However, the term smart contracts was introduced in theory long before the origin and development of the aforementioned blockchain technologies. Authorship is attributed to the legal theoretician and cryptographer Nick Szabo, who, in his 1997 article (Smart Contracts: Formalizing and Securing Relationships on Public Networks) considers common drink vending machines to represent smart contracts, since in his opinion they involve the conclusion of a purchase contract with a seller who is not present at the time but represented by the vending machine. As soon as the purchaser inserts coins in the machine and selects the required goods, they accept the seller’s offer and the contract is subsequently performed by the vending machine, which delivers the goods to the purchaser and allows them to acquire the ownership right.

Blockchain and the development of smart contracts
However, the true development of smart contracts did not start until recent years, especially thanks to the development of the technology called blockchain, which has brought a crucial commodity to the technological world – data credibility.

So how can we understand smart contracts in the context of today? In general, it can be said that a smart contract is any algorithm that can independently verify, execute, enforce or restrict the performance of contractual rights and obligations. In practice, we can think about purchase or lease contracts, handling of financial derivatives or negotiation and realisation of pledges. However, a warning suggests itself here that the practical use must also be understood in the context of the technological nature of smart contracts. After being approved by both parties, a smart contract (i.e. a mere software code) is uploaded to the blockchain database environment, it is verified and then it waits without a possibility of change for the determined date when the performance of “A” or “B”, or even “C” occurs (e.g. cancellation of the obligation, if-then principle).

One of the many flaws of smart contracts is the impossibility to subsequently alter the obligation that has been entered into the blockchain environment. Nevertheless, before we focus on the individual pros and cons of smart contracts as such, let’s first consider whether this procedure can be regarded as a contractual process in line with valid law.

What does Czech law think about this?
Can smart contracts be considered contracts as such? The Civil Code states that “in a contract, the parties express their will to establish an obligation between themselves and to be governed by the contents of the contract” and that “a contract is concluded as soon as the parties have agreed on its content”. In the case of smart contracts, there is no doubt that the algorithm that is supposed to perform the obligation is an expression of the will of the parties and that at the moment of arranging this obligation, it is validated as an obligation in the environment of the blockchain network, i.e. the contract is concluded.

The Civil Code allows everyone to select whichever form they like for their legal acts (unless the agreement or law stipulate otherwise). Another question suggests itself with respect to smart contracts, namely whether legal acts in the form of smart contracts will hold even if the written form is required. Since all smart contracts, or more precisely their contents, are captured in algorithms written in specific programming languages, expert knowledge is required from the reader to understand them. However, there is no regulation that sets what language has to be used to meet the requirement of written form. We can therefore conclude that an agreed algorithm as such can completely capture the contents of a legal act.

Identification of the agent

Since every user in the blockchain database is a holder of two certification keys – private and public – it is possible to determine the agent, even though it is not possible to identify this person in this way based on usual civil identification data (first name, last name, etc.). This, we should admit, could represent the most problematic part of our assessment and going forward probably also the biggest stumbling block for any efforts to integrate smart contracts in the law.

On the other hand, is it necessary in the times of advanced technologies to rigidly insist on the need for identification using conventional data, or is it instead possible to accept a digitalised form of identification features of individual persons, especially in the unique environment that the parties have selected for the “written form”?

Since the private key can be held only by the specific user and the data cannot be changed after being entered in the database, the requirement for signing the written form with an advanced electronic signature is also met, in line with EU legislation and the Act on Trust Services for Electronic Transactions.

This article was published in the online magazine epravo.cz, 17 October 2018.