Against “Smart Contracts”

It is not clear who first coined the term “smart contract” for self-executing transactional processes and logics that play out on Blockchain/DLT platforms, but we applaud that decision.

Yes, you read that right.

1. As Marketing Fodder, It’s Gold

Even though we are against the continuing usage of the term “smart contract” to describe these various on-chain processes, we have to start by giving the devil her due.

The “smart contract” banner is a very catchy marketing ploy. It has been instrumental as an adoption driver. It’s edgy, contrastive and highly-prescriptive: if you’re not hip to “smart contracts,” well, then, maybe you’re just not … smart.

2. Today, “Smart Contracts” Are Dumb

Bigger picture, however, so-called “smart contracts” (“SCs”) are in trouble. The problems with SCs have to do with myriad conceptual contradictions between how developers understand these creatures, how lawyers understand these creatures, and how the public is being educated about these mythical creatures.

Why Worry?

On the one hand, everything seems to be going well for SCs. In the U.S., at least two states (Arizona & our home jurisdiction of Tennessee) have recently passed legislation recognizing the legal validity of “smart contracts.”

“Those Ethereum & EOS and other crypto folks keep saying they’re building ‘self-sustaining legal systems.’ What do you say we show them who’s boss, Senator?” — CleanApp (photo by Kyle Glenn)

Legislative authorities all over the world continue to be studying these curious creatures, and the momentum is building for even more legislation to do the same thing that Arizona and Tennessee did:

Q: Ya’ know, it ain’t altogether clear if these so-called ‘smart contract’ thingies are all legal, so why don’t we pass a law to make ’em legal! Whadya say, Senator?
A: Well, I do declare; I’ve always liked my contracts like I like my interns, nice and smart. Let’s do it!

On a serious note, these types of legislative interventions serve many positive legitimating functions: (1) they give a budding technology greater visibility and credibility within mainstream economic and policymaking institutions; (2) legislation serves an important educational function, raising awareness about the risks and benefits of a new technology like SCs; (3) legislation can help channel parties away from disparate sites of contestation towards known dispute resolution mechanisms like courts; (4) etc.

Any time a legislative or regulatory body adopts some rule that gives any sort of acknowledgement or nod in the direction of “crypto” — the DLT community, by and large, goes positively wild. We get it: legislative approbation and validation feels really good.

“Yeah, another state just passed a law making ‘smart contracts’ legal! Quick, give me my Ledger Nano, I gotta make me some trades on this positive news! Woooooo!!!” — CleanApp (photo by Adam Whitlock)

After years of coding behind closed doors and often facing social ridicule for believing in Bitcoin or crypto, recently-minted cryptonaires can now point to legislation like Tennessee’s Senate Bill 1662 to say,

Look ma’ — you said I wasn’t gonna amount to much by playing all those video games, but now, even Governor Haslam is nodding along. Oh, and by the way, I hope you like the diamond necklace that I got for you.

But as everyone should know, nods of acknowledgement are also how gangbangers meet one another before a duel.

“Crypto regulation in one fist; crypto legislation in the other. You choose with which I will destroy your brother.” — CleanApp (photo by Clem Onojeghuo)

Instead of cheering at the fact that The Jets are starting to “give propers” to The Sharks, maybe the DLT community should slow its roll a bit, and consider whether these legislative/regulatory interventions are just nice ways of keeping friends close, but enemies even closer.

Stop Reading Headlines & Listen to Experts!

Writing for the MIT Technology Review a few months ago, Mike Orcutt wrote a brilliant piece. The title gives a nice flavor of what’s inside:

States that are passing laws to govern “smart contracts” have no idea what they’re doing: legislation meant to clarify things for blockchain developers could end up hurting innovation

Yeah, that was the title. It’s brilliant because it captures the essence of the argument within. But in today’s TL;DR mindscape, titles and headlines are all that many people read, unfortunately.

Want to know how to tell that nobody really read Orcutt’s finely distilled argument? Because the term “smart contract” is still in use. Even though experts who care deeply about the broader DLT project are blowing every possible whistle and waving every possible flag to warn DLT principals of an imminent collision over the misuse of contract and law terminology, everyone seems content to sail full steam ahead.

“Yeah, simmer down CleanApp, we get it that we all need to be more careful about the way we use Legalese, but ‘smart contracts’ is how we made our fortunes. ‘Smart Contract’ is also what I named my yacht, so cut it out and let me keep calling these ‘smart contracts.’ — it’s not like anything bad can happen from just two words. Geez!” — CleanApp

Take a listen to the warning sirens that Orcutt sourced and compiled:

If enough states create differing versions, “it’s just going to be chaos,” says Peter Van Valkenburgh, director of research at Coin Center, a policy think tank that advocates for blockchain technologies.

Here’s another:

New laws are likely to add confusion and unnecessary complexity and cost, says Andrew Hinkes, a lawyer and adjunct professor at New York University’s Stern School of Business. That could hamper technological development. “Laws should not attempt to define technologies that do not have a widely held definition in their relevant technical communities,” says Hinkes.

Even though we’re supposedly living in a new technocratic age, ruled by experts who wield powerful governance tools that they pluck from deep expertise “toolkits,” in reality, here’s a likely response from many DLT folks to these experts’ warnings:

¯\_(ツ)_/¯

One possible translation:

Oooh, experts. It’s not like they’ve ever been wrong before! Lulz — Dude, I totally dropped out of college precisely so I could HODL on to my primal instincts and wouldn’t need to read this boring junk.

As we’ve been explaining for a while, whatever fetish or attachment DLT folks may have for the term “smart contract” — it’s time to let it go.

The benefits of avoiding unnecessary legal scrutiny far outweigh the costs of coming up with a new term and popularizing that new term’s usage.

Changing the “smart contract” name and making a concerted move away from Legalese is the easiest, fastest, and arguably most consequential legal risk mitigation strategy that the DLT community can pursue today.

You don’t need to “trust” some pointy headed experts who represent precisely the type of “centralized authority” you claim to despise.

You can mistrust their motivations all you want, despite the fact that many of the experts who are warning about — (1) chaos, (2) incoherence, (3) unnecessary complexity, (4) regulatory blowback, (5) added costs, (6) confusion, (7) reduced innovation! — are doing so from positions of hardcore respect for what DLT has pulled off, and from rational considerations of shared interest.

We get it. So let us speak bluntly:

Look, DLTers, you’re smart folks, so we understand that you may not want to rely on headlines, or experts —so just take a look at the source code itself.

What you find should send shivers down your back.

Stop Reading Headlines & Read The Law!

By way of example, here is Tennessee’s Senate Bill 1662, signed into law by Tennessee’s governor on March 22, 2018.

Here’s how Tennessee Code Annotated, 47–10–201(1), now defines DLT:

“Distributed ledger technology” means any distributed ledger protocol and supporting infrastructure, including blockchain, that uses a distributed, decentralized, shared, and replicated ledger, whether it be public or private, permissioned or permissionless, and which may include the use of electronic currencies or electronic tokens as a medium of electronic exchange;

Okay-ish. Let’s keep going.

Here’s how the Tennessee legislature and governor insist that “Tennessee law” defines “Smart contract” in Tennessee Code Annotated, 47–10–201(2):

“Smart contract” means an event-driven computer program, that executes on an electronic, distributed, decentralized, shared, and replicated ledger that is used to automate transactions, including, but not limited to, transactions that:
(A) Take custody over and instruct transfer of assets on that ledger;
(B) Create and distribute electronic assets;
(C) Synchronize information; or
(D) Manage identity and user access to software applications.

Now, hold on! First off, the definition is already worryingly under-inclusive and over-inclusive. Second, “custody,” “assets,” “software,” “events,” … what the “smart contract” does this all mean?

Third, we emphasize the legislature’s and governor’s understanding of the law, as opposed to just saying that this is Tennessee’s new “smart contract law” because, as we all know, in a trilateral system of government, Tennessee courts will also have a thing or two to say about “smart contracts” once cases and controversies start percolating up judicial dockets.

And when courts in Arizona, Tennessee and other jurisdictions with “smart contract legislation” start looking closely at the Legalese, the certainty and verifiability and autonomy that DLT code-coders thought they were scripting into these things called “smart contracts” starts to fall apart.

Here’s how and why.

Law is a Site of Contestation

One of the first lessons many law students get in law school is that there is no such thing as a fixed legal construct, or an immutable legal form.

Law is relational. Law is contextual. Law is site of contestation.

So when smart contract disputes arise, say, in Tennessee — which has global corporate giants like FedEx implementing DLT/“smart contract” solutions, and a very active DLT startup scene — parties will make the legal arguments that they need to make to win their case.

Because these will be cases of first impression, there will be many disputes where the legal status of a particular instrument will be at issue — Is this thing even a contract? Is it a ‘smart contract?’— as well as, who should decide whether this is a ‘smart contract’ — ? Is this a question of law for a judge, or a question of fact for a jury? Etc.

In a dispute where the stakes are high, the big guns come out.

It’s at this point that earlier drafts of legislation can be introduced, like this jewel from early in the legislative drafting process of Tennessee Code Annotated 47–10–201(1):

“Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared, and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable, and provides an uncensored truth;

As DLT continues its quest to vanquish “Trust,” please consider the serendipitous appearance of “uncensored [T]ruth” in our legal imaginaries of what DLT & “blockchain technology” is.

If you’re a DLT developer, be honest: Did you know you were in the “uncensored truth” business?

All of these definitions, all of this conceptual slippage, all of the chaos can be and will be now used as legal ammo in legal fights. (And this, of course, does not even begin to grasp the conceptual nightmares and gross unpredictability that comes from #CryptoLawyers self-nominating as “crypto law experts” to testify on behalf of their buddies/clients that X was a “smart contract,” and Y, of course, wasn’t.)

3. With CryptoLaw, Check Your Lawyer!

We all know the adage about law-making and sausage-making: these processes are messy. That’s why received wisdom suggests we leave these questions to the “professionals.”

Often, that’s good advice.

However, in the context of the budding field of CryptoLaw, that received wisdom is wrong.

Non-lawyer developers and investors are advised to familiarize themselves with basic legal forms and institutions — such as the basics of contract law.

The suggestion isn’t that everyone should become a lawyer and train for expertise in CryptoLaw. Instead, baseline knowledge of law allows non-lawyers to exert a check on the growing power of CryptoLawyers.

4. Seeing the Legal Matrix

What non-lawyers will see once they start their self-directed law study is that “law in action” is often radically different from so-called “law on the books” — especially in emerging legal fields like CryptoLaw.

Law School

This may come as a surprise to coders who are used to rigid logics, and expect similar rigor from legal forms and processes.

But for lawyers all over the world, the messy gray areas between “law in action” and “law on the books” is … home turf. These gray areas are why the world needs lawyers, and why lawyers can never be replaced by code.

Gray areas are not bugs in the system; they are the system.

Sample Legal Gray Matter = Rule (containing Exception (that affirms Rule))

To succeed in a system run by lawyers, it’s extremely important to understand how lawyers actually work to resolve particular disputes. Instead of falling back on wildly inaccurate cliches about ‘lawsuits,’ ‘trials,’ ‘impartial all-law-knowing judges’ and mythical ‘triers of fact’ — crypto folks should understand that law people are just people.

They work hard to get you the best outcome they can, while educating you about the importance of faith in certain baseline rules that structure the Legal Matrix.

Crucially, good lawyers will tell you that there isn’t one correct way of doing legal battle. Instead, in a big enough legal fight, every tool and tactic is fair game — including tweaks to certain rules that structure the Legal Matrix itself.

Law Library.

5. Legal Practice = Bending The Law

Now that we’ve plugged into reality of legal practice in the global Legal Matrix, we can see that legal practice is nothing more than skilled manipulation of the law and legal processes.

In a very real sense, day-to-day law practice is nothing more than a lawyer folding and bending “the law” to advance a particular client’s objectives.

Please note, we’re using the words “bending” and “manipulation” in their literal senses (bending ≠ breaking; manipulation = changing an object’s or phenomenon’s properties with one’s hands).

Non-lawyers might have thought what lawyers or judges do is just “apply” the law. But application necessarily implies interpretation, which introduces subjectivity and opportunities for bending rules in this and/or that direction, often simultaneously.

Once you see the world for the legal 1s, 0s, and ∞ number of phases between 1 and 0 that it is — you begin to see just how easy it can be for different crews to operate within the box, outside the box, and against the box.

6. Smart Contracts Are a Battlefield

Lawyers, judges, arbitrators, law folks employ every tool to advance their particular legal positions. For instance, returning to “law on the books” & “law in action,” they can turn to legislative history to understand what a legislature or a legislative committee had in mind when they drafted a given law.

This is already happening in the “smart contract” space, and it will only increase once “smart contract” legislation goes to court.

Legal crews (aka law firms) will be able to point to the history of “smart contract” legislation, arguing that this legislation was passed to “legalize” or “formalize” the status of new technologies like “smart contracts.” Lawyers can glean the overarching object & purpose of “smart contract laws” like Tennessee’s 47–10–202(c) from the plain letter of the statute:

Smart contracts may exist in commerce. No contract relating to a transaction shall be denied legal effect, validity, or enforceability solely because that contract is executed through a smart contract.

But as Orcutt points out, and as any lawyer anywhere in the world will confirm, if they need to, lawyers will also be able to argue that their particular “smart contract” creature operates outside of the scope a particular statute or regulation, irrespective of the fact that the “smart contract” called itself that.

Skilled CryptoLawyers will be able to argue that legislative interventions and definitions like this one were, and remain, superfluous — in light of the common law of contract and/or another statutory scheme and/or X and/or Y and/or Z, and/or et al.

7. “Smart Contract” Statutes Don’t Displace Cases

A “common law” argument for and/or against enforcement could go along the following lines.

Of course “smart contracts” may exist in commerce! We didn’t need a statute to tell us that: that’s Contract Law 101

Parties can create contractual relationships in any form, by any means, and can call their contractual relationship by any name they desire. The legal tests for contract formation are some of the oldest rules of private law in global legal history. The majority of the world’s legal systems have flexible contract law doctrines that anticipate technological change.
So, why are legislatures rushing to fix things that aren’t broken?

So while dedicated “smart contract” legislation can clarify legal relations, it’s just one of the tools in the lawyer’s toolkit. Lawyers can always invoke other sources of legal authority for and/or against particular legal positions.

8. What Else Are “Smart Contract” Statutes Doing?

If they are not really needed, per se, are there other objects and purposes to “smart contract” legislation and regulatory intervention? The answer, of course, is “Yes!”

Even if it doesn’t clarify underlying legal forms in a material respect, legislation serves numerous other functions, such as educating, legitimating, and claiming jurisdictional reach.

For instance, today’s “smart contract” legislation serves as a very effective exercise of prescriptive jurisdiction and extraterritorial jurisdiction (pursuant to, say, the U.S. Constitution’s Full Faith & Credit clause, and various state & foreign analogues). Translating from Legalese, here’s one of the things that legislators are saying when they pass these types of statutes: “It’s cute that you thought you were creating ‘self-sustaining legal systems’ and ‘smart contracts.’ But so you don’t get ahead of yourself, simmer down, let us tell you what you’re actually creating.”

By continuing to take increasingly legalistic and legal-institutional turns, the DLT community is spurring these types of ad hoc legislative and regulatory interventions. With no apparent coordinated regulatory engagement strategy, the DLT community is ripe for age old “divide & conquer”/“define & tax” regulatory actions.

In terms of on-the-ground effect, “smart contract” legislation only adds more attack vectors for parties that want to enforce a particular contract relationship or want to deny the enforceability of a particular contract relationship. The only people that benefit from learning about this attack vector, from researching how to operationalize it in a particular dispute, and so on — are lawyers.

This should be one of the easiest arguments for non-lawyers to appreciate, and yet, for some reason, it’s not sinking in. So let’s make it clearer.

The main beneficiaries of DLT’s continued usage of the term “smart contract” and more general usage of Legalese — are lawyers.

Try to think of it like this, every time a non-lawyer uses the term “smart contract,” imagine a bell ringing at each 6-minute “analytical increment” as a lawyer does billable work in effort to “understand the legal effect of that Ethereum or MIOTA transfer in light of Tennessee and Arizona ‘smart contract’ legislation.”

If you’re a DLT developer who hasn’t seen this billable code or descriptor yet, please look closely, it’s coming. Your usage of Legalese has real costs, and not just in terms of billables for legal advice. There are deep structural problems with misuse of Legalese like this at global scales.

When we add other jurisdictions that are racing ahead to pass “smart contract laws” —our aperture broadens to appreciate the minefields that DLT has laid for itself. Totally. Unnecessarily.

9. What Should We Do Instead?

Please heed this advice from a crew that ❤s DLTs and eats law-cakes for breakfast: it’s a lot easier to change course now and to abandon “smart contract” terminology altogether than to navigate the complex and drawn out battle lines of national, regional, and global legal harmonization over the next 10–20 years.

Some analysts seem resigned to the latter. Orcutt’s opening line is also the pragmatic overarching theme to his MIT Technology Review piece: “Like it or not, we seem to be stuck with the term ‘smart contract.’”

And it’s the only part of the Orcutt analysis that we disagree with.

No, we aren’t stuck with the term “smart contract.”

Please understand that even our multi-pronged arguments against its continued usage are just scratching the surface of how costly, incoherent, and destructive “smart contract” usage is once it starts smashing more forcefully against established civilian contract dogma and common law contract doctrine.

If you’re a lawyer who needs proof of this, open your hornbooks, practice guides, and casebooks to the doctrine of conditions in Anglo-American contract law. If you’re a non-lawyer, you can save yourself the trouble. The material is inaccessible to non-specialists because even judges often begin their “condition v. term” analyses with admissions that, conceptually and doctrinally, this stuff is really not clear.

And yet, much more so than a “contract” in a legal sense, what we think of as ‘smart contract’ processes in colloquial usage and technical implementation are much closer to the legal fiction of an “express condition,” of an “express condition precedent” variety.

Please note that even when we try to build better legal taxonomies, we’re just restating the problem, only in different terms. We haven’t solved anything; our usage of Legalese just obfuscates the factual dynamics at play between the various participants in a set of specific DLT exchanges.

The key point?

As a term, “smart contracting” opens up a dangerous and totally unnecessary Pandora’s box of legal incongruities.

At CleanApp Foundation, we are doing everything possible within our means to keep developing these arguments and broadening their reach. We do so because these are existential questions for the DLT community, and for us.

Nobody who cares about DLT should view these “legal formalities” as abstractions. If FedEx delivered a package to you recently, wherever you may be, a part of that transactional chain that got you your package on time was governed by the Tennessee law we just started unpacking.

If everything worked out well, you have nothing to worry about, you probably won’t have a legal dispute. But if the FedEx package you expected to receive had a kidney you needed for transplant (or a Ledger Nano S with a nice $82M cache of crypto), and which went missing along the way, your contract rights just got murkier, not clearer with the passage of Tennessee Senate Bill 1662.

Please let this sink in before you celebrate the next enactment of a “smart contract law” or explain DLT to a newcomer or a potential institutional investor as a “smart contract technology.”

Bottom Line

It doesn’t matter if you’re a Winklevoss, a Buterin, a lawyer, or an “institutional investor” — if you continue using the term “smart contract” to describe on-chain processes, logics, and transactional exchanges, you are playing with fire.

If you’re a DLT developer who continues formalizing “smart contract” terminology into your code(s) & constitution(s), you are playing with fire.

By continuing to play fast & loose with Legalese — you’re unnecessarily painting a target on your back. The only people who win from this are lawyers who will gladly come to your aid to block you from the boomerang effect of your own dumb “smart contract” usage. Why put yourself and your community through this trouble?

Stubborn insistence on the “smart contract” moniker is irrational. It’s a classic example of costly institutional path dependence. It’s dumb because everyone is worse off with (1) chaos (2) incoherence, (3) unnecessary complexity, (4) regulatory blowback, (5) added costs, (6) confusion, (7) reduced innovation.

The only reason we take the strident step of calling this continuing usage “dumb” is because someone somewhere had the brilliant idea to use a presumptuous “smart” prefix to describe a fascinating contractual and non-contractual, legal and non-legal innovation.

As a marketing tactic, it was a master stroke. Kudos. Respect. In that sense, yes, an actually smart move. But now that the heavy lifting has been done, now that the world sees the potential of these technologies, the term must be banished, tightly compartmented, or at a minimum, severely qualified.

There’s nothing smart about opening yourself, your crew, and your community to unnecessary legal risk.