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The legal implications of blockchain
Smart contracts
As we have seen before, the bitcoin blockchain is not the only application of blockchain technology. A special category of blockchain applications are the so-called smart contracts. A characteristic of smart contracts is that the execution of agreements can be automated, no longer depending on the actions or inactions of parties. Since the smart contract is stored in a blockchain, it cannot be altered by parties. But what if the execution of a smart contract leads to unwanted consequences that parties did not foresee? For example, in 2016, a problem arose on Ethereum, a platform for smart contracts, where an Ethereum smart contract began paying out amounts to an unknown third party.
In order to determine if parties can seek protection under the provisions of the Civil Code in such cases, it must be examined if smart contracts can be incorporated within the existing legal figures of Dutch private law. Only then can parties turn to the court with a claim for, for instance, performance or damages.
Meeting of the minds
The principle of Dutch private law is that agreements are not bound by form. Even before the rise of blockchain technology, parties could (in theory) record their agreement in programming language. What is new now, is that these agreements are executed by a network of independent third parties and the outcome is final. This is exactly why it is unclear to what extent a smart contract can represent the meeting of the minds between parties. This is especially relevant if the contracting parties are not programmers and have had their agreement drafted by a third party.
Through the theory of programmed intent, the consequences of the automatic execution of a smart contract can be traced back to the intent of the contracting parties. However, the extent to which unwanted outcomes can be traced back to the intent of parties remains an open question. Moreover, the use of smart contracts brings about new legal issues. For example, who is liable when the execution of a smart contract deviates from the intended outcome? This question becomes even more complex when the error does not occur in the source code of the smart contract but, for instance, in the Ethereum platform itself.
Interpretation
In traditional contracts, provisions can sometimes be ambiguous or highly subjective. Consider provisions such as 'depending on the circumstances' and 'parties will use their best efforts to [ ]'. This always leaves the question of how to measure these circumstances and the efforts of the parties, and what consequences are attached to them. In certain cases, this can be advantageous for parties, especially when dealing with agreements regarding uncertain, future situations. A smart contract would struggle with such provisions as they require human interpretation and considerations.
Where the application of blockchain becomes particularly interesting is in contract provisions where it is important to prove that a specified action included in the provision has indeed been carried out. This is applicable, for instance, in a payment in exchange for the transfer of specific software. If the blockchain does not record a timely or complete payment, then the transfer of software will not take place. If payment is made in full and on time, then the transfer will occur.
Smart or classical?
It could be argued that smart contracts, for now, are mainly useful as a supplement to contracts in the traditional sense. The drafting and especially the interpretation of contracts remain predominantly the work of lawyers. The legal certainty of parties, in particular, is a key requirement for the acceptance of smart contracts. Problems such as those with the Ethereum smart contract undermine confidence in smart contracts. As long as smart contracts do not enhance legal certainty compared to traditional contracts, their use adds little value.
Cryptocurrencies in court
So, what about the legal classification of cryptocurrencies? In 2014, the Overijssel District Court made an important ruling. In a case involving a failed sale of 2,750 Bitcoins, the court addressed the question of whether Bitcoin can be legally considered as 'money'.
The court stated that Bitcoin is not considered as giral money simply because there is no bank or giro institution involved. This is logical, as the absolute control over Bitcoin lies with the person holding the private key and not with a third party. In a bank or giro institution, it is the institution holding your money on your behalf.
Can it then be seen as ‘common money’? Whether this is the case depends mainly on whether it is a legal means of payment. In this regard, Minister Dijsselbloem has already stated:
“Bitcoin does not fall under the definition of (electronic) money within the meaning of the Financial Supervision Act, among other things because Bitcoin does not represent a claim on the issuer.”
The court also considers the description of Bitcoin provided by the European Central Bank:
“[ ] a virtual currency scheme based on a peer-to-peer network. It does not have a central authority in charge of money supply, nor a central clearing house, nor are financial institutions involved in the transaction, since users perform all these tasks themselves. Bitcoins can be spent on both virtual and real goods and services. Its exchange rate with respect to other currencies is determined by supply and demand and several exchange platforms exist.”
The court's ultimate conclusion – considering all of the above – is that Bitcoin cannot be classified as money, but should be viewed as a medium of exchange.
While it is quite likely that the judiciary will revisit this ruling in the future, the decision of the Overijssel court is understandable. For those interested, progress and innovation in the field of cryptocurrency and blockchain are clearly tangible. However, for the average citizen, this is (still) not the case. They will only take developments seriously once an established opinion has emerged. The judiciary is one of the institutions that can contribute to this. It is expected that judicial decisions in the field of cryptocurrencies and blockchain will increase, generating more public interest.