What are Smart Contracts?
Whilst most seem to be intrigued with the emergence of blockchain technologies and cryptocurrencies, few understand the present implications and possible future opportunities of these tools. Nick Szabo, a legal scholar and computer scientist first introduced the concept of a smart contract in a peer-reviewed journal in 1997. He defined a smart contract as a set of promises, specified in digital form, including protocols with which the parties perform on these promises[1]. The performance characteristics usually linked with blockchain, are also directly linked to smart contacts: transparent, immutable, irrevocable, programmable, no single point of failure and time-stamped.
This literally means that a smart contract could potentially be a replacement for what we currently define as a contract, whereby parties agree to a set of clauses written in code. Through this blockchain technology, parties remain anonymous although the contract is transparent since it is recorded in the public ledger. It is also self-executing since any condition (for example, an expiration date) executes itself automatically in accordance with the agreed terms in the code.
The present major player in the field of smart contracts is undoubtedly Etheruem, a major cryptocurrency having the second-largest worldwide market cap after Bitcoin. Ethereum is a decentralized platform that runs smart contracts[2] and thus, unlike Bitcoin, has an added virtual machine layer. Other platforms using smart contracts include Waves, Stratis, Hyperledger, Neo and Agrello.
A major misconception surrounding smart contracts is the misnomer that it will signal the end of lawyers and notaries and their current functions. Whilst the emergence of this technology may alter current roles, the legal profession will be vital to make sure that smart contracts will continue to reflect the parties’ wills in the future.
Taking the example of real estate, property transfers currently depend on a centralised system of title ledgers controlled by Public Registries. Blockchain technologies provide an opportunity for governments to decentralised these systems by developing a digitized registry. When acquiring or selling property, this system would alter the current process. Primarily, since a system based on blockchain would in itself be a source of trust, the parties may remain anonymous, and the smart contract would be able to hold assets in escrow and distribute the assets at the finalisation of the contract. This would avoid intermediaries’ costs, considerably reduce current time-frames and facilitate the transfer using cryptocurrencies. Such a shift would lead to a decrease in ownership disputes and an automatic system for settlements.
Some argue that smart contracts are the future, but they are also the present. The Maltese Government has recently announced a pilot project to explore the possibility of issuing educational certificates on the blockchain. The government has also recently set up a task force that is reviewing the best way to introduce virtual currencies and the use of blockchain in Malta[3].
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Chetcuti Cauchi Advocates is a leading law firm within the Fintech industry, where Senior Partner Dr Priscilla Mifsud Parker, and Head of Corporate & Fintech, Mr Steve Muscat Azzopardi are actively advertising and assisting clients to navigate through the new regulatory regime. Should you be interested in setting up your tech company and attaining recognition from the regulatory, launching your ICO under Maltese regulatory framework, setting up a Crypto Exchange or a Crypto Fund, we would be happy to guide you through the regulatory processes.
[1] Nick Szabo, 'Formalizing and Securing Relationships on Public Networks' [1997] 2(9) First Monday
[2] https://ethereum.org/
[3] https://www.timesofmalta.com/articles/view/20170922/local/malta-becomes-first-country-to-explore-blockchain-education.658599
