Academic journal article Fordham Journal of Corporate & Financial Law

Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity

Academic journal article Fordham Journal of Corporate & Financial Law

Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity

Article excerpt

INTRODUCTION

The technology, business, financial, and legal industries have increasingly adopted blockchain technology and have developed innovations to blockchain in various contexts within their respective fields. Developers have built increasingly complex blockchain applications and the range of users has grown from a few early adopters to many major corporations and even global banking institutions. Major media and legal publications have broadcasted the precipitous rise of blockchain technology, showing the rapid growth and endless new applications of the technology.1

While the general discussion around blockchain technology and its implications has accelerated in recent years, one particular blockchain technology application garnered attention recently: smart contracts. Smart contracts are not new; the first documented reference to the instrument appeared in the 1990s and described it as a mechanism involving "many kinds of contractual clauses []such as liens, bonding, [and] delineation of property rights" that record and execute transactions between two parties on a blockchain.2

Smart contracts rely on automation and the interconnectivity aspects of blockchain technology to connect parties, exchange consideration, and record transactions.3 Currently, smart contracts are used primarily for simple transactions that require an "if-then" function.4 Financial institutions and banks have begun to invest in and leverage blockchain technologies, recognizing its increased efficiency in automated transactions and reduced operating costs.5

Recently, scholars, lawyers, regulatory agencies, and state legislators have begun pondering how to interpret and regulate smart contracts consistently.6 These parties must address numerous concerns, including unclear compliance requirements and the enforceability of smart contracts under traditional contract law.7

It is particularly difficult to develop compliance guidelines for the administration of transactions on a decentralized platform such as a blockchain.8 From a statutory perspective, state legislatures are beginning to consider and implement blockchain technology laws and determine the enforceability of smart contracts within their jurisdictions.9 As of April 2019, state legislatures have considered 133 blockchain technology-related laws.10 Of those, only seven proposed, passed, or dead bills relate to smart contracts.11

Part I of this Note discusses blockchain technology and its current and future applications. Part II describes the growing field of smart contracts and discusses the enforceability of smart contracts according to contract law. Part III considers legislative movements currently in consideration in state capitols across the United States. Specifically, this Part discusses two different movements emerging in state legislatures: 1) proactive regulation, and 2) a hesitance to legally recognize smart contracts. Finally, Part IV contemplates a uniform code, based on the Uniform Electronic Transactions Act, which states can adopt to legitimize and legalize smart contracts.

I. SMART CONTRACT FOUNDATION: BLOCKCHAIN TECHNOLOGY

A. BLOCKCHAIN BACKGROUND & TERMINOLOGY

The history of blockchain technology is difficult to summarize. In testing digital code and various related theories, coders and developers discretely developed many early blockchain innovations with limited collaboration or guidance.12 Most commentators point to the invention of Bitcoin in 2009 as the seminal moment for blockchain technology's explosive growth and mainstream recognition.13 Nakamoto's white paper delineated Bitcoin and, more importantly, the necessary underlying blockchain technology used by the cryptocurrency.14 Bitcoin could not exist without the foundation of a peer-to-peer network revealing a chronological record of transactions, the essential function of blockchain technology.15 Thus, other applications soon developed using the same decentralized foundation to record and transfer data between transacting parties. …

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