Smart Contracts Through
the Eyes of Legal Experts

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Nick Szabo first used the term “smart contract” in the early 1990s. This concept is experiencing its golden age after the development of the Ethereum blockchain. Smart contracts are used in many sectors conducive to digitization, from NFTs to supply chains, from intellectual property management to trade finance. They have begun to take on the role of an essential tool in terms of establishing and conducting legal relations between individuals and institutions.

The expression "contract" in the concept of smart contracts makes us think that these protocols always have the characteristics of a contract in the legal sense. However, many people working with smart contracts emphasize that smart contracts are neither smart nor contracts. The fact that they are "smart" does not imply that these computer programs need or use artificial intelligence. Yet, we are faced with a contract in the legal sense only if the agreeing will of the parties for the realization of a legal consequence, can be determined from a smart contract code. Perhaps it would be more accurate to think of smart contracts as a technology that can execute legal commitments (obligations) as well as various commands agreed upon in a contract.

So, What Kind of Relationship Is There Between Smart Contracts and Law?

Smart contracts can have different types of appearances. For example, the parties may have left the execution of the contract they have established in natural languages outside of the blockchain to the program code of the smart contract (off-chain smart contracts). Or the parties may have wanted to regulate the entire relationship between them with computer codes, that is, they may have placed the contract clauses in the smart contract code (on-chain smart contracts). This last situation will force lawyers as it requires good coding knowledge. However, if we leave this difficulty aside, no matter what type of smart contract it is, it needs to ensure compliance with the legal rules to be applied to this legal relationship. Smart contracts cannot prevail over the law. For example, the content of a smart contract should not be contrary to law, morality, or public order. Similarly, the parties to the transactions carried out with smart contracts must be competent to form a contract.

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Industry 4.0, Smart Contracts and Law

Perhaps the following understanding needs to be established first: The fact that transactions made with smart contracts produce results in the blockchain does not make them immune from legal rules. In other words, smart contracts are also subject to the laws of obligations, consumer protection law, personal data protection law, and commercial law. So, are the current and applicable legal rules sufficient and appropriate to solve the legal problems arising from smart contracts? Or should separate and special rules be set according to the unique structure of smart contracts?

In fact, these questions are among the most fundamental problems faced by legal systems in the Industry 4.0 era. The founded legal frameworks should support innovation and market development by removing barriers while protecting fundamental values such as justice, equality, and the protection of the weak. This is true of all technologies, such as artificial intelligence, blockchain, and the Internet of Things. Some countries prefer to go on with existing rules, while others are exploring how to set rules specific to smart contracts. It is possible to say that the UK has been very proactive in this regard.

Especially considering that smart contract technologies are constantly in motion and new application areas are emerging day by day, the importance of establishing a legal framework for smart contracts comes to light. Soon, we may encounter smart contracts integrated with artificial intelligence systems that manage more complex relationships than they are now.

A determination as to whether the transactions made with smart contracts are legally valid is significant not only for the parties to the contract but also for the investments made or planned to be realized with smart contracts. In order for the parties to prefer smart contracts, they should not doubt the validity of the resulting transactions. Therefore, legal systems need to be able to confirm the validity of transactions made through smart contracts. Only by providing such legal certainty will make the market develop, and investors will be encouraged to trade with smart contracts.