CBDCs, regardless of the technology used, and to other representations of value, financial assets and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof, that are issued or represented in digital form through the use of distributed ledger technology. For example, digital assets include cryptocurrencies, stablecoins, and CBDCs. Regardless of the label used, a digital asset may be, among other things, a security, a commodity, a derivative, or other financial product. Digital assets may be exchanged across digital asset trading platforms, including centralized and decentralized finance platforms, or through peer-to-peer technologies.
(e) The term “stablecoins” refers to a category of cryptocurrencies with mechanisms that are aimed at maintaining a stable value, such as by pegging the value of the coin to a specific currency, asset, or pool of assets or by algorithmically controlling supply in response to changes in demand in order to stabilize value.
Interesting to see no mention of smart contracts in any of the substantive sections, or definition section of the executive order, though perhaps one can be inferred through algorithmic reference. There are obviously many more gaps both federally and at state level that continue to be filled in as the ecosystem matures.