Blockchain technology for cryptocurrency
Distributed ledger technology, including blockchains, allow for decentralised, transparent and immutable records of a transaction, including crypto transactions. This enables all participants in the blockchain to operate within an agreed protocol established for that blockchain, creating a trust-less network where no one participant has more access or control than the other participants. The transactions for exchanging, creating or storing crypto on a blockchain are often referred to as a smart contract.
Smart contracts for cryptocurrencies
A traditional contract, whether written or agreed verbally, is the evidence of the terms the parties have agreed in respect of their rights and responsibilities. A smart contract is a computer programme which manages the performance of part or all of a traditional contract. A smart contract behaves by being fed certain data, which triggers the next performance step. For example, a protocol sets a mathematical problem to be solved; the answer is the input data which is validated by the other participants on the blockchain and on validation, a pre-defined amount of a specified cryptocurrency is transferred from one wallet to another.
Contracts, including smart contracts for the movement of cryptocurrency, concluded through or recorded on blockchains must meet the standard elements of a contract if the participants wish to rely on them to enforce legal rights. This approach has been confirmed in the UK through the 2019 Jurisdiction Taskforce Legal Statement on Cryptoassets and Smart Contracts, which states that smart contracts are (subject to the parties' words and conduct) capable of meeting the standard contractual elements of offer and acceptance, consideration, intention to create legal relations and certainty.
Offer and acceptance
An offer, in the contractual sense, is a promise made by one party to enter into a binding agreement with another party on specific terms. An offer is distinct from an invitation to treat, which means one party is seeking to negotiate the terms on which it might ultimately enter into an agreement. A simple example involves a bag of crisps: in a local grocery store, the presentation of the crisps is likely to be an invitation from the grocer to the consumer to enter into an agreement, but falls short of indicating the grocer is settled on the terms of the sale and intends to be legally bound. If the consumer is willing to pay the correct price, the grocer may still choose not to part with the bag of crisps. However, that same bag of crisps presented in a vending machine is likely to be the subject of a firm offer which can be immediately accepted by the consumer. Unlike the grocer, the vending machine is not capable of negotiating and on payment of the correct amount, it will dispense the bag of crisps.
Acceptance is the counteraction to an offer; it is the assent to the offer exactly as presented. Any variation to the offer is not acceptance but a counter-offer which is itself subject to acceptance. This flipping of offer and acceptance means the offeror can become the acceptor, and vice versa. Acceptance must be clearly communicated, which traditionally involves signature but can also include conduct or even texting a thumbs-up emoji. If a manner of acceptance is specified in the offer, that manner must be followed to ensure the acceptance is binding.
A smart contract can be thought of as the vending machine; the mathematical problem is put out for acceptance on the blockchain like the vending machine offering the bag of crisps, and the protocol requires that the validated solution is input through the blockchain to release the corresponding cryptocurrency into the specified wallet.
Consideration
A core element of contracts is that each party must get 'something'. That 'something' is known as consideration. Continuing the bag of crisps example, the consumer pays to the grocer consideration in the form of cash (regardless of whether payment is made by cash, card, bank transaction or other method), and receives consideration in the form of the bag of crisps. While consideration in its simplest form is cash for goods, or cash for services, this is not always the case. The parties to a contract might agree on certain behaviours, such as keeping each other's sensitive information confidential, and the promise to behave in that manner can itself be the 'something' given and received.
The law is not concerned with the adequacy of consideration. Whether the grocer or vending machine agrees to sell the bag of crisps for 1p or £100, either is good consideration in the eyes of the law. This can cause complications in volatile assets such as cryptocurrencies. If a payment is made and a lower than anticipated value in the selected crypto is received due to a sudden market shift, disputes might arise. To manage this risk, any blockchain terms or protocol should clearly stipulate that the consideration is paid for the transfer of the crypto, not a guaranteed valuation of the crypto at the point of transfer.
Intention to create legal relations
A contract is only a contract if the parties intended to be bound by it. In a typical commercial situation, the court will presume that the parties did intend to enter into a contract and understood they would be bound by it. Even in respect of smart contracts which might be automatically triggered, it is likely that a party will struggle to argue that it did not intend to be bound by the agreement which involved that automatic trigger. The participants' agreement to operate within the protocol for the blockchain which enables the execution of the smart contract would likely be a relevant factor.
Certainty and completeness
A binding contract is only possible if all of the material terms are agreed. There are two ways in which a contract can fail this requirement; either for incompleteness, or ambiguity. While a court may find that the parties intended to be bound, and might even have paid good consideration, if the terms to which the parties purportedly agreed are not complete or clear, the contract might not be enforceable. Smart contracts seem at low-risk of failing this element, as the code should not execute if the instructions within it are not clear. Although, a consumer craving a particular flavour of crisps from a vending machine might not be happy with a smart contract which is ambiguous about the flavour which will be released! There have been complaints from users about confusion arising from different protocols applying on crypto networks (particularly where a network will allow a transaction in respect of a cryptocurrency it does not support), however these have not yet been fully assessed by a court.
If a situation did arise whereby a smart contract came to be interpreted, the court would be confined to interpretation of the code itself and limited other evidence would be admissible. An important distinction would be whether the smart contract was merely implementing the parties' rights or responsibilities under a contract, or whether the smart contract itself contained the terms which defined what those rights or responsibilities are.
To avoid the risk of uncertain or incomplete smart contracts, it is advisable to pair a smart contract with a more traditional contract which unambiguously sets out the parties' understanding of the deal which has been struck, especially if high values of cryptocurrencies are at stake.
Not quite smart enough?
Contracts in their various forms must meet the basic requirements to give each party the legal comfort that their bargain is binding. Smart contracts can be an efficient and traceable means of giving effect to a cryptocurrency transaction, but it is sensible to supplement the operational steps which are undertaken through a smart contract with a traditional contract to complete the full picture.
