The legal challenges of Blockchain and smart contracts according to a recent EU Flagship report

The European Commission has recently published an extensive Flagship Report in which the possibilities and opportunities, but also the (legal) challenges and consequences of blockchain and distributed ledger technology and of smart contracts are extensively investigated.

We summarize the main points of the report and summarize what smart contracts are and why your lawyer should also be familiar with the ins and outs of this technology. The report itself is in any event a must-read for anyone interested in technology and the future of our economy.

blockchain and smart contracts

Beyond the hype …

Blockchain and distributed ledger technology are past the hype,” we read in a recent trend report. The latest Gartner Hype Cycle for Blockchain also shows that the blockchain hype is somewhat over its first peak.

However, that does not mean blockchain technology isn’t particularly valuable for our digital economy and will eventually find its way to all layers of society. Cryptocurrencies and digital tokens have attracted the most attention when it comes to blockchain applications in recent years, but the real added value of the technology may lie elewhere, in so-called smart contracts.

Over here at Sirius Legal, we follow up closely on all evolutions regarding blockchain and smart contracts, but also in artificial intelligence, and we are working very hard ourselves on a new contract management service for our clients that will be based on blockchain technology. Our lawyers follow intensive training courses to be able to follow all technological developments closely and learn how to program themselves, so that they also master the technical side of the story and can consult with programmers and IT people.

EC Flagship Report on blockchain and distributed ledger technology

In the meantime, the European Commission has long recognized the importance of blockchain and distributed ledger technology and last week the European Commission published an extensive Flagship Report in which the (legal) challenges and consequences of blockchain and distributed ledger technology are investigated.
The report offers an in-depth and practical insight into blockchain, goes beyond the hype around blockchain and examines how the technology can be used in the financial world, industry, trade and other policy areas. The report also identifies ongoing and future transformations in a range of sectors related to distributed ledger technology and describes an anticipatory approach for further research. This research is part of the EU’s continued interest in blockchain and fintech, starting with the horizontal task force of the Fintech Commission and the establishment of the Blockchain observatory and forum.

Smart contracts

The report also extensively examines the potential of smart contracts and how they will transform the way we enter into contracts today, transfer ownership, exchange data and services, …

A smart contract is in itself no more than a piece of software code that ensures that a contract is executed automatically if previously agreed upon criteria are met. Smart contracts make it possible to execute agreements automatically without the intervention of a third party. For example, the purchase of a property could be handled perfectly without the intervention of a notary.

Thanks to blockchain technology, all contracts and all steps in the process are unchangeable, always traceable and irreversible.  A classic example of a smart contract is, for example, the hotel room whose door opens automatically based on your fingerprint if you have made the payment in advance.  In this example, there is no more need for a receptionist, no room key, etc … The mere fact that you have paid has the consequence that the room opens for a certain time based on your ID.

Smart contracts therefore hold great promises: contracts are fully automated, safe, unchangeable and are performed impartially.

The end of the lawyer?

Incidentally, the fact that smart contracts exclude the role of lawyers is a common misunderstanding. After all, lawyers are still needed to (co) program smart contracts and to cope with disagreements about their correct course. After all, technology is not infallible and, moreover, cannot (for a long time) absorb all unexpected variables from daily life. What if the payment for your hotel room went wrong? What if your room turns out not to be in order on arrival? What if the technology refuses service and the door still does not open? What if the hotel servers are hacked and your personal data is lost? …

Enough challenges for the lawyer of the future and that is precisely why our lawyers at Sirius Legal invest a lot of time to follow training courses on blockchain and artificial intelligence and to learn to program. After all, the lawyer of the future cannot work without knowledge of the technology that will (hopefully) lead the legal relationships of his or her clients in the right direction.

But back to the EU Flagship report

An essential observation in the report – and by the way not a new one, we already discussed this several times in the past at conferences and seminars – is the observation that blockchain technology is difficult to fit within the current legal framework and that this conflicts in particular with GDPR and data protection legislation and in some cases also with consumer protection.

The European Commission is right to say: “Policy makers and regulators must make progress in assessing whether existing policies and laws are appropriate for the intended purpose or whether new frameworks are needed. Urgent discussions include, for example, the legal classification of tokens and coins, validity of smart contracts, applicable jurisdictions, consumer and investor protection, enforcement of anti-money laundering requirements and data protection and privacy guarantees.

With regard to GDPR in particular, we have seen essential compatibility issues for some time. After all, data in a blockchain is unchangeable and undeliverable. GDPR, however, gives data subjects the right to correct, delete or be forgotten their data. Concepts that are impossible to fit into a blockchain concept. After all, data is included in it unchangeable and indelible. In addition, questions arise about limited retention periods under GDPR vs.. indelible content in blockchain, to Data Protection by Design and Data Protection by Default, to data export outside the EU, …

Enough challenges that the European regulator will have to deal with in the coming years.

Questions about smart contracts, blockchain, GDPR or technology in general?

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