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Ep 25: Emerging Technology's Language Wars - Smart Contracts
125 Plays8 months ago
Professor Carla Reyes (SMU) unpacks the interdisciplinary perspectives on smart contracts, highlighting the unique vantage points each group brings to the table. She explores the divergence between legal definitions of ‘contracts’ and their technical counterparts in smart contract technology, uncovering the potential impacts of this disparity on the regulation and understanding of these innovative digital agreements.
Read her full paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4380724
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Transcript
Introduction to Owl Explains Hootenanny
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. Owl Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem. My name is Silvia Sanchez, project manager of Owl Explains and with that I'll hand it over to today's amazing speakers.
00:00:34
Speaker
Hi, everybody.
Carla Reyes on Smart Contracts and Emerging Technologies
00:00:35
Speaker
Welcome to another one of our Hootenannies here at Owl Explains. Today, we are joined by Carla Regis from SMU, and she has authored a thought-provoking paper called Emerging Technologies' Language Wars, Smart Contracts. So, Carla, thank you for joining us today. Why don't you introduce yourself very briefly?
00:00:53
Speaker
Yeah, hi, so I'm Carla Reyes. I have been a lawyer in the blockchain space since around 2011. I practiced at Perkins Coie for a long time before joining the academy. I'm now an associate professor of law at SMU Deadman School of Law in Dallas, Texas, where I teach blockchain and the law, AI and the law, business enterprises and secured transactions. I'm heavily involved in blockchain related legal reform efforts.
00:01:24
Speaker
for the UCC, for example, with the Uniform Law Commission. I'm a member of the American Law Institute now, only recently, and I'm an expert member of a couple of projects at Oneetra that's also looking at harmonizing private law rules for digital assets.
Understanding Smart Contracts Across Disciplines
00:01:42
Speaker
And lastly, I was the chair of a blockchain working group that was created by the Texas State Legislature for a year or so as they created policy
00:01:53
Speaker
prescriptions or suggestions for the legislature to consider in terms of bringing the Texas blockchain industry to better growth.
00:02:03
Speaker
Fantastic. Thank you so much. So given your wide expertise and all the backgrounds, we're really excited that you've decided to join us today. And basically, I wanted to get started discussing the premise of your paper. Because essentially, you go over different perspectives on smart contracts among legal academics, practicing lawyers, the technical science researchers, judges, lawmakers, and regulators.
00:02:30
Speaker
So how does this interdisciplinary view shape the understanding of smart contracts? Yeah, so this project is part of a series of projects, actually, or a series of papers, all of which start with the title Emerging Technologies, Language Wars. And so there's one on cryptocurrency specifically, one on smart contracts.
00:02:51
Speaker
There's a separate one on AI and criminal justice and then I'm working on one still that places cryptocurrency and smart contracts in the context of international discussions because there's an extra layer of I think language wars or language stuff in the international context. But the projects all come out of my experience in legal reform efforts.
00:03:14
Speaker
where a bunch of people get in a room together all coming from different disciplinary backgrounds, law on the one hand, technical expertise on the other, and try and talk about the same thing, but really talk past each other.
00:03:30
Speaker
And it was my anecdotal feeling sitting in those rooms that it wasn't just a matter of the definition itself of the terms that people were using different definitions, but that sometimes the words meant things like in terms of values and expectations. And that sometimes then the discussion was actually more of talking past on policy priorities as much as anything else.
00:03:53
Speaker
And so the idea of the series of projects is just to like, get past the anecdote, like, great. So I feel like people don't say this mean the same thing when they say crypto asset or smart contract, right? I feel like that's true. But like, how do I prove it? Right. And the idea of the project was to use corpus linguistics to go in, like, literally take a look at how people are using these terms and see if, in fact, they are using them differently in different disciplinary contexts.
00:04:23
Speaker
Got it. That sounds amazing. Thanks. And basically from what you've mentioned also within this series, but specifically on this segment of smart contracts, I was reading about it. And why do you think that legal researchers and lawyers are preoccupied about the legal enforceability of smart contracts while technical science researchers seem to be less concerned?
Legal Concerns and Smart Contracts
00:04:46
Speaker
So it has to do with the use of terms of art in different disciplines. And contract, the word contract in law is a key term of art. One that we as law students in the first year, we spend a whole semester learning what the
00:05:04
Speaker
term contract means from a legal perspective and so in the beginning it was I think only natural for lawyers to hear smart contract and think artificially intelligent legally enforceable agreement right and because that's naturally where their thoughts went there were then some really high profile
00:05:26
Speaker
I think projects on the technical side thinking about how could you use smart contracts in the context of contract drafting and contract execution. And there's been a longer term legal scholarly interest in computational contracting more broadly. So the natural
00:05:46
Speaker
inclination was to try and fit this idea of smart contracts, whatever that meant from the technical side, into some kind of computerized, legally enforceable agreement framework for lawyers. And in practice, over time, it became clear that's not at all necessarily what technical folks use smart contracts to achieve. Yeah.
00:06:08
Speaker
Got it, got it. And you also mentioned that judicial decisions rarely discussed smart contracts. So how might this scarcity affect the legal precedent and understanding of smart contract enforceability?
00:06:22
Speaker
So at the time I did the study, the time frame of the documents that I pulled, there really weren't a lot of smart contract related cases before court. So since that time, obviously, we've seen Okey-Dow, we've seen the Van Loon v. Ofak case. And while I could, you know, one
00:06:43
Speaker
Worry might be that those cases just prove my theory wrong. That's not at all what happened. In particular, in the Van Loon case, the decision rests on, at the district court level anyways, rests on the idea that smart contracts are any contract whatsoever in the nature of a legally enforceable contract, when in fact that's not at all what the smart contracts in tornado cash are, like not at all. And really the
00:07:12
Speaker
misunderstanding even in that decision bears out the research that's in the article even though at the time the article didn't find like there just weren't a lot of cases to study at the time but the the whole point is when different disciplines use the same words in the same in different ways and don't adjust for or think about the other
00:07:36
Speaker
term of art potential use. When they talk to each other, they're going to talk past each other. And when put in front of a judge together, the judge is going to pick one. And it's going to be often the one that they understand better, right? And that's what happened here. The idea was the smart contract is any contract whatsoever. So it's a form of property, and it can be put on the list. And that's not at all what the tornado cash contracts, smart contracts are doing.
00:08:03
Speaker
from a technical perspective.
Technology in Legal Education and Policy
00:08:05
Speaker
And so it's going to come down, I think, in cases, and particularly going forward as these types of issues continue to come up, it's going to come down to good lawyering on the technical side, explaining, being able to explain what the technical attributes of smart contracts and what they're doing actually are and how it's not necessarily a legally enforceable agreement, nor was it intended to be a legally enforceable agreement.
00:08:31
Speaker
Right, there's definitely a big difference there because in fact you addressed several times the need for deeper technological competence among illegal professionals to avoid these kinds of confusions. So how do you think that this might impact not just the legal education landscape but also the blockchain and web3 policy scene?
00:08:50
Speaker
Oh, it's a really good question. So in terms of legal education, I know for myself and for other schools here at SMU, so at Cox, the business school, and Lyle, the engineering school, the focus has been on really introducing students to smart contracts and how you build them.
00:09:08
Speaker
Even my law students, finding a low code way to help them build smart contracts and realize the things that you can do with them that aren't writing contracts. And the reasons why you actually probably don't use them to write contracts very often. There are reasons why in particular big clients aren't gonna incorporate them unless it's a super routinized agreement. And there's this one clause that just needs to be executed
00:09:37
Speaker
routinely in the same fashion over and over, right? Otherwise, you don't see big clients at big law firms using smart contracts quite as often as people might have thought originally. So for me, it's been about really, so in my, for example, in blockchain law and policy, we spend the first three weeks reading out of
00:09:56
Speaker
Professor Narayanan's Computer Science Bitcoin and other cryptocurrency textbook, they don't read law at all. For the first three weeks, they just read computer science text so that they can get a handle on the tech. And then we have a whole, I don't know, two weeks devoted to smart contracts alone. And then we do DAOs, which is also talking about how you use smart contracts in a different
00:10:15
Speaker
context, but we do two weeks just on smart contracts and part of that is coding smart contracts using a programming language called Lexon, which is basically English language that you can use to code smart contracts. It makes it more accessible for law students who don't have technical backgrounds. And then there's some opportunity to cross-pollinate with true engineers. So to go to Lyle and the Hunt Institute for Humanity and
00:10:43
Speaker
you know, work to think about what you would solve using what kind of problems you could solve using smart contracts that aren't contracts at all. So mostly it's about exposing students to the other the other uses of smart contracts that they might not think about. And in terms of policy education, I do think there's a dire need for a
00:11:04
Speaker
I don't know, almost routinized, very straightforward set of education materials for policymakers sort of writ large from state legislature level, where the thing to do for smart contracts, which is mentioned in the paper, is to change the Uniform Electronics Transactions Act.
00:11:23
Speaker
to accommodate smart contracts. And then in doing so, they actually disadvantaged smart contracts in ways they didn't expect to be doing. And then up to the federal legislative level, it's important. There's a lot of misunderstandings a la tornado cash and other anti-money laundering questions. And then certainly regulators, I think, need additional training on what smart contracts are, how they're controlled in the background or not,
00:11:52
Speaker
what it means to be part of an open source community that contributes to the updates to the code and how much control that gives you. Those kinds of questions, I think there's a real opportunity to just educate and then see hope. And then certainly I would expect to see better policy outcomes as a result.
00:12:13
Speaker
I think there's just a gap. And I think the gap in large part stems from the miscommunication about what the words are and what they mean in the first instance.
Token Classification and Consumer Protection
00:12:24
Speaker
Absolutely. And I completely agree with you. And in fact, here at OWL Explains, one of our really big points is understanding technology. Whether you are a regulator or focusing just on law, I think that given all the innovation that's happening at this space and also the pace at which it's happening,
00:12:41
Speaker
It is crucial that before you're going to regulate something, before you're going to court for a case, we should really get down to understanding, okay, what is this? Breaking down the myths and we go over this a lot in the Tree of Web Through Wisdom, for example. And I also wanted to mention a thing
00:12:58
Speaker
related to this, which is also classifying the tokens because this has become almost like a mantra here for us. Lee has written extensively on classifying tokens on these things. So I also wanted to hear from you. Could you elaborate on the significance of token classification clarity and fostering consumer protection, but also from the law education perspective?
00:13:21
Speaker
Yeah, when it comes to, and that's the subject of the other paper in the series, Emerging Technology Language Wars, cryptocurrency. When it comes to tokens and cryptocurrency and the other range of what is often referred to as crypto assets or digital assets, I think the biggest threat to good law and policy in that arena is lumping them all together and treating them as though they're the same with the same attributes.
00:13:49
Speaker
And I, for that reason, really dislike the term crypto asset or the term digital asset to use specifically in reference to cryptocurrency and other types of tokens because they are quite different in both their technical attributes, the values that they carry, the uses that they're intended for, and frankly, the way their technical attributes tie into legal issues like control, like
00:14:15
Speaker
I don't think it's a legal attribute, but things that some regulators seem to think matter like decentralization. But I think understanding the technical differences between the types of tokens, including governance tokens and tokens that were intended for capital raise, I think all of that is incredibly important to get the law right in any arena where you're trying to regulate activity that involves tokens.
00:14:44
Speaker
I also am not a fan of the idea of regulating the token itself. That's not how we usually do law. We regulate activity. We create law that governs activity, and we regulate or govern that activity in the same way, whether you're conducting that activity with cash
00:15:05
Speaker
or with tokens or with your credit card. And the technical attributes of the token itself determines whether you can conduct the activity using that vehicle that is regulated or not. And there are some cryptocurrencies, some governance tokens, some other kinds of tokens.
00:15:25
Speaker
that simply do not fall within the regulated box because they don't enable the activity that we actually regulate. We don't regulate the thing. We regulate what people do with the thing. And so the tendency, though, in this arena has been to say, oh, it's a crypto asset. It's all the things, right? They're all the same. And we're going to regulate the crypto asset, which we don't really know what it is. We're just going to lump it in together. And then we're going to hope for the best.
00:15:53
Speaker
And the interdisciplinary language problem there is really quite stringent because if lawyers are doing that, often they hold in their head an archetype of a cryptocurrency. So for them it's Bitcoin, because it's the most well-known, or Ether, right? Or maybe now people are thinking, when they think of stablecoins, they think of
00:16:15
Speaker
a USDC or something, right? Which is like more of a custodial model of a stablecoin. And they're not thinking of things like DAI, right? They've never heard of it, maybe. But in their head, stablecoin means this kind. In their head, cryptocurrency means or crypto asset means Bitcoin. And that's dangerous because there are lots of cryptocurrencies with extremely different technical attributes that enable different kinds of functionality and activity that you need to think about differently.
00:16:45
Speaker
I think it's also difficult because in law we have a concept of token that goes back a very long time. And so one reason to gravitate towards calling it a crypto asset or digital asset is because we don't want to use the word token because for us that means something different and something a bit broader most of the time.
00:17:08
Speaker
Um, but, but doing that causes other problems. Similarly for technologists, right? There's different meanings of the term digital asset, right? Um, digital asset might be an Amazon book, right? Like a digital book. It could be, it's much broader. Um, and anyway, I just think in order to
00:17:27
Speaker
guide law to good outcomes, predictable outcomes, even if they're not good, predictable outcomes, stable outcomes. We have to get a grip on what the differences are between the types of crypto assets in the world. I think the difficulty in taxonomy projects, though, is that you can get it terribly wrong.
00:17:49
Speaker
If you're not asking the right people, you can create a taxonomy that is wrong straight up, or that focuses so much on the technology at a specific moment in time that by the time your taxonomy is published, things have changed.
00:18:04
Speaker
right? And it's behind already. So in my view, some of the best taxonomy work is some of the best definitional work is technology neutral. So using words where any number of things could fit, but what you are describing isn't necessarily the technical attributes of the cryptocurrency itself, but the technical attributes of like,
00:18:24
Speaker
the activity. If somebody was going to do this activity, what is the activity we want to fall in the bucket? And if it happens through a technical mechanism, then it's in the bucket. If it happens through a paper mechanism or physical handshake mechanism, then it's in the bucket. But that's how I would like to see law develop.
00:18:43
Speaker
without regard. So because of recognizing the technical differences between different types of cryptocurrencies, focusing rather than on the cryptocurrency or the crypto asset as the object of regulation, focusing where we always focus on governing the activity.
00:19:01
Speaker
Absolutely. And I think you've summed it up perfectly in the sense that they're not a homogeneous asset class. And it can be very different to say, oh, we're talking about one Bitcoin or one Avax, one Ether, whatever it is, versus something on Amazon. Because essentially, you can tokenize anything. They're just a digital representation of something. And I think that getting down to the core of what something really is, whether it's
00:19:26
Speaker
a stablecoin, whether it's an NFT, I think that can just set the precedent for proper treatment of these kinds of things. And also based on what we've seen, what role do you think that international regulations play in standardizing smart contract interpretations and applications across different jurisdictions?
International Regulations and Standardization
00:19:48
Speaker
That's interesting. So in terms of smart contracts,
00:19:51
Speaker
I think the most, so I'll sit, put it out there, like I'm not a fan of Mika. I think, I don't like, and I think I sort of say that in the cryptocurrency paper, but I don't think, I think that's one version of a taxonomy sort of gone wrong. And I think we've seen it play out as they consider, continue to consider now Mika too, right? There's a reason they had to come up with a new one because the first one didn't do what they hoped it would, right? So to that extent, it's useful to see
00:20:21
Speaker
an attempt and to see what maybe we want to fix a little bit, right? In terms of smart contracts, I think some of the best work has come out of private law efforts. So looking at the ALI, ELI principles of a data economy, I think have lots of applicability to
00:20:42
Speaker
smart contracts and transactions involving smart contracts. I think looking at work that is ongoing around data and contracting and I think the work of Unidra in terms of the
00:20:57
Speaker
What do we call it? The principles of private law and digital assets. I think those things can go a long way to harmonizing at least the private law affecting smart contracts and transactions using smart contracts. When it comes to regulation, on the other hand, I worry that the United States has such an outsized
00:21:19
Speaker
role, particularly with respect to financial regulation, both domestically and then internationally as part of international groups of regulators, that the mistakes we see regarding smart contracts from the CFTC, from OFAC, from FinCEN,
00:21:38
Speaker
I think, I worry that those get spread because we play a big, we being the United States play a big role in setting policy abroad in that regard. But I think that remains to be seen. I think, I will say, I think it's why it's really important that advocates in the United States
00:21:58
Speaker
continue to push back both through the comment period for the proposed Vinson regulations and through work in the courts related to both the SEC case and the OFAC case. I think it's important that we push the regulators to be specific because often in the financial world, financial regulation, the standards we set get exported.
00:22:25
Speaker
and it's worth paying attention and encouraging them, encouraging the regulators to be precise in what they're crafting.
00:22:37
Speaker
Very interesting point, yes. And I think that kind of what we were mentioning at the beginning in the sense that how can we keep the pace with the innovation that's happening, but also as we define these terms, as we create this set of taxonomy to ensure that what we're putting out there, what we're regulating stays relevant. I think that's obviously a sweet spot that
00:23:01
Speaker
I think it's easier said than done, but I think that we can see these principles and also know what to apply, what not to apply as constant updates are being published.
Self-Regulation in Blockchain
00:23:11
Speaker
And also for this, what role do you envision for self-regulatory mechanisms or industry standards in supplementing formal governmental regulations to ensure that there's a responsible innovation and compliance in the blockchain system in general?
00:23:27
Speaker
Yeah, that's a really excellent point. I do think there's a role for self-regulation and industry standards to play. I think the more like the to the extent that they are tied in more with like traditional models of self-regulation and industry standards, the better. So working with IEEE, working with the
00:23:53
Speaker
WC3 so working through the traditional the UN internet governance forum like work appearing and working through traditional channels is a good first step right for legitimacy purposes and then to the extent possible using Mechanisms that have worked in the past so one of the most effective industry standards
00:24:17
Speaker
tool that has been used has been by EMV co and in the payments context with the chip and pin process right and the liability shift like there are time and tested private law versions of how you implement Standards to affect the market more broadly that that could be used in this context And then of course, there's the more public facing models like sorrows for securities, right? but but I think there's
00:24:45
Speaker
always a good use for them. I think it's going to come down to implementation and buy-in, right? And in particular, and I think the two are connected, right? The more the implementation looks like things people recognize, the more likely you are to get buy-in. The difficulty is if you're modeling it after things people recognize, maybe you're losing some of the benefit of the decentralized nature of
00:25:08
Speaker
the technology in the first instance. So I think it's a difficult line to balance, but I think that there's potential there for sure. Indeed.
Conclusion and Resources
00:25:19
Speaker
And as we wrap up, I mean, I've loved how you've discussed these different aspects, but if there's one thing that you would like our listeners to take away from this discussion and from this series of papers in general, what would it be?
00:25:33
Speaker
I think it's mostly a message for lawyers and the message is, although it's tempting to say this is law, law wins every time. Whatever the law words say is the winner. The technical details of things matter for the law and you can't just put up a blinder and say, I'm a lawyer, I don't have to understand the technology.
00:25:56
Speaker
You actually have to understand the technology to give good legal advice. And particularly if you are involved in legal reform or in proposing legal change, you have to understand the technology to craft good rules. And so just the fact that we're lawyers doesn't mean we get away with not understanding the tech. We need to understand the tech or we're going to mess it all up, law and tech. So that's the main message of the papers.
00:26:25
Speaker
Absolutely. And while we're out of time, but once again, thank you so much for joining us, Karla. You're brilliant. I loved hearing from you. And also thanks to our audience for tuning in. We will link your paper in the description of the podcast for those interested in reading more about it. So thank you so much, Karla.
00:26:45
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!