Evidence Meeting  6 – Smart Contracts

 In Evidence, Evidence Meeting Overviews

For the full overview, including written evidence submissions, please download the PDF Evidence Meeting 6 Overview here.

Video recording of the Evidence Meeting available below.

1.   Details

  • Date: 20 November 2018
  • Time: 5:30 – 7:00 pm
  • Location: Boothroyd Room – Portcullis House

Chaired by Damien Moore

Secretariat – Big Innovation Centre

2.   Purpose

The mission of the All-Party Parliamentary Group on Blockchain (APPG Blockchain) is to ensure that industry and society benefit from the full potential of blockchain and other distributed ledger technologies (DLT) making the UK a leader in Blockchain/DLT’s innovation and implementation.

Evidence Meeting 6 explored the potential of Evidence Meeting 6: Smart and Intelligent Contracts

3.   Evidence Givers

  • Shirley Bailey-Wood, Director of Information Solutions, BSI Standards
  • Peter Hunn, Founder, Accord Project
  • Charles Kerrigan, Partner, Banking & International Finance, CMS
  • Siobhan McKeering, Lawyer, The Law Commission
  • Christina Blacklaws, President, The Law Society
  • Kevin Gidney, CTO & Founder, Seal Software
  • Vinay Gupta, CEO, Mattereum

4.   Questions for Inspiration

  1. What is the future of contractual transactions? (Intelligent and smart contracts)
  2. What does it mean for financial, legal and commercial stakeholders? (people, shops, investors, banks, legal practice, insurance, others)
  3. How might blockchain revolutionise the legal industry, contract writing, other sectors using contracts and how IP is transacted?

5.   Summary

APPG on Blockchain met on the 20th of November to discuss the impact of blockchain technology on smart and intelligent contracts. The meeting was chaired by MP Damian Moore and included,

The discussion evolved around two opposite positions towards implementation of smart and intelligent contracts with most of the speakers focusing on the positive aspects of the transformation while both Charles Kerrigan Partner, Banking & International Finance at CMS and Kevin Gidney, CTO & Founder at Seal Software from Seal Software, brought forward some negative consequences and suggested solutions. The focus was on data and smart and intelligent contracts providing an infrastructure for data transfer, but missing laws on data use to ensure availability, liability and security.

  • Standards and Harmonization

Standardization will enable the market acceptance of smart contracts” – said Shirley Bailey-Wood, MBE, Director of Information Solutions at BSI Standards, who opened the discussion with presenting BSI and their work on smart contract standardisation. The BSI standards series in development on blockchain will aim to enable greater acceptance with businesses of blockchain as an emerging technology.

Shirley argued that one of the standards under the BSI portfolio, entitled “Smart Contract that may be Legally Binding – Technical Specification”, will address how smart contracts are written, how they are enforced, and how to ensure that the automated performance of an intelligent contract is faithful to the meaning of any relevant contractual documentation.

BSI is specifically developing a new fast track standard known as Publicly Available Specification (PAS) in partnership with Accord Project. The intended outcome is a “code of practice” for the technical implementation and use of smart legal contracts.

Shirley Bailey-Wood highlighted that to gain mass market usage, smart contracts need to be taken up by the technology community, but more importantly, accepted by the judicial system and those in organisations who do not necessarily have, or need deep technical expertise.

For this to happen, the privacy and security principles need to be built into technology, so businesses and consumers are confident in blockchain.

The fact that different laws exist in different jurisdictions adds complexity ensuring smart contracts implementation.

Harmonising those was highlighted by Charles Karrigan from CMS, who pointed to the differences in English and French law. The former being based on freedom of contract, the latter on civil, commercial and mixed agreements.

Adding to that, there are hard problems of equity, good faith and fairness as well as contracts that are negotiated as opposed to regulated.

Given that smart contracts change the nature of the very transaction among people, the Law Commission, that provides recommendations and advice to Government on law reform to ensure fair, modern, simple and cost-effective laws, has started a project on smart contracts to ensure that the law is sufficiently flexible and precise to apply in a global digital context.

Siobhan McKeering, lawyer at the Law Commission, posed critical questions on which the Law Commission will seek consultations, launching a call for evidence in early 2019. These are:

  1. Questions of liability – what happens when a smart contract does not execute an agreement as expected, and how is liability allocated for any resulting loss.
  2. Questions as to whether tokens are intangible property and whether legislation such as the Bills of Exchange Act 1882 should be reviewed
  3. Questions of contract law, including interpretation, applicable law and remedies.
  • Legal use and framework

As a response and a possible solution, both BSI and Accord Project propose a framework that could help to ensure that a relevant environment is created in which the transformation to smart contracts can take place.

BSI is working on interoperability and compatibility frameworks standards to avoid technology lock-in, thereby reducing the risk for consumers and improving their likelihood of acceptance of the new type of contractual relations. BSI recommends that government engages directly with a wider stakeholder community via HMG to bring insights, perspectives and experiences on blockchain and to shape workable solutions.

On the other hand, Accord Project proposes a framework that would work firstly for law practitioners before consumers can take advantage of the implementation of smart contracts.

There are many advantages of smart contracts, as pointed by Peter Hunn Charles Kerrigan. Before we reap the benefits at the consumer level, there is work to be done to prepare the legal practice for a big change.

Peter Hunn expressed the need to facilitate conditions to allow stakeholders to use and experiment with technology safely and with an appropriate degree of certainty. He believes that smart contracts start out to:

  1. Be partially computable – through a concept such as “smart clauses” and
  2. Not necessarily “self-executable”

He highlighted that for this environment to exist, we must not rush into regulation and develop a three-pillar framework:

Viney Gupta, CEO at  Mattereum focused on a key reason for Smart Contracts- an application for “moving things”. In that, smart contracts are an extension of using a computer for drafting a contract, which he believes means that there is no need for strong regulations. He explained that what is needed is a system for identification of assets: there should be legal titles of goods/copyrights/patents of what exists and what does not.

Once we develop such framework that will support commercial infrastructure to develop, we will be able to transact in a more comprehensive manner and gain value of goods and services not yet identified- smart contracts will only allow automation of contracts and facilitation of legal transactions.

  • Law vs lawyers

Another difficulty in this complex environment has been noted by Charles Kerrigan when he caught everyone’s attention by using the phrase: “Don’t assume that lawyers have the answers”.

Charles Kerrigan pointed to the fact that like any other persons, lawyers have preconceptions.  For example, a lawyer would always consider the fact that any specific law may contain hidden policy choices.

Charles Kerrigan added:

  1. Lawyers naturally want to categorise and systematise things they deal with – it’s too early for smart contracts – we need to see what they do not put them in boxes
  2. Lawyers are trained that contracts have certain named features – offer and acceptance, consideration – smart contracts don’t meet these criteria – it doesn’t matter – the current question is what they can do in practice not what they should do
  3. Contracts have these “features” because they address defects that courts have found in agreements which they believe should not be enforced – there is a major implicit assumption – that courts are required for enforcement

Christina Blacklaws from the Law Society talked about the impact on smart contracts on the legal profession and reckons that Smart Contracts “can be a lawyer’s friend”. Law on Smart Contracts will change both parties (…) it can reduce the workload of litigation lawyers, but it will require further understanding of computer codes by lawyers of smart contracts. It will reduce the groundwork of transaction for a lawyer but it will have to have more regulation and a safe online space, so there is more work to be done to ensure that businesses are compliant with regulations of every sector

. The key point Christina Blacklaws made is that “the legal consequences that have to be explained to humans and not smart contracts themselves. Even if the contract is self-executing, it doesn’t mean that the terminology will be understood by the system, e.g. “in good faith”; the work will be simply different for lawyers, but they will not lose their professions.

 

  • Negative consequences and difficult questions

Lastly, we touched upon negative consequences of smart contracts and the need for smart contracts become more intelligent, as expressed by Kevin Gidney from Seal Software.

Kevin Gidney brought forward an issue relating to the use and availability of the data that is used within a Smart Contract. Questions of data ownership, the use of the data for teaching / learning from and where data is used beyond the original intent. Another example he described refers to the storage and security around the information.

Kevin Gidney proposed some very key questions:

  1. With contractual data potentially holding key personal information such as PKI (in the case of employment agreements or notary items), how will this information be secured in a way that is both safe and usable?
  2. In addition, how will this information be removed when or if regulations change on how the data is managed or if at the request of users?
  3. Finally, how will Smart Contracts deal with people passing away, and what is kept of the person’s digital fingerprint?

Furthermore, smart contracts are limited in performance and scope. They are simply a method to automate simplistic contracts so how will this eventually scale to account for more complex contracts, where a real representation of an agreement can be presented and learned from.

  • Oracles

One of the key issues relating to Smart Contracts is the use of Oracles. Kevin Gidney discussed how Oracles are going to be mandatory for auto-completion of contracts based on real-world events. New questions arose:

  1. Who controls those and how can they be stopped from being hacked?
  2. Do governments control them?
  3. And is a consensus of answers is being used?
  4. Does this not then undermine the entire notion of decentralised and trust less systems?

6.    Recommendations

In terms of the “practical steps” that government can take, when it comes to standards the most practical step is for HMG is to get involved directly with the wider stakeholder community that is already engaged in this work, to bring their insight, perspectives and experience on blockchain to the wider community and to help shape workable solutions. In the future BSI would also welcome HMG support to encourage implementation of the resulting standards to ensure the technology reaches its full potential – Shirley Bailey-Wood, Director of Information Solutions, BSI Standards

In our view, smart contracts should become more intelligent, we all know that if quantum computing does become a reality at room temperature, blockchain and security becomes hackable. And this must be accounted for in a more intelligent way, and have this accounted for within the base design of any Intelligent Contract system – Kevin Gidney, CTO & Founder, Seal Software

Questions to work by Charles Kerrigan, Partner, CMS:

-Regulation where the regulator has less information than firms (Pigole p84)

-Automation is leading a shift from negotiated contracts to regulated contracts

-Need for a standard e.g. acceptable outcome

-A role for insurance, at least where the problems financial risk and loss

-Recognition of digital assets – should information be property?

Goverment should support the development of a framework similar to that I have outlined. Doing so enables the UK to move forward in a concerted effort to build the appropriate techno-legal foundations into our legal system that is the envy of the world Vinay Gupta, CEO, Mattereum

Twitter: @appg_blockchain

Watch the full evidence session below

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