Blockchain of Things (BoT)-Robotics, Artificial Intelligence and Machine to Machine (M2M) Contracts.

There is no doubt regarding the immense potential of the Internet of Things (IoT) market in a vast array of sectors that can literally lead to the so called 'Connected Life'. Its subsequent application as the reality evidences. is ranging from smart homes and cities to smarter retailing, manufacturing, healthcare and logistics. IoT devices are creating smarter ecosystems resulting in improved efficiency,reduced costs and fully-automated tasks. Research from Gartner forecasts that 8.4 billion connected things will be in use worldwide in 2017, up 31 percent from 2016. This figure is set to reach 20.4 billion by 2020. But the centralised model that currently supports the billions of smart devices connected to the Internet of Things devices fails to address several critical issues, due to the lack of interoperability between the implemented softwares as well as the poor quality of protection the manufacturers initially agreed for in order to save costs.

1. Regulating Emancipated Devices and Challenges

Peering into the future and taking into consideration the continuing upgrade of artificial intelligence, it is considered almost impossible not to expect the emanation of autonomous and self-sufficient blockchain-based business models grounded entirely on machine-to-machine transactions (M2M) in SCF, signal the so called “next generation” of IoT. Even though utilization of Blockchain networks tend to construct ‘alegal’ and potentially lawless systems, many ways can be utilized to discipline and subsequently restrict their anarchic nature.  

Due to their disintermediated structure the need for trusted central operators will inevitably be reduced, however it will not be wholly eliminated. According to the US Director of the Federal Trade Commission, David Vladeck “Where the hand of human involvement in machine decision-making is so evident, there is no need to reexamine liability rules”.  Agency law should be upheld and remain the cornerstone to any potential regulatory approach, since the devices are considered to serve as tools following predetermined encrypted instructions.  

Several legal concerns could inevitably be raised in case they do not qualify as electronic agents depending on the decree of disintermediation that will emerge with the utilization of smart contracts. In this case does the device have the legal capacity to enter into valid commercial transactions? How and under what terms will liability be established if the device causes any kind of harm due to unexpected performance? As Sean Murphy, Global head of blockchain department of Norton Rose mentioned in the Dubai International Blockchain Summit 2018, a legal “personhood” for these autonomous devices should be established to make them enforceable under the Law by enabling them to acquire hybrid forms of rights and obligations and accordingly entitle them to participate in legal proceedings.  

Even if a legal status quo will eventually be formed, within the pursuit of lex cryptographica or lex digitalis new complications will unequivocally be raised. The most prominent concern especially in the realm of trade finance where multimillion transactions are engaged in the ordinary course of business, refers as to whether the courts can force a devise to pay damages in case of a contractual infringement, since only code can access the device’s funds. The incorporation of third-party oracles and other functionalities in the contract code could provide effective payment solutions in case of a court order.  

Moreover, assuming blockchain lead to far-reaching lack of centralization; laws enacted by the government, market forces, social norms and the rule of code itself could be utilised to uphold the rule of law according to “pathetic dot theory” which was first promulgated in 1999 by Lawrence Lessig as a potential model to regulate the Internet.  

2. Machine-Facilitated Contracts (M2M) and Existing Frameworks 

Trade finance Financial Institutions in collaboration with FinTech companies have already begun to explore potential benefits of blockchain networks combined with IoT technology to trade fungible assets towards revolutionizing trade transactions throughout the global supply chain. 

The Commonwealth Bank of Australia (CBA), Brighann Cotton and Wells Fargo have successfully conducted the world’s first interbank paperless letter of credit by combining blockchain, IoT and smart contracts to transpose cotton from Texas (US) to Quindao (China). To avoid regulatory sandboxes surrounding the binding force to contracts initiated by electronic agents, even though it was technically feasible as the CEO revealed, the traditional SWIFT system has been utilized instead to release the payment.  

It is disputed among commentators, as to whether systems based entirely on code can legally interact with other devices to create legally binding contractual premises, since such an affair does not conceptually fit into the solid model of offer and acceptance.  

 The English Court in Software Solutions Partners Ltd v. HM (2007) decided that autonomous systems cannot obtain the legal capacity of an agent, since only a human being with a mind can be regarded as such in Law. The judge further added that intention as a compulsory requirement for a contract to be validly concluded is given to the system, not to specific transactions and therefore the relevant systems should be regarded simply as communication tools.  

It is worth noting, that under English common Law a relevant software-based contract may lack contractual force due to uncertainty or vagueness related to its terms. Accordingly, despite the legal effectiveness of electronically concluded contacts under the auspices of Article 9 of the Electronic Commerce Directive and its potential expansion to cover M2M transactions , existing regulatory impediments may act as legal barriers for an immediate adoption.  

Meanwhile in the US, E-Sign Act and UETA have already accommodated potential enforceability problems of machine-initiated contracts , so long as the actions of an electronic agent are accountable to an identified person and the code of smart contract reflects the parties’ intention(Chwee Kin Keong and Others v Digilandmail.com Pte Ltd [2005] 2 LRC 28). It is likely smart contracts under the US regulation to follow a path similar to “clickwrap” agreements(Hill v Gateway Inc. [2000] 105 F.3d.). Further requirements imposed by the Uniform Commercial Code (UCC) since transactions are related to the sale of goods as well as existing principles under US Contract law should be satisfied. 

3. Conclusion-Additional Legal Observations

Advanced artificial intelligence may mean that M2M contracting can take place on a larger scale and be no longer restricted mainly to transactions within framework contracts or systems managed by intermediaries. However, existing problems of liability and risk management are still aggravated, and new regulatory models (e.g. strict liability, compulsory insurance) will have to be discussed. 

Author: Panagiotis Gkikas-Lawyer

E-mail: [email protected]

Date: 7.10.2018