Smart Contracts: Revolution of legal agreements through blockchain technology

Smart contracts, initially conceived by Nick Szabo in 1994 and emerging from blockchain technology, revolutionise traditional contract systems. Unlike conventional paper contracts, smart contracts are digital protocols stored on a blockchain, facilitating direct asset exchanges between parties without intermediaries. They automate contract execution, operating autonomously to ensure swift and secure transactions, eliminating human errors, and reducing costs. Ethereum stands as a leading platform for smart contract execution, leveraging blockchain's transparency and security.

Despite challenges, such as varying legal treatment globally and the need to address legal and technical complexities, smart contracts offer numerous benefits, including faster processing, autonomy, and reduced fraud risks. They ensure parties' compliance with obligations through self-execution, bolstering trust and efficiency in contractual relationships. Continued research and development are essential to unlock the full potential of smart contracts across diverse industries.

The legal treatment and regulation of smart contracts vary across jurisdictions, lacking a universally accepted definition and leading to legal ambiguity and regulatory gaps. For instance, Italy's Blockchain Decree recognises smart contracts as computer programs executing agreements via blockchain technology, while the EU views them as a digital protocols or code. Scholars diverge on defining smart contracts either as mere computer code or as automated agreements.

Although many countries lack specific legislation for smart contracts, two primary regulatory approaches are evident: One, seen in France, applies existing contract law to smart contracts, while another, observed in Estonia, involves crafting special legislation for cyberspace transactions, including smart contracts. The US exhibits diverse state-level regulations, with some states recognising smart contracts as traditional contracts executed on blockchain and others merely as computer programs. Italy stands out for legislating terms like 'smart contract' and DLT at a national level.

Efforts towards harmonising smart contract regulation are underway within the EU, highlighting their importance in modernising contractual relations through automation, despite the absence of specific legal frameworks in many regions.

The evolution of computer technology prompts the adoption of more efficient and reliable methods for online contract conclusion. Smart contracts, defined variably worldwide, offer a solution, either viewed as cryptographic agreements on blockchain or computerised transaction methods. Blockchain enhances smart contracts' security and efficiency, exemplified by multi-sig contracts. However, challenges persist in achieving legal clarity and enforceability due to discrepancies in global regulations.

While smart contracts promise enhanced trust, efficiency, and security, their legal and technical complexities require resolution for widespread adoption and effectiveness in diverse sectors, including banking and supply chain management. Despite inherent limitations such as inability to automate aspects reliant on vague terms or external real-world events, smart contracts represent a transformative technology with potential benefits across industries.

To overcome these limitations and maximise their potential, innovations like the Diamond Pattern and legal research play crucial roles. By addressing legal and technical challenges, such innovations pave the way for leveraging smart contracts in areas like the Internet of Things and beyond, ensuring their beneficial impact on the digital and legal landscapes.

In regions like the UAE and GCC countries, where technological advancements thrive, addressing smart contract regulation is imperative. Research investments can inform clear legal frameworks tailored to smart contracts, ensuring legal certainty. Independent analyses are vital for understanding legal and social implications, aiding informed decision-making.

Embracing clarity early on will streamline contractual relations, fostering the adoption of smart contracts in the technology era, particularly in regions like the UAE and GCC countries, thus propelling forward the integration of this transformative technology into various sectors.

— Hassan Amine Al Sayed is a senior legal advisor at GIG Gulf, Dubai.

• KT Network