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Blockchains and smart contracts

Blockchain technology is set to bring fundamental change to the IT industry. It breaks with the widespread client/server principle and creates the possibility of direct communication between systems. An intermediary is no longer required, transaction costs are reduced, and confidence in the integrity of data rises. The use of blockchains and smart contracts throws up a host of new legal issues. Our specialised lawyers have both the technical understanding and the necessary legal expertise to advise your company on all relevant aspects.

How blockchain technology works

Essentially, a blockchain is simply a database that resembles a book of accounts (or ledger). The special feature of this database is that it records all changes and never forgets them. The individual account movements are known as transactions and typically represent payments using a cryptocurrency like Bitcoin, for example. The database is not managed by an intermediary (such as a bank), but distributed across a large number of computers that make up a blockchain network. The majority of these computers vouch for the integrity of the database, resulting in a democratisation of communication.

Similarity to banknotes

Blockchain exchange transactions (i.e. crypto money payments, for example) are similar to exchanging banknotes. In the latter case, the parties have confidence in the banknote’s authenticity, while in the former they trust the cryptography that is intrinsic to the blockchain. A shared feature is that no independent, trusted third party is required. The recipient can always be certain that a transaction is authentic and unique.

Possible applications

The business models currently being discussed mainly involve scenarios in which intermediaries have been required up until now, or where excessive transaction costs or a lack of trust in contract partners have prevented transactions from taking place. Blockchain is thus not only of interest to banks, insurance companies, fintech and insurtech players, but also to companies which need to keep records of transactions for verification purposes, e.g. in connection with identity management or supply chain management.

Smart contracts enable automated performance relationships

Smart contracts utilise blockchain technology to execute across the computers in a blockchain network rather than on a server.

A smart contract is a piece of software that can manage, control and document contract performance automatically. This allows performance to be made dependent on certain conditions being met. Assume, for example, that asset X should only be transferred to the other party to the contract when that party has provided the required performance. A smart contract can monitor this performance and ensure that counterparty risk is virtually reduced to zero (see our blog post on smart contracts for more details).

Smart contract compliance

In cases where smart contracts are used to execute agreements, their code needs both to replicate the content of the contract and also to comply with applicable law. This is due to the fact that contracts do not normally govern a legal relationship in its entirety; recourse to existing laws and statutes is always necessary. Additionally, laws can also impose limits on freedom of contract, meaning that smart contracts must likewise comply with the law. Any violation would lead to defective performance. Since a smart contract cannot normally be reversed, its key advantages would thus become disadvantages. A smart contract compliance audit can prevent this situation from arising.

Smart contract arbitration

Rules of arbitration can be agreed and implemented which are tailored specifically to smart contracts, making it possible to resolve disputes. In terms of technology, this is ensured through the incorporation of smart contract arbitration libraries. CMS has already provided advice in blockchain-based arbitration proceedings and drafted the arbitration rules to be applied.

Initial Coin Offering (ICO), Initial Token Offering (ITO)

ICOs and ITOs are an innovative way of raising venture capital. They involve creating a dedicated crypto currency (coins or tokens) that can be purchased by investors. The principle is similar to using an initial public offering (IPO) to issue shares. The rights associated with the coins and tokens are defined at the start of the ICO/ITO. This may involve claims to a future entitlement or to company shares, for example (see our blog post on ICOs for more details).

Comprehensive knowledge and expertise around blockchains and smart contracts

The use of blockchains and smart contracts involves a range of legal issues that require particular expertise. Examples include:

  • Blockchains, smart contracts and ICOs/ITOs from a regulatory perspective
  • Legal constraints when using blockchains and smart contracts
  • Challenges related to structuring smart contracts
  • Structuring terms and conditions for ICOs and ITOs and drafting white papers
  • Incorporating rights and obligations into the source code of smart contracts
  • Warranties and liability when using smart contracts
  • Formation of contract under the law of obligations and rights in rem
  • Framework agreements
  • Determination of reciprocal performance
  • Interface for arbitration bodies

Our experts have deep insight into the technology behind blockchains, smart contracts and ICOs/ITOs, as well as the associated legal issues. Their many years of experience allow them to engage with developers on an equal footing and also provide the additional expert knowledge needed by legal departments when structuring new business models.

We also work hand-in-hand with developers, creating relationships that enable a detailed legal audit of technical code. We provide comprehensive code compliance audits.

Please don't hesitate to contact us.