Blockchain and smart contracts

Blockchain technology and smart contracts have the potential to revolutionize numerous industries and enable new business models. These technologies offer enormous opportunities for innovative companies, but also present them with complex legal challenges. This article highlights the most important legal aspects that companies need to consider when implementing blockchain solutions and smart contracts.

Legal classification of blockchain and smart contracts

The legal classification of blockchain technologies and smart contracts is not always clear due to their novelty and technical complexity. In principle, it can be said that

1 Blockchain: In the legal sense, a blockchain is initially a technology for decentralized data storage. Depending on the application, however, various areas of law may be affected, in particular data protection law, contract law and financial market law.

2. smart contracts: Smart contracts are self-executing contracts whose terms are written directly in computer code. Legally, they can be understood as declarations of intent within the meaning of Section 116 of the German Civil Code (BGB), whereby the special features of automated execution must be taken into account.

Contract law aspects of smart contracts

Smart contracts raise a number of questions under contract law:

1 Conclusion of contract: The time of contract conclusion for smart contracts can be unclear. It must be clarified whether the programming of the smart contract is already considered a binding offer or only the initiation of the transaction.

2. declarations of intent: With smart contracts, declarations of intent are made through technical actions. It must be ensured that these meet the requirements of Section 126a BGB for electronic form.

3. avoidance on the grounds of error: The possibilities for avoidance on the grounds of error (Sections 119 et seq. BGB) are limited in the case of smart contracts, as execution is automated.

4. contract amendment and termination: The immutability of blockchain entries can make it difficult to subsequently amend or terminate contracts.

To overcome these challenges, it is advisable to embed smart contracts in a legal framework agreement that regulates the basic rights and obligations of the parties and provides mechanisms for disputes.

Data protection challenges

Blockchain technology is in a certain tension with the principles of the GDPR, in particular

1. right to erasure (Art. 17 GDPR): The immutability of blockchain entries conflicts with the “right to be forgotten”.

2. principle of data minimization (Art. 5 para. 1 lit. c GDPR): Redundant data storage in the blockchain is contrary to this principle.

3. determination of the controller (Art. 4 No. 7 GDPR): In decentralized networks, determining the controller under data protection law can be difficult.

Possible solutions include the use of off-chain storage for personal data, the use of encryption techniques and the implementation of “pseudo-deletion functions” by overwriting data.

Financial market law aspects

Particularly in the context of cryptocurrencies and token issues (initial coin offerings, ICOs), financial market law aspects must be taken into account:

1. licensing requirement: Depending on their design, blockchain-based financial products may fall under the licensing requirement of the German Banking Act (KWG) or the German Investment Code (KAGB).

2. prospectus requirement: Public offerings of tokens may be subject to a prospectus requirement under the EU Prospectus Regulation.

3. prevention of money laundering: providers of cryptocurrencies must comply with the provisions of the German Money Laundering Act (GwG).

BaFin has commented on these issues in several publications, but many detailed questions remain unanswered and must be examined on a case-by-case basis.

Liability issues and IT security

The decentralization and automation of blockchain systems raise new liability issues:

1 Faulty smart contracts: Who is liable for damage caused by errors in the code of a smart contract?

2. IT security: How can companies fulfill their obligation to ensure adequate IT security when using blockchain technologies?

3. responsibility in decentralized systems: How can accountability be assigned in decentralized networks without a central control authority?

Companies should establish clear governance structures for their blockchain projects and carry out comprehensive risk analyses.

Practical tips for innovative companies

Based on his experience as an IT legal expert, the following practical tips for companies can be derived:

1. legal analysis: Carry out a comprehensive legal analysis of your blockchain project at an early stage to identify potential risks.

2. regulatory dialog: In the case of innovative projects, seek dialog with supervisory authorities at an early stage in order to clarify regulatory uncertainties.

3. contract design: develop clear contractual frameworks for the use of blockchain and smart contracts that also provide mechanisms for disputes and contract amendments

4. data protection by design: Implement data protection measures in your blockchain solutions right from the start, for example by using zero-knowledge proofs or off-chain storage.

5 Governance structures: Establish clear governance structures for your blockchain projects that regulate responsibilities and decision-making processes.

6. continuous review: regularly check the legal compliance of your blockchain applications, as the regulatory framework in this area is constantly evolving.

The legally compliant implementation of blockchain technologies and smart contracts presents companies with complex challenges. However, a proactive approach to the legal aspects is essential in order to fully exploit the potential of these innovative technologies. In view of the legal complexity and constantly evolving regulation in this area, it is advisable for companies to obtain specialized legal expertise at an early stage.

Blockchain technology and smart contracts offer enormous opportunities for innovative business models. Companies that master the legal challenges can secure a decisive competitive advantage and position themselves as pioneers in their respective industries.