Yes, blockchain technology can do things which conventional ledgers or registers cannot do. A few days ago I argued that this didn’t mean blockchain should replace traditional ways of recording legal transactions wholesale. Traditional ways of recording legal transactions embed functions which blockchains don’t embed yet. Where the law demands it or wherever else it makes sense we should think about implementing them.
Here’s in more detail what I had in mind.
What Blockchains Are Inherently Good At: Evidence and Control
There are two things that blockchain technology can do better than any notary, traditional register or piece of writing. They’re related. First, clarify with certainty whether a transaction has come about and what the content of this transaction was. It’s an evidential function. Second, enable compliance control or, more positively speaking, compliance management. This can come into play where transactions trigger tax obligations such as property tax or stamp duty. It’s a controlling function.
The Traditional Legal Approach
These two functions are inherent in blockchain technology, which allows the recording of data in a durable, immutable, reliable, available and transparent manner. Traditionally, legal systems, at least those embracing freedom of contract, allow legal transactions to go ahead without ensuring these functions. That’s because traditionally only imposing additional, often inconvenient requirements on the parties involved could ensure these functions. In freedom of contract systems, restrictions like this are only justifiable to protect overriding interests, usually overriding public interests.
Written form is an example of a relatively mild, um, form of such a requirement. Then there is notarial form, the requirement to have a legal transaction recorded by a notary. Another requirement is the duty to have the result of a legal transaction entered in an official register. Sometimes we find more than one of these requirements imposed at the same time.
Shares in Private Companies
The corporate space is a good example.
In Singapore, the transfer of shares in a private company is not effective until the registrar has updated the electronic register of members of the company. Registering a share transfer requires a proper instrument of transfer; an instrument being a written document, mind. A sale of shares triggers stamp duty, and no respective instrument is admissible in evidence for any purpose unless it’s duly stamped.
In Germany, the transfer of shares in a company with limited liability by a shareholder requires notarial recording.
There’s no need to go into detail any further. Suffice it to say that a transfer of shares in private companies isn’t as easy as one-two-three.
Landed property provides even better examples.
In Singapore, any contract for the sale or other disposition of immovable property must be in writing to be enforceable. For an instrument of transfer of ownership in registered land to be effective you must enter it in the land titles registry. There are prescribed forms for this, which you must use. These instruments trigger stamp duty, too. And again, only an instrument duly stamped is admissible in evidence.
In Germany, for a contract on the transfer of ownership of land to be effective a notary must record it. The transfer of ownership itself, called declaration of conveyance (Auflassung), is a separate agreement. All parties must enter into it before a competent agency. This can be a notary but also a court at times, among others. In addition, for the transfer of ownership in land to be effective you must register it in the land register.
An agreement to transfer ownership not recorded by a notary is void. It becomes valid, though, if the parties declare conveyance and the transfer is registered in the land register. In other words, fulfilling that second form requirement heals not fulfilling the first form requirement.
Again, there’s no need to go into further detail. As you can see it isn’t easy to act rashly on a landed property transaction. Also, you really need to know what to do if you want a landed property transaction to be effective.
Another one from Germany, often overlooked. A spouse may only agree to dispose of his property as a whole, and of objects of the household too, if the other spouse consents.
If one spouse enters into such a contract without the consent of the other spouse, the contract is ineffective. Unless the other spouse ratifies it. If one spouse enters into a unilateral transaction without the necessary consent of the other spouse, the transaction is simply ineffective. It’s a unilateral transaction, for example, and not a contract, if one spouse abandons ownership of his property as a whole.
What Blockchains Are Not Inherently Good At
These are examples of legal transactions which are subject to restrictions of private autonomy. Why aren’t we free to transfer ownership of our house and our shares in a private company to a friend by handshake agreement alone? In Germany, why must our spouse be okay with it if the house and shares are everything we own? And if we add a few household objects for good measure?
Warning and Advising
There are various reasons why a legal transaction needs to meet conditions to be valid and/or enforceable. A written form requirement has evidential function. So does law which prescribes that something is only admissible in evidence if stamp duty has been paid. Written form also emphasises that what I’m about to be doing is not as simple as buying a magazine. Having to comply with it reminds me not to rush things. It’s a warning function.
The same applies where law decrees that to be effective a legal transaction requires notarial recording. The notary’s explanations of what’s happening and what it all means add an advising function to the whole. A notary can also ensure compliance with tax and duty obligations, thus fulfilling a controlling function.
In fact, having to involve any specific third party serves the above functions combined: evidential, controlling, warning and advising. Be it a notary, the government, the missus or the hubby.
Finally, registration requirements fulfil evidential and controlling functions. Where you need to register a transaction for it to be effective in the first place, it serves a warning function too.
Implementation in Blockchains
Of its own accord, blockchain technology doesn’t fulfil warning and advising functions. As things develop lawmakers might consider this insufficient. This could set back or even render impossible the use of blockchain technology for certain legal transactions. In particular, transactions whose objects are physical, because they are under the aegis of lawmakers.
That’s why we should think about how we can load the warning and advising functions into the technology.
And although there’s not much that lawmakers can do to make observing these functions mandatory for transactions taking place in cyberspace entirely (because haha) it might make sense to implement them there as well.
How to Do That?
A blockchain is a ledger, a register, a database, but in the form of software. It can contain as data anything which its paper-based equivalents can contain too. Including code. The difference is that code on paper can’t be run directly but code on a blockchain can be.
This has been discussed under the term ‘smart contract’. It means that you can code all kinds of things onto a blockchain including warning and advising functions.
The degree to which a function so coded must be fulfilled before a transaction can get executed may vary. It’s possible to implement a simple are-you-sure-confirm-or-cancel dialogue, or a detailed guidance procedure tantamount to an afternoon at the notary’s. Or everything in between. Where warning and advisory needs are small, simple confirm-or-cancel dialogues, mandatory videos etc. could do the trick. Code can provide for that. Where law or good sense call for more sophisticated effort, code alone may not be enough. Instead, a combination of code and human involvement could implement more stringent requirements as needed. In this case code could contain the condition of a decision maker’s placet as trigger for the transaction to proceed. In so far, this would mean taking the transaction off-chain. Think of that notary or the revenue authority or their cyber equivalents. Think of the spouse.
Smart contracts aren’t secret sauce. The novel bit is that today the idea of executing parts of a smart contract off the chain is better accepted than before. For a moment in time this ex machina element had seemed inconceivable to many proponents of blockchain technology. Some coders and other enthusiasts had even assumed that one could transcribe any legal transaction into code entirely. And thus administer and execute it by code alone. This way, they had believed, blockchain technology would obviate the need for third-party involvement in legal transactions, especially that of humans. From the perspective of jurists mindful of the dangers of conceptual jurisprudence (Begriffsjurisprudenz), that was so 1867. But the events leading to the hard fork after the DAO hack of 2016 has put the orthodox right.
By now it’s widely accepted that smart contracts can contain more than self-executable code. They may, and perhaps should at times, contain a combination of code and human language. Smart legal contracts like this, other than smart contract code alone, have the potential to evolve into sophisticated transaction tools. Adding warning and advising functions to blockchains is only a small, albeit important detail of this evolution.