Storing estate planning documents can be challenging. The location needs to be safe from natural disasters and secure. On the other hand, if the documents are too far out of sight, they will be out of mind, meaning they won’t be updated after marriages, divorces, deaths, and births.
Blockchain provides a safe and secure way to store estate planning and other legal documents as smart contracts. A smart contract is an agreement between two parties that is automatically executed when certain conditions are met.
The importance of security
Estate documents contain sensitive information about your financial assets, accounts, and properties. They also describe how you wish to distribute these assets. Your net worth and who you intend to share it with is confidential information that could cause serious issues if uncovered by the wrong people.
What are smart contracts?
Blockchain is a decentralized and immutable digital ledger technology that ensures transparency and security. It is similar to a giant spreadsheet made up of connected blocks. Blockchain is decentralized, so no one can update it, making it immutable.
Transactions on the blockchain are universally agreed upon, which makes it difficult for hackers to corrupt. While blockchain became well known as the underlying technology for buying and selling cryptocurrencies, it has many other uses.
Smart contracts are self-executing digital contracts. When certain conditions are met, the smart contract automatically executes specific predefined actions. Smart contracts serve the same purpose as traditional legal contracts, but they allow a transaction to occur between two anonymous parties without the need for supervision by a central authority or the legal system.
How do smart contracts work?
Smart contracts use computer code to execute an agreement between two parties. The overall process for smart contracts is as follows:
- Two parties agree on the terms and conditions of the transaction. Everyone must agree on how the smart contract will work and what conditions must be met for it to be executed. Consult with a lawyer to verify whether the smart contract is legally binding.
- The smart contract is created and coded by the relevant parties or a smart contract developer. A poorly designed smart contract can be a security risk. Top-notch coding is required to ensure the smart contract has the best security features. The coding should be audited regularly. The smart contract should undergo rigorous testing to ensure its stability and expected outcome.
- The smart contract is deployed to the blockchain. It is broadcast just like any other cryptocurrency transaction. Once the transaction is confirmed and live on the blockchain, it cannot be revoked or changed.
- The blockchain or other verifiable data are monitored, looking for when the triggering conditions are met.
- Once the triggering conditions are met, the smart contract is executed.
- Once the smart contract is executed, its status is recorded on the blockchain. The completed smart contract is stored on the blockchain and is available for review.
What can go wrong with smart contracts?
Newer technologies may take some time to resolve security risks and be accepted by regulatory authorities.
Even when a smart contract is technically sound, it may not be legally enforceable, especially when coders without a law license don’t understand what they are hard coding. While the most obvious problem is that coding errors can lead to unexpected outcomes, language can also be a problem.
Contracts are written in natural language that both parties can fully understand, including the potential areas of dispute. This may not be the case when the contract is directly written in code. A contract is more likely to be legally enforceable if it is written in natural language and then coded.
Traditional contracts are typically edited and appended over time. This can lead to terms and conditions that are disparate or contradictory, as legal verbiage is carried along from one version to the next. Smart contracts cannot be executed when there is contradictory information. Everything in a smart contract must be explicit and precise. Smart contracts lack flexibility.
Traditional contracts are sometimes vague to allow for interpretation. Since natural language is not easily translated into code, developing a comprehensive and clear understanding of your business goals for your smart contract is essential.
Connecting the digital and physical world is challenging. While smart contracts are immutable, transparent, and trustless, this is not the case in the physical world where non-digital assets are located. Talk to your estate planning attorney to clarify your goals and determine whether a smart contract is an appropriate way to make a contractual agreement.