The former life and criminal risks of smart contracts

Smart contracts are the hot blockchain term of the moment, and their hotness goes hand in hand with the vagueness of their concept.

I. What is a smart contract

Smart contracts are the hot blockchain term of the moment, and their buzz goes hand in hand with the vagueness of the concept, as Peter Todd (one of the developers of Bitcoin Core) has bluntly stated, “No one understands what a smart contract really is, and we should need a prophecy machine to implement it.” To understand smart contracts and the criminal risks behind them, it is clearly not appropriate to talk to yourself under your own constructed set of discourse, but rather to review their development history and try to clarify what is an old problem and what is a new one.

(i) The four stages of smart contracts

If we understand a smart contract as a “contract” or “artifact” that “automatically concludes and fulfills a transaction”, then it is not a new thing. Even its origins, like many other legal things, are religious. According to Heron in his book “PNEUMATIKA”, in ancient Egyptian temples as early as BC, there was a mechanism for the automatic sale of “holy water”: by putting in a coin, the plate was tilted and a valve was opened, allowing the holy water to flow until the coin slipped off the tilted plate. At this time, the balance lever is pulled back to the original position, the holy water will stop flowing. Relying on people’s reverence, trust, and fear of religion, this automatic sales mechanism solved the problem of trust in “uncontracted”, but with the decline of religion, this trust also dissipated.

In the 18th and 19th centuries, similar to the modern vending machines, people solved the problem of trust in “unmanned contracts” to some extent by relying on the mechanism provided by the machines to secure the goods and stored coins. However, due to the limitations of the machines, which are prone to malfunction, the use of counterfeit coins, or even direct human damage, this “unmanned contract” is also difficult for buyers and sellers to truly rest assured.

In 1994, computer expert Nick Szabo created the concept of smart contracts in the modern sense: “A smart contract is a computerized transaction protocol that enforces the terms of a contract. The overall purpose of designing smart contracts is to satisfy common contractual terms (e.g., payment terms, warranty enforcement terms, confidentiality terms, and even enforcement terms), minimize intentional or negligent exceptions, and minimize the need for trusted intermediaries. Related economic goals include reducing fraud losses, arbitration and enforcement costs, and other transaction costs.” Such smart contracts are clearly more secure than in the mechanical age, but they still rely on one or more third-party authorities for their operation and dispute resolution. It also lacks a “value system” to break down the barriers between the digital world and real-world property interactions.

In the blockchain era, blockchain-based smart contracts have to a certain extent compensated for the above-mentioned defects of the old smart contracts. On the one hand, with the consensus mechanism brought by distributed ledger, the data becomes highly credible and does not need the intervention of third-party authority; on the other hand, relying on the circulation of digital currency, smart contracts can interact with the real-world property.

(II) Operational architecture of blockchain smart contracts

In essence, a blockchain smart contract is a piece of code written on the blockchain, but we should observe it from the perspective of dynamic operation. A blockchain smart contract consists of: (1) contract participants; (2) contract assets; (3) an automatic state machine (responsible for current resource state judgment and contract transaction execution selection); and (4) a collection of contract participants’ behaviors.


(1) a person saves the completed program code on the blockchain and then sends a message to call a function that can execute this smart contract on a virtual machine at each validation node.

(2) The smart contract periodically checks the state of the automatic state machine, itemizing the state machines, transactions, and trigger conditions contained within the contract.

(3) When a transaction trigger condition is satisfied, the transaction whose condition is satisfied is pushed to the queue to be verified, pending consensus.

(4) Relevant transactions will be diffused to each verification node, which will perform signature verification to ensure the validity of the transaction. After the verification nodes reach consensus according to the rules, the transaction will be successfully executed, triggering a change in the contract assets and notifying the contract participants at the same time.

(5) The automatic state machine judges the state of the contract to which it belongs, and if all transactions within the contract are executed sequentially, it marks the contract state as completed and removes the contract from the latest block.

By sorting out the past and present life of smart contracts, we can find two main characteristics of blockchain smart contracts: first, it is automatically executed (rather than intelligent, it is automated), just like its predecessor; second, it is based on blockchain technology, which brings new and more solid consensus mechanisms, and may stimulate new criminal means and new forms of crime.

The former life and criminal risks of smart contracts

Smart Contracts as a Crime Agency

Whenever there are iterations of crime tools, we always discuss questions such as “the difference between killing with a kitchen knife in the past and killing with a robot now”. Due to the convenience, security, anonymity and irreversibility of blockchain, it can easily become a new type of crime tool in addition to traditional crime.

As to whether artificial intelligence can be used as the subject of criminal liability, Professor Jiang Su has already proved it from the perspective of criminal law philosophy (for details, see Jiang Su’s “Artificial Intelligence as the Subject of Criminal Liability: Evidence Based on Criminal Law Philosophy”), and the use of smart contracts to buy and kill people, drug trafficking, human trafficking, etc. certainly constitute the corresponding traditional crimes, but there are still many new issues worth discussing.

The first is the problem of fictitious smart contract transactions.

On the one hand, criminals want to use the convenience of smart contracts to commit crimes, but on the other hand, they want to avoid regulation and not expose the details of the crime (smart contracts are visible to all on the blockchain), so they will choose to fictitiously create a smart contract. For such fictitious behavior: firstly, it does not attack or tamper with the smart contract, which does not constitute a computer-related crime; secondly, if the relevant criminal transaction is successfully completed, the fictitious smart contract behavior should constitute a money laundering crime due to the fact that it helps to cover up illegal transactions and also transfer the proceeds of crime; finally, if the relevant criminal transaction is not completed, it should be found to constitute a preparatory offense for the corresponding crime, of course. After all, in a traditional case, the act of a single fictitious legal transaction obviously does not reach the degree of criminal preparation, but taking into account the special nature of smart contracts, the social harm brought about by their use in crime is far more extensive than the traditional behavior, so it is necessary to identify the point of criminal preparation in advance.

Second, it is the question of knowledge.

The use of smart contracts to recruit accomplices is characterized by the fact that the accomplices may be complete strangers to each other, and subjectively there may not even be guilty contact. To take a crude example, a principal in a drug trafficking crime may issue a recruitment through a smart contract to load a certain package of goods onto a truck, another recruitment to drive a certain truck with drugs to a specific location, etc. Although the actors who receive and complete the recruitment participate in the same criminal act, there is no guilty contact between them, and there is a lack of evidence of two-way guilty communication, much less between them “moral encouragement and support”, which causes an impact on the principle of partial implementation of total responsibility.

Thirdly, it is the issue of platform responsibility.

Although blockchain smart contracts are born based on a distributed platform, this does not mean that it will not intersect with centralized network platforms (such as exchanges, wallets, etc. that provide financial services and hosting services). Article 286 of China’s Criminal Code provides for the crime of refusing to fulfill the obligations of information network security management, which imposes a new criminal law obligation of network security management on the creators and managers of network platforms.

Faced with the market of traditional crimes using smart contracts, the criminal law does not allow platform managers to turn a blind eye or even connive. Of course, to what extent this management obligation, the obligation to review, whether it is necessary for managers to identify the high-risk nature of the relevant address can be, or a higher requirement, remains to be further explored in practice. But it is undeniable that the network platform managers can not be negative management on the grounds that they are “completely incapable” of influencing the relevant criminal market, but should be actively compliant mentality and means to avoid platform administrative responsibility or even criminal liability. The specific compliance direction can be divided into two: the first is to do their duty to identify harmful smart contracts and high-risk addresses; the second is to do their duty to protect smart contracts and the blockchain itself from random attacks by hackers.

Write at the end

Whenever we face new things generated by blockchain, we always put special emphasis on compliance awareness and compliance thinking. A kind of technical utopia cannot really take root and land in reality, but must be managed and regulated everywhere by the centralized platform – whether it is a commercial platform or a public power platform. The participants of blockchain smart contracts and platform managers should be aware and prepared to face the legal risks, especially criminal risks, that may arise in its booming development.

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