UK crypto, smart contract statement ‘far from a done deal’

The UK’s legal statement on crypto assets and smart contracts provides market participants with a legal baseline on crypto but does little to kickstart the use of smart contracts, the industry has responded.

Juliet Mason, legal director at TLT

Juliet Mason, legal director at TLT

Yesterday, the UK Jurisdiction Taskforce of the LawTech Delivery Panel published a legal statement on crypto assets and smart contracts wherein the panel addressed the legal uncertainty associated with recognising crypto assets and smart contracts as a tradeable property and as enforceable agreements respectively.

Smart contracts aim to implement and automate performances of contracts between parties, automatically executing transactions by removing the middleman. However, the key hurdle for wider adoption of smart contracts is that they are in their infancy, Juliet Mason, legal director at UK law firm TLT, told IBS Intelligence.

“Smart contracts certainly have wide practical adoption possibilities – however, whether this includes wide application as fully independent contracts is far from a done deal.”

She noted that they also cannot yet be drafted to give the same commercial flexibility as a fully written agreement.

“For example, even the simplest of contracts will include exclusions of liability. How do you write an exclusion of indirect loss into a smart contract? Never mind indemnities or such phrases as ‘reasonable endeavours’ or ‘material breach’. The reason for these phrases in legal contracts is to give the parties flexibility as not all possible eventualities can be known at the outset.”

“Some may say that such flexibility is not required for smart contracts – however, there is no such thing as perfectly written code. There is always the risk of error and unforeseen events and, of course, the industry is still wrestling with the Oracle Problem. Therefore, smart contracts are often used to perform part of a wider traditional agreement (such as the payment mechanism) rather than representing an entire standalone legal contract,” Mason commented.

Tara Waters, FinTech partner at Ashurst

Tara Waters, FinTech partner at Ashurst

The statement does, however, provide more clarity for the UK market on the legal status of crypto assets, reiterating the need for a multi-faceted and fact-specific analysis, according to Tara Waters, a fintech partner at law firm Ashurst.

“By acknowledging that crypto assets should be treated in principle as property, it provides market participants with a legal baseline from which to conduct that analysis. The statement also identifies some areas where further clarification in law would be helpful – for example, in relation to transferability and registration of ownership of crypto assets.

“This further analysis and guidance will certainly be helpful for legal practitioners, although other market participants are likely to still feel uncertainty as to how their proposed activities fit within the wider and complex legal & regulatory environment,” Waters said.

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