Splitchain: the legal and technological strands of blockchain

While academic debate and government consultations ensue with interest groups and industry sectors, businesses and legal practitioners can benefit from a conceptual tool such as 'splitchain' to help clarify blockchain’s interaction with existing legal principles and obligations. By looking at the 'chained economy' as two technological and legal strands working in parallel, we gain a clearer understanding of how blockchain fits within an existing legal framework and can successfully be applied commercially.

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(a) Splitchain-in-action

Splitchain-in-action can be seen when we put blockchain-based smart contracts, smart legal contracts, intellectual property (IP) and consumer law under its lens. It shows that if both sides of the blockchain-legal double helix are not considered, significant risks start to emerge. Each of these areas will be considered in Part Three (c), but first it is important to set out the basic line of inquiry guiding a splitchain analysis (further detailed in Part Four).

The most critical questions to ask are four-fold:

• what is the ultimate objective to be achieved;
• does blockchain alone achieve it;
• if not, why not?
• what legal steps are required to achieve the objective?

For example, if assignment of intellectual property rights from one party to another is intended, basic due diligence will demonstrate that blockchain alone is deficient in legally transferring title - in other words, it cannot be achieved via blockchain alone. Splitchain brings this pivotal issue into focus.

In the context of non-fungible tokens (NFTs), there are a range of additional questions that a splitchain analysis can pose. These include:

• what value does a record of tokenisation on blockchain represent?
• does the token link to terms and conditions that explain its value?
• does this value make it a commodity or a game of chance or skill, or a security or a derivative, and so regulated?
• is transfer of ‘ownership’ possible on blockchain?
• what legal steps are required to preserve value and facilitate the value-exchange?

(b) Common misconceptions from smart contracts to ownership

Splitchain helps to distinguish between a variety of blockchain-based transactions and applicable legal rights and obligations. By forcing us to look for all strands that make an enforceable legal transaction, we can start to see that blockchain technology alone is not the endgame.

This section considers some blockchain concepts and misconceptions using a splitchain lens.

(i) Smart Contracts

In its purest sense, a smart contract is computer code stored on a blockchain-based platform, executing certain actions when triggered to do so. These actions are to typically release funds without the involvement of an intermediary, thus limiting time delay. The blockchain is then updated with the completion of the transaction, meaning that the transaction cannot, in principle, be changed. While such mechanisms are a great accelerator to online transactions, these decisive 'if/when' statements alone fail to encapsulate the full terms, protections and considerations found in traditional 'off-chain' contracts, and the broader body of law that may apply. Smart contracts are, therefore, not legal contracts. As well as considering the technological 'strand' of a smart contract, the legal strand must also be addressed for the contract to be of ultimate and enduring commercial value. This is absent in smart contracts that comprise only the technology strand of splitchain.

(ii) Smart legal contracts

A smart legal contract is a legally enforceable contract that is completely available in natural language, and partially available in computer code. To be enforceable at law (in most common law jurisdictions), legal contracts need to satisfy certain formalities, such as:

• offer
• acceptance
• consideration
• intention to create legal relations
• certainty of terms

Legal contracts allocate risks and impose rights and obligations on both parties, and importantly provide remedies when things go wrong.

Smart legal contracts attempt to satisfy these requirements of contract formation in an online or blockchain environment ─ but they do not generally exist only on-chain and they do not account for the rest of the law that may also apply.