Blockchain Technology: How Smart Contracts & ICOs Practically Depend on Law

The blockchain technology should engage lawyers as architects of its applications.

You likely heard about blockchain technology and its applications, such as smart contracts, Bitcoin, other cryptocurrencies, and ICOs.

What’s that all about?

Blockchain Technology

In a nutshell, the blockchain technology is a distributed ledger system that exists in the form of decentralized database. In plain language, blockchain is a network of computers keeping logs of transactions.

The goal of blockchain is to execute transactions among parties directly. This technology cuts out middlemen, such as banks. Blockchain thus reduces transactional friction and costs.

Blockchain Law

Now, what does this technology have to do with law?

Shortly speaking, a lot!

Decentralized per se, the blockchain relies on legal systems, which are centralized.

Firstly, the blockchain technology eventually becomes regulated in various jurisdictions. For example, the state of Delaware now explicitly allows companies incorporated in Delaware to use blockchain to track their shareholders and outstanding stock.

Additionally, the transactions that the blockchain serves are usually regulated. So, the blockchain projects also depend on the laws governing their subject matter.

Now, how much does blockchain technology depend on law? Let’s consider a few examples.

Smart Contracts

One is a smart contract. That’s a contract that executes automatically under certain conditions. This is where blockchain makes lawyering much more efficient.

Smart contracts essentially convert legal terms turn into a computer code. The terms and code correlate as substance and form. 

To put this differently, the code is largely a reflection of the terms – just like a photo is of a painting.

Notably, the terms answer the questions of 5Ws:

• Who (subject)
• What (object)
• Where (location)
• When (date and time)
• Why (purpose)

Importantly, the terms determine a condition for something to happen. That‘s the “if-then” relation.

In contrast, the code answers the question of how. The code replaces paper and self-executes. This creates a legal automation.

ICO

Another example of dependence of blockchain on law is an initial coin/currency offering (ICO). Sale-and-purchase of tokens may easily qualify as an investment contract falling into securities under the U.S. law. 

As such, offering or sale of tokens may be subject to mandatory registration with the US Securities and Exchange Commission (SEC), unless a valid exemption applies. To this end, all token offerings should pass a legal test.

Apart from falling under securities law, the ICO tokens may eventually encounter a separate regulation. This is, for example, similar to drones, which until recently were subject to general regulations that apply to huge airplanes.

Legal Architects

Lastly, what role would lawyers play in an automated world?

Like any business, the blockchain technology projects need a legal support, even notwithstanding the fact that all actions happen automatically online. 

In fact, lawyers play a vital role and can determine whether a blockchain project would succeed or fail. For example, The DAO tokens failed to comply with the US securities law and ultimately collapsed.

Lawyers should also act as architects of smart contracts. Designing the systems, the lawyers would be able to make the smart contacts legal, valid, and enforceable.

To conclude, smart contracts, ICOs, and other blockchain applications should seriously take into account the legal framework.

With this perspective, let’s look together into the future of blockchain technology law.

If you have any questions, feel free to contact us.

Now, what do you think of the relation between blockchain and law? Just leave your comment below.