Regulating smart contracts: An efficient integration approach

Abstract

A smart contract is a digital protocol (software code) that enables automated monitoring and executing contract’s provisions without the need for intermediaries. Blockchain technology allows implementing smart contracts through a distributed ledger, but has no reliable way of enforcing legal rules. For example, in networks such as Bitcoin, it is possible to engage in illegal activities such as money laundering and dealing in weapons. In addition, it is impossible to enforce and audit legal costs such as taxes and duties. This research has devised a plan that allows official institutions to enforce the rules and audits efficiently during automatic execution process of smart contracts. This article discusses five important challenges in applying legal rules to Blockchain: the accreditation to the contracting parties’ and the goods’ nature, collecting legal costs, enforcing territorial laws and auditing. We present “Hyper Smart Contract”, a method for regulating Blockchain-based smart contracts and assess the limitations of the current generation of smart contracts on Ethereum to ensure a proper implementation of this plan. The performance of proposed method evaluated on a motivation application.