The journey to “Industry 4.0” brought not only technological advances, but also generated technical, philosophical and legal questions and potential problems. Digital technology, blockchain, big data and artificial intelligence have led to serious discussions in private law, even in commercial law, capital markets and intellectual property law where there is pre-established and traditional rules. It has become more and more difficult for legislators and jurists to follow and understand progress to prevent problems or find solutions. The slow development of the law prevents reconciliation with new technology.
Blockchain is considered part of this journey. The term blockchain constitutes three concepts, blockchain technology, blockchain software and blockchain platform. It is defined as “a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers.”1 It uses cryptography to allow each participant on the network to securely manipulate the ledger without the need for a central authority. Without a central authority, it provides security by using cryptography, which prevents the alteration of the data to the maximum possible level. Therefore, it is considered to have significant potential to facilitate and secure public and private business transactions and reduce costs.
When it comes to legal processes, the technical concepts and terms of blockchain must be well understood since blockchain constitutes the origin and platform of smart contracts. Blot chain can be simply defined as a distributed ledger including a chain of transactions that continuously adds to another block of transactions and is recorded on multiple networks and computers2 . Blockchain has two main concerns: permissionability and the “code is law” principle. The first is generated by the lack of necessary regulation and jurisprudence in different jurisdictions. Since smart contracts do not have a uniform definition or are considered legally binding in all jurisdictions, their permissibility is still questioned. The second gives the impression of eliminating legal certainty in a way and introducing a technological alternative. The “Code is law” principle uses technology to enforce rules, creating an automated world dictated by codes.
Use of technology from the beginning of the contractual relationship
The first step to entering the tech bubble was to define digital content as the subject of a contract, which happened a long time ago. It is often used to search for a potential counterparty, buyer or user of an asset/service, as in the case of Uber.
At this point, the main issue is the legal properties of smart contracts. Can a smart contract be considered an agreement within the scope of the law of obligations or should it be considered a tool for entering into an agreement or performing it?
Nick Szabo, a computer scientist and cryptographer, introduced the concept of “smart contract”. Smart contracts therefore make it possible for the parties to prepare the contact in code language. In other words, smart contracts are digital codes that provide an automated or self-executing program. When it comes to smart contracts, we can list the following characteristics:
- Secured transactions
There are keys available either publicly or privately that identify each user. - Immutable nature
Once registered, the contract cannot be changed by anyone unless a deactivation function is included in the algorithm. - Self-execution
Once the conditions are met, nothing can prevent the implementation. This automation reduces costs. Although enforcement is guaranteed, the authority of the courts cannot be eliminated. - Transparency
Although the parties and details of the contract cannot be accessed by others, everyone on the blockchain can know the existence of data.
Apart from the above, smart contracts have many aspects that differ from traditional contracts, including costs, parties, intermediaries and even negotiations.
Simple and frequent use of smart contracts in digital fundraising is undeniable, but not everything can be subject to smart contacts, the subject must be assets that can be registered and controlled by the blockchain. In other words, smart contracts are limited to the digital world and their subjects can only be electronic transactions and digital assets3 . On the other hand, smart contracts cannot be entered into where discretion comes into play. Many authors suggest that the code of smart contracts cannot interpret abstract legal terms that we come across in traditional contracts such as “negligence”, “good faith”, “good cause”, “bona fide” and so on.
There are different approaches to smart contracts in different jurisdictions. The Swiss Federal Council defines smart contracts as a data protocol that allows an automated execution between parties with previously coded data based on a decentralized system4 . Accordingly, they have three main characteristics, no human intervention, immutability and limitation to the digital world. Similarly, a smart contract is defined in US law as a computer code, stored in a blockchain-based platform, that automatically executes all or part of an agreement.5
That said, there is no solid definition of smart contracts in general, and the relationship between digital codes and contracts is still unknown. It is still a question whether we can consider a valid exchange of consent as defined in the Turkish Code of Obligations No. 6098 Art. 1. Since the accepted definition also includes the completion of predefined steps that do not constitute any legal consequence, it is difficult to place all smart contracts under contract law. Therefore, the doctrine divides smart contracts into two: “smart legal contract” and “smart contract code”. However, there is a disconnect between smart legal contracts and smart contract codes, as smart legal contracts require smart contract codes to be implemented. 6
Electronic contracts are often confused with smart contracts. However, electronic contracts differ since their main requirements and legal characteristics are almost identical to traditional contracts. The most important thing is that they are equally permissible. In other words, there are contracts signed via electronic communication tools. Smart contracts, on the other hand, have a different character and their admissibility is still questioned.
In conclusion, even if the smart contract is accepted as a new and different type of contract in the doctrine, it cannot be considered as an alternative to traditional contracts within the current legislation. They are tools that enable the establishment or execution of online agreements, but certain conditions must be met in order to be legally binding. Nevertheless, disputes arising from smart contracts will be governed by existing general principles of law, especially contract law. In other words, despite the “code is law” principle, the rule of law cannot be set aside, and the legal relationships arising from smart contracts will be governed by both general and private provisions of the law of obligations.
Footnotes
1 Steven Norton – “CIO Explainer: What is Blockchain?” – Wall Street Journal, February 2016
2 Dr. Pınar Çağlayan Aksoy –
Smart Contractual Terms – 2021
3 Dr. Pınar Çağlayan Aksoy –
Smart Contractual Terms – 2021
4 The Federal Council of Switzerland – “Legal Framework for Distributed Ledger Technology and Blockchain in Switzerland”December 2018
5 Alex Lipton, Stuart Levi, Skadden – “An Introduction to Smart Contracts and Their Potential and Inherent Limitations” – May 2018
6 ISDA and Linklaters – “Smart contracts and distributed ledger – a legal perspective“, August 2017
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
