Guest Writer Aly Sosa: Blockchain and Legal Contracts - Navigating Notice and Consent

Aly is the founder of MetaLegal Advisory Services.

Our guest writer this week is Aly Sosa, who is one of the world's foremost thought leaders on the legal implications of NFTs and is a regulatory expert on all things crypto, blockchain, and tokenization. She is the founder of MetaLegal Advisory Services and an advisor at Crypteriat, and was previously the Head of Web3 at HeroMaker Studios. Prior to that has spent time in various roles at global organizations including Goldman Sachs, Credit Suisse, the WTO and more. She is no stranger to this newsletter, having contributed a piece last year on the lack of forward thinking on digital asset regulations here in the US and its impact. She will also be joining our NY Fintech Week kickoff event virtually next week (as a reminder, Thursday April 11, at 5:30 PM EST in NYC or virtual - register here). Over to Aly:

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In the landscape of blockchain technology, the enforcement of contracts introduces distinctive challenges, notably in fulfilling legal standards for notice and consent. These challenges derive from the unique interplay between innovative technologies and well-established legal principles. This discussion aims to illuminate the complexities surrounding notice and consent in blockchain contracts through a blend of technical and legal insights.

Understanding Notice and Consent

Notice and consent form the backbone of contract law, ensuring that all parties are fully informed of and agree to the contractual terms.

Historically, websites have relied on two primary methods to bind users to terms and conditions found in disclosures such as privacy policies: browsewrap and clickwrap agreements. Browsewrap refers to the practice of posting terms of service on a website, usually accessible via a hyperlink at the bottom of the page, with the assumption that by merely using the site, users agree to these terms.

As we embrace the digital shift, our journey through the evolution of notice and consent highlights how laws like ESIGN and UETA anchor the leap from paper to digital, ensuring that contracts signed with a click hold the same weight as those signed with ink. This transition becomes even more intriguing with blockchain technology. Here, the challenge is making smart contracts—agreements coded into the blockchain—understandable and agreeable for all. By weaving these legal safeguards into the fabric of blockchain contracts, we're ensuring that every digital nod or handshake is as meaningful and binding as their traditional counterparts, preserving trust and clarity in our increasingly digital world.

Blockchain's Challenge to Traditional Agreements

Blockchain technology, with its emphasis on transparency and permanence, shifts how legal agreements are conceived, especially with digital assets like cryptocurrencies and NFTs. This shift necessitates rethinking how contracts are displayed and consent is obtained, given blockchain's distinct approach to information sharing and transaction processing.

Smart Contracts and Consent

Smart contracts, self-executing contracts with the terms of the agreement directly written into code, bring efficiency but complicate the traditional understanding and agreement process due to their immutable nature once deployed. This raises significant challenges for amending or rescinding contracts, unlike in conventional legal frameworks where mutual consent can facilitate changes.

Navigating Blockchain Contract Complexities

Integrating blockchain technology into contract law brings up complex challenges, especially in how contracts are shown to us and how we agree to them. One of the main issues is that contracts on the blockchain tend to be broken up into pieces. This can make it harder to see the full picture and understand all the details of what we're agreeing to. Also, working with blockchain means finding the right balance between reviewing contracts in detail before they go on the blockchain and making sure that these reviews are properly noted on the blockchain itself. This dual approach leads to important questions about whether all parties fully understand and agree to the contracts they're entering into. Agreements should be clear and upheld, keeping the integrity of the contract process intact.

Exploring Solutions to Blockchain Contract Challenges

Next, we examine some of the innovative solutions currently being employed to navigate these challenges.

Enhancing Contract Integrity

Layer 2 protocols act as an extension of the primary blockchain (Layer 1), offering a scalable solution for handling transactions and data storage without compromising the main network's performance. These protocols are pivotal in addressing the scalability and cost issues associated with storing large contracts on the blockchain. Two notable implementations are:

• State Channels: These are private communication pathways established between parties wishing to interact, allowing for numerous transactions or data exchanges to be conducted off-chain. Once the interaction is concluded, the final state is committed to the main blockchain. For contracts, this means that the detailed terms can be agreed upon and signed off-chain, with only the final agreement or a cryptographic proof of this agreement being recorded on-chain. This significantly reduces the blockchain's burden while ensuring that the terms are securely and efficiently managed.

• Plasma Chains: Plasma chains create a hierarchical network of smaller blockchains anchored to a main chain, enabling the decentralization of data processing. In the context of contracts, a Plasma chain could host detailed legal documents, with only essential information or proofs (such as the existence of a contract or signatures) being relayed back to the main blockchain. This method maintains the integrity and accessibility of contract information without overloading the main network.

Metadata embedding involves summarizing key contract information—such as the contract's purpose, parties involved, terms, and conditions—into the metadata of a blockchain transaction. This approach not only streamlines the contract's presentation by providing a concise overview of its most critical elements but also enhances clarity and understanding for everyone involved. Furthermore, metadata embedding facilitates a more efficient review process, as the encapsulated summaries provide a quick reference to the contract’s fundamental aspects, thereby aiding in better decision-making and agreement validation.

For comprehensive documentation, decentralized storage solutions like the InterPlanetary File System (IPFS) come into play. IPFS offers a peer-to-peer method for storing and accessing files in a distributed file system, making it an ideal platform for the secure, decentralized storage of large legal documents. By storing a document on IPFS, a unique hash of the file is created, which can then be embedded in a blockchain transaction. This hash acts as a fingerprint, verifying the document's existence and integrity without storing the entire document on the blockchain. When it comes to contracts, this approach ensures that detailed terms can be easily accessed and reviewed off-chain, while the blockchain records a tamper-proof reference to these terms, aligning with the legal requirements for notice and consent.

Sophisticated Consent Mechanisms

Enhancing the process of obtaining consent in blockchain environments involves developing interactive interfaces and APIs (Application Programming Interfaces). These tools bridge the gap between blockchain's technological landscape and the nuanced demands of legal compliance. Interactive interfaces present contracts in a user-friendly manner, enabling thorough review before consent is given. Subsequently, APIs play a critical role in capturing and recording this consent on the blockchain, ensuring that the agreement is transparent, verifiable, and immutable. Moreover, the integration of Digital Decentralized Identities (DDIs) with these systems underpins the verification process, tying consent directly to individuals' verified digital identities. This not only reinforces the legality of the agreements but also enhances security and privacy, ensuring that consent is explicitly linked to the verified parties involved in the contract.

Future Innovations and Approaches: Charting the Path Forward

Bridging the gap between the dynamism of blockchain technology and the rigidity of traditional contract law will not be a straightforward task. The future of this integration demands a series of forward-thinking steps, each aimed at enhancing the synergy between these two worlds. Here’s a glimpse into what these future directions might entail:

1. Enhanced Interoperability: Seamless integration of off-chain contract documents with their on-chain counterparts, possibly through advanced cryptographic techniques, ensuring the integrity and authenticity of documents stored off-chain but represented on the blockchain.

2. Smart Contract Templates: Creation of standardized templates for smart contracts, illustrating how traditional contract terms are interpreted and applied within the blockchain framework, demystifying the process and encouraging wider adoption and trust in blockchain contracts.

3. Innovative Consent Protocols: Designing consent protocols that function effectively across both on-chain and off-chain environments, incorporating multi-step verification processes to ensure all parties have a clear understanding and agreement throughout the contract's lifecycle. This could involve exploring Open Consent Protocols and related approaches, leveraging their potential to streamline consent acquisition and verification processes in blockchain-based contracts.

4. Regulatory and Technological Collaboration: Active collaboration between legal experts, technologists, and regulatory bodies to develop guidelines and frameworks that address the unique challenges of blockchain in the legal domain, fostering an ecosystem where blockchain technology in legal contexts remains compliant, transparent, and accessible to all stakeholders involved.

Conclusion

As blockchain technology evolves, so too must the legal frameworks surrounding contract management. By addressing the unique challenges posed by blockchain, including contract display and consent, stakeholders can foster a future where digital contracts are both legally robust and technologically advanced. This adaptation will ensure the full potential of blockchain can be realized within the legal domain, maintaining integrity, transparency, and user trust.