Smart Contracts and Blockchain: Legal Challenges and Opportunities in Serbia
With the accelerating digital transformation, the legal world is changing faster than ever before. The emergence of blockchain technology and smart contracts is giving rise to new models of entering into and performing contracts, and traditional contract law is facing unprecedented challenges – but also a range of opportunities. In this blog, we will examine what smart contracts are, what their legal challenges and opportunities are, and where Serbia stands on the map of regulation in this technological revolution.
Smart contracts are self-executing computer programs hosted on a blockchain network. When pre-agreed conditions are met, the contract executes automatically – without the need for human intervention. The difference from traditional contracts is enormous: instead of judicial interpretation of contractual provisions, here “code enforces justice.”
This innovation has the potential to radically change the way we do business, particularly in areas where transparency, speed and security are essential: finance, supply chains and intellectual property.
The Bernstein Case and the Origins of Blockchain
When Daniel J. Bernstein, a doctoral student at the University of California, Berkeley, developed an encryption method in 1996 – “delay-free private-key stream encryption based on a one-way hash function” – which he called “Snuffle,” he asked the US Government whether he needed a licence to publish Snuffle in any of its various forms.
That question sparked a protracted legal battle which, as it later turned out, would prove fundamentally important for the development of blockchain technology.
But we will return to Daniel J. Bernstein later.
We are witnessing blockchain technology gradually taking its place in our everyday lives – faster in some parts of the world, slower in others. It would seem that this is an irreversible process.
Every new technology looked, at its inception, like some kind of innovation destined to fail. Cloud technology probably seemed insecure and impractical at first, yet today it is part of everyday life. The so-called share economy as a business model was once equally unimaginable.
Recently, smart contracts have been emerging as a distinct topic within blockchain technology – as a solution that can contribute to efficiency in legal matters. It is very possible that smart contracts will have a far-reaching impact on the legal industry – to a greater or lesser extent, in the nearer or more distant future.
So, what are smart contracts, and how are they defined?
What Is a Smart Contract?
The best-known definition was given by Nick Szabo, a computer scientist renowned for his research into digital currency, in 1995: “A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on those promises.”
Let us try to explain this in simpler terms.
The Present and Future of the Smart Contract
Let us assume that today we are at the most rudimentary stage of the smart contract, in which one contracting party holds a certain contract on their computer, and the other contracting party also holds that contract on their computer – that is, in digital format.
The logical next stage of this mode of contracting (which is already possible at this moment) is for both contracting parties to electronically sign that same contract using a digital signature or digital certificate.
The following stage of smart-contract realisation would be for the contract price to be paid in a digital currency (for example, Bitcoin).
Now imagine that you are at the next stage of smart-contract development, and that an entire contractual provision – for example, a clausula intabulandi (consent to the registration of real property) – is expressed as source code which, when a pre-agreed trigger is activated (for example, payment of the purchase price), registers the property in the competent Land Registry within milliseconds.
Or, to add one more detail to this scenario: imagine that the registration fee is paid in a special digital currency issued by the Land Registry and called, instead of BitCoin, something like “TaksenaMarkaCoin.”
And now imagine that all previous registrations were also carried out using earlier smart contracts and blockchain technology.
In practice, this would truly mean that escalation of a dispute between the contracting parties is inconceivable, because the primary premise of blockchain technology is precisely the absence of any dispute over any transaction.
In the current way of doing business, there is always the possibility of human error, whereas blockchain technology never “sleeps” and never makes mistakes.
Can Source Code Be Law?
Finally, imagine a smart contract that consists entirely of the appropriate codes, instead of legal language and articles of a contract.
We would agree that this sounds like science fiction, especially in the current business environment where we have not even achieved a paperless way of working.
Of course, there are a great many uncertainties associated with such a development of smart contracts using blockchain technology.
The fundamental problem is that a smart contract is so effectively executable that it is simply unstoppable – there is no way to prevent or interrupt a transaction once the specified conditions are met, i.e. once some pre-agreed trigger is activated.
The question also arises: how do you amend such a contract? How do you change the rights and obligations of the contracting parties? How do you change the deadlines for performance of contractual obligations?
A whole series of other questions remain open, which we will discuss in one of our upcoming blogs.
In law, it is often said: the contract is the law between the parties. Indeed, courts themselves frequently state in their judgments that a contract is “the law between the parties.”
In the manner described above, through the use of blockchain technology in the development of smart contracts, we will reach a situation where source code becomes a source of law – the law between the parties.
Source Code Is Speech, Protected Not Only as Copyright but Also by the Right to Free Speech
Let us now return to the case of Bernstein v. United States (a series of cases brought by Daniel J. Bernstein challenging restrictions on the export of cryptography from the US).
In its final judgment in 1999, the Court of Appeals – the second-highest court in the United States – ruled that software source code also constitutes speech and, as such, is protected by the right to free speech guaranteed by the First Amendment to the US Constitution.
That case directly enabled the current blockchain technology, because it concerned statutory prohibitions on the publication of cryptography that now secures the internet and, of course, blockchain technology itself.
In other words, the source code of a smart contract is speech, and speech is protected from any restrictions by state or government agencies that would require permission for its publication.
Serbia’s Regulatory Position
Serbia is not lagging behind global trends and already has specific legislation relating to blockchain and smart contracts, primarily through the Digital Assets Act of 2021 (Zakon o digitalnoj imovini).
Smart contracts and blockchain are not merely a “technical innovation”: they are fundamentally changing our understanding of contracts, the consistency of their performance, and legal certainty. Serbia is among the countries that have recognised the importance of regulating digital assets and smart contracts, but it is essential to continue aligning regulations with global standards on an ongoing basis.
If this topic interests you in greater depth, you can also read our earlier article on the same subject.
Exciting times lie ahead, and there is every reason to believe that the stars of this era will be blockchain and the smart contract.
Need legal advice?
Follow for more legal insights:
