Law and Technology

Contracts will be Smart, but will they be Secure? (3/3)

Binit Agrawal

The future of smart contracts: State intervention to ensure security. 


This is the third and last entry in our ‘Smart Contract’ series.

Issues of Security and Privacy

A few years ago, before Blockchain had taken the fin-tech world by storm, the underbelly of online forums took an active interest in the technology and its capabilities. The Dark web was used, and drug and crime lords found it to be a convenient mechanism for trade. The reason behind this was the anonymity and privacy that Smart Contracts allow the parties to enjoy. This has led governments across the world to categorize Smart Contracts as a convenient mechanism for undertaking criminal activities.

Further, Smart Contracts not only make it convenient for criminals to engage in nefarious trade, but also serve as a ground for committing crimes. It has been found that for every one thousand lines of codes there are approximately fifteen to fifty defects. These defects, while prima facie invisible, can be exploited by those who know the source code with precision. The Decentralized Autonomous Organizations (DAO) debacle is a case in point. DAO is an investment platform that uses Smart Contracts and works with ether (the powering force behind Ethereum). It lost 50 million dollars when a person exploited a loophole in the code to embezzle the money. Although eventually, the theft was not successful due to timely intervention by the founders of DAO, this represented a major scare.

This implies that those looking to exploit this technology will engage in activities like implanting such defects within the code, which can later be exploited. Furthermore, this issue of code exploitation is also extenuated when we realize that computer language will form the basis for smart contracts, and not usual human langauges. Hence, once signed, the computer code, with all its loopholes, will formulate the content of the contract. In the DAO debacle, which never went to Court, it was widely believed that an action against the defrauder would have failed. This security concern has the potential to take away all the trust that the public has reposited in Smart Contracts. As such, governmental regulations and support in assuring safety and curbing any such schemes will be a must.

The issue of security is followed by that of privacy. As mentioned above, Smart Contracts will become a convenient means for undertaking spurious and illegal transactions. This will result in a general increase in criminal activities, violation of the society’s laws and pose a real threat to the safety of the citizenry. As a result, while people will have privacy online, their lives in the real world will be jeopardized. This will force the government to do three things: first, a rich body of laws will have to be created for ex-ante regulation of possible anti-social transactions. This will imply that there will be a strong body of law and state control of Smart Contracts. Secondly, the government will try to gain access to the content of all the contracts being entered into. Lastly, the government just like its control over the internet, will exercise control over Blockchain platforms.

Thus, instead of opposing government control and securing privacy, Smart Contracts have a potential to further increase government surveillance and control over our lives.


It can safely be concluded that Smart Contracts are far from perfect and can hardly alter the social fabric. Active support from the government is needed in the form of regulations and laws to make sure Smart Contracts fulfil their purpose. Further, there is a very thin line between government support and government control. Thus, guidelines and privacy protection laws will be needed to contain government’s breach of rights. The arguments outlined above, however, are not to say that smart contracts are legally and practically infeasible. They will prove to be a robust technological innovation but not as has been described by certain over-enthusiasts.

Categories: Law and Technology