
How Smart Contracts are Revolutionising Legal Agreements in Web3
Oct 25, 2024
7 min read

Smart contracts represent one of the most exciting innovations in blockchain technology, offering a way to automate and enforce agreements without intermediaries. These contracts are central to the Web3 revolution, where decentralisation is redefining how we interact with digital platforms, financial systems, and legal structures. As businesses across industries increasingly adopt blockchain-based systems, understanding the legal implications of smart contracts is essential for founders, legal professionals, and companies alike.
What Are Smart Contracts?
Smart contracts are essentially self-executing contracts, with the terms written into code. Once triggered by a specific event, they enforce the agreed conditions automatically, removing the need for intermediaries. This innovation significantly reduces time, cost, and reliance on third parties.
How Smart Contracts Work
Smart contracts live on a blockchain, often Ethereum, and execute based on pre-programmed conditions. For example, a real estate contract can automatically transfer ownership or title to the property once payment is confirmed, recorded immutably on the blockchain. The entire process is handled by the code, transparent, and tamper-proof – removing the need for escrow agents or title companies.
Core components of smart contracts include:
Code: The terms of the agreement are encoded.
Trigger: An event or action that triggers the contract to execute.
Blockchain: The distributed ledger on which the contract resides, providing security and transparency.
Execution: When the conditions are met, the contract executes autonomously.
Advantages of Smart Contracts
The benefits of smart contracts are vast, especially in the context of blockchain technology and decentralised systems. Key advantages include:
Automation: Smart contracts eliminate manual processing, reducing human error and the time it takes to finalise transactions.
Cost Savings: By removing intermediaries such as brokers or banks, businesses can save on service fees and operational costs.
Security: The decentralised nature of blockchain ensures that once deployed, smart contracts are secure and cannot be tampered with.
Transparency: The blockchain provides a transparent and immutable record of all transactions, increasing trust between parties.
Efficiency: Traditional agreements often require extensive negotiations, paperwork, and time delays. Smart contracts are faster, with less paperwork.
However, with these advantages also come legal and regulatory challenges, particularly when it comes to how smart contracts fit into established legal frameworks.
Legal Implications of Smart Contracts
While smart contracts offer an efficient way to handle digital agreements, their legal status is still evolving. There are several areas where traditional contract law clashes with the decentralised and automated nature of smart contracts, creating ambiguity and potential legal risks.
1. Enforceability
Most jurisdictions accept that contracts can be formed digitally, but the code alone may not meet all the requirements of a legally binding agreement. Courts still look for key elements such as offer, acceptance, and the intent to form legal relations. When these elements are hidden in code, disputes regarding enforceability can arise.
2. Contract Interpretation
In traditional contracts, language can be open to interpretation, which allows flexibility when disputes arise. Smart contracts, by contrast, are literal in their execution—they do only what they are programmed to do. While this rigidity eliminates ambiguity, it also makes it difficult to address unforeseen circumstances or resolve disagreements which lawyers can assist with.
3. Jurisdictional Uncertainty
Given that blockchain operates on a global scale, determining the applicable law and jurisdiction for smart contract disputes can be difficult. If a smart contract operates across multiple countries, questions arise about which country’s laws will govern the contract and how enforcement will be handled.
4. Breach and Remedies
In traditional contracts, breaches are often addressed through remedies such as monetary compensation or termination of a contract. With smart contracts, the automated execution of code may leave little room for such remedies. Once executed, the contract is irreversible, leaving parties with limited options if things go wrong.
5. Data Privacy and Security
Smart contracts can raise privacy concerns, especially when personal data is involved. For example, the immutable nature of blockchain means that sensitive information stored within a contract may remain permanently visible, even if it violates data protection laws like GDPR.
Role of Smart Contracts in Facilitating Securities Transactions
The use of smart contracts extends beyond simple peer-to-peer transactions, playing a significant role in the broader landscape of securities and finance. A recent case involving the Securities and Exchange Commission (SEC) and ConsenSys, the developer of MetaMask, provides an important illustration of how smart contracts can be used to facilitate complex financial operations while also presenting new regulatory challenges.
The SEC filed a complaint against ConsenSys, alleging that its MetaMask Swaps and MetaMask Staking services operated as unregistered brokers by facilitating transactions in crypto asset securities. These services leveraged smart contracts to perform many traditional brokerage functions, such as soliciting trades, routing orders, and handling assets. The SEC, however, highlighted that even when automated technologies like smart contracts are used, they still need to comply with existing securities regulations.
MetaMask Swaps and MetaMask Staking demonstrate that smart contracts can take on the role of intermediaries, but they also bring new scrutiny regarding their regulatory compliance. In this case, the use of smart contracts for transactions involving crypto assets, some of which the SEC views as securities, underscores the need for adherence to brokerage laws.
Key takeaways include:
Substance Over Form: Whether or not human agents are involved, the key question remains whether the platform performs traditional brokerage functions. If it does, it must comply with relevant laws and regulations.
Intermediary Role of Smart Contracts: Smart contracts used to transfer assets between investors and third-party liquidity providers must still comply with securities laws if they facilitate securities transactions.
The MetaMask case underscores that while technology can innovate traditional financial services, entities facilitating these transactions may potentially still need to operate within the bounds of established regulations. Legal professionals thus play an essential role in ensuring these platforms navigate compliance effectively, helping to bridge the gap between innovation and regulation.
Smart Contracts in Web3 Legal Frameworks
As Web3 expands, we are beginning to see efforts by governments and regulatory bodies to introduce frameworks that specifically address blockchain-based contracts. Some countries, like Malta and Switzerland, have started to establish legal frameworks for smart contracts, particularly in the context of cryptocurrency and decentralised finance (DeFi).
In the UK, the Law Commission has taken steps to clarify the status of smart contracts, acknowledging that the traditional legal framework for contracts can potentially accommodate smart contracts in most cases, provided that they meet established legal principles. The UK Law Commission's latest report on smart contracts suggests that:
Enforceability: Smart contracts can generally be enforced under existing contract law if they meet standard legal requirements such as offer, acceptance, and consideration.
Interpretation of Code: Courts should take a practical approach to interpreting smart contracts, using expert testimony where necessary to understand the coded terms.
Dispute Resolution: The report acknowledges the need for mechanisms to address disputes, including the potential use of traditional courts and on-chain dispute resolution methods.
Data Privacy and Cross-Border Issues: Concerns about data privacy and cross-border enforcement may arise in which the UK Law Commission recommends further regulatory cooperation to address these challenges
Regulators are increasingly concerned about the potential for smart contracts to be used 1for illegal purposes, such as money laundering or fraud. As a result, compliance requirements are being introduced to ensure that smart contracts adhere to existing legal frameworks while fostering innovation.
Challenges of Implementing Smart Contracts
Despite their potential, there are still hurdles to overcome before smart contracts become mainstream:
Coding Errors: Even small errors in the contract code can lead to unintended outcomes. Ensuring that smart contracts are meticulously reviewed and tested is crucial to prevent costly mistakes.
Lack of Flexibility: Smart contracts are rigid and cannot account for unforeseen circumstances or changing needs, making them unsuitable for certain types of agreements that require more flexibility.
Regulatory Uncertainty: The regulatory landscape for smart contracts is still in its early stages, with much ambiguity surrounding compliance with existing laws.
The Future of Smart Contracts
The future of smart contracts is undeniably promising, with growing interest from industries beyond finance, such as real estate, supply chain, and healthcare. However, the widespread adoption of smart contracts hinges on several factors:
The development of clearer legal frameworks
Widespread understanding and expertise in blockchain and smart contract technology
Integration with existing legal and regulatory systems
For businesses operating in Web3, now is the time to start exploring how smart contracts can be incorporated into operations. This will involve collaborating with legal experts who understand the nuances of blockchain legal contracts and can navigate the challenges ahead.
The Role of Legal Professionals
Legal professionals will play an essential role in the future of smart contracts, especially as more businesses seek to implement them. While the code itself defines the contract’s terms, legal consultants can ensure that these terms are enforceable and compliant with current laws.
As blockchain technology continues to disrupt traditional industries, smart contracts represent the next frontier in legal agreements. By offering automation, transparency, and security, they are well-suited for the decentralised nature of Web3. Their success will, however, depend on how well we can address the legal and regulatory hurdles that lie ahead. Legal frameworks that support smart contracts will still need to evolve alongside technology to accommodate the growing demand for automation in legal agreements.
Synergy Consulting Group is at the forefront of advising businesses on the legal and practical integration of smart contracts into their operations. Whether you’re looking to streamline processes, minimize costs, or navigate regulatory complexities, our expert team of consultants are here to help. Contact us today for a free consultation and learn how we can support your business in this new era of decentralised technology.
Disclaimer: This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. For advice tailored to your specific needs, please consult a qualified attorney or financial professional.