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Blockchain, Smart Contracts, what else?

For a long time, the world of law believed it was free from disruptive technological developments and yet, it is now being quietly threatened by the emergence of an IT system that appears to attack its most fundamental concept: the contract. The profusion of conferences, symposia, seminars on the blockchain and smart contracts highlights the confusion rather than identifying the issues.

October 2017
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lire en français
Executive Summary

The first difficulty lies in the identification of the object: what is a blockchain and what do these so-called smart contracts represent? In fact, even if Bitcoin is probably the most illustrative example of the use of blockchains, it remains difficult to describe the latter as a coherent set of techniques. The main idea is to create an encrypted and distributed register of transactions that allows secure exchanges between two parties, for example a seller and a buyer. The technical problems that must be solved through the implementation of an electronic currency consist in ensuring that all exchanges are performed in a unique manner – to avoid paying several sales with the same ticket – and banknotes must be impossible to duplicate. As a result, Bitcoin solves these problems by using electronic encryption and encrypted data blocks distributed over several computers hence creating enough references to make their falsification impossible.

This quick description immediately reveals one crucial element: blockchain technology is not a specific invention, like a cryptography technique. More of an architecture than combines several pre-existing techniques to solve a specific problem. For this reason, new architectures must be developed for each new problem. If necessary, they will free themselves from the solutions chosen for the canonical form of blockchains. This leads us to our first important remark: in the world of engineering, we solve problems without bothering about concepts i.e. it really doesn’t matter if the offered technical solution uses deep learning, big data or blockchain. What really matters is the relevance of the solution, even if it “simply” combines proven techniques. But these solutions must be sold by issuing distinctive signals that will alert decision-makers: it is the role of the modernist terminology that surrounds this universe.

The development of smart contracts is an extension of the blockchain approach: once a secure exchange is in place, the mechanism can be supplemented by a program that is not limited to the exchange of a virtual currency but will condition this exchange to a set of parameters. The program can therefore trigger a payment if a given condition is met. The recent announcement by Axa of smart contracts for an insurance on flight delays is based on the following principle: the contract subscription uses an algorithm that consults a database of flight delays and pays the expected amount to the policyholders. This contract is managed through Ethereum, an architecture created in 2014 to generalize the Bitcoin approach to any kind of program. 

Until then, nothing really threatening for legal experts. If we were to erase the terminology and stick to techniques, the Axa service is an automated service that can be developed based on more classical architectures. It is difficult to see anything radically new for the lawyer in this context since the consumer would be entitled to hold Axa accountable if the proposed service did not work in accordance with their expectations.

This is where another dimension of these architectures comes into play: they are based on a global distribution of their contributors and present themselves as transactional protocols that erase any possibility of questioning a particular responsibility. It should be specified, however, that even if the Ethereum network is the result of a collaboration between many anonymous actors, the fact remains that the execution of an individual contract associates two well-identified parties. In the example of Axa, the underwriter of the contract and the insurer. Innovation concerns the tool that supports the contract, not the contract itself. We are in a situation of uberization of the materiality of the contract.

The challenge is to determine whether the use of Ethereum leads to the disappearance of the contractual relationship between the parties. 

The challenge is to determine whether the use of Ethereum leads to the disappearance of the contractual relationship between the parties. If not, the smart contract is a mere technological device which will allow faster and safer performance of reciprocal obligations without disrupting the traditional legal categories. On the contrary, if the insertion of the contractual relationship in the blockchain means that the parties are dispossessed of any possibility of returning or challenging the software operation, then we are witnessing a real legal innovation. This is clearly what Ethereum developers are claiming. But this approach is limited when one moves into the real world: who could venture into a contractual relationship by abandoning any idea of ​​a mastery of the terms of the contract? In fact, the security and confidence claimed by technology are not of the same kind as what is meant when dealing with transactions taking place in the real world. It is therefore not at all certain that the use of blockchain will lead to renouncing to current legal protections.

Hence, it seems to us that the interesting point is not so much the technological architecture supporting these transactions as the contractual relations that sustain the interface between this architecture and physical and moral persons. In other words, an in-depth reflection should be carried out on how to firmly root law in the ether of cyberspace.

Marc Clément
Judge at the Administrative Court of Appeal of Lyon