Smart Contracts — Can Machines Rule the World?

A ‘Smart’ Introduction.

You may all be famil­iar with ‘Skynet’ — the fic­tion­al neur­al-based con­scious group and arti­fi­cial intel­li­gence sys­tem that serves as ‘the Ter­mi­na­tor’ film series’ main antag­o­nist. In the movie series, Arti­fi­cial Intel­li­gence (AI) had reached a stage where it was final­ly able to con­scious­ly decide and exe­cute its plan [albeit rather unilaterally/independently] with­out any form of human inter­ven­tion.

We might have chuck­led at the very notion of such a pow­er­ful inter­face man­ag­ing to alter the des­tiny of the world, but there are signs a ‘Skynet form’ of sys­tem might slow­ly start to per­me­ate our dai­ly lives.

Smart Contracts.

Smart con­tracts have the poten­tial to rev­o­lu­tion­ize the way we think, work and enter into agree­ments. You might recall that we had touched upon these form of inno­v­a­tive ‘dig­i­tal agree­ments’ in pre­vi­ous arti­cles. Blockchain tech­nol­o­gy [the ubiq­ui­tous term which will short­ly also be reg­u­lat­ed via the Mal­tese Dig­i­tal Inno­va­tion Author­i­ty] pro­vides an archi­tec­ture for a DLT [Dis­trib­uted Ledger Tech­nol­o­gy] on which we can auto­mate the exe­cu­tion of ‘processes/commands’ using Smart con­tracts.

Integrating the Blockchain Technology.

In as much as the above­men­tioned descrip­tion can sound a tad com­plex and tech­ni­cal — a basic appre­ci­a­tion is some­times all that is need­ed. Con­sid­er­ing the fact that Blockchain tech­nol­o­gy was specif­i­cal­ly designed to han­dle Bit­coins and Cryp­tocur­ren­cies, this rev­o­lu­tion­ary ‘plat­form’ is now being import­ed and inte­grat­ed into Con­tract Law.…literally!

How Law Governs a Smart Contract.

Imag­ine the tra­di­tion­al con­trac­tu­al agree­ment. Two ran­dom per­sons meet up and con­sen­u­al­ly agree to sell a vehi­cle. In the Mal­tese sce­nario, our Civ­il Code [built on Roman Law] would serve as the legal basis and prin­ci­ples such as: Caveat Emp­tor, Lex Loci Con­trac­tus and Arti­cle 966 of the Civ­il Code would apply. More often than not, doc­u­ments are exchanged, sig­na­tures are indeli­bly left on papers, pho­to­copies are need­ed, per­mits are issued and sev­er­al meet­ing are arranged. The process is cer­tain­ly tedious and most def­i­nite­ly bureau­crat­ic.

With a smart con­tract sys­tem, codes are cre­at­ed to reg­u­late a dig­i­tal­ly-based con­trac­tu­al arrange­ment. Imag­ine a dig­i­tal box with a ver­i­fi­ca­tion code need­ed to access a ’smart key’. This ‘key’ would then con­tain the loca­tion of the car includ­ing the garage num­ber accord­ing­ly. In order to obtain this ‘key’, a suc­cess­ful dig­i­tal trans­ac­tion would have to be cre­at­ed [approved by the sell­er and accept­ed by the buy­er].

Creating ‘code’ for a Smart Contract.

The ‘code’ itself [reg­u­lat­ing this pur­chase] would act as the ‘law’ — mon­i­tor­ing the trans­ac­tion. The buy­er would only be able to com­plete his trans­ac­tion once all require­ments would be adhered to. In oth­er words, the smart con­tract itself would gov­ern a ‘legal rela­tion­ship’ between the par­ties — a rela­tion­ship facil­i­tat­ed by elec­tron­ic means with­out the need of: paper, pho­to­copies, fax­es and more impor­tant­ly an inter­me­di­ary [No notaries, lawyers or accoun­tants would be need­ed to help gov­ern the trans­ac­tion].

The most obvi­ous per­ti­nent ques­tion ema­nat­ing from the above asser­tion would sim­ply be: ‘But how does one ascer­tain that the code cre­at­ed is in fact based on pre-exist­ing laws?’ This is where the ‘Ora­cle’ comes in — the Ora­cle [can be any com­pe­tent & qual­i­fied per­son] acts as a link between the blockchain technology/smart con­tract and the ‘real world’. Once the Ora­cle checks the ‘terms and con­di­tions’ of the agree­ment, these terms are then ‘trans­port­ed’ and ‘written/coded’ into the smart con­tract itself [this is where ‘Smart Laws’ also come into play where hypo­thet­i­cal­ly ‘human inter­ven­tion’ can poten­tial­ly also help reg­u­late a smart con­tract]. It is only once all these con­di­tions are hon­ored that the smart key would be acces­si­ble to the buy­er and a suc­cess­ful pur­chase would be com­plet­ed.

The ‘Nature’ of a Smart Contract.

Smart con­tracts there­fore thrive on self-exe­cu­tion and self-gov­er­nance and by using Blockchain technology/ DLT — the sys­tem guar­an­tees that the infor­ma­tion is in itself per­ma­nent, immutable and secure. To note that Blockchain tech­nol­o­gy is already being used through­out the world to facil­i­tate the use of Smart Con­tracts. Coun­tries are already look­ing into imple­ment­ing this struc­ture into local Land Reg­istries, Vot­ing Sys­tems, Insur­ance con­tracts and Health­care sys­tems.


Is this tru­ly the ‘dawn of the machines’? Does this spell the end for all Lawyers, Notaries, Medi­a­tors and Accoun­tants? Valid ques­tions which are cer­tain­ly impos­si­ble to answer but per­haps the days of AI being sim­ply enjoyed at the the­ater are vast­ly fad­ing and the dawn of a new-tech­nol­o­gy based modus operan­di is quick­ly gain­ing trac­tion.

Dis­claimer: The above-men­tioned arti­cle is sim­ply based on inde­pen­dent research car­ried out by Dr. Wern­er and Part­ner and can­not con­sti­tute any form of legal advice. If you would like to meet with up with any of our rep­re­sen­ta­tives to seek fur­ther infor­ma­tion on how to apply Blockchain Tech­nol­o­gy into your busi­ness ini­tia­tives, please con­tact us for an appoint­ment.

About Dr. Michael Calleja

Dr. Michael Calle­ja, born on the 07.01.1988, stud­ied law at the Uni­ver­si­ty of Mal­ta from 2006 till 2012. He grad­u­at­ed Bach­e­lor of Laws & Euro­pean Stud­ies in 2009 with a Sec­ond Class Upper Degree and grad­u­at­ed Notary Pub­lic in 2010. He suc­cess­ful­ly defend­ed his the­sis enti­tled: ‘Beyond the Bosman Rul­ing: Con­trac­tu­al Dis­putes in Foot­ball and the Spe­cif­ic Nature of Sport in the Euro­pean Union’ in 2012 and obtained his Doc­tor of Laws (LL.D) accord­ing­ly.

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