Technologically, smart contracts offer considerable scope for on-chain automation, enabling processes to be automated and interactions to take place both on-chain and off-chain. This is achieved by executing the commands coded into the contract.
It should be stressed, however, that the ability to code instructions, perform netting and settle transactions (payment versus payment and delivery versus payment) does not necessarily produce automatic legal effects.
The accompanying illustration makes the point. The transaction it describes would allow a real-world asset (RWA) to be traded on-chain, granting access to the (previously deposited) asset through tokenisation and smart contracts (delivery versus payment). This would happen once the buyer had paid the price set by the seller using tokenised money.
Crucially, though, acquiring a real-world asset takes more than simply coding the transfer of access to it. The relevant legal requirements must be met. This means there must be an effective transfer of ownership or of rights of use (requiring consent, object and cause). The proper procedures must also be followed, whether for the acquisition itself or for establishing the acquirer’s entitlement. It is also essential that the token holder is the lawful owner or has the necessary power over the token. Otherwise, consideration must be given, among other matters, to the legal recognition of good-faith acquisitions based on the appearance of title.
In short, holding a token acquired through a smart contract does not automatically make its holder the lawful owner or possessor of the security or right that the token purportedly represents. The legal effects of smart contracts will be determined by the applicable rules, both between the parties involved and more broadly.
Image credit: Hashcash Consultants (2023)
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