Technology

Should Smart Contract Developers Be Held Responsible?

Under certain circumstances smart contract developers could be held accountable.

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Smart contracts, self-executing code based on “if-then” encoded logic, provide an alternative way to transact. Increasingly though, regulators ask, “Who should be held responsible? Who should be held accountable?”

Based on a recent U.S. Commodity Futures Trading Commission (CFTC) speech on October 16, 2018, by the CFTC Commissioner, it seems that individual smart contract developers may be held liable for aiding and abetting CFTC rule violations. Here are a few observations from the speech that I found interesting.

Smart Contracts Are Powerful

There is an unmistakable realization that smart contracts are a very powerful tool that may be misused. The CFTC Commissioner summarized, “In brief, a smart contract is a computer code containing all terms of the contract and is self-enforcing — meaning the software can execute the terms of the contract without additional input from the parties.” He added, “Once the smart contract is formed on the Ethereum network, it operates without further intervention. Some software developers have written code that allows users to create specific types of smart contracts that can be deployed on the blockchain. Once users download this application, they can easily find others using that same protocol willing to transact.”

Many Actors Participate in the Blockchain Ecosystem

Several actors are involved in the blockchain ecosystem. “[T]here are many actors essential to the functioning of the blockchain ecosystem: the core developers of the blockchain software, the developers of smart contract applications, miners that validate transactions, and users, who transact and execute smart contracts on the chain.”

Unlimited Smart Contracts Applications Are a Reality

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The CFTC Commissioner highlighted that smart contracts have many applications. He stated, “Smart contracts are easily customized and are almost limitless in their applicability. For example, a protocol could create smart contracts for flight insurance. [. . .] Smart contracts could also be used to facilitate the sharing economy by enabling users to rent houses, cars, and other property.”

He observed that smart contracts could touch areas that have been traditionally regulated. “Other protocols could create smart contracts that more closely resemble traditional financial products. [. . .] Depending upon the facts and circumstances, this activity could present regulatory issues. It could look like providing investment advice, or, given the anonymity of the predictions, could be used nefariously to facilitate insider trading.”

Some Actors Could Foresee Violation of Laws

The core developers of the underlying blockchain code “had no involvement in the development of the smart contract code.” The CFTC Commissioner explained. Similarly, “miners and general users of the blockchain are not in a position to know and assess the legality of each particular application on the blockchain. The anonymous, decentralized nature of the chain makes it difficult or even impossible for miners and users to monitor the activity of other miners and users.”

The developers of the smart contract code that underlies these event contracts are different. He continued, “[T]he appropriate question is whether these code developers could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations. [. . .]  As such, the CFTC could prosecute those individuals for wrongdoing.”

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Code Is Not Law

While in the developer community “the code is law” is debated, CFTC Commissioner disagreed. He said, “I have heard some say that ‘the code is law,’ meaning that if the software code permits it, an action is allowed. I disagree with this fundamental premise. Case law, statutes, and regulations are the law. They apply to the code, just as they apply to other activities, contracts, or agreements.” He explained, “It is certainly possible that the software code does not represent the entirety of the participants’ agreement and must be interpreted in connection with traditional contract law concepts like good faith and fair dealing.”

CFTC realizes that smart contracts are powerful tools with an unlimited potential and their use will increase as more blockchain deployments occur. CFTC increasingly scrutinizes smart contracts against legal requirements. It is also increasingly asked, who is responsible? Under certain circumstances smart contract developers could be held accountable. Do you think it makes sense to hold individual smart contract developers responsible?

Olga V. Mack is an award-winning general counsel, operations professional, startup advisor, public speaker, adjunct professor at Berkeley Law, and entrepreneur. Olga founded the Women Serve on Boards movement that advocates for women to serve on corporate boards of Fortune 500 companies. Olga also co-founded SunLaw to prepare women in-house attorneys become general counsel and legal leaders and WISE to help women law firm partners become rainmakers. She embraces the current disruption to the legal profession. Olga loves this change and is dedicated to improving and shaping the future of law. She is convinced that the legal profession will emerge even stronger, more resilient, and inclusive than before. You can email Olga at olga@olgamack.com or follow her on Twitter @olgavmack.

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