Today, blockchain, distributed ledgers and smart contracts represent potentially transcendent technology that could revolutionize many industries. Attorneys are guardians of reason and wisdom; however, smart contracts and distributed ledgers are being created now by developers, often without any advice from attorneys. Is it wise or legal for developers to draft smart contracts without attorney oversight?
The answer is that it depends. Adopting a few common-sense measures when deploying blockchain and distributed ledger technology, will help interested parties avoid the executioner’s ax. Justin Steffen, partner with Jenner & Block LLP, sat down with Inside Counsel to discuss why blockchain, distributed ledgers and smart contracts represent potentially transcendent technology that could revolutionize industries.
“Blockchain, distributed ledger technology, and smart contracts are exciting because they offer the benefits of security, transparency, immutability and efficiency,” he explained. “The combination of cryptography and the need to approve transactions through a consensus of network members makes it incredibly difficult to ‘hack’ the blockchain and change previous entries. Coupled with blockchain, smart contracts–digital, self-executing promises or if/then statements committed to code–can be used to increase efficiency and reduce costs.”
These benefits have led enterprises to explore using the technologies to facilitate securities trade clearing and settlement, supply chain and trade finance management and to automate the insurance claims payment process. Unlike physicians, attorneys do not have to take a Hippocratic Oath, but they are entrusted with advising clients so that they “do no harm” to their businesses, according to Steffen. Attorneys can help clients understand what they can do (legally) as well as whether they should pursue a certain course of action.
“As a litigator, I often witness first-hand the consequences of hastily drawn agreements and poor choices,” he said. “Sage legal advice, however, can prevent those legal molehills from turning into mountains.”
According to Steffen, simply put, developers are necessary, attorneys are not. Most attorneys are not experienced coders–and coding, not legal acumen, is the key to creating a smart contract. Not all smart contracts resemble traditional legal contracts–in fact, many do not. Still, smart contracts can represent the parties’ entire agreement, they can alter parties’ rights and responsibilities, and consulting an attorney before memorializing an agreement or a promise in a smart contract still may be advisable.
So is it wise or even legal for developers to draft smart contracts without attorney oversight? According to Steffen, that depends. The ABA rules restrict the unauthorized practice of law and various states have criminalized the unauthorized practice of law, as well.
“What constitutes the practice of law is murky, at best, and could depend largely on which state you are in,” he said. “Regardless, drafting a smart contract or determining which contract terms can be committed to self-executing code may require the exercise of legal judgment, in which case there is risk involved in drafting a smart contract without attorney involvement.”
As to the wisdom of disintermediating attorneys from the smart contract process, the more complicated the smart contract or the more that is at stake, the wiser it is to consult legal counsel. Attorneys can advise clients about potential legal consequences. Once a smart contract is drafted, it will execute automatically. Consequently, one should understand all the risks, including the legal ones, before finalizing a smart contract.
So what measures can those interested in deploying blockchain and distributed ledger technology undertake to avoid the executioner’s ax?
First, per Steffen, hire a knowledgeable attorney–especially where an individual is interested in drafting a smart contract that resembles a more traditional legal agreement or which affects parties’ rights and responsibilities, an attorney can help. Second, even if one prefers to hire a developer, nothing prevents them from also consulting an attorney. Outside developers can act as translators, turning a customer’s desires into computer code. Finally, attorneys can help themselves and learn how to code. In the meantime, attorneys should be open to working with developers and CTOs.
Amanda G. Ciccatelli is a Freelance Journalist for Corporate Counsel and InsideCounsel, where she covers intellectual property, legal technology, patent litigation, cybersecurity, innovation, and more.