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It’s Time To Break The 5 Most Common Myths About Smart Contracts

Smart contracts are one of technology’s current buzz words.  Much is said about them, much is written about them and there is an increasing acceptance that they will soon officially confirm their position as the next big thing.  However, who really understands them.  Who has taken the step back and asked what their real purpose is, what they really are and who can benefit from them?

As with all new ideas, a lot of what’s being said and written isn’t actually correct.  We thought it may be beneficial if we used our experience in this very specialist area to shatter five of the most common myths surrounding smart contracts.


  1. A smart contract is a contract


No it isn’t.  Although the term ‘smart contract’ is now in common parlance, it’s totally misleading.   It would be much more accurate to call it a smart automated computer code.  The use of the term smart contract has led many people to believe this is something that can assist their business, could be a contract set up on the blockchain to be used as a precedent for terms of business etc.  This is not what a smart contract is (at this stage in any event).


  1. A smart contract is smart


Sorry, that’s another no.  In fact we should revise the previous point; if we were being pedantic we’d also drop the smart and just call it an automated computer code.  Smart contracts aren’t smart in the true sense.  They don’t rely on artificial intelligence.  They rely totally on the architecture put in place by the developers and their solicitors.  Maybe ‘potentially useful automated computer code’ would be a more accurate description.


  1. Arguably smart contracts are fit for purpose


OK, there is lots of buzz about smart contracts but, in their current form, can they do what they’re set up to do?   If you are considering using smart contracts then we’d assume you are in a position where you need to enter into a series of commercial contracts with a number of customers and/or suppliers.  If so those contracts must afford you the highest levels of legal protection so, at this stage at least, a traditional contract may actually be the smart option.


  1. Smart contracts can’t be enforced in a court of law


Any contract can be enforced in law.  As explained above, the definition of smart contract is misleading.    It is hard initially to understand how or why anyone would want to sue in relation to automated computer code.  However, when thinking deeper, each smart contract is based upon a heads of agreement (presumably drafted by a lawyer or the parties to the agreement) the structure will clearly set out how it is to perform.  If the computer code does not perform, then of course, their would be a breach of contract between the developer and the client who required the smart contract.  Another point, if automated, how does it stop?  There have to be mechanisms in place for the client or the developer to pull the plug.  If there are not (or if for example, the developer was the party with the power to stop the smart contract from working and refused to) then the client would have the right to go to court for injunctive relief.

Therefore, whilst computer code itself cannot be sued, the parties to the initial agreement for development certainly can.

Similarly in order to work, each contract will also need to identify the parties involved, their jurisdictions and their responsibilities.  All of this information can be used by a solicitor to resolve a dispute should it arise.


  1. Smart contracts will continue unlegislated and unregulated


As with any new technology or idea, ultimately, legislation and regulations will follow.  There is much talk in the industry now about regulating digital currency exchanges.  To this end,  get ready for the Smart Contracts Act 2025 now!  With so much potential revenue at stake the framework will have to be supported by legislation in the same way as every other part of a commercial vehicle is.  It is also highly likely this legislation will reflect legal precedents being established now.

However attractive bringing new technology into your business may be, smart contract may not be the answer in their current state or, indeed, under its current name.  This technology is new.  It will develop, it will change.  Will it be widely adopted though?  The answer is unknown at this stage,

Selachii LLP are recognised as one of the leading dispute resolution specialists within the fields of smart contracts, Bitcoin and blockchain technology.  Partner Richard Howlett regularly provides commentary for the sector’s leading publications and for leading media outlets including the BBC and speaks on the legal issues affecting these growing commercial technologies.

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