Smart Contracts... Between Development and the Quagmire of General Legal Theory

The legal and economic landscape today is witnessing an unprecedented revolution driven by blockchain technologies and their emerging phenomena, such as smart contracts and cryptocurrencies like Bitcoin. While proponents view these technologies as the future’s hope for overcoming bureaucracy and intermediaries, a legal perspective raises fundamental questions about their compatibility with established principles of law and whether they truly represent progress or merely a fertile ground for legal chaos.

First: Positives and Technical Advantages: It is undeniable that encryption technology and smart contracts have provided innovative solutions to some flaws inherent in traditional transactions:

1. Execution speed and elimination of intermediaries: Smart contracts execute automatically once predefined software conditions are met, thereby eliminating the need for banks, notaries, or brokers.

2. Data transparency and difficulty of forgery: Encryption relies on distributed ledgers, making it technically nearly impossible to alter or falsify data.

3. Global nature of transactions: Digital currencies transcend geographical boundaries, facilitating direct financial transfers across countries without exorbitant remittance fees.

Second: Legal Criticism and Drawbacks (Critical Perspective)

Despite their impressive software advantages, a legal approach to these technologies reveals deep gaps and profound issues within the general theory of law and contract:

1. The smart contract’s inability to accommodate “human intent”:

• In legal theory, a contract originates from mutual consent (offer and acceptance) and remains subject to modification or annulment if the consent is vitiated by defects such as duress, mistake, or fraud.

• Smart contracts are rigid software programs that execute commands blindly; they do not recognize force majeure circumstances, fail to adhere to the principle of good faith in contract performance, and cannot be halted even if both parties discover a fundamental error.

2. Absence of regulatory authority and loss of rights:

• The philosophy behind Bitcoin and encryption is based on “absolute decentralization,” meaning the elimination of the state’s role and the judiciary. This contradicts the core of legal norms, whose strength derives from the organized and effective sanctions imposed by public authority.

• In cases of fraud or software vulnerabilities, there is no authority to which one can turn to restore rights or freeze assets, leaving individuals at the mercy of software rather than under the protection of the law.

3. Ease of exploitation for illegal activities:

• Digital currencies provide an anonymous environment, making them a fertile tool for money laundering, tax evasion, and financing illegal activities, which clashes with the fundamental legal concept advocating for public order and economic stability.

4. Value volatility and breach of the requirement for social stability:

• The extreme fluctuation in the value of cryptocurrencies conflicts with the objectives of legal theory in maintaining transaction stability and preventing uncertainty (gharar) and excessive harm to one party.

From a critical reading, it can be said that the extreme glorification of technology and the rejection of law is an unrealistic proposition. The “smart contract” in its current form is merely an automated program for executing obligations, not a comprehensive legal contract; it lacks flexibility and the capacity to apply principles of justice and legal interpretation in the event of disputes.

Technological development is inevitable and cannot be resisted. However, the solution does not lie in leaving digital transactions unregulated, but rather in reforming legislation to frame and harness these technologies, ensuring that “smart contracts” become a tool managed under the umbrella of law and the judiciary, not a substitute for them.

Jawzaa Hamoud Al-Mutairi

College of Business Studies, Law Major