Organizations are increasingly experimenting with applications built on blockchain technology as a means to improve operational efficiency, build greater transactional transparency and ensure that they are well positioned to take advantage of this technology. There are numerous existing and potential blockchain applications, the most advanced and promising one remains smart contracts, the benefits of which include operational simplification, counterparty risk reduction, clearing and settlement time reduction, and fraud minimization. However, as this technology becomes more widespread, many important legal concerns have come to light, particularly with respect to cybersecurity, privacy, and contract law.
I. BLOCKCHAIN AND SMART CONTRACTS: A PRIMER
In its simplest form, a blockchain is a distributed ledger – that is, a list of transactions that is shared among a statistically relevant number of computers. Prior to being added as a block, the integrity of a transaction must be confirmed through a “consensus mechanism” whereby various computers in the network agree to update the blockchain after a transaction has taken place. Once a block is validated and added to the ledger, it cannot be changed unless validated by the entire network, creating a permanent and immutable public record.
Smart contracts are self-executing electronic instructions drafted in computer code, allowing a computer to "read" the contract and automatically execute the stipulations when predetermined conditions are met. Currently, most smart contracts: (i) are relatively simple; (ii) do not govern complex contractual relationships; and (iii) are comprised of relatively basic “if/then” protocols. It is expected that as the adoption of smart contracts increases, so will their complexity.
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