The development of commercial turnover has led to the creation of various tools to facilitate and secure the contracting process. Among these solutions are e-signatures, digital archiving, evidence records, and smart contract.
A smart contract adopts all the concepts of a traditional contract, but is the result of a computer program written in a blockchain.
At first glance, blockchain may seem complex and abstract, but its basic concept is relatively simple. A blockchain consists of individual blocks that store certain information. Each block contains previous and timestamp information, which ensures the connectivity and traceability of all transactions back in time.
By its nature, a Smart Contract is a self-executing computer code that is written in a chain of blocks stored on multiple computers.
It is characteristic of smart contracts that the conditions under which certain results will occur are specified in advance. In other words, these contracts are like little computer programs working on the principle: if "X" occurs, do "Y".
Accordingly, once the term or condition has occurred, the contract is executed immediately without the need for human intervention to review and process documents. Smart contracts aim to simplify business and trade without the need for an intermediary.
Undoubtedly, smart contracts can provide significant advantages for parties. They are characterised by shorter performance periods, they do not require intermediaries, which saves the parties monetary resources, there is immutability of the contract content and traceability and accuracy of each transaction and term. All of this largely prevents bad faith actions by the parties, hence leading to greater efficiency and accuracy in the performance of the terms and conditions of the contract.
Despite the advantages, smart contracts have some disadvantages. One of the main legal problems is that the parties to a smart contract are pseudonymised.
Smart contract transactions use aliases for the parties. This does not mean that they are anonymous, but still does not require a legal identity of the parties. Consequently, in the event of a dispute over the performance of a smart contract, the lack of legal identification would cause significant problems because it is almost impossible to determine which person is a party to the contract. Despite this drawback, smart contracts are finding their application and are increasingly being resorted to because of their overwhelming advantages.
While it may sound abstract and not so functional, smart contracts are slowly but surely starting to make their way into more and more areas around the world.
Not all transactions and not all relationships can be settled by a smart contract, but in some cases it is a significant facilitator. A smart contract can be programmed to disburse funds for someone's birthday each year, i.e. the computer program will make a payment each year on the specified date without the need to initiate other actions - transfer orders, confirmation, request, approval by an intermediary, etc. The occurrence of the specified date is the condition whose realization automatically submits a request for the transfer of the pre-specified amount to the pre-specified person.
At the moment, smart contracts are primarily developed and used by cryptocurrency providers, but they are entering more and more relationships. Here are a few interesting applications of smart contracts:
Financial services
Smart contracts are at the heart of the we-trade.com trade finance network. It allows to create an environment of trust for global trade, thus facilitating the trade process for the companies involved. Buyers and sellers of financial services enter payment terms and conditions in advance, which they confirm and save through a smart contract supported by the network. The finance network performs automated monitoring of contract terms and triggers payments, sending email notifications when status changes. Buyers can optionally instruct their bank to provide a seller payment guarantee. The bank agrees to remit a predetermined amount to the seller as soon as the agreed terms are met. The provision of a bank guarantee in this case constitutes an irrevocable and absolute obligation of the buyer's bank. The we-trade.com network operates as a joint venture between twelve major European banks: CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale, UBS and UniCredit, which demonstrates the globality, importance and development of smart contracts in this sector.
Mortgage transactions
Smart contracts could be applied extremely effectively in mortgages and property transactions or in the execution of individual transactions related to them. Although this does not currently seem applicable in Bulgaria, in Georgia it is already possible to register land titles on the Bitcoin blockchain network. Thus, Georgia has become one of the first countries to use blockchain to conduct government property-related transactions. Since 2016, this country has been developing a blockchain-based land title registry, and similar projects are underway in other jurisdictions such as Sweden and the United Arab Emirates (UAE).
In recent years, at the supranational level, and increasingly at the national level, significant efforts have been made to develop legislative changes to regulate the actual interaction between blockchain, smart contract and law.
At EU level, the issue of smart contract regulation is already on the agenda. In a 2020 report. The Law Commission points out that smart contracts are being used in a number of areas without a proper legal framework, indicating that there is uncertainty about the legality of such contracts and their applicability in cross-border situations. This report asks the Commission to examine the modalities for ensuring appropriate balance and equality between the parties to smart contracts, taking into account the weaker party's private interest concerns or public interest concerns. The Law Commission strongly recommends that smart contracts include mechanisms that can ensure suspension and reversibility of their performance and related payments.
It will be very interesting to see what approach the European Union takes in regulating the interaction between the smart contract and the law. As technology advances, using increasingly diverse and innovative decentralised applications and platforms in a variety of areas, legislative and regulatory bodies need to find workable solutions that put a legal framework around the natural processes of society, technology and law. At the same time, decision-making on these challenging issues should ensure free and flexible regulation of the sector in order to continue to stimulate innovation and increase the efficiency of the market mechanism while legitimising its development.
Lawyer Ivanka Tankova
Stankov, Todorov, Hinkov & Spasov Law Firm