State Smart Contract Laws? If It Ain’t Broke, Don’t Fix It

Perianne Boring is the founder and president, and Amy Kim is the global policy director and general counsel, of the Chamber of Digital Commerce, the world’s leading trade association representing the blockchain industry.

John Hancock’s signature is easily the most recognizable among the signers of the Declaration of Independence of the United States.

As the story goes, he wrote it large so that if the British monarchy could “read the name without spectacles; let them double their reward.” In fact, it is so famous that “John Hancock” is synonymous with “signature.”

Today, documents can be legally effective if signed with the “invisible ink” of software. Electronic signatures are just as legally binding as handwritten ink signatures when establishing a contract. E-commerce based on e-signatures has been humming along brilliantly for many years now.

Several very supportive and innovative state legislators are creating legislation for this new technology. While we support their efforts to promote blockchain technology, we believe this action is unnecessary as these so-called “smart contracts” are already covered by existing laws.

Luckily for 21st-century commerce, federal legislation and state laws nationwide ensure that e-signatures are in fact legal and binding means of signing a contract.

Specifically, the federal Electronic Signatures in Global and National Commerce Act (ESIGN Act) and the Uniform Electronic Transactions Act (UETA) provide an unquestionable legal basis for smart contract technology executing the terms of a legal contract.

Once cryptographically signed, legal efficacy is granted to electronic signatures, records, and contracts so long as the parties are provided with appropriate written notice and consent to conduct business electronically.

Today, the emergence of these smart contracts has caused some to question whether they are valid under existing law. To be clear, smart contracts are not necessarily “smart” nor are they necessarily contracts.

In simple terms, a smart contract is computer code that programmatically executes transactions in accordance with pre-defined terms. Thus, a “smart contract” may or may not be a contract at all. It may be simply a digital instruction to execute an agreed sequence of events.

Cryptographic signatures (also known as digital signatures), records, or contracts used to execute the terms of a legal contract, entirely or in part, fall squarely within the ambit of the UETA and ESIGN Act. In fact, the ESIGN and UETA legislation were designed to avoid state-by-state enactment of individual laws recognizing digital signatures and records. Any additional regulation would be, at best, redundant.

50 shades of confusion

Unfortunately, it would be potentially confusing for companies and their lawyers to consult multiple sources of legislation when conducting business nationwide.

Rather than consulting the ESIGN Act and UETA, can you imagine having to look at each state’s “smart contracts” legislation, and then comparing it to ESIGN and the state’s UETA to ensure there are no gaps or conflicts, and to ensure your particular form of “smart contract” is covered by the new law?

Enacting unnecessary new legislation (and triggering the associated compliance costs) would undermine confidence in the legally binding status of the digital signature and associated record. New laws could potentially bog down e-commerce.

The Chamber of Digital Commerce has investigated the legal underpinnings of these laws and concluded that enactment of state legislation regarding smart contracts is unnecessary and potentially undermines the growth of the industry.

There are, however, specific legal situations that are not covered by ESIGN and UETA. These include, for example, wills, codicils, testamentary trusts, official court documents, and documents related to family law matters, which should not affect everyday commerce.

The Chamber of Digital Commerce applauds and supports those legislators who are ahead of their contemporaries in understanding the value of this technology and seeking ways to support it. Such action demonstrates their astute sense of the continued success of blockchain technology.

Nevertheless, we caution that this particular course is unnecessary and potentially detrimental to a stable and consistent understanding of the treatment of smart contracts under law. As we wrote in our legal primer on smart contracts:

“Existing legal frameworks for defining and giving legal effect to contracts cover smart contract technology, and nothing regarding smart contracts ought to change existing definitions or the application of current contract law. Additional laws are largely unnecessary and will only serve to confuse the application of current law.”

Or, in plain English:  If it ain’t broke, don’t fix it.

For more on this topic, tune into CoinDesk’s free webinar on state smart contract legislation Feb. 27 at 11:00 a.m. EST. Register here.

USA map image via Shutterstock

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