Smart contracts were first proposed in the early 1990s by computer scientist, lawyer and cryptographer Nick Szabo, who coined the term, using it to refer to “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. In 1998, the term was utilized to describe objects in rights management service layer of the system The Stanford Infobus, which was a part of Stanford Digital Library Project.
Legal status of smart contracts
A smart contract does not necessarily constitute a valid binding agreement at law. Some legal academics claim that smart contracts are not legal agreements, but rather means of performing obligations deriving from other agreements such as technological means for the automation of payment obligations or obligations consisting in the transfer of tokens or cryptocurrencies.
With the 2015’s implementation of Ethereum, based on blockchains, “smart contract” is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger. Indeed the US National Institute of Standards and Technology describes a “smart contract” as a “collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network”. In this interpretation, used for example by the Ethereum Foundation or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program. A smart contract also can be regarded as a secured stored procedure as its execution and codified effects like the transfer of some value between parties are strictly enforced and can not be manipulated, after a transaction with specific contract details is stored into a blockchain or distributed ledger. That’s because the actual execution of contracts is controlled and audited by the platform, not by any arbitrary server-side programs connecting to the platform.
In 2017, by implementing the Decree on Development of Digital Economy, Belarus has become the first-ever country to legalize smart contracts. Belarusian lawyer Denis Aleinikov is considered to be the author of a smart contract legal concept introduced by the decree.
In 2018, a US Senate report said: “While smart contracts might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code.”A number of states in the US have passed legislation on the use of smart contracts, such as Arizona,Nevada,Tennessee, and Wyoming.
Smart contracts should therefore be distinguished from smart legal contracts. The latter refers to a traditional natural language legally-binding agreement which has certain terms expressed and implemented in machine readable code.