Blockchain Technology and Smart Contracts

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Quick Facts

  • Project Type: Instrument
  • Procedure: Regular
  • Adopted: CD 2018/9
  • Project Period: September 2018—March 2021

Background

Distributed Ledger (or ‘blockchain’) Technology (DLT) and smart contracts are technologies that have a huge potential to fundamentally change many areas of private law transactions.

Blockchains are technologies for storing and transmitting data, allowing the constitution of replicated and distributed ledgers, without a central monitoring body, secured by cryptography, and structured by blocks linked to each other, at regular intervals of time. Smart contracts are auto enforceable code, running on top of a blockchain.

The applications of blockchain go beyond the strict framework of crypto-currencies and are potentially numerous. DLT is already used to replace some back-office functions of banks and insurance providers, but it could also be used to auto-execute European standard forms, such as the European Certificate of Succession which gives authoritative information to banks and land registries on eg heirs and their inheritance rights. Its application in land registration and numerous other fields is constantly being considered. It would be irresponsible not to scrutinise the legal basis for these applications and consider how the law can enshrine sufficient operational security and whether minimum standards should be regulated. Given the, almost by definition, cross-border nature of these developments, and in light of the need to secure a level playing field within the European internal market, these minimum standards will have to be European.

At the same time, blockchain technology is starting to offer interesting opportunities for private transactions in the form of smart contracts, in fact, self-executing computer programmes.

Such smart contracts eliminate the need for trust and good faith, but can easily be frustrated at the slightest change of contractual circumstances. Such smart contracts may, in the future, facilitate the functioning of smart objects. Whether the current system of private law can readily cope with these novel forms of ‘self-executing’ computer programmes and agreements, or whether new solutions are required, are fundamental questions. These contracts also have the potential to create increasing uncertainty in the area of jurisdiction and choice of law.

DLT and smart contracts function within the immaterial and fluent world of ‘data’. The potential impact of these technologies is enormous and is, by definition and unavoidably, cross-border. Legislative measures, whether at the level of the Member-States or the EU, will only be able to follow these developments slowly and behind the facts. And even when there is legislation, it might be outdated the moment it is promulgated. A notorious example is the ‘right to be forgotten’ in privacy law: how to implement this right if the information is stored in an immutable block on a blockchain?

Holding existing EU instruments in the areas of cross-border enforcement of claims, procedural law and application of foreign law against the light of these IT developments needs to be done urgently to understand the – both positive and negative – consequences of DLT and smart contracts, also to see if the implementation of these instruments in legal practice can be further facilitated by using the new technologies. It is to be expected that legal practitioners, more particularly judges, will be the first to be confronted with legal questions.

 

Aim

The project aims at providing policymakers, legislators, but also legal practitioners with a legislative guide, a toolbox on how to approach the questions mentioned above.

The legislative guide will contain two parts: a general and a more specific part.

The general part will start with an introduction as to what DLT and smart contracts are, the link that can be established between smart contracts and the Internet of Things, followed by an overview of more general legal questions which may arise. Such questions are: how should one decide which jurisdiction should have competence, which law ought to apply, what standard of proof is applicable? The general part will also show the limitations of purely national solutions, which will only have a very limited field of application.

The more specific part will focus on three ‘layers’ of the blockchain technology that have an impact on certain areas of law:

The ledger layer as a database that allows data authentication and certification: What are, for instance, the consequences of storing EU standard documents, such as the European Certificate of Inheritance, on a blockchain?

The applications or smart contracts layer: it might be desirable to consider the question of the contracting parties, their potential anonymity on a blockchain, and the protection of their personal data.

It might also be desirable to consider the notion of ‘oracle’ and the notion of ‘hybrid contracts’ (half traditional contracts in natural language, half smart contracts).

It might also be desirable to explore the question of the articulation between the immutability of the blockchain with the notion of nullity of the contract or alternative dispute resolution methods in case of non-performance of smart contracts.

This ecosystem has specifically given rise to new forms of financing. ICOs (Initial Coin Offerings), an original and unregulated type of fundraising, has been very successful (a cumulative total of over 8 billion Euros in March 2018). These digital assets (tokens) raise problems of qualification or identification of the types of applicable law.

The layer of the smart objects that will function thanks to smart contracts on the blockchains: it might be desirable to consider the question of liability due to the failure, the malfunctioning of the computer programmes or of smart objects.

 

Project Reporters

  • Sjef van Erp
  • Juliette Sénéchal

Project Team Members

  • Adrien Basdevant
  • Raffaele Battaglini
  • Christoph Busch
  • Vincent Danos
  • Jean-Paul Delahaye
  • Primavera de Filippi
  • Nathalie Martial-Braz
  • Tamás Parti
  • Denis Philippe
  • Pascal Pichonnaz
  • Ernst Steigenga
  • Teresa Touriñán
  • Jos Uitdehaag
  • Aura Esther Vilalta Nicuesa
  • Aneta Wiewiórowska-Domagalska
  • Christopher Wray
  • Fryderyk Zoll

Advisory Committee Members

  • Martine Béhar-Touchais
  • Hans Schulte-Nölke
  • Célia Zolynski
  • Christiane Wendehorst