Smart contracts are a great technological evolution, but questions regarding their validity remain. For example, are smart contracts even legally binding in their current state? The answer to that lingering question may surprise some people. A new whitepaper created by R3 and Norton Rose Fulbright sheds some light on this topic.

The Legality of Smart Contracts In The Real World

Cryptocurrency enthusiasts are well aware of what smart contracts bring to the table. Other than automation and improved transparency, this technology allows for autonomous business models. But if things go awry, is it even possible to hold the participant of a smart contract responsible? A big question that deserves a thorough answer. The recently published whitepaper by R3 and Norton Rose Fulbright provides some valuable insights.

Going by the “code is contract” approach, the answer would be affirmative. However, there is a large set of variables that needs to be taken into account before such a contract can become legally binding. Just because “contract” is in the original term does not mean it is automatically binding. Instead, it serves as an agreement between parties subject to a factual matrix within which it operates.

Enforcing the legally binding aspect of smart contracts is something certainly worth considering. Without a central authority to resolve disputes – most smart contracts rely on oracles – it is difficult to determine who is in the right. The whitepaper by R3 and Norton Rose Fulbright also mentions how “using particular distributed ledger technologies may be problematic”. A rather unusual finding, to say the least.

Norton Rose Fulbright global head of blockchain Sean Murphy stated:

“The industry has been grappling with the issue of whether or in what circumstances a smart contract gives rise to a legally binding contract. Through our research and analysis, we have concluded that  the answer can vary according to, among other things, the smart contract model used. The answer can also vary by country because of differences in local law. Inserting a dispute resolution mechanism into a smart contract could provide a potential solution to the question of enforceability, and in the paper we examine how such a mechanism would operate.”

It’s nice to see a renowned global law firm dedicated research to distributed ledgers and smart contracts. Both technologies present an infinite amount of possibilities, but adoption of either technology remains slow due to these unanswered questions. Legality of a virtual contract needs to be established as soon as possible, but the whitepaper shows that is much easier said than done in most cases.

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