Blockchain, Smart Contracts and “Judge as a Service” in Brazilian Law

Blockchain technology, developed in 2009 as the basis for the functioning of the Bitcoin cryptocurrency, soon became an thing in itself due to the doors it opened for a myriad of applications well beyond the financial scope of the Bitcoin. The ability to verify transactions and informations in an inherently decentralized manner has become the technology’s main attractive, allowing for the development of public authentication services, through payment systems and even ordinary social apps.

One of the innovations allowed by the blockchain is the creation of smart contracts – self-enforced contracts ruled only by code. These contracts allow for individuals to set up contracts for transactions of goods and values associated with the blockchain that would be automatically enforced once the contractual conditions were fulfilled. A new dynamic would then arise, eliminating the need for trust – whether on the opposite part or on State jurisdiction – when establishing contractual relations involving goods and values of all kinds. Smart Contracts would then be a literal concretization of Lawrence Lessig’s “Code is Law” theory – they would work independently of the state jurisdictional power.

The initial inflexibility and irreversibility of the smart contracts, however, turns out to be a hindrance to the widespread adoption of the technology by most of the population and in face of the traditional requirements of ruling contract law on most jurisdictions. Once signed, these contracts enforce themselves automatically and independent of state jurisdictional power so that, in some contexts, not even state coercion might be enough to reverse them. For that reason, the non-retroactivity principle of the blockchain becomes a factor that distances even further the adoption of these advances in more diverse and widespread ways on daily interactions.

The idea of the judge as a service then arises: a kind of arbiter or judge with technical powers to revert or change transactions undertaken through the blockchain smart contracts. During the development of the smart contract, an individual is pre-defined who will analyse the juristic act and will attest to its validity, having powers to guarantee its enforcement in compliance with the law of the jurisdiction the parts are inserted in. The challenge, therefore, lies on the adequacy of the smart contracts through a mechanism of Judge as a Service, or other equivalent, to the rule of law. Facing the recent shocks between the Brazilian legal system and the technical workings of Internet applications, compliance with Brazilian law during the design-phase of blockchain-based applications may guarantee a wider adoption and less subject to conflicts with the Justice.

The Blockchain

What is the Blockchain?

The Blockchain may be defined as a technology for registering information by relying on a decentralized, peer-to-peer network to create consensus amongst participants regarding the information stored on it. To do that, these participants (nodes) will share a public ledger that allow them to verifying the information shared by these nodes, creating the necessary trust to guarantee the functioning of the technology.

Recent developments have allowed for the Blockchain to incorporate unto itself any kind of content or information. Furthermore, the nature of its workings makes frauding it economically inviable, as the necessary cost to do so surpasses by far the possible gains.

Therefore, the Blockchain allows for autonomous interaction between peers, dismissing the idea of trusted third parties, as this this trust is assured by the system’s own architecture. This allows for greater fluidity of interactions, as well as an endless list of possible applications.

Smart Contracts

A way of outlining the idea of smart contracts is to say it is the representation of a deal through which one can verify the enforcement of a previously established condition, which then results in a consequence, also previously established. Therefore, the functioning of a smart contract follows the basic programming logic of “If X, then Y”, contained on the through which the contract will be ruled. With that, the smart contract becomes self-enforceable, as the fulfilling of the condition leads to the result.

One may mention the example used by Nick Szabo, originator of the idea of smart contract, that a vending machine is a primitive form of smart contract. That is so because the machine owns a certain amount of goods, stored on a safe space which costs more to violate than the value of its contents, working under the following logic:

if button_pressed == “Coca Cola” and money_inserted >= 1.75:

release(“Coca Cola”)

return_change(money_inserted – 1.75)

else if button_pressed == “Aquafina Water” and money_inserted >= 1.25:

release(“Aquafina Water”)

return_change(money_inserted – 1.25)”

If the programmed value is inserted, then the soda will be dispensed. That way, the contract programmed on the machine is self-enforced and concerned only about the fulfillment of its requirements.

Examples of possible services using the blockchain and smart contracts

The possible applications for the Blockchain and for smart contracts are endless. They are usually divided between “financial”, “semi-financial” and “non-financial”, and new applications based on distributed ledgers have been spawning almost daily to replace almost any system dependant on intermediaries or trusted third parties. Among the developed applications are public registry systems for property, insurance contracts, collective governance systems, investment funds, stock exchanges, electoral systems and others. Nearly any kind of juristic act that involves a condition for an execution followed by transactions of values or property has been contemplated with a Blockchain-based application.

Blockchain non-retroactivity

The primary functioning of smart contracts may be defined by its non-retroactive nature. This means that once both parts have signed a contract it will be enforced automatically, following only the pre-established orders on the code. If for any reason the involved parts desire to revert the transaction, returning to its status quo, they must engage in a new smart contract in order to do so. In the scope of smart contracts, their efficiency depends on the fulfillment of objective requirements such as possibility, determination and economicity. As they are instantly and fully enforced once they are signed by the involved parties, subjective requirements for their validity have no practical or factual relevance.

Naturally, such an ascertainment goes strongly against Brazilian Law. It is unacceptable to our legal system for a contract without validity to be executed with full efficacy without any chance for the parts to claim full or partial nullity due to non-fulfillment of subjective or formal requirements, for two main reasons: i) there is no able time for this to be done after the signing of the contract; ii) after the enforcement of the contract, the goods or values may be in a situation that makes it impossible for the contract to be reversed. From a traditional legal viewpoint, there is no such situation as that described in point ii): once the claim for nullity of a contract is recognized by a judge, he/she may issue a court order forcing the other part to to take the necessary measures for the goods and values to return to the status quo. It just happens that a smart contract creates a possibility in which there is no human part to be coerced and therefore the good or value to be completely out of reach for state jurisdiction. When a smart contract becomes the owner of a purely digital good or value, only a pre-determination by code and technical mechanisms might allow for such good or value to be transferred to someone else.

Concept and use of the JaaS

New situations then arise in which human intervention on a code may prove to be necessary in order to fully explore its potential. Among the uses for a smart contract that might require such intervention are those on a complexity level higher than that possibly predictable by an algorithm, as for instance any contract involving a highly subjective event such as the performing of a service, the storage of a deposit and eventual transfer after certain highly subjective conditions are fulfilled or even emergency measures to withdraw funds from a smart contract, for any reason. This last example is particularly important.

For those uses the idea of a Judge as a Service, a kind of arbiter with technical powers to revert or change transactions on the blockchain, was proposed. During the development of a smart contract, one or more individuals – or a mechanism that defines these individuals, such as an objective reputation system – are predefined, which will then analyze the juristic act and attest its validity, having powers to ensure its enforcement in compliance with the law of the governing jurisdiction, and therefore correct and vices or nullities on a smart contract.

The parallel between JaaS and the paradigm of the Civil Procedure Code of 2015 for consensual conflict resolution

Considering the implementation of the new Civil Procedure Code of 2015, a change in the model of procedural resolution in Brazilian law can be noticed, in a distancing from the arduous procedural conflicts to consensual resolution of demands. This new perception of procedure borrows principles from Arbitration and its mechanisms.

In the same sense, JaaS naturally tends to be a more harmonic way of solving conflicts. Taking as starting point the conditions established through code, the judges ponder inside the logical limits of each contract (Which in theory have the consent of the parties). However, there is compliance with certain general principles for formation and enforcement of contracts. The idea of JaaS serves at first as a facilitator, an intermediary seeking to facilitate the dissolution of an stalemate found by the parties. Only after the confirmation of the impossibility of a deal between the parties will the Judge make use of his privileges to change any issues of that contract.

Furthermore, decentralized tribunals allow for the use of mechanisms exclusive to online dispute resolution, such as double blind bidding and visual blind bidding, which are forms of negotiation between parties. In such a context, the demands of each party are externalized without the knowledge of the other party, leaving to the algorithm to evaluate proposals and attempt a deal.

Other innovations of the CPC/15 is the precedent system for resolution of repetitive demands, laid out on articles 926 to 928. On this paradigm, courts must standardize jurisprudence, in a coherent manner with the national legal system, complying with superior instances as well as applying their decisions on incidents of repetitive demands.

Returning to the JaaS sphere, this rationale would lay out in an even more advantageous way, as organization, classification and application of precedents can be done through algorithms. These would verify the similarity between new demands and those previously defined as precedents. Beyond that, the registering decisions on the Blockchain further perfects and gives more safety to this model.

Final Considerations

Considering the exposed, it may be worth to use as an example of the impossibility of adoption of principles on a practical world the Ethereum Classic, created and developed by some participants on Ethereum as the latter suffered a hard fork.

Using a Judge as a Service resource may be vital to increase the adoption and popularity of blockchain technologies. Currently, one of the larger barriers for the expansion of the technology is distrust and uncertainty by final users regarding the values to be transacted through the system. Without the guarantees offered by the State, the perception of risk is high and discourages the common user who is not familiar with the technology.

Finally, it is important to highlight the enormous potential for the use of Artificial Intelligence in a mechanism such as the JaaS since, besides further perfecting the precedent system and repetitive demands, Artificial Intelligence allows for automation of increasingly complex decision making, transforming conceptions of procedural time and of volume of deliberation.

The dissemination of smart contracts will still face challenges regarding to auditing of their functioning, which will require a joint effort by computer scientists and lawyers alike.