ABSTRACT
As a result of the digital age, rapidly developing technology affects various sectors. The outstanding elements are speed and convenience of operation for effectiveness and efficiency. In this context, digital transformation has taken place by adopting new technologies in many sectors. Although the legal sector is resistant to change due to potential uncertainties and risks, new technologies have also been developed in this field as a reflection of digital transformation. In this context, electronic contracts and smart contracts are the technologies that will replace traditional contracts in the field of law.
Electronic contracts refer to contracts concluded by the parties using an electronic communication tool, usually through the internet. Smart contracts, on the other hand, are defined as contracts in which the performance of the contract is automatically fulfilled, therefore human intervention is removed from the contract.1It is important to determine the differences and similarities between these concepts for better understanding and determining the legal framework.
Electronic Contracts
Electronic contracts are not defined under Turkish Law. However, in practice, they are encountered as contracts in which at least one of the parties of the contract digitizes the declaration of its will and transmits it electronically.2 Electronic contracts can also be characterized as the version of traditional contracts drafted and concluded in a digital environment. In Turkish Law, the provisions applicable to traditional contracts are also applied to electronic contracts. Pursuant to Article 1 of the Turkish Code of Obligations No. 6098 ("TCO"), the constituent elements of electronic contracts are the mutual declarations of the will of the parties and their consentaneous explanations. Since it is a contract drafted in a digital environment, it is concluded between those who are not present. Electronic contracts, which are referred to in three different forms in terms of conclusion, can be concluded through websites, electronic mail, or electronic data interchange ("EDI").3 EDI basically refers to the standardized computer-to-computer transfer of data with regard to the contracts priorly concluded between parties without human intervention. It is mostly used for the transmission of standardized orders, invoices, etc., and other records between the parties.4 Law No. 6563 on the Regulation of Electronic Commerce should also be taken into consideration when preparing electronic contracts concluded for electronic commerce.
Smart Contracts
Smart contracts, which first became known with the article titled "Smart Contracts" written by Nick Szabo in 1994, are defined as "a transaction protocol that fulfils the conditions of a contract and is concluded through a computer".5 Smart contracts can also be defined as code that is stored in the blockchain and automatically fulfils the terms of the contract. The basic program used in the creation of a smart contract works with a pattern formulated as "If....Then" Therefore, the contract is self-performing when the priorly agreed conditions are fulfilled. The protocol in smart contracts signifies to the algorithms that determine how the connection with the smart contract is uploaded to the blockchain and which action is permitted by the rule laid down in the protocol.6
Smart contracts are solely drafted with a digital content. It is not possible to constitute the subject matter of smart contracts unless the obligations can be digitally verified.7 In other words, smart contracts pertain to the reflection of a concrete asset, which exist in reality, to the digital environment. As an instance, a token transferred from one party to another when the conditions are fulfilled may represent a real property. Smart contracts are not regulated under Turkish Law. In this context, in the event of a dispute, the provisions to be applied to smart contracts and the judgement to be made by the court is uncertain. In particular, the performance of legal transactions with a smart contract may be problematic, such as the sale of immovable property and mortgage which are subject to an official legal form. When the conditions are fulfilled, the asset actually reflected by the smart contract, performed in the digital environment, may actually be null and void due to the non-compliance with the legal form requirement.
Key Differences of Electronic Contracts & Smart Contracts
At first glance, smart contracts may resemble electronic contracts since both are drawn up on the internet and with a digital form. However, they do not have the same meaning. In order to distinguish these concepts from each other, an explanatory comparison will be made by emphasizing the main features of both contracts.
Essentially, electronic contracts are concluded like written contracts but in an electronic environment. Accordingly, people are able to access the contract documents in written form, concluded in an electronic environment for sales of goods and services. For this reason, courts apply the same provisions to electronic contracts and ordinary written contracts.8 On the other hand, smart contracts may not even be considered as contracts; but computer codes that are automatically activated in the distributed ledger.9 In this context, smart contracts are related to the performance of the contract rather than the contract itself. The main reason is that smart contracts do not enter into force until the precisely defined conditions are fulfilled.
At the time of the performance of a smart contract, there is no necessity for the contracting parties or third parties to take action. Unlike electronic contracts, the performance and counter performance of smart contracts are determined initially and performed automatically by using software and hardware in programming language.10 As a result, the intermediaries are eliminated and a peer-to-peer transaction is carried out. In electronic contracts, there may be human intervention at every stage of the contract. The electronic contract is drafted by the parties themselves, such as the case in traditional contracts. Unlike smart contracts, a central intermediary may be required for the conclusion. For example, when the terms of a smart contract are fulfilled, a token can be transferred automatically from the wallet of one of the parties to the other without the need for the intermediation of a bank, while the payment for the performance of an electronic contract may require a bank transfer.
For the amendment of Smart Contracts, the approval of both parties is mandatory; one of the parties cannot amend the code on its own. On the other hand, in electronic contracts, a provision can be included authorizing one of the parties to amend the contract on its own. Therefore, there may be situations where the approval of both parties is not mandatory for the amendment of the contract.
CONCLUSION
Although both electronic contracts and smart contracts are drafted in a digital environment, there are essential differences in terms of conclusion, nature, and performance of the contract. While electronic contracts refer to the drafting of written contracts in a digital environment, smart contracts are defined as the computer codes that provide performance once precisely defined conditions on the blockchain are fulfilled. Electronic contracts are not defined in Turkish Law, but the provisions applicable to written contracts are also applied to the electronic contracts. On the other hand, Smart Contracts are not regulated under Turkish Law. Accordingly, in case of a dispute, the applicable provisions and the possible interpretation of the court is unknown. In smart contracts, human intervention is very limited, resulting in a peer-to-peer and intermediary-free transfer. For electronic contracts, human intervention is possible at every stage and the necessity of an intermediary has not been completely eliminated. Whereas the approval of both parties is required for the amendment of Smart Contracts, a unilateral amendment by one of the parties can be decided for Electronic Contracts.
Footnotes
1. Krş. Paech, s. 1082; RASKIN, Mask, The Law and Legality of Smart Contracts, Georgetown Law Technology Review 304 (2017), s. 305
2. KENTLİ IConclusion and Validity of Electronic Contracts, Master Thesis,p.9,2021
3. Conclusion of Smart Contracts and Conditions of Validity, p.94; Governatori et al. S.384, Doç. Dr. Pınar Çağlayan Aksoy, Onikilevha Yayıncılık, January 2021
4. Conclusion of Smart Contracts and Conditions of Validity, s.100, Doç. Dr. Pınar Çağlayan Aksoy, Onikilevha Yayıncılık, January 2021
6. DOĞANCI D.E.,Legal Characteristics of the Smart Contracts Based Upon Blockchain, Conclusion, Interpretation, Performance and Some Example Legal Applications, p.78, On İki Levha Yayıncılık, 2021.
7. "The Smart Contract Report", Blockchain Turkey: Law, Regulations and Public Relations Working Group, Türkiye Bilişim Vakfı, July 2021, pg.11
8. "Conclusion of Smart Contracts and Conditions of Validity", p.98; O'Shields, s.181, Doç. Dr. Pınar Çağlayan Aksoy, Onikilevha Yayıncılık, Ocak 2021
10. "The Smart Contract Report", Blockchain Turkey: Law, Regulations and Public Relations Working Group, Türkiye Bilişim Vakfı, July 2021, pg.11
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