IoT, Smart Contracts & Digital Commerce: Where to from here?
Over the past two decades, our increasing connectedness to the internet has led to an explosion of digital commerce and technological development on an unprecedented scale. Where “digital commerce” previously comprised of buying goods from online retailers, today, we have distributed ledger technology and cryptocurrencies that can be used to purchase goods and services online, Internet of Things (IoT) devices such as digital tracking wearables which can monitor our daily movements, and automated speakers which act as personal assistants. The combination of these technologies is changing commercial systems and continues to alter the digital commerce landscape.
IoT refers to the increasing connectedness of gadgets and everyday items to the internet. This allows these items to send and receive data and, ultimately, automate many of the interactions we have. A common example is the Google Home device, which has embedded capabilities enabling it to control your smart home.
On a larger scale, IoT is leading to the development of smart cities. Barcelona has been developing its smart city projects since 2011, and has already seen a number of positive changes and benefits throughout the city. These have included the introduction of municipal smart bins which help the city optimise waste management, smart sensors which monitor irrigation and water levels in public water fountains, and digital bus stops which provide commuters with updates on bus locations. Following the implementation of IoT systems, a 2017 report from Philips Lighting of the World Council on City Data indicated that Barcelona saved approximately €42.5 million on water and generated an extra €36.5 million a year through smart parking.
In industry, IoT enabled devices are already assisting corporations to streamline processes and increase efficiency. In the insurance industry, providers are beginning to consider information recorded by constantly monitored smart homes or self-driving cars. Insurance policies may be adjusted according to the person or object covered by the policy. For example in the USA, the life insurance John Hancock Vitality Program uses an Apple Watch to track the healthy activity of policy holders and offers discounts to those who exercise regularly.
IoT is also making waves in the supply chain industry. In Australia, Woolworths is developing a new large-scale IoT project which uses sensors installed throughout its supply chain to track fresh produce from when it is grown by the supplier to when it is sold to the retail consumer. The sensors assist Woolworths to track data such as how much sunlight and water crops receive and how long produce is refrigerated for in transit which form a key part of the supermarket’s efforts to optimise their supply chain.
With the advent of distributed ledger or blockchain technology and the refinement of self-executing smart contracts (which we have previously discussed in our June 2016 and August 2016 articles), it is becoming increasingly possible for goods and services to be transacted for on a blockchain. Writing smart contracts into a distributed ledger can expand a ledger’s functionality to include terms of agreements and enable instantaneous contract execution and performance. Combined with IoT technology, it is becoming possible for those goods and services to be delivered to customers through IoT enabled products without the need for human intervention.
This capability significantly expands the potential application of IoT into commercial transactions. For example, the rental app Slock.it is developing a sharing economy network. Titled the Universal Sharing Network (USN), the app will allow people to find, locate, rent and control any object connected to the USN. Users can log into the app to find a USN connected object, pay for its use, and then immediately use it once the necessary smart contract has been unlocked without the need for a human intermediary.
Whilst some are positive about the idea of living like the Jetsons, this change in the commercial landscape is not without challenges.
Stability: The nature of smart contracts and their role in blockchain operations means that it is becoming increasingly important that the technology and code used to write the smart contract is stable, and has been thoroughly vetted. There are different kinds of risks that operators and consumers need to be aware of when choosing to transact on blockchain. While blockchain records remain immutable, the code written to run transactions on the blockchain is still susceptible to attacks or coding mistakes.
For example, in 2016, investors who purchased tokens in the Decentralised Autonomous Organisation (DAO) lost US$50 million when attackers exposed a “recursive call vulnerability” in the DAO’s smart contract design. The DAO hack demonstrates that substantial losses can be incurred when a coding weakness can be taken advantage of, which can result in unintended consequences.
Privacy: Though IoT is quickly making its way into many industries and people’s homes, IoT devices are more often than not focused on connectivity rather than security. The privacy risks associated with IoT devices and similar personalised services can reveal private behaviour and this is aggravated by the lack of fundamental security safeguards in many first generation IoT products.
The availability of blockchain technology has now led to suggestions to secure IoT devices on the blockchain. The incorporation of smart contracts into IoT devices can improve the behaviour of devices by verifying programmed actions before execution. Though it will not resolve all the security and privacy challenges IoT faces, it can certainly help.
Privacy is a growing issue throughout the world of digital commerce with the most obvious recent examples being the introduction of the Notifiable Data Breaches (NDB) Scheme and the recent commencement of the EU General Data Protection Regulation (GDPR). You can read our views and content on the NDB Scheme and GDPR here. As well as understanding obligations under national and international privacy laws, those seeking to use Blockchain and IoT devices should carefully consider how information privacy is designed into the system and be cognisant of Privacy trends and legal developments.
Legality: the potential for transactions to be automatically executed on the blockchain relies heavily on the function of smart contracts. However, despite its name, smart contracts executed on the blockchain are not in and of themselves contracts and legal questions may arise regarding enforceability and liability.
Whatever form the transaction takes, there still needs to be compliance with the elements required for the formation of an enforceable contract such as consideration, and intent. Lawyers need to ensure that the smart contract is only executing what has already been agreed to, and any element of duress, undue influence or unconscionable dealings could render a transaction void at law. Depending on the events that lead to entering into the smart contract, and how much of the transaction is purely automated code, a smart contract may not be binding Under current law, it is questionable whether the ‘purest’ forms of smart contract transactions are binding - in transactions which rely on permission-less blockchain technology, parties may not be notified of the contract’s terms.
Operators also need to consider what happens when programming errors arise and how parties will be able to claim against another. Where commercial activities on the blockchain are occurring across jurisdictional boundaries, parties need to understand which laws of which jurisdiction will apply, and where dispute settlement will occur at a minimum.
If you have any queries in the IoT, smart contracts or blockchain space then please get in touch with HopgoodGanim Lawyers’ Corporate Advisory and Governance team.