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Smart Contracts, Blockchain Technology and the IPRs

Smart Contracts, Blockchain Technology and the IPRs: A Harmony which, when regulated, has the potential to revolutionize the whole world for the Good

Introduction

Smart Contracts was first coined by the cryptographer and computer scientist Nick Szabo back in the mid-1990s as a graduate student at the University of Washington. He defined it as the “set of promises, coded in the digital form containing all the terms and conditions.” ‘Vending Machine’ is a great example to comprehend his concept. We put coins in a Vending machine, allowing us to then opt for the item we want to buy. Then we choose the item we want by pressing the buttons, followed by which the machine delivers us the item we opted and paid for. Smart contracts also work similarly but by digital programming. Blockchain technology is the backbone of smart contracts. It makes smart contracts more transparent, secure, cost-effective, and accessible to the public at large. The realm of IPRs can also profit from the blockchain technology. It can easily delimit the scope of IPR registration and licensing by making it incorporated into a globally connected platform.

Applications of Smart Contracts

Smart contract works on the ‘If-Then’ principle. This principle means that if we fulfill the ‘IF’ clause of the contract, the program will proceed for the ‘THEN’ clause of the contract, thereby performing the contract. In a Smart Contract, the terms and conditions of the contracts we see in our conventional contracts are digitally coded and programmed to work by the if-then principle. A smart contract is an agreement whose execution is automated.

But then how is blockchain technology going to supplement Smart Contracts? Blockchain technology is a groundbreaking innovation that works with the motive of decentralizing databases, thereby giving access to every party to validate the information and its history. No single party is responsible for the regulation of data in the blockchain technology. It is a type of ‘Distributed Ledger Technology.’ It is based on the principle of a distributed ‘Peer-to-Peer’ system, where both parties can work things out without the involvement of a third party. This makes this system a very reliable and secure one. In Blockchain, data are stored in multiple systems, and hence, to hack it, it is required to hack all those systems at once, which is not at all an easy task.

Furthermore, blockchains rely heavily on cryptography to achieve data security. They use ‘Cryptographic Hashing Functions, ’ which is unique for every data block, like fingerprints in humans. If someone tries to change or taint the hash function, then the whole Blockchain after that block will have to be changed, making the data secure.

In contract, the presence of trust between the contracting parties is very pertinent. Smart contracts enable unknown persons to trust each other because the whole operation is automated completely. In case of a breach by a party, the program can be coded in such a way to return to the original state as it was before entering into the contract. Hence, in Smart Contracts, there is no need for a party to develop trust in the other, thereby working even with trust-lessness amongst the parties. Also, there is no need for third-party and institutions for enforcement, thereby decreasing the transaction costs and minimizing the outcome uncertainty.

Smart Contracts gained popularity by introducing platforms like Ethereum, which is specifically built for creating smart contracts. But are we ready for such a groundbreaking technology? How will Blockchain impact development and cooperation at the global level? Does the state need to regulate the blockchains? There are many uncertainties as to which governance structure to follow to regulate the blockchains because of its unforeseeable capabilities. The blockchain technology is revolutionary because of its global scope. But this leads to a very significant question in the contract law, i.e., what will be the governing Law and Jurisdiction? Parties generally decide which laws will govern them and which adjudicating institutions will have the jurisdiction to entertain any dispute redressal. The whole world can be incorporated together by this technology. Hence, there is a need for a standard set of legal principles and adjudicating bodies to govern and regulate them.

The world of IP, combined with the Blockchain technology and the Smart contracts, will kick start a new era of innovation. Presently the IPs are registered in IP offices and are dependent on these offices (which maintain the record of the IP data) under the geographical regions, wherein the IP holder wants to secure his/her rights. The most significant limitation of this system is its physicality, making it difficult and slow to access.

Blockchain technology, along with the Smart contracts, has the power to overthrow all the limitations. By using Blockchain, IPRs can be made Identifiable, Publicly accessible (transparent) yet very secure. It can be made accessible to every common man. We have a globalized world today, which will for-sure further move towards globalization in the coming future. Yet, we lack a single common registry for all the patents. Incorporation of IPRs, along with Blockchain and Smart contracts, will give it global acknowledgment and accessibility. Blockchain will make the management (Registry and Regulation) part of the IPRs very easy. Smart contracts will make the licensing part very easy and accessible. One can very easily access the license of the IPRs with the help of Smart Contracts by paying the royalty to the owner in real-time once he uses it. This will save the licensee and the IP holder from incurring extra licensing liabilities (Sale agreement, execution, payment, etc.).

The Blockchain will maintain the record of licensing and ownership, which will be immutable and transparent. The only major drawback that a blockchain has is its transaction speed (validation speed). Still, luckily, we don’t need hundreds of transactions per second for the licensing and registry of the IPRs. Even if we reach close to 1 transaction a minute, it will revolutionize the world.

Legal and Tech Challenges

Specific legal challenges are more related to how parties transact business and how the smart contract code operates. Like any conventional agreement, a smart contract also complements a business transaction. But what if there are no amending and terminating provisions in the smart contract? How will the parties negate their business relationship? Presently, there are no simple ways to amend the smart contracts, creating hardships for the contracting parties. When we amend something in the contract, it changes all the blocks attached to that chain.

Often the parties will have to hire a third party to code the program to enter into a contractual relationship. In such instances, there are chances of errors or inconsistencies, which may be the result of miscommunication between the parties. Furthermore, smart contract developers must also be held accountable for their coded contracts if used for illegal purposes. Reasonable efforts must be made by the developers to ensure that the contracts are not misused.

In a Smart contract, unlike in the conventional ones, there is no scope of ambiguities in the provisions. It’s either this or that. The contract works on a clearly defined If-then principle, which negates the scope of any ambiguity in the provisions of the contract. Hence, the parties no longer get the privilege of intentionally incorporating ambiguity in the provisions to use it later in their favor.

Also, the ‘If-Then’ trait of the smart contracts is often criticized by the critics claiming that this limits the human intervention, thereby limiting the human values. For example- ‘A has taken a loan from the bank B and is a valued customer of the bank because he always pays his dues on time, sometimes even before time, But due to some unfortunate circumstances, he was not able to pay his dues on a particular month, and as a consequence, the penalty as coded in the smart contract was enforced upon him. Had this been a relationship based on a conventional agreement, the bank would have been able to give some relief to A for that particular month’. But I choose to differ from this notion of limitation cast upon human values. We are shifting towards the era of Artificial Intelligence (AI), which will enable us to incorporate human intelligence and values in the smart contracts. Like in the example we took above, by the use of AI, we can allocate some Social Credit Score to A. This score will then allow the AI to judge the credibility of A, which will then exempt him from any penalties.

Conclusion

Governments across the globe are assessing the potential of blockchain technology, which, when combined with smart contracts and IPRs, generates a massive scope of abuse. For efficient and constructive use of this technology, it must be regulated by some guiding principles. There are several advantages of these technologies, but the same advantages, on the contrary, also prove to be the challenges for its regulation. Don’t we need a global uniformity and cooperation to harness the blockchain technology globally when making every person eligible a part of the global Blockchain? But, will these regulations limit the scope of blockchain innovations? The regulatory dilemma that regulators face is that they have to encourage the innovation and beneficial use of the technology on the one hand and have to limit the scope of illicit or criminal use of it on the other.

Countries are using blockchain technology both at private and public levels and are assessing their potential. Currently, the Smart Contract, Blockchain, and IPR technologies and their regulations are in the nascent stage. These technologies do have an exponential potential which needs to be regulated within the contours of the Law. There still exist dilemmas on issues like data privacy, ownership, jurisdiction, liability, interoperability of blockchains, restraint to innovations, Blockchain’s independence, contract’s enforceability, etc.


Title Image source: The Street


This article has been written by Advait Mishra. Advait is a second-year undergraduate student at Hidayatullah National Law University, Raipur.