Tom Braegelmann's panel presentation at the 24th Annual IBA Global Insolvency and Restructuring Conference, 7 May 2018, Amsterdam, The Netherlands

1. Smart Contracts: Practical Legal Issues
24th Annual IBA Global Insolvency and Restructuring Conference
7 May 2018 De Rode Hoed, Amsterdam, The Netherlands
Tom Braegelmann

2. The Concept of Smart Contracts
Nick Szabo, who coined the term “smart contract”, stated the concept as
follows:
−“I call these new contracts ‘smart’, because they are far more functional than
their inanimate paper-based ancestors. No use of artificial intelligence is
implied. A smart contract is a set of promises, specified in digital form, including
protocols within which the parties perform on these promises.
Werbach/Cornell:
−“[a] smart contract, in theory at least, takes away the legal system entirely.
Now there is nothing but that digital agreement. That is the entirety of the
relationship, and everything from the negotiating of the agreement, all the way
to the full enforcement and clearing of the agreement, happens digitally.”
− Do you need a blockchain for smart contracts in this sense?
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3. German Financial Regulator BaFin on Smart Contracts
− Smart contracts allow for a significant degree of independence
− parties to an agreement do not need to rely on an
intermediary.
− this reduces the risk of potential manipulation by a third party
− because the contract is managed automatically by blockchain
mechanisms and not by one or more entities that might be
biased or make an error
− also allow for faster settlement processes because tasks are
automated
− business processes can be simplified while human error,
interface points and the transfer of data between
different media types are minimized.
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4. Basic Legal Questions
ho enters into the “smart” contract?
hings / programs by themselves? Humans/legal entities?
− ePersons?
− What has actually been agreed by whom?
− Application of classic doctrines of contracts
− Code is law? Inadmissible for consumer contracts
− Two contractual versions necessary?
− Dual system = software version + prose version?
− Classic example of contract similar to “smart contract”:
− vending machine (if coin is inserted, then automatically
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5. Basic Legal Questions
− Stress test: Do Smart Contracts withstand possible judicial
review?
− Execution of Smart Contracts is fully subject to judicial review
− How does a Judge review a full blockchain?
− Do you need to print the respective blockchain out in full or
in part, or provide it on a DVD etc, depending on the court’s
digital capabilities? How does the judge view it? Do you
need to have an expert testify?
− Value / availability of Blockchain entries as documentary
evidence and proof to be used in lawsuits not yet resolved
by courts or legislatures
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6. Basic Legal Questions
− The risks associated with smart contracts primarily have to do
with the lack of a central entity which can take corrective
action against any intentional or unintentional misconduct.
− “unstoppable” and “immutable” – does this work for law?
− Underlying law may change. Can the smart contract then be
updated, and what if not?
− Challenge: Application of national, fragmented laws to
transnational crypto-assets and smart contracts
− Multi-jurisdictional challenges will not go way and you can only
deal with them as good as possible each time
− These are not new issues, they are common in international
commerce and there is a lot of experience among lawyers and
commercial practice with how do address this
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7. Examples
− The door of apartment or car leased by smart contract might
only open (or engine of car only starts) if the leasing payment
has been received
− Issue: Protection of possession (Besitzschutz)
− Tension between self-execution / self-enforcement via
software and the governmental monopoly on the use of
force
− What if
− car is needed for emergency or in motion?
− Children/valuables still left in locked apartment?
− Liability of owner for damages done by smart contract
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8. Examples for Smart Contracts
− Late flight damage payments
− Arbitration proceedings
− Initial Coin Offerings
− Management of goods and spare parts (logistics tracking)
− IoT database for documentation of consumption data (Smart
Metering)
− Traffic, management and promotion networks
− Insurance (using oracle date on storms, other weather data)
− Recording/tracking of legal property positions (IP, real estate)
− World Food Programme
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9. Famous example of a Smart Contract gone wrong: THE DAO
− Decentralized Autonomous Organization
− About 17,000 participants - Crowdfunding, June 2016
− Shareholders? Partners?
− no human executives – all decisions made by the people who bought in
− making it a sort of technology-enabled leaderless collective
− but were there really no humans “in charge”?
− Can you determine applicable company/securities law? SEC Report: Yes
− Over USD 150 million
− most successful crowdfunded venture ever
− Crypto currency worth millions of USD withdrawn against original “intent”
− due to a previously largely unnoticed program part in the central Smart
Contract
− Hack? Not a hack? Code is law – or is it?
− What counts? Immutable and unstoppable code? Or intent?
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10. Bankruptcy Law and Blockchains
− Obligation to file for bankruptcy, how would that work for a
DAO or another crypto fund or ICO etc? COMI?
− How do you “find” digital assets?
− Just an issue of forensics / IT experts?
− Certain bank accounts are prima facie evidence that debtor
traded / used cryptocurrencies
− Specifically, may an insolvency administrator sell off found
Bitcoins?
− Are there regulatory and AML issues for trustees and
insolvency administrators?
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11. Bankruptcy Law and Smart Contracts
− How can loss of value be avoided if a smart contract does not
fit anymore but is immutable and unstoppable?
− Digital Ruins?
− Automatic Stay – automatically violated?
− If smart contracts are "immutable and" unstoppable ", what
about the general ban on payments while insolvent?
− Example: automatic payment of damages by airline to
passenger for late flights, at the exact time of landing
− AirBerlin was flying while in preliminary insolvency
proceedings
− Would such automatic payments have been stoppable?
What if this was forgotten? Liability of management?
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12. Bankruptcy Law and Smart Contracts
− Are smart contracts programmed flexibly enough to cope with
new economic situations??
− Enforcement „against“ blockchains or „against“ unstoppable
and immutable smart contract:
− Unresolved – going after other personal assets of
participants, as far as they can be identified?
− What about avoidance actions / preference law suits?
− Intent is often relevant - whose intent counts?
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13. Whose intent counts when it comes to smart contracts
− German case law by the Federal Court of Justice:
− It does not depend on the view of the developer or the software:
"For the interpretation of declarations, however, it is not possible to rely
on the automated reaction of the computer system[...]. Not the computer
system, but the person (or company) that uses it as a means of
communication is issuing the declaration or is the recipient of the
declaration made. The content of the declaration is therefore not to be
determined in accordance with how it is expected to be interpreted and
processed by the automated system, but rather according to the way in
which the human addressee, in good faith and under accepted customsary
standards, may understand it.“
− When a declaration of intent is interpreted, it is necessary to ascertain the
true intention rather than adhering to the literal meaning
− BGH, decision dated 16. 10. 2012 – X ZR 37/12 (flight booking)
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14. *****
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