September 28, 2020

The Law Commission has announced that it will analyse the law relating to smart contracts, to find any gaps in the law and identify reforms to ensure that the law can meet the growth in the use of this technology. The Commission says that its work on digital assets will ensure that the law is capable of accommodating electronic documents, cryptoassets and other digital assets in a way that allows the possibilities of technology to flourish.

The Commission notes that emerging technologies, such as distributed ledgers, have made it possible for the performance of contracts to be automated. These “smart contracts” command performance by computational algorithms without the need for human intervention. They have been widely touted as promoting efficiency, trust and certainty in business.

The Commission explains that English contract law has developed with natural language contracts in mind. The development of technological capacity to engage in smart contracts gives rise to a range of questions. In what circumstances will a contract written in code be legally binding? How are smart contracts to be interpreted by a court? What are the legal consequences of the code not performing as intended? These questions need to be answered so that English law maintains its reputation for sophistication, coherence, and efficacy, and so that businesses can be confident in their use of smart contracts.

The Commission will analyse the law relating to smart contracts, highlight any uncertainties or gaps, and identify any reforms to the law that may be required. It is also currently seeking initial views from business and from the technology sector, with a view to publishing a call for evidence in late 2020.

As for digital assets, the Commission notes that the commercial world is moving rapidly towards complete digitisation of trade and transactions, yet legislation implemented more than a century ago is preventing businesses from achieving an optimal electronic environment. For example, the intangibility of a simple digitised document means it cannot, on current understanding, be “possessed” and therefore cannot constitute a document of title under the Bills of Exchange Act 1882. This can cause considerable commercial difficulties, particularly in the context of international trade finance.

The consideration of the digitisation of commerce has given rise to general questions about the legal status of intangible assets. Some, such as electronic documents and computer software, are not novel in commercial terms; others, such as Bitcoin or distributed ledger entries tied to physical assets, are far less familiar to both users and their professional advisers.

The Commission has been asked by Government to make recommendations for reform to ensure that the law is capable of accommodating both cryptoassets and other digital assets in a way that allows the possibilities of this technology to flourish. In the first instance, the Commission says that it will consider the issue of possession, particularly with regard to documents of title, documentary intangibles and negotiable instruments. The current intention is to publish a consultation paper in the first half of 2021. To read the Commission’s announcement in full, click here.