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Preparing Ahead for Smart Contracts Opinion

Preparing Ahead for Smart Contracts

With the advancement of technology, we are facing rapid innovations and novelty in digital breakthrough. This progress has caused many sectors to change their business operation, especially the legal industry which relies on paper to execute contracts. With the rise of paperless era, smart contract has been given a roll of red carpet for its admission. In September 2016, there were approximately 123.376 smart contracts deployed online on the public blockchain platform. While today, more than a million smart contracts were created and used all around the world. The practice of smart contract grows exponentially in a fast moving pace, and it would be just a matter of time that the trend would reach Indonesia sooner before we know it.

To put it simple, a smart contract has a similar trait to a traditional contract. It is an act to which one or more individuals bind themselves to one another, arising rights and obligations converting them into a binding agreement. The difference would be that a smart contract is purely digital and drafted by formulating lines of computer codes with the support of a blockhain platform. The most common blockchain platform used to create smart contracts is called Ethereum. The unique characteristic of a smart contract lies on its self-executing and self-enforcing attribute, executing all provisions automatically with precision as it is set up to by their creators. Smart contracts can also be considered as electronic transactions based on the Indonesian Electronic Information and Transaction Law since they are legal actions executed by using computer, computer network, or other electronic media.

The use of smart contract has drawn many interests from entrepreneurs, web developers, and even government officials. If well engineered, a smart contract can provide protection to its users by encrypting the contract on a shared ledger using cryptography, making it safer, more trusted, and even anonymous. As additional protection, smart contracts can also provide back-up systems in case of data corruption or error in programming. A smart contract is also far more accurate and works faster. It would save a significant amount of time to make and can avoid errors that come from manual paper work due to the use of software codes that automates the contract execution. Lastly, smart contract is cheaper to create and it can bring autonomy to its users, reducing its reliance on brokers, lawyers, intermediaries, and prevent the danger of manipulation by a third party. Smart contract could bring many more advantages and it is limited only by the capacity of the creators.

The influence of the smart contract is widespread. All of the present smart contracts deployed on the Ethereum blockchain hold an amount of 86.456.306,005 Ether (a cryptocurrency similar to Bitcoin with the value of $304,83/1 Ether). One of the biggest transactions by smart contracts was in 2015 where a US post-trade financial services company, the Depository Trust & Clearing Corporation, used a blockchain ledger to process more than $1.5 quadrillion worth of securities, representing 345 million transactions.

If smart contracts were to be implemented in Indonesia, we must sort some issues concerning its legality. First, we must ensure it is in compliance with our laws. Based on the Indonesian Civil Code, an agreement is valid if it has met four conditions: (i) the consent of the parties, (ii) the legal capacity to enter into an obligation, (ii) a specific subject matter, and (iv) a permitted cause. These conditions apply to a written, spoken, and even encrypted agreements. It is noteworthy to consider the legal capacity, as smart contracts are often handled anonymously. If this condition be questionable or unsatisfied, it is justified to annul smart contracts.

The second issue relates to the payment provision as set out in the contract. Almost every payment mechanism arranged in smart contracts is paid using cryptocurrency such as Bitcoin, Ether, Litecoin, etc. Meanwhile, the Regulation of Bank Indonesia Number 18/40/PBI/2016 has stipulated the prohibition to use virtual currency in Indonesia. Third, we must also consider the risks of failure of the smart contract or the event of default caused by a bug in its coding lines or negligence of the programmer. The consequences of such risk may cause loss and damages to the parties. We must bear in mind that there is currently no specific regulation guaranteeing liabilities and responsibilities of parties in a smart contract.

Finally, another nature of smart contracts is that they are decentralized, meaning they are not governed by any laws or central authority. Prior determination of which laws and jurisdiction apply to a smart contract is the key element to identify its legal stance. The legal consequences that might appear from smart contracts are deeply relevant to the applicable law where the smart contract is enforced. While jurisdiction plays an important role to rule emerging disputes and where they will be handled.

The Indonesian Government must be aware of such advancement in the blockchain technology to determine its current disposition and future adjustment measures in its prevailing laws to prepare the emergence of smart contracts. Smart contracts will certainly change how humans interact and bind to each other in the near future. We cannot prevent the advancement of technology, and every epoch brings its own innovation. Ignoring the presence of smart contracts and other digital breakthrough is the same as denying the progress made by mankind, and if we do so, we will without doubt be left behind.



Technology Law, Legal Technology, Contract, Digital Business
Published in The Jakarta Post, 21st November 2017

Written by Bhirawa J. Arifi
Technology, Media, and Telecommunication Lawyer at Bahar & Partners Law Firm