An Introduction to Smart Contracts and the Law

What are smart contracts?

There is no one definitive answer to the question “What is a smart contract?” Depending on who you ask a smart contract could be either considered lines of executable code existing on a blockchain or an autonomous agreement. In the context of the legal industry, a smart contract is defined as an agreement between two or more parties to the exchange of information or assets; based on one or more conditions being met; which is self-enforcing, autonomous and operates as a computer program.

Such smart contracts are not written or oral contracts but are instead programs executed and stored, most commonly, on a trusted and independent blockchain (a decentralized public ledger). Smart contracts do not necessarily have to be executed on the blockchain (such as a simple transaction processed by a vending machine), however, the use of secure blockchain technology ensures that both parties are able to trust that their smart contract cannot be changed or reversed by any party. The use of blockchain technology ensures that both parties are able to view and access the code of a smart contract and also allows for smart contracts much more complex than simple automated transactions.

The purpose of smart contracts is to prevent parties, to a contract, from failing or refusing to fulfill their agreements. Since smart contracts are written into code and executed independent of both parties, it is impossible for any party to renege on their agreement. Essentially smart contracts create trustless environments where parties to a contract do not have to rely on each other nor fallible and centralized institutions (such as law firms or the government) to enforce contracts.

How can smart contracts be used?

There are numerous practical applications of smart contracts. One common application of a smart contract is for betting. Parties to a betting agreement will all send their assets to a smart contract which then waits for a condition to the bet to be fulfilled (for example whether or not a winner has been declared for the Mayweather v. McGregor fight) and then based upon the result, the assets of the losing parties are redistributing to the winning parties. In this example, while the smart contract still relies on a third party to decide the winners, it is impossible for the parties to the contract to renege on their agreements by refusing to pay the winners.

A more complex application of smart contracts is insurance policy. Smart contracts are now being used to autonomously execute insurance payouts, without the policyholder having to make a claim. Instead, payouts can be automated if verifiable and public information (such as if the policyholder had died, or if a natural disaster had affected their home) is found by the contract. Such an application would significantly reduce the possibility of insurance fraud, as well as saving the time of both policyholders and insurers in making and verifying claims.

The possible applications of smart contracts are extensive and varying from simple transfers of assets to complex financial operations. The trustless, self-enforcing and public nature of smart contracts has also opened up the possibility of their use by governments and the legal industry. In many countries and in the US, governments are considering using smart contracts in elections. This fact demonstrates the increased importance of both blockchain technology and smart contracts and, in the context of the law, the need for definitive legislation and research on smart contracts.

Are smart contracts legal?

Smart contracts are not inherently legally binding and recognized contracts, however, that does not mean smart contracts cannot be legal. The legality of a smart contract is dependent upon the nature of the agreement, the conditions of the agreement and whether parties to the contract are consenting. It is also dependent on a legal system’s definition of what is and is not a contract.

The primary issue with the legality of smart contracts is that unlike traditional contracts, smart contracts are neither written text nor oral communication (which is a requirement of contracts in most legal systems). Smart contracts are solely code and while the code of a smart contract is supposed to be accessible to both parties, code is not a natural language or even a language for that matter.

One notable case that demonstrates the risks of recognizing code as a legal contract is the DAO incident. In the DAO case, a smart contract known as the Decentralized Autonomous Organization was supposed to raise money from investors who would then use the smart contract to fund other blockchain projects that they liked. It was essentially a democratic Kickstarter for blockchain projects. The DAO eventually raised over $150 million USD, however, due to a bug in the code of the DAO smart contract, hackers were able to steal over $50 million dollars. Although to the code of the smart contract this was a completely legitimate transaction, the intended and implicit agreement between the participants of the smart contract wouldn’t have allowed for such an action. This case demonstrates the problem with treating code as the rule of law in smart contracts.

One solution offered to this problem is that smart contracts, if intended to have the protection and recognition of the law, should be accompanied by written agreements that would supersede any faults in the code of smart contracts. In such cases, the legality and rules of the smart contract would be clear to both participants and to the law. Outside of cases where smart contracts are not accompanied by written contracts, there exists a large legal gray area. In certain US states such as Arizona, Nevada, and Vermont, legislation has been introduced that legally recognizes smart contracts. However, in other states and countries, there is no definitive legal position on whether code alone is considered legally binding. 

While there are very obvious cases where smart contracts would not be recognized by the law, such as an assassination smart contract or smart contract that trades state secrets for fiat, in more innocuous cases such as betting there are questions over just how much participants are protected by the law. Such questions over the legality of smart contracts will likely depend on future state legislation and an increase in use-cases for which the legal industry can begin to evaluate.

What is the future of smart contracts and the law?

As the use of smart contracts for financial operations increases, so will the desire for definitive legislation on smart contracts. Despite some proponents of smart contracts arguing that they will remove the need for contract lawyers, cases such as the DAO demonstrate that for now, code is not law. Smart contracts do make many common operations and contracts much cheaper and efficient and this may limit the responsibilities of many lawyers, but such contracts will still require the protection of the law.

While the self-enforcement of smart contracts seemingly eradicates the need for contract law enforcement, the DAO shows that when smart contracts fail to enforce their intended agreements, that failure can have significantly detrimental and sometimes irreversible consequences that can only be prevented and reversed by the human element of the law. The legal industry will also play a significant role in assessing the legality of different smart contracts and possibly attempting to supersede the self-enforcement of such contracts when they circumvent laws and regulations (i.e. tax law, gambling laws). Smart contracts are a tool that when used in accordance with the law and with the protection of the law, can provide a great deal of value to its users. However, when such contracts fail to act as intended or attempt to circumvent the law, contract law will definitely be required to overrule smart contracts.

In conclusion, smart contracts will not in the near future be replacing contract law enforcement. There is no doubt that smart contracts will not only require legal oversight to protect consumers but will likely increase the role of law in contracts. The law will be needed to prevent the misuse of smart contracts and the exploitation of smart contract code, for the protection of both consumers and the law.

An Evaluation of Western Sanctions on Iran

The effectiveness of Western sanctions on Iran can be evaluated by three key criteria: Whether they have had a significant impact on Iran’s economy, whether they have a set and achievable end-goal and whether the sanctions have been supported and upheld by allying states. These three criteria are crucial to the effectiveness of sanctions, as outlined in a previous essay,[1] and can therefore be used to judge if Western sanctions of Iran have been effective in achieving their desired goal. These criteria can also be used to assess exactly why Western sanctions of Iran have been effective, in comparison to numerous other failed sanctions.

The current impact of the Iranian sanctions on Iran’s economy has been significant. Since 2011 the Iranian Rial has been continuously depreciating. Iranian oil exports have also decreased because of EU sanctions and as such the main consumers of Iranian oil are now China, India and Russia. This dependency on trade with China, India and Russia represents a weakness in their trading power. It has led to increase inflation and the banning of Iranian banks by the EU and US has prevented Iran’s ability to deal with Western based multinational corporations (MNCs). According to a report by the World Bank Group: “the imposition of sanctions on Iran’s oil exports had a serious negative effect on the Iranian government budget.”[2] Public welfare has also decreased with the government removing food, electricity, water and gas subsidies in 2010 and an estimated unemployment rate of 35% due to low export demand.[3] The Iranian economy has lost approximately $17.1 billion USD in export revenue.[4] Such statistics highlight the significant impact that Western sanctions on Iran have had on the Iranian economy, largely due to the Iranian economy’s reliance upon oil exports to the EU and services from American MNCs. Despite economic relief being provided by China and Russia, the Iranian national economy has failed to recover from the impact of such sanctions. These findings give credence to argument that Western sanctions have been extremely effective in halting the Iranian economy.

In assessing the goals of Western states in sanctioning Iran, the West has used their sanctions to halt the Iranian nuclear program. This goal, unlike most goals of sanctioning states, is a practical and achievable goal that attempts to restrict Iranian military and political power in exchange for economic power. This fact combined with Iran’s heavy reliance upon trade with the West highlights the fact that Western sanctions on Iran have been extremely effective and that their outlined goal was achievable. The recent Iran nuclear framework agreement to end Western sanctions in exchange for the ceasing of Iran’s nuclear program highlights the efficacy of sanctions as a method of conflict resolution. The willingness of Iran to give up their sovereignty in exchange for economic power emphasis the effect that such sanctions have had and can have on a state by efficiently targeting its economy and setting realistic and practical goals.

Another important factor in the effectiveness of the Iran sanctions is the fact that they were multilateral and supported by numerous Western states. The sanctions involved restrictions imposed by the UN on arms trade with Iran, Iranian assets and Iranian banking. American sanctions when further by completely banning any American firms from dealing with Iran which greatly restricted Iran’s access to Western markets and services. EU sanctions also supported American sanctions by restricting Iran’s access to European markets and arms trade. European sanctions had the greatest impact on Iran by completely preventing their access to any Western markets, greatly devaluing their trading power. The involvement of Western states, other than the US, such as the EU and Australia played a large role in having an impact on Iran, by completely restricting Iran’s dealing to economically developing states such as India, China and Russia. It is as such that a major aspect of the efficacy of the Iranian sanctions was the fact they involved multiple economically developed states that the Iranian economy was reliant upon.

The effectiveness of Western sanctions on Iran, as an exercise of coercive state power, cannot be understated. Because of the multilateral nature of the sanctions, the significance of Western markets to the Iranian economy and a set and achievable end-goal for the sanctions, Western sanctions have been extremely effective in coercing Iran into ending their nuclear program. The 2015 Joint Comprehensive Plan of Action, signified the end of the Iranian nuclear “issue” with Iran dismantling their nuclear program in exchange for sanctions relief. This case study demonstrates the coercive power of sanctions as method of conflict resolution and the requirements for such sanctions to have an impact upon a state.


[1] Butler, Umar. 2017. The Efficacy of Sanctions as a Method of Conflict Resolution. February 8. Accessed February 11, 2017. http://umarbutler.com/index.php/2017/02/08/efficacy-sanctions-method-conflict-resolution/.

[2] Ianchovichina, Elena, Shantayanan Devarajan, and Csilla Lakatos. 2016. Lifting Economic Sanctions on Iran: Global Effects and Strategic Responses. Policy Research Working Paper, World Bank Group.

[3] Peterson, Sabrina M. n.d. Iran’s Deteriorating Economy: An Analysis of the Economic Impact of Western Sanctions. Accessed February 12, 2017. http://www.iar-gwu.org/node/428.

[4] Mufson, Steven. 2015. What ending sanctions on Iran will mean for the country’s economy. August 12. Accessed February 12, 2017. https://www.washingtonpost.com/business/economy/what-ending-sanctions-on-iran-will-mean-for-the-countrys-economy/2015/08/12/2c3a9942-3d17-11e5-b3ac-8a79bc44e5e2_story.html.

The Fundamentals of Intra and Interstate Conflict Resolution

Introduction

To a large extent, the mechanisms for resolving conflict can only be effective if they address the causes. In regards to interstate conflicts, effective mechanisms for resolving conflict largely focus on attempts to regulate the anarchical nature of the international sphere, whereas more temporary and less effective methods attempt to “alleviate the symptoms” of such a system. In regards to intrastate conflicts, truly effective mechanisms of conflict resolution must focus on dealing with the root causes of civil conflict as methods of conflict resolution that do not do so usually leave long term discontent that has and will fester within a civilian population. It is as such that in general, methods of conflict resolution must address the root causes of conflict if they aim to be truly effective.

Causes of and solutions to interstate conflicts

To first attempt to resolve interstate conflicts the causes of interstate conflict must be understood. Theories about the causes of interstate conflict are derived from two key principles, one being that the nature of the international system is anarchical and another being that all states will attempt to preserve their own sovereignty. As a result of these two principles, we notice that states will either act in an offensive or defensive manner. When acting offensively a state will attempt to maintain their own security through hegemony and domination. This perspective on interstate relations is known as “offensive neorealism” and was first postulated by John A. J. Mearsheimer.[1] An opposing theory known as “defensive neorealism” argues that it is in the best interests of a state to increase and maintain their own security by bolstering their military and forming alliances. The main proponent of this structural theory is Kenneth Waltz.[2] Both of these methods can and usually do result in conflict, especially when states conform to offensive neorealism, but also when states employ defensive neorealism and create what is known as the “security dilemma” wherein each state continues to bolster their military power to protect themselves from the other. The fact that there is no establishment that can control or restrict states, thus the nature of international system being anarchical, implies that all states will never have perfect knowledge of the intentions of other states and as such they will always act to preserve and increase their own power whether by aggressive or defensive methods.

Another important cause of interstate conflicts is the existence of what Johan Galtung, the founder of Peace and Conflict studies, calls “negative peace.”[3] Negative peace can be defined as the resolution of violent conflict, without the resolution of the underlying cause of conflict. Galtung argues that negative peace was an incomplete form of peace with actual peace being the restoration of positive relations between parties to conflict, also known as “positive peace.” When parties to conflict fail to establish positive peace it becomes more likely that, as a result of increased negative skepticism about the intentions of conflicting states, parties to conflict will eventually re-engage in violent conflict.

Effective methods of resolving interstate conflicts largely attempt to focus on causes of interstate conflicts by avoiding the “security dilemma”, establishing positive peace between previously conflicting states and creating situations where conflict is not in the interests of states, whereas methods of resolving conflict that avoid focusing on the causes of conflict and instead focus on the conflict itself are largely ineffective. One example of the effectiveness of methods of conflict resolution that target the causes of interstate conflict is the establishment of the European Union. By focusing on providing order to the anarchical international system and promoting the sharing of resources and weaponry by European states, the European Union has effectively been able to prevent any interstate conflicts between EU member states since the formation of the EU in 1992. Another example of this is the North Atlantic Treaty Organization. The NATO alliance, beginning in 1949, has been effective in preventing any conflict by NATO member states due the fact that it alleviates aspects of the anarchical nature of the international system by sharing the military resources of member states thereby preventing the “security dilemma.” It is also in the best interests of member states to cooperate with each other thereby strengthening their military and diplomatic power as an international bloc. The resolution of underlying causes of conflicts and establishment of positive peace between states is also an effective method of interstate conflict resolution that targets the causes of interstate conflict. The cessation of negative peace is important as it reinforces and increases skepticism that already exists due the anarchical nature of the international system. It is as such that truly effective methods of conflict resolution must target the anarchical nature of the international system, negative peace and the “security dilemma.” An example of the ineffectiveness of conflict resolution methods that do not target the causes of interstate conflict would be the sanctioning of Russia by the EU for Russia’s invasion of Ukraine 2014. These sanctions failed to target the causes of the Ukrainian conflict, that being the “security dilemma” from the approaching geographical NATO influence near Russia, and as such the sanctions failed to effectively cause Russia to leave Ukraine.[4] As demonstrated through these examples, any method of interstate conflict resolution must target underlying causes of the conflict, that being the anarchical nature of the international system, if it is to be effective.

Causes of and solutions to intrastate conflicts

To effectively resolve intrastate conflicts the causes of such conflicts must be understood. Unlike interstate conflicts, the possible causes of intrastate conflicts are numerous and nuanced. However, according to economist Paul Collier most civil conflicts are caused by a combination of civil discontent and wide-spread economic issues with economic problems being the main cause of such conflicts.[5] While civil discontent does play a part in causing and justifying civil conflict, economic issues are extremely effective motivators for intrastate conflict with conflict becoming necessary for the survival of citizens. One example of this is the Sierra Leone Civil War from 1991 to 2001. Due to the sudden discovery of rich natural resources within Sierra Leone, a civil war ensued between rebel groups and the Sierra Leone government for control of such economic resources. The cause of this intrastate conflict was the ambitions of rebel groups for control of economic resources. They were also aided by the fact that due to a deficiency of industry within Sierra Leone, the government lacked enough military resources to deal with such rebel groups. The presence of significant economic issues contributes greatly to civil discontent, especially when there is a lack of military power to suppress such discontent. When citizens are economically satisfied, they are much less inclined to effectively lower their own economic status by engaging in civil conflict. One example of this is the 2016 Turkish coup d’état attempt. Despite there existing a large amount of Turkish anti-Erdoğan Kemalists, the coup d’état attempt failed to gain support from both civilian and military populations. This was in part due the fact that the Turkish government is relatively stable in comparison to bordering states and is also experiencing significant economic development under Erdoğan.[6] It is as such that the presence of economic issues, or lack thereof, can have a great impact on whether intrastate conflict will occur within a state.

Another important cause of civil conflict is the existence of negative peace and what Galtung calls “structural violence.”[7] While economic factors play a large role in causing conflict, in some cases intrastate conflict may be caused by the presence of structural violence and negative peace from previous conflicts. Galtung claims that structural violence is the violent oppression and restriction of a targeted group from access to basic necessities. The presence of structural violence greatly increases chances of civil conflict by creating groups of oppresses individuals that hold large amounts discontent for other groups within a society, thereby creating negative peace. Negative peace also plays a large role in creating civil conflict as it increases the likelihood of civil disobedience by oppressed groups towards their oppressors and creates rifts within societies, these rifts can then be monetized upon to encourage civil conflict usually to the economic benefit of one party. One example of this would be the Rwandan genocide of 1994. This genocide was a result of pre-existing negative peace between Hutu and Tutsi Rwandans that existed due to the historical oppression of Hutus by a Tutsi government regime. While the Tutsi regime eventually ended and a Hutu majority government was elected, the underlying social rifts between Hutus and Tutsis had not disappeared. The Hutu dominated government slowly began to create structural violence by requiring special identification cards for Tutsis and attempting to prevent the intermarriage of Hutus and Tutsis. This eventually deteriorated into the outright massacre of Tutsis by the government and Hutu militias. Due to the failure of the government to effectively create positive peace between the two pseudo-ethnic groups and remove structural violence from Rwandan society, civil conflict ensued. It is ass such the existence of negative peace and structural violence in a society can greatly contribute to the presence of civil conflict by justifying its existence and creating large amounts of civil dissatisfaction.

For solutions to intrastate conflicts to be effective they must target the root causes of such conflicts. One example of the efficacy of solutions that target the causes of conflict, specifically targeting the economic issues that lead to civil conflict, is the Second Liberian Civil War from 1999 to 2003. The resolution of this conflict involved the recollection and distribution of wealth taken by the warlord Charles Taylor, large amounts of humanitarian aid being provided to the Liberian people and it also dealt with the granting of rights to women within Liberian society. By specifically targeting the causes of the conflict, that being widespread poverty, the resolution of the Liberian conflict was effective in creating a form of “positive peace” between the parties to conflict (that being the Government and numerous rebel groups) and in removing justifications for conflict. Another example of the effectiveness of solutions to intrastate conflicts that target the causes of such conflicts, specifically targeting the existence of negative peace and structural violence, is the South African Truth and Reconciliation Commission. Following the formal ending of apartheid in South Africa, the Truth and Reconciliation Commission was established and measures were put in place to protect against the discrimination of races in the workforce and in education. Such measures were effective at ending the structural violence that had been rampant throughout South African society and had been endorsed by the Apartheid polices of the South African government. The establishment of the Truth and Reconciliation Commission also dealt with the issue of “negative peace” by granting amnesty to certain perpetrators of structural violence thereby encouraging such perpetrators to come forward and admit their wrongdoings to their victims. This process involved the investigation of both “white” and “black” individuals that had committed crimes and was effective in creating positive peace by humanizing both the victims and perpetrators of such crimes. The process of conflict resolution adopted by the South African government was extremely effective at targeting the causes of intrastate conflict, thereby successfully resolving the oppression that had occurred under Apartheid. It is as such that effective resolutions of intrastate conflicts must target the causes of such conflicts by attempting to repair the economic issues that caused such conflicts, creating positive peace between conflicting parties and dealing with the existence of societal rifts and the structural violence that may oppress one of the conflicting parties.

Conclusion

The most important requirement of any solution to inter or intrastate conflict is that such a solution be able to effectively target the causes of the conflict. In the context of intrastate conflicts this means that for a method of conflict resolution to be effective, such as the Truth and Reconciliation process in South Africa, it must deal with the economic issues present within a state and attempt to prevent societal rifts by creating positive peace and eradicating structural violence. In the context of interstate conflicts this means that for a method of conflict resolution to be effective it must alleviate the “security dilemma”, it must bring some aspect of responsibility and order to anarchical international system and it must also prevent the existence of negative peace between states which can increase tension and mistrust between conflicting states. These requirements are crucial to any successful resolution of either inter or intrastate conflict.


[1] Mearsheimer, John. 2001. The Tragedy of Great Power Politics. New York City: W.W. Norton & Company.

[2] Waltz, Kenneth, Hedley Bull, and Herbert Butterfield. 1979. Theory of International Politics. New York City: McGraw-Hill.

[3] Galtung, Johan. 1996. Peace By Peaceful Means: Peace and Conflict, Development and Civilization. New York City: SAGE Publications.

[4] Francis, David, and Lara Jakes. 2016. Foreign Policy – ‘Sanctions Are a Failure…Let’s Admit That’. 28 April. Accessed November 30, 2016. http://foreignpolicy.com/2016/04/28/sanctions-are-a-failurelets-admit-that/.

[5] Collier, Paul. 2006. “Economic Causes of Civil War and Their Implications for Policy.” Oxford: Oxford University Press, April.

[6] Economist, The. 2016. Erdogan’s new sultanate. 6 February. Accessed November 2016, 30. http://www.economist.com/news/special-report/21689871-under-recep-tayip-erdogan-and-his-ak-party-turkey-has-become-richer-and-more-confident.

[7] Galtung, Johan. 1969. Violence, Peace, and Peace Research. Oslo: International Peace Research Institute.