As technology seems to birth diverse leaps-and-bounds in different sectors, the modus operandi of relationships relating to business dealings between people have to an extent changed over the years. Cryptocurrencies, which can be safely referred to as subsets of the Blockchain technology have seen an astronomical increase in their values over the years. On April 5, 2021, the value of the cryptocurrency market topped $2 trillion. This was driven by a rally in Ethereum, the world’s second-largest virtual coin. Although only EL-Salvador has openly accepted Bitcoin as a legal tender[ii], Cryptocurrencies are generally permissible in countries like Japan, The United States of America, Germany, France, Malta, Canada, to name but a few[iii].
The resultant effect of the overwhelming acceptance of Cryptocurrencies in parts of the world has been the proliferation of Blockchain transactions. Even in Countries like Nigeria where Banks have been prevented from dealing with Blockchain wallets, and generally anything that has to do with Cryptocurrencies, there is still the existence of peer-to-peer transactions between people on certain Crypto currency applications and wallets. It is general knowledge that the Law is a tool for social engineering, and that it seeks to regulate every reasonable aspect of human endeavors. This leads to the emergence of the concepts of Smart contracts, and Smart legal contracts.
SMART CONTRACTS AND SMART LEGAL CONTRACTS
Smart contracts are essentially subsets of the Blockchain space. They are programs that directly control the transfer of digital assets between parties after certain conditions have been met. They are blockchain-based programs that encode certain condition precedents and the subsequent fulfillment of an agreement between two or more parties and automatically fulfills the terms of the agreement once conditions are met. This arrangement presupposes the fact that the functions of an escrow third party is essentially dispensed with, owing to the fact that Smart contracts essentially have escrow functions embedded in them.
Before briefly explaining Smart Legal contracts, it is pertinent to note that Smart contracts are made possible by Smart contract codes. Smart contract codes are executable codes that sit on a blockchain, and essentially interact and interface with the information on the blockchain. For avoidance of misunderstanding, Smart contract codes are the source codes and the programs that birth Smart contracts. Smart Legal contracts are particular applications of Smart contract codes, and they facilitate a binding legal agreement between two or more parties.
The Nature of Escrow agreements
Escrow agreements are those kinds of agreements that involve the use of third parties that hold some form of assets or funds before they are transferred from one party to another. In escrow agreements, the third party, who is referred to as the escrow agent, holds the funds until both parties have performed their contractual requirements (condition precedents).
Escrow Agreements and Smart contracts
A typical example of an escrow agreement, as it would relate to smart contracts, is the buying and selling of cryptocurrencies on Blockchain wallets. In Nigeria, since banks have been forbidden from being involved in Cryptocurrency agreements, most people resort to peer-to-peer transactions. A major example of this is usually found on the Binance app. On Binance Peer-to-peer transactions, the parties essentially involve the seller of the coin, the buyer, and Binance in itself. The roles of the seller and the buyer are obvious. However, Binance largely has got a role to play in the performance of the contract in question. When the Seller indicates his interest to sell the coin, and the buyer has indicated his interest to buy the coin, the seller gives the quantum of the coin in question to Binance, who in turn holds the coin pending the payment of the agreed amount by the buyer to the seller. Upon confirmation and receipt of the money by the seller, the agreed amount of the coin in question is therefore released by Binance to the buyer.
A smart contract has got details and certain permissions which are usually embedded deeply in code. This contract requires an exact sequence of events to take place, so as to trigger and bring to force the agreement of the terms which are mentioned in the smart contract. This is the medium through which the nature of Escrow agreements come to play in Smart legal contracts. The possibility of a consideration which ought to be furnished to a particular party is largely dependent on his performance of his own part of the condition precedent to the contract. The performance of a person’s obligation in a contract would automatically trigger the consideration that should ordinarily accrue to the given party.
One of the largest benefits of smart contracts is the automated nature of its operation. It is interruption-free, and a third party cannot make changes in the agreement and decision. In fact, the Smart contract code is at best what would be perceived as a third party. There are usually issues which are intrinsically attendant with escrow agreements, and these problems cannot exactly be totally dispensed with, owing to the humanoid natures of these Escrow agents. Such problems include, but are not limited to the commingling of funds and the utilization of funds for personal purposes, fraud, as seen in instances where the grantee or the purchaser cooperates with the escrow agent and inadvertently caused the property to be delivered before the condition precedents and the metrics laid out in the contract were met. The Garbage-in, Garbage-out system which smart contract codes work with is in this instance very advantageous, as the only possible way a smart contract code can compromise the position of either parties is if the code is hacked and manipulated by some form of supervening virus or program created by a hacker. Asides this, a smart contract code can obviously not be bribed or be manipulated emotionally.
In essence, Smart contract codes serve as escrow agents for smart transactions between parties on the Blockchain realm. The role of escrow managers are already being replaced by smart contracts. Any rules that surround the proposed exchange between the parties cannot be altered once on the blockchain. This gives both the buyer and the seller confidence that they will not be cheated during the transaction or the exchange, as the case may be.
Written by Theophilus Aigbogun
Theophilus Aigbogun is a Junior Associate with Marcus-Okoko & Co., and specializes in Tech Law Advisory, Legal Tech, and Regulatory compliance.