Smart Contracts and New Frontiers in Estate Planning
Cryptocurrencies, such as Bitcoin and Ethereum, have been surging in popularity. As our colleagues have written here and here, they have raised a variety of unique considerations in the context of estate planning. However, the underlying technology in cryptocurrencies, blockchain, has given rise to a variety of digital tools beyond cryptocurrency. “Smart contracts” are one of these.
Broadly speaking, blockchain allows blocks of information about transactions to be recorded and stored on a distributed ledger. This article provides a more detailed overview of blockchain for those interested. Smart contracts are an extension of blockchain. They are programs stored on blockchain that run when certain pre-determined conditions are met, thus automating the execution of an agreement. Since the steps in a smart contract are hard coded, failure to fulfill conditions as agreed upon, prevents any progression. When conditions are fulfilled, the blockchain is updated and the agreement proceeds.
Two of the main attractions of these smart contracts is that they can serve to accelerate the transaction by removing middle-men and add a high degree of certainty to the performance of an agreement based upon the pre-established terms.
These benefits, however, should be approached with caution. The basis for the certainty arising from smart contracts is that they are hard coded, and the blockchains on which they are built rely on encryption to prevent fraud. The same certainty which is a strength can be a weakness though, as it makes changing the terms of an agreement difficult, if not impossible, in some circumstances.
Businesses advertising smart contracts in the context of estate planning are becoming more common. Potentially removing the need for executors, lawyers and other intermediaries in the administration of an estate can sound very appealing from a cost perspective.
Having said that, one should bear in mind that the law and factual matrix of an estate can and often does vary over time. Certainty can become fatal inflexibility in the face of change. A change in the law or conditions around an estate may prevent the performance of a smart contract where the coded preconditions require an impossible or illegal action.
New technologies are often exciting, and no doubt can bring positive change, but they also bring unknown risks. An abundance of caution would be well advised when using novel tools like smart contracts.
Thank you for reading and have a great day!
Suzana Popovic-Montag & Raphael Leitz