Ethereum's Impact on Digital Contracting Creates R&D Tax Credit Opportunities
Ethereum
Blockchain technology offers more security and encryption for our
global market than previous technology. The first and most widely known
implementation of blockchain was in 2008, known as Bitcoin
cryptocurrency. The pseudo-anonymous creator of Bitcoin, Satoshi
Nakamoto, interpreted it as a ledger for currencies. He also foresaw
the possibility of making contracts via a scripting language enforced
by a network consensus. The network consensus exists because of the
decentralized, open-source foundation of blockchain technology.
In recent years, however, security researchers
identified flaws in the Bitcoin scripting language; these features were
removed in 2011. Despite this change, the dream of digital contracting
was not eliminated, and in 2015, some researchers released Ethereum,
promising to make cryptographically secure contracts a reality.
Embedded in Ethereum is a programming language called Solidity, which
is one of several programming languages used to write contracts for the
Ethereum Blockchain.
Ethereum contracts require expertise in computer
science as well as an understanding of legal ramifications to ensure
smart contracting is safe, secure, and of proper legal intentions. Now,
Ethereum is bringing change to almost every industry that requires
contracting, transactions, and other services that can now be
digitized. With it comes an implication for the future of blockchain,
network security, data integrity, and law. As of August 8, 2017, the
Bitcoin market value was up 3.85% at $3,432.27, blockchain market value
was up 61.59% at $353.75, and Ethereum market value was up 3.6% at
$276.43. They are expected to continue growing and influencing
the global marketplace. In July, Bitcoins were trading for $2,550,
which is a 170% increase from the beginning of 2017. Similarly,
Ethereum increased from $10 to $300 since the start of 2017,
representing a 3,000% increase.
Institutions and researchers involved in innovative
efforts to program and encrypt digital contracts via Ethereum and
blockchain technology may be eligible for federal and state R&D tax
credits.
The Research & Development Tax Credit
Enacted in 1981, the federal Research and Development (R&D) Tax
Credit allows a credit of up to 13% of eligible spending for new and
improved products and processes. Qualified research must meet the
following four criteria:
- New or improved
products, processes, or software
- Technological in nature
- Elimination of
uncertainty
- Process of
experimentation
Eligible costs include employee wages, cost of
supplies, cost of testing, contract research expenses, and costs
associated with developing a patent. On December 18, 2015,
President Obama signed the bill making the R&D Tax Credit
permanent. Beginning in 2016, the R&D credit can be used to offset
Alternative Minimum tax and startup businesses can utilize the credit
against $250,000 per year in payroll taxes.
Blockchain Defined
Blockchain is one of the fastest up-and-coming technology sectors
in recent years. It is a trustless and distributed database system that
offers secure payments and data management. Blockchain technology is,
in a way, a triple entry accounting system in which each transaction is
given a unique signature that is immutably stored along with references
to inputs and outputs. Blockchains most often use public-private
key encryption to secure and verify the ability to create a transaction
with funds stored within the blockchain. Companies can also build
custom chains to perform internal tasks more efficiently. Otherwise,
the majority of companies rely on the public blockchain ledger.
In the cryptocurrency industry, Bitcoin is “a
purely peer-to-peer version of electronic cash” that is not added to
the blockchain until the transaction is confirmed and validated.
This adds a layer of security to the blockchain ledger, which contains
values for thousands of existing transactions. A transaction can only
be confirmed when it is part of a block that meets the cryptographic
rules enforced by the network. If it does not conform to these rules,
the blocks will become invalid.
The blockchain employs a proof-of-work (POW) system
to deter denial of service (DoS) attacks and network spam. A DoS attack
is a form of cyberattack in which the hacker makes a machine or network
resource unavailable by disrupting the services of a host connected to
the Internet or that network. POW validates each new group of
transactions. Regarding cryptocurrency, the Hashcash POW is utilized in
block generation of Bitcoins. The POW must be completed before the
block is accepted by network participants. The chain is made in such a
way that each block contains the hash of the preceding block;
therefore, each has a chain of blocks. As a result, it is supposedly
impenetrable and secure. The blockchain is protected from alterations
by a ‘safety lock.’ In other words, to change one component on the
chain, the block requires a regeneration of all the block’s successors.
This additive measure helps prevent against hackers or other attackers.
This level of encryption ensures that any infiltrator must jump through
hoops to redo the POW of the targeted block and all proceeding blocks,
then quickly catch up to surpass the current work on the chain.
The complexities of the blockchain make it possibly
one of the most secure facets for institutions, and individuals, to
engage in financial transactions. With its growing popularity,
blockchain technology has the potential to revolutionize the world’s
economy, but also positively and negatively impact any industry
employing it. In a McKinsey & Company interview with Don Tapscott,
CEO of Tapscott Group, Tapscott highlights the varying disruptions.
Regarding the financial services industry, it can be either transformed
or interrupted since blockchain can move, store, lend, trade, and
account for any currency. Many banks and other financial institutions
already created new standards and protocols to ensure security and
encryption of public and private blockchains. This level of security is
of upmost priority for financial institutions to succeed in day-to-day
operations, smart contracts, and currency transfers. More abstractly,
the blockchain also impacts the music industry, in which artists can
distribute their music on the blockchain, tacked with smart contracts
that highlight usage rights.
Other industries that will be impacted by blockchain technology include
healthcare, academia, voting, real estate, insurance, and security. In
healthcare, the blockchain would create new opportunities to securely
share data across different platforms and networks. This would not
compromise patient or data security and integrity. In fact, there is a
startup called the Gem Health Network which uses an Ethereum blockchain
platform with multi-signature and factor authentication technology.
A similar application would be in academics, in
which blockchain technology would authenticate academic certificates,
transcripts, and diplomas. Voting would greatly benefit from the
blockchain, because it would prevent against voter fraud and lost
records. The blockchain would ensure casting, tracking, and counting of
votes is done more securely, efficiently, and effectively. The real
estate industry would see obvious benefits in a reduction of reliance
on paper-based recordkeeping. When purchasing homes or signing leases,
there is always an extensive amount of paperwork that slows down the
transaction process. Blockchain, however, can help record, track, and
transfer everything from land titles to property deeds and liens. Not
only would this speed up the overall process, it would ensure that
documents are accurate, verifiable, and free from potential fraud.
Finally, advances and applications in the insurance industry are a
little less clear than in others. However, blockchain can help
individuals enroll in micro-insurance so that high-value items
exchanged between individuals in the blockchain as part of a contract
are insured.
Ensuring continuous success and development of
blockchain technology does raise some topics of discussion. One regards
how the blockchain will be governed. As mentioned in a McKinsey report,
“Unlike the Internet, which has a sophisticated governance ecosystem,
the whole world of blockchain and digital currencies is the Wild
West.” It does not help that the blockchain is open source,
because at least if it is handled by a private institution, that
institution can set the groundwork for regulation. When it is open
source, the blockchain can only rely on democratic mass collaboration
that should steer clear from chaos and continuous debate all while
reaching a consensus. In this regard, some form of leadership is
required to ensure the blockchain remains enforced, continuously
improving, and secure.
Another risk with blockchain concerns security.
Although this is a pressing issue for future transactions, the
blockchain is actually currently used to prevent and mitigate
cybersecurity risks in trade finance. Guardtime is a software security
company that created a digital signature system derived from blockchain
technology. It has the Keyless Signature Infrastructure, which runs on
a private blockchain to ensure authentications “are not tampered with,
and are timestamped, and stored in the cloud. By doing this, such as
application components, log files and firmware, the system can provide
real-time alerts to any compromises…allowing organizations to identify
and manage breaches in real-time.” This new form of
authentication is not only more secure but also faster to process than
relying on two-factor authentication and traditional RSA cryptosystem
digital signatures. The blockchain also ensures that the stored records
maintain their integrity, which is less possible when employing
traditional databases where records can be altered, deleted, or updated
on a whim.
As one can see, the benefits and applications of
blockchain technology are limitless. It does raise many questions
concerning its ability to reduce risk and benefit cybersecurity and
potentially any industry in the market. The inherent risks and
challenges can only be anticipated as blockchain technology continues
to develop and become more incorporated in Ethereum and digital and
legal contracting.
What is Ethereum?
Ethereum is an open source decentralized platform geared more
specifically towards smart contracts. Since it is built on a
blockchain, it avoids downtime and third-party interference, thus
ensuring more security and integrity. Ethereum offers a simple
application called Ethereum Wallet for users to hold and secure ether
and other crypto-assets developed on the Ethereum network. The user can
also code, deploy, and use smart contracts. Now, users can even create
their own currency in the form of a tradeable token which can “use a
standard coin API, so your contract will be automatically compatible
with any wallet, other contract or exchange also using this standard.
The total amount of tokens in circulation can be set to a simple fixed
amount or fluctuate based on any programmed ruleset.” In essence,
users have the ability to completely manipulate and create their own
virtual worlds and markets. Never before was it feasible for
individuals to create their own currencies that can be transferred and
converted to other forms of currency while maintaining underlying
network value and security.
Despite the ability to customize a market and
currency types, Ethereum holds much of its pride in its democratic and
autonomous organizational structure. Most notably the DAO, or
Distributed Autonomous Organization, was created to fund development of
the crowd fund platform on the Ethereum network. DAO runs smart
contracts directly on the Ethereum blockchain. Already, it raised $150
million in virtual currency and gives its funders digital voting rights
on potential projects. The announcement of DAO increased the digital
value of Ether by 50% since May 2016. A hack of the DAO in June 2016
raised many questions about the integrity of smart contracting.
Eventually a solution to the hack came in the form of resetting the
ledger so it appeared as if the hack never occurred. As a result, the
funding was restored to the DAO. The hack was merely a mistake in the
code that permitted users to withdraw unlimited amounts. Since the
hack, institutions are slightly more reluctant to rely on smart
contracting, especially for financial services.
The benefit of Ethereum for any organization or
individual is the elimination of middlemen that manage organizational
assets and governance. With Ethereum and its unique blockchain
foundation, a user can build:
- A virtual organization
where members vote on issues
- A transparent
association based on shareholder voting
- A country with an
immutable constitution
- Democratic voting and
shareholding systems
- Platforms for prediction
markets
- Energy billing and
distribution networks
Ethereum invoked the idea of more decentralized
applications. Unlike the traditional blockchain, Ethereum creates its
own blockchain protocol with a unique and native programming language
predicted to surpass Bitcoin. For example, in March 2017, its digital
currency, called Ether, reached $30, boosting the market cap for
Ethereum to $2.57 billion. Corporations like JPMorgan and
Microsoft are joining the Enterprise Ethereum Alliance to further
develop Ethereum and ensure its popularity amongst various industries.
Companies Utilizing
Ethereum
Many companies already use Ethereum to resolve
issues and identify solutions that will prevent future problems from
arising.
KYC-Chain Ltd: This Hong
Kong-based company uses Ethereum to build protective measures around
online consumer data. Cryptographic protocols protect user data while
permitted ‘gatekeepers’ can retrieve and authenticate customer
documents.
Weifund: This decentralized
crowd funding organization takes advantage of smart contracting. It
offers customizable solutions to contributors, making it possible to
contribute unique things to development while complying with
transparency and contract limitations.
Everex Inc.: This company intends to create a
global economy that facilitates cross-border transactions. Customers
can use varying agencies to manage personal finances while engaging in
global investment opportunities. In simple terms, it is a blockchain
credit and money transfer platform relying on Ethereum.
Ethereum DApps
Currently, over 545 DApps are listed on ethercasts.com. DApps
stands for decentralized applications, and must comply with several
rules. The following rules apply:
- The application must be
open source; all changes must be decided upon by user consensus and no
single party controls a token majority
- All data and records are
stored cryptographically in a public and decentralized blockchain
- A cryptographic token is
used
- Tokens are generated via
a standard algorithm demonstrating proof of value nodes
Ethereum is considered a DApp that uniquely employs
its own blockchain. Below are some DApps that either use their own
blockchain, use existing ones, or create a two-fold layer of customized
and existing blockchains.
Augur: This is an open source prediction and forecasting market
developed using Ethereum. A user may enter into an agreement with other
parties about the results of an outcome. Due to the Ethereum network,
no counterparty risk is involved. It is intended as a self-sustaining
computer program that does not require a corporation for operation.
WeiFund:
As mentioned previously, WeiFund is a decentralized and open source
crowd funding platform. Since it is built on Ethereum, counter party
risk present in services such as Kickstarter and GoFundMe are
eliminated. The WeiFund contract system is currently in early alpha
stage.
BAT
for Brave: The Basic Attention Token (BAT) received $36 million
in crowd fund revenue in less than 30 seconds to develop a token used
by advertisers on the Brave browser. Brave was founded by Brandon Eich,
the creator of Javascript. With the BAT he hopes to remove middle
parties from the advertising business and provide better compensation
to content creators.
Ethereum’s Impact on Cryptocurrency
In
simple terms, any Ethereum user can write smart contracts and DApps
with their own rules and transaction formats. As a result, each user
can have his currency that automatically becomes compatible with any
Ethereum-based contract, exchange, or wallet. Each account contains a
nonce, or counter checking that each transaction occurs once, an ether
balance, contract code, and the storage space.
Ethereum offers many advantages over Bitcoin that
can change cryptocurrencies in the future. It employs a token system
with a simple algorithm which benefits contracting but also
sub-currency dependency. In other words, transaction fees are directly
included in that currency, which is not possible with on-chain
Bitcoin-based meta-currencies. Therefore, “the contract would maintain
an ether balance with which it would refund ether used to pay fees to
the sender, and it would refill this balance by collecting the internal
currency units that it takes in fees and reselling them in a constant
running auction.” Furthermore, with smart contracting
capabilities integrated in Ethereum, a hedge contract can address
cryptocurrency volatility so that tokens do not lose value but rather
build trust and fraud prevention.
As previously mentioned, institutions, such as
JPMorgan, are investing in Ethereum. JPMorgan created a partnership
with Zerocoin Electric Coin Company to add Zcash’s private technology
to Quorum. JPMorgan built Quorum as an enterprise blockchain
platform on Ethereum, emphasizing smart contracting. Zcash would then
use its privacy coin as a true digital equivalent of cash. Before
Ethereum, financial institutions were hesitant to use blockchain
technology because it lacked privacy and confidentiality features
required for market trading. Now, Quorum offers a secure and
confidential means for financial smart contracting. Zcash is but one
privacy coin used to protect these transactions and promote financial
institutions like JPMorgan to use Ethereum.
Ethereum’s Impact on Smart Contracts and
the Legal Industry
Since Ethereum offers customizable cryptographically secure permission
schemes for computations and storage, it acts as a trusted authority
for digital information and processing. Creating legally binding
contracts the traditional way requires an outdated method of written
signatures, which has a higher likelihood of being forged. Ethereum, on
the other hand, offers the possibility to immediately sign contracts
with intrinsic cryptographic identify and robust time-stamping.
With Ethereum, contracts can be programmed to
respond to signed instructions from pre-agreed arbitrators. This helps
resolve any deadlocks or conflicts down the road. Because of the
blockchain, a contract’s code as well as its terms are stored in the
same ledger and shared with multiple parties. In terms of a buy-sell
contract, this ensures the buy-sell contract is executed at the same
time as an accompanying payment contract. In the traditional sense of
buy-sell contracts, the post-trade settlement (payment contract) often
takes a long time to fulfill and may result in a costly process. With
blockchain and smart contracts, however, post-trade settlements are
automated and recorded in the blockchain for immediate dispatch and
automatic execution. One of the greatest challenges, perhaps, is that
Ethereum creates regards the ability of lawyers to keep up with changes
to the law and digital contracting. Ethereum contracts will require
lawyers to understand programming to create and decode future
contracts.
Several legal issues are raised regarding
interpreting and advising clients in an age of Ethereum contracting.
Simply put, smart contracts implement self-executing code that
automatically implements the terms of an agreement via the blockchain.
A computer network will execute the smart contract with consensus
protocols to affirm the sequence of actions derived from the contract’s
code. In so doing, there is minimal risk of error or manipulation in
agreement completion. Smart contracting was not feasible without
blockchain because parties in agreement would have separate databases.
Nonetheless the blockchain now bridges differences in databases and
offers a universal playing field to make seemingly different values and
databases compatible with the terms of a single agreement. Because
Ethereum offers a shared database running a blockchain protocol, smart
contracts self-execute so that all parties can validate the agreement
without bringing in a third-party intermediary.
Smart contracting offers a variety of benefits. Some
are listed below:
- Accuracy with minimal
manual error
- Minimized manipulation
and nonperformance execution risks because of a network-governed
decentralized execution process
- All documents are
encrypted on a shared ledger to increase trust and transparency
- Contract backups are
made constantly on the blockchain
- Minimal human
intervention translates to reduced costs
- Creates new avenues for
businesses and operational models
Smart contracts are anticipated for adoption in many
industries. For example, in financial services, they can be employed
for trade clearing and settlement, coupon payments, insurance claim
processing, and micro-insurance. Smart contracts can also expect
adoption in royalty distribution, public sector record keeping, supply
chain and trade finance documentation, product provenance and history,
peer-to-peer transacting, and voting. Smart contracts are already used
by several organizations around the world.
UNICEF Ventures Corp.: This branch of UNICEF
employs Ethereum’s smart contracts to transfer assets over the
internet. This increases public transparency and better secures funds
transferring. Tracking international transactions prior to smart
contracts presented numerous threats and compromised transparency. Now,
with smart contracts, partners of UNICEF receive ether tokens so long
as they are validated account signers. Furthermore, such a shift
to smart contracting lets the public govern over the contracting system
and audit the transfers and progress of UNICEF Ventures. This will
undoubtedly increase transparency, trust, and aid to children around
the world.
Protostarr: This
Virginia tech startup uses Ethereum’s smart contracting to allow fans
and investors to fund up-and-coming Youtubers and Twitch Casters in
return for a share of channel revenue. This DApp uses smart contracts
to automatically distribute revenue to fans and investors when the star
earns on his channel. Each contract is negotiable, depending on
the interests of the star and the individual investors/fans. The
intended goal is that the model to donate is transformed to one
specifically for investments as it “gives fans the ability to see a
real payoff for their loyalty, while investors looking for new,
exciting opportunities could see payouts better than traditional
investment avenues.” Beginning on August 13, 2017, investors will be
given tokens to gain percentages of incomes of all stars on
Protostarr—specifically 2% of every smart contract an investor
signs. It is scheduled that for each subsequent week, one ether
token diminishes in value regarding the number of investor tokens
purchased.
Creating a smart contract is rather simple and only
requires basic programming knowledge and an understanding of Ethereum’s
native language. Bitcoin is more limiting because it has a restrictive
language in which developers cannot write their own programs. Ethereum
offers unlimited processing capabilities which makes it the most
suitable blockchain for contracting. An example of a method in Ethereum
that allows another contract to spend tokens on a party’s behalf is
depicted below:
function approve(address_spender,
uint256_value) returns (bool success){
Allowance[msg.sender][_spender]
= _value;
return true;
}
In this example, the function, or method, called
approve will collect the address of the spender. The allowance of the
spender will be equal to the int (integer/numerical) value brought in
as a parameter in the function calling. As a result, the function will
return a Boolean value, which can be true or false. If a value of true
is returned, it signifies a success of the spender spending the number
of tokens stored in _value. In all the contract code, the function
entitled approve must be called upon within the main body of code.
Other functions are developed to approve and communicate about contract
signings, money transfers, attempts to collect coins, and messages when
someone attempts to send ether to another party.
In the future, as smart contracts become more
popular, code libraries ought to exist with functions that are widely
applicable to varying types of methods required in a contract. Lawyers
will be able to choose appropriate code out of the library and directly
apply it to their contracts. Once the contract is confirmed, it will be
self-executing, which makes it operate outside the confines of the
coercive powers of state. Policymakers will have to consider whether
this presents an issue and how it can be resolved to make smart
contracts acceptable and popular regardless of the legal issue it
addresses.
Several legal issues will arise. The first regards
the ether, or Ethereum’s main form of token. It is uncertain yet how
authorities will judge and react to people transferring ether to each
other to gain access to DApps on Ethereum. Another issue confronts the
issue if Ethereum contracts are legally recognized as components in
legally binding contracts. Finally, another concern is the amount of
additional work Ethereum creates for lawyers. As of now, it is not
expected that smart contracts will replace the need for lawyers. If
anything, it will require more attention from lawyers because they will
need to do more than just traditional legal assessments. This new form
of contracting creates opportunities for lawyers to grow in their field
and learn how to code, create, and translate information from Ethereum
contracts.
Lawyers will transgress from writing traditional
contracts to making standardized smart contract templates. The
transition to full reliance on smart contracts will take time, but for
now it is probable that lawyers will use a hybrid of paper and digital
content in which contracts are verified by blockchain and substantiated
by a physical copy.
Just as Bitcoin and blockchain change the face of
the financial industry, Ethereum brings similar changes to the legal
industry. For smart contracts to be accepted, they must comply with
existing laws. They will have to embrace the concepts of contract law
in the event that auto enforcement coding fails (which is highly
unlikely at the time). Smart contracts will have to be flexible to
allow for rescissions, modifications, and reformations. There
will be additional pressure to find engineers who know the law but also
lawyers who code in the contracting language to build compliance in the
earliest stages of the contract.
Smart contracting may benefit Intellectual Property
rights management the most. With smart contracting, a publicly
accessible and indisputable ledge for each IP filing is made but also
affirmed throughout all global jurisdictions. As a result, clear and
concise rights of use for all parties are exemplified. An algorithm can
be developed to identify incoming trademark and patent applications and
compare them to those existing. This way, pending patents and
trademarks can more accurately and quickly be granted or dismissed.
This would resolve many of the issues the IP industry currently faces.
One way in which the legal industry will be changed
concerns equitable principals. Since smart contracts are
self-executing, when conditions in the contract occur and are verified
by the blockchain, the cryptocurrency will be immediately unlocked and
delivered to the other party. As a result, such transactions are
irreversible and more verifiable than traditional paper contracts. In
some instances, parties will not know the other parties involved. If
one party feels something was amiss with contract execution, smart
contracting makes it less likely that redress in our court system is
feasible. Policymakers will have to find ways to regulate pitfalls such
as this one. However, this makes finding a resolution more challenging
because of blockchain’s, and specifically Ethereum’s, decentralized
nature. There is no one individual that the coercive power of state can
be exercised on. A steady adoption of peer-to-peer economic
relations increases anonymity and makes it more challenging to find the
party responsible for a misrepresentation of the law or contract.
As of now, smart contracts are best regulated by
existing legislation and legal policies. However, initiatives such as
CommonAccord are instantiated to create global codes of legal
transacting by codifying and automating legal documents. This will
attempt bridging any gaps in contracting, from differing jurisdictions
to party languages. The benefit of smart contracting on a global scale
is to “automate routine transaction functions while the legal text
provides a frame for legal enforceability.”
Lawyers are currently discussing what legal actions
would be admissible via smart contracting. Some “non-operational
clauses—for instance, the governing law of a contract—are less
susceptible to being expressed in machine-readable code. Some legal
clauses are subjective or require interpretation, which also creates
challenges.” Unlike operational clauses, non-operational ones are
more subjective to human interpretation and are therefore less easily
conveyed and managed via programmed contracts. Operational clauses
pertain to objective legal actions that, for example, may require
payment by a certain date and no other human-based conditions. Some
lawyers anticipate that standardized definitions ought to be put in
place to resolve complicated terms and activities relating to both
operational and non-operational clauses before smart contracts can
become more widespread and effective. Otherwise, smart contracts are
only valuable in the face of reaching decisions derived from
non-operational clauses.
Some lawyers also argue that smart contracts are not
considered legal contracts in the first place. They are merely a set of
business rules embedded in software. These rules or principles hardly
translate into universally accepted and practiced laws and regulations.
It is suggested that one still needs “a separate legal agreement in
order to have something that is enforceable. If you are looking at the
wider blockchain environment, if those activities cross boundaries, you
may need binding agreements regarding whose jurisdiction will be the
governing law.” Since a smart contract is merely self-executing
computer code, it can be governed by some existing legal principles.
Smart contracts are still in the infancy development phases. They
present a challenge to create agreements that are more complex and
address a variety of legal issues. As of now, there are no set of
standards to directly govern smart contracts. It should only be a short
period of time before guidelines and more legal principles are
instantiated to address the varying challenges and complexities of
smart contracting.
Perhaps one of the most significant fallbacks of
current smart contracts is their inability to work with off-chain
systems. Smart contracts are unable to connect with external data
fields which limits its ability to function with modes other than
blockchain cryptocurrencies. Once smart contracts are integrated with
middleware that connects it to off-chain systems, such as banks, the
number of available benefits grows significantly. In this regard, a
bank, for example, could use smart contracting for more than just
digital token transactions.
If a smart contract is to function more efficiently
in the financial sector, it would require knowledge about commodity or
equity prices, which are not available on the blockchain. In fact, a
startup called SmartContract just began experimenting with enabling
smart contract capabilities in real-world applications. It recently
underwent one phase of implementation with Swift, permitting a bank’s
back office Swift systems to communicate directly with smart contracts.
As a result, the smart contract can potentially help the bank send
money in any currency, including dollars and yens, not only
cryptocurrencies. If the phases of implementation are successful,
SmartContract expects to provide services to 11,000 banks.
Over the past several years, digital signatures have
been more widely accepted as evidence of an agreement in court, thus
replacing the traditional requirement of handwritten signatures. Now,
cyber contracts are permissible as long as the mouse click is clearly
indicative of the agreement. Since the 2001 Specht v. Netscape
Communications Corp. case setting this precedent, cyber contracts,
including smart contracts, have been divided into two categories:
click-wrap and browse-wrap. A click-wrap agreement is common for
software licensing companies. License terms are presented to a user and
he must accept or reject them before gaining access to the software.
Contract law is applied to such agreements and it is up to the court’s
discretion whether or not to declare a click-wrap agreement as void or
breaching an established rule of contract law. On the other hand,
browse-wrap agreements don’t require active consent from a user; as a
result, it is not always enforceable by law. Because enforcing these
agreements present inconsistencies, most smart contracts fall under the
category of click-wrap, and are therefore governed by existing contract
law. As previously mentioned, whether the involved parties and those
accused of fraud or some mishap are properly identified becomes a
concern for policymakers in this new digitized legal era.
Conclusion
Since the first introduction of Bitcoin and blockchain to the global
market, rapid advancements have been made to better various industries,
namely the financial sector. Open source, decentralized Ethereum was
then derived from the original blockchain, offering users the
opportunity to create their own currencies and smart contracts. This
presents a new realm for business and operational models, creating some
challenges to the legal industry and the future of not only the
financial industry but also cryptocurrencies in general. Institutions
and individuals engaging in research and development of the blockchain,
Bitcoin, and Ethereum are now eligible for federal and state R&D
tax credits. As the three continue to grow in value and popularity,
more advancements and improvements to this already impenetrable network
will push it to the forefront of our rapidly digitizing market.
