The rapid digitalization over the past two decades has caused significant changes in the life of each individual and entire industries. The quite traditional and relatively conservative sphere—jurisprudence—was no exception.
A striking example of such innovations in jurisprudence is the emergence of "smart contracts". These contracts are digital contracts created and stored using blockchain technology whose terms are executed when predetermined (encoded) circumstances occur.
How smart contracts work
According to the definition of a large international IT company IBM, smart contracts are a set of codes/algorithms that entail a certain action using simple instructions “if/when—- then—-”. For example, "if the Forwarder does not deliver the goods on time, then the Customer withholds 0.1% penalty for each day of delay from the price of the service." According to this example, the system recognizes that the case provided in the code has occurred and it is necessary to deduct 0.1% of the penalty automatically.
On the website of the Ethereum.org blockchain system, the following definition is provided: “Smart contract is a program that runs on the Ethereum blockchain. It is a set of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain.”
The above example demonstrates that the developers of a smart contract at the stage of its creation must provide for all possible or necessary conditions and paths for the development of events under which a certain measure will be taken per the code.
One advantage of smart contracts is the use of blockchain technology, which eliminates the possibility of adjustments to the already written code. Smart contracts cannot be changed and supplemented by replacing any page or by any other manipulations possible when using paper media. However, there is the possibility of concluding an additional agreement or a new contract with other conditions. It is also worth emphasizing that the simplicity of drafting a smart contract does not require the involvement of a lawyer on an ongoing basis, and the language for compiling the code is understandable for people without a legal education.
The automatic fulfillment of contractual obligations increases the level of reliability and trust between partners, since in case of violation of the terms of the contract, sanctions can be applied immediately, without negotiations or involving any intermediaries or litigation. Given that both parties to the contract know exactly the consequences of non-performance or improper performance and the inability to resolve the dispute in other ways, the parties will take their obligations much more seriously.
Thus, the use of a smart contract reduces transaction costs for the parties to the contract and positively affects the reliability and fulfillment of contractual obligations.
Smart contracts in Kazakhstan
The review of open sources and analytical materials on the Internet does not provide a specific list of countries in which smart contracts are separately recognized as a form of transaction. However, it is known that in December 2017, smart contracts were officially recognized in the jurisdiction of the Republic of Belarus. Many countries provide for the possibility of making a transaction in electronic form, which includes the mechanism of smart contracts but does not distinguish them into a separate category.
Smart contracts are not currently recognized as a full-fledged form of transactions in Kazakhstan. According to paragraph 1-1 of Article 152 of the Civil Code of the Republic of Kazakhstan, the written form of the transaction is made on paper or in electronic form. The Civil Code of the Republic of Kazakhstan requires that the written form of the transaction shall be signed by the parties or their representatives. When making a transaction, it is allowed to use the means of facsimile copying of a signature, an electronic digital signature, if this does not contradict the law or the requirements of a party.
Article 6 of the Law of the Republic of Kazakhstan No. 370 of January 7, 2003 On Electronic Document and Electronic Digital Signature provides that electronic document management is carried out in State and non-State information systems based on the following principles:
1. Functioning of various electronic document management systems;
2. Applying electronic documents in any field of activity where information and communication technologies are used to create, process, store and transmit data;
3. Transferring electronic documents using any information systems.
This article provides for public or private information systems, including blockchain systems for smart contracts, wherein electronic document management is carried out in any activity.
However, the main requirement for recognizing an electronic document as legal is signing with an electronic digital signature issued by the National Certification Center of the Republic of Kazakhstan. This means that a smart contract can be recognized and used as a legal document, provided that it is signed by both parties with an electronic digital signature.
There is no separate concept of a “smart contract” with its own regulation procedure in Kazakhstan. In Belarus, for example, paragraph 9 of Appendix No.1 to the Decree of the President of the Republic of Belarus On the Development of the Digital Economy provides that a smart contract is defined as “a program code designed to operate in a transaction block register (blockchain), another distributed information system for the purpose of automated execution and (or) performance of transactions or other legally significant actions”.
Considering that there is no concept of “smart contract” in the national legislation of Kazakhstan, interpreting the smart contract provisions for the automatic execution in the event of disputes between the parties remains unclear.
Conclusion
Based on the above, smart contracts are a program code or algorithm in the blockchain system, which is agreed between the parties and contains the essential terms of the transaction, such as the subject, rights, obligations, terms, price and liability. The compilation and execution of a smart contract is fully automated and carried out according to the written code which cannot be changed due to the peculiarities of the blockchain system.
Smart contracts are not recognized as a separate form of transactions in the Republic of Kazakhstan. However, there is a fairly prepared basis for implementating such contracts, as conceptually the legislator recognizes that transactions can be made electronically in private information systems.
We believe that if an electronic digital signature is integrated into the smart contract blockchain system, such transactions will have legal force per the legislation of the Republic of Kazakhstan. To begin with, the legislator should consider the possibility of recognizing smart contracts for transactions with digital assets and simple contracts for the supply from warehouses of large retail stores in a pilot mode. There is definitely room for improvement in national legislation in this direction.
