Techno-Legal Standards Are Needed for Smart Contracts

By July 26, 2017Blog

Guest post: Houman Shadab, Co-Founder, Clause.io

As the potential benefits of blockchain-based “smart contracts” become widely understood, a lingering question remains: how will they gain widespread adoption?

In the past, fundamental changes to the technical and legal aspects of markets were adopted  not just by market forces but also by overt cooperation and coordination to develop standards. For example, in 1947 the International Organization for Standardization formed and since then has become a universally recognized source for providing standards that drive quality assurances and harmonization across a wide range of industries and business practices. Likewise, the International Swaps and Derivatives Association in the 1980s catalyzed the global market for financial derivatives by establishing standards for contract structures important practices such as risk management — which would be all but impossible without the standards.

In technology, standardization is one of the many benefits and drivers of open source software development, which proceeds by using widely shared code that serves as the basis for developers to build on and ultimately customize. As digital transformation increases the need for businesses to interconnect their systems, the value proposition of open source becomes all the greater.

In the world of legal contracts, the structure of modern, commercial agreements has come to be relatively standardized. Commercial contracts usually consist of recitals, definitions, the exchange of value, representations and warranties, conditions and ancillary obligations, and boilerplate clauses such as indemnification and choice of law. Businesses around the world benefit from this implicit consensus on structure. But drill down deeper into contracts used even within the same industry and one will find a plethora of specific approaches. This lack of uniformity causes persistent problems and inefficiencies in business, and has spurred several initiatives to develop contract standards.

All of which brings us back to smart contracts. In order to realize the potential benefits of legally binding contracts that use blockchain technology, widespread agreement must reached on a far greater range of issues than required to overcome the costs of proprietary approaches with traditional contracts. These issues range from foundational ones, including the usage of templates and the proper interface for legally binding text, to issues unique to smart contracts, including the suitability of data to confirm contract obligations to security, storage, and execution with a blockchain.

Without standards, smart contracts may improve businesses, but they won’t transform them.

The need for standards and open source tools to usher in a change to the nature of legal contracts and business relationships is why we at Clause (www.clause.io) are launching the Accord Project. Accord will not only develop consensus on smart legal contract structures and associated technical issues, however. It will also establish a set of open source software development tools, which will be proposed to the TSC as new projects at Hyperledger, so that a broad community of developers and users will be able to collaborate directly on the future of contracting.

If you are interested in learning more about the Accord Project, please get in touch at: admin@accordproject.org. Or if you’d like to contribute, our code will be hosted at https://github.com/accordproject.