Smart contracts: An introduction to a new era of blockchain technology in Kenya

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By Nimo Kering

The principle of blockchain, although still in its inception stages, remains an uncharted territory with respect to its potential impact on legal transactions in Kenya. The cryptocurrency, Bitcoin, is a much more familiar concept. While bitcoin is not equivalent to blockchain, it is the database on which bitcoin runs. In the same way the law adapted to the Internet, it will have to adapt to the emergence of blockchain. Regulatory systems will have to be repositioned to cater for the complexities of this technology. Lawyers, regulators and the courts must not be left behind.

Blockchain is a database which stores data to form a cohesive and unbroken record of information. The science behind the blockchain model entails the presence of identical copies of information which can be accessed from any computer. If any alteration is made to the information, it reflects on all the copies. Although not impossible, it would be difficult to hack into the information system on the blockchain itself.

Author Jacek Czarnecki defines smart contracts as “a legal tie that can function independently in cyberspace, without the need to refer to the real world. Contractual terms are executed automatically upon parties meeting the pre-outlined conditions. This form of a contractual agreement is aimed at increasing efficiency and pruning risk. The exclusion of third parties (for example lawyers and banks) gives smart contracts a vast boost. All processes required in execution of contracts are automated which consequently lowers transaction costs. The legal relationship is therefore concluded by electronic means and allows parties to transact securely without intermediaries.

Smart contracts are not only pegged on agreements but extend to other legal relationships as well. Systems that store sensitive data can apply blockchain-smart contract technology. An example would be aligning the lands office and voting system on blockchain technology. For lawyers intending to remain relevant in the next few decades, understanding the intricacies of blockchain is imperative.

Unlike the traditionally drafted legal contracts, smart contracts are written as a programming code. They do not contain legalese. The language is code. How does code supersede legalese? Consistency.

Unlike legalese which is, in most instances, embedded in jargons of complex sentence structures, code language is straightforward and non-contentious. Parties will have no apprehension with the agreement and its execution from the get go – that is, prior to becoming parties to the smart contract agreements. It is vital to note that these contracts encompass all elements of a contract. Conditions, modes of executions and consequences of breach are clearly outlined. The legal binding nature of these contracts will however depend on the type of smart contract in issue.

Bank standing orders can be used for a simple illustration on how smart contracts work. An individual invites the bank to transfer a stipulated amount of money on a set date to another account. If the individual’s account does not comprise of the minimum amount required to execute the transaction, the individual must pay a fine. The account thereafter is to be reset before the whole process is once again automated. The whole idea is to move from the “hereunder” and “consensus ad idem” to a simple “parties agree to abide by the code.”

In addition to smart contracts, blockchain technology can revolutionise many industries in the country. Take for example a highly operational area with substantial national interest such as conveyancing. This technology bases its strength on, among other things, transparency and reliability. The strength of this system and the needs of this area of law, if amalgamated, could result in ultimate service delivery and efficiency.

On a progressive note, the Kenyan government has, in conjunction with various companies, begun exploring possibilities of implementing blockchain in keeping a log of land registries. Such a move will make it very difficult for individuals to produce fake title deeds or carry out illegal sale and/or transfer agreements. The principle behind blockchain, in relation to conveyancing, holds it possible to see transactions that have taken place. This information would be critical when investigating a title on behalf of clients.

As technology continues to evolve, the law needs to diversify its scope as a means of keeping abreast with trends in society. Blockchain as a concept has the potential to change operations in many industries. This directly impacts the law and its ability to govern these industries. While it may take time for blockchain to be embedded as a reality in our region, the stakeholders in various industries should consider this emergent issue with the urgency it demands. ^

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