Blockchain & The Law: Are Smart Contracts Legally Binding?
There’s one single prevailing question that gets asked no matter what type of company consulting for:
Are Smart Contracts legally binding?
TL;DR
Quick Wrap Up: I personally dont think this is a cut & dry, either/or, yes/no type answer. We should NOT be be pushing for Blockchain to replace the law (code wont be ready for that any time soon). We should be building the Blockchain to be a supplement to making the law work more effectively in our era of new technology.
The answer gets complicated, quick. But the end result is:
Code is Code and Law is Law.
Code can be programmed to act in a way that law considers illgal. If running code is illegal or breaks a law, the law supersedes and regulates the ability to execute that code.
People can use legal code in illegal ways.
If you’re a bad actor, the law will get you. But, at the moment, in the end those who have the gold, have the gold. The best analogy is a robber in an American Western: The law finds out who robbed the bank, brings them in, put ’em behind bars, but the gold is still buried out there under a toombstone somewhere.
Until now… (read to end for more on this)
How Can Blockchain Assist The Law?
An easy example to take a look at is Copyright Law. One of my companies (nomcre.com) makes media.
Technically, we own the copyright as soon as the media is created. But, if the first place we publish that media is on a Social Network, likely the copyright is compromised.
If someone downloads one of our photos and adds an InstaFilter + a logo, very few computer programs can even understand how similar the images are.
Take a look at YouTube as an example. It is against the terms of service to post someone else’s work. Even still, a bunch of users create ‘lyric’ videos for music that belongs to artists. They post it on a channel that does NOT belong to the musician and profit from the views. It became such a problem, that YouTube put policies in place to verify and validate accounts before they could profit from this kind of shady, if not illegal, activity.
YouTube , Facebook & Instagram will all reject a video if it has a song in the video, if they can prove the copyright to that song belongs to someone other than the person making the post.
TikTok has very specific rules about how you can use other people music, along with providing music clips that they’ve negotiated a specific license to include <15 seconds of a song.
So, that should be the end of the story right?
Well, what happens in the real world is a lot like adding an InstaFilter. The publishers of these lyric videos, slow down or speed up, the song just enough that the software cant catch it as a ‘sample of copyrighted material’.
In this type of a case, what happens?
To a human the copyright is still being violated. To a computer the changes to someone elses source material are great enough to condiser it an original work. So what now?
This is where the blockchain can assist the law.
While Record Labels have enough money and experince to know that they have to actively submit for copyright any creative for which they want to protect… Most artists may not even know that they have to. Convential Common Law on Copyright used to be pretty straight forward. But in the digital age, things have taken a few wonky murky turns.
How does an artist (read: photographer) copyright their work? You’d think posting it to Social Media so that they could prove the first use would be good enough but that argument won't stand. There are a bunch of websites that will let you swap out the image that shows up for a specific link (vimeo does this with videos if you want to add a new version), or delete the image entirely.
If an artist were able to submit a hash of their work to the blockchain, the court would have a true record of first use. Blockchains are fundamentally a record keeping service, and one that cant be changed after a record is made. The tansactions holding an image can serve as a timestamp to PROVE first use beyond a reasonable doubt.
But what happens when someone else adds an InstaFilter to the photo and posts it as their own?
The law comes in to play.
Copyright is a legal construct not a technological one.
By submitting the image, the hash of the image (that can be used to look up a timestamp & prove the image being submitted is the one on the blockchain) and the Image that is accused of violating Copyright, a human court would have all the evidence they needed to make a ruling in the favor of the original owner.
Obviously the idea isn’t limited to pictures and video… the same can be done with Books, Songs, Code, Poems, Podcasts, Broadcasts, process diagrams, patents, and so much more.
Imagine a world where internet publishers had been legally de-incentivized to copy their competitors work. What a world that would be :)
Tokenization AND Legal Standards
There is no reason to think that the standards by which smart contracts (protocols) operate are all that different from processes in the real world. If we think about technology adoption, ditigal analogies for the things people spend a lot of time doing, usually end up taking over the responsibility of those humans. Think: PC took off with Spreadsheets which could auto balance the checking account ledger.
If we assume that Smart Contracts will become more normalized over time, not a shift from traditional to smart at the flip of a switch, then it’s fair to assume that Legal Standards will be created to address a state of affairs as it arises for the first time. We can’t create laws for unimaginable scenarios. It’s impossible to imagine every possibility. So, as we draft Smart Contracts today, it’s imperative to the growth of the industry, that these contracts enforce the sprit, if not the letter, of what is allowed.
If there is no standing or settled law that pertains to something a smart contract can manage. It’s a good housekeeping exercise to have the contracts audited; either publicly by open source, or privately with public findings. This way even if everything goes the shitter — you can prove you weren’t acting with ill intent.
Tokenization To Legal Standards
If malicious activity is found in the real world today, a bank is required to sieze (freeze) the funds at the request of an Authority with jurisdition. But, in BTC, ETH, XRP and many of the clones there is no protocol or process to re-claim funds. That is a core tennant of Bitcoins elegant solution to the double spend paradox.
The answer therefore are tokens not ledgers, where the contracts governing the token (read: rules on the digital dollar) have innate rules (protocols) for proving the identity to/of an authority, and allowing that authority to recognize and implement the process in their jurisdiction. In the real world banks freeze assets, and in the event of proven criminality re-coup the assets. If the accused is adjucated not guilty, then we gotta thaw those assets out.
The ledger (read: Blockchain) itself can be immutable, private, pseudonymous, and all the other buzzwords…
And still work to create currency tokens with the rule (protocols) in place to give the government all the rights and privileges legislated to them by a their governing body.
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