fintechview sat down with Klitos Platis, Advocate & Partner at Kleanthous & Platis law firm. He is primarily engaged in litigation, real estate, energy and fintech sectors. The accelerated adoption of artificial intelligence (AI) and big data is another leading trend in proptech. Numerous proptech companies are using these tools to collect and analyze vast amounts of data within seconds, providing valuable insights for real estate. Klitos Platis shares his insights about how smart contracts and digitalization is the new norm in real estate and how this impacts various areas positively.
PropTech is evolving fast. What is blockchain and how it relates with smart contracts?
Blockchain is a type of distributed ledger technology (DLT). It is a shared database that is decentralised, trustless, secure and tamper-proof. The data is stored in a chain of blocks and each block contains data that is verified, validated and then “chained” to the next block.
The decentralised (that is, distributed) aspect of a blockchain means that no one party “controls” the database. Each participant (referred to as a “node”) hosts their own copy of the database. The database is held by all nodes in the blockchain and is updated in real time. Changes to the data are verified by all nodes in the blockchain. The trustless aspect means that the blockchain can verify data without the need for a central administrator to sanction transactions. This potentially reduces the need for third parties such as banks, as parties to the blockchain can “trust” each other and do not need third parties to enable the transaction. Blockchain is also designed to be secure and tamper-proof. Once data is stored on a blockchain it is secured through cryptography. As the data files are distributed across the network, there is no single source of failure meaning that the records cannot be tampered with as any corruption should be easily spotted.
A smart contract, while often used in conjunction with blockchain, is technically distinct from it. It is a form of computer code that directly controls the transfer of digital assets or currencies between parties, under predefined conditions. This code essentially constitutes an agreement that is self-executing and self-enforcing.
While smart contracts can exist independently, they are often deployed on blockchain platforms, which provide the necessary decentralised, secure, and immutable environment for these contracts to operate. In such a setting, the terms of the smart contract are automatically carried out upon the occurrence of certain coded conditions or events. This automated execution eliminates the need for a trusted third party, leading to more efficient and potentially more secure transactions.
What is the legal status of smart contracts in Cyprus?
As of now, Cyprus does not have a specific legal framework explicitly addressing smart contracts. However, the Distributed Ledger Technology Law Bill of 2021 includes provisions on smart contracts’ capacity, applicable law, the use of electronic signatures, and more. Although the said Bill has not been passed yet, it provides potentially insightful guidance regarding definitions and applications related to blockchain and smart contracts.
Key characteristics of smart contracts include:
- Automaticity: A smart contract is, at least in part, executed automatically without (or in some cases, without the possibility of) human intervention.
- Computer-readable form: The terms of the smart contract are recorded in code.
In examining whether smarts contracts are legally binding, the Cyprus Courts may take the following into consideration:
- That traditional contract law formation principles (certainty of terms, intention to be legally bound, and consideration) can apply to smart contracts. Compliance with these requirements will depend on an objective assessment of the parties’ words and conduct, as with any other contract.
- That standard rules of contract interpretation can apply to a smart contract. Despite arguments that a purely code-based contract might not be susceptible to interpretation, smart contracts can be viewed as clear-language contracts leaving little to no room for departure from their terms.
- That users within a smart contract chain often transact in relative anonymity. Cyprus law doesn’t require parties to a contract to disclose their real identities, for example in auction sales to the highest bidder, or contracts through anonymous agents, and therefore a smart contract can potentially be formed by anonymous or pseudonymous parties. Nevertheless, while technical feasibility allows anonymity, legal considerations such as anti-money laundering and Know Your Customer (KYC) requirements may necessitate identity disclosure.
In conclusion, a smart contract could be recognized as a valid and legally binding contract, provided it meets the principles of contract formation under Cyprus law. If it does, such contracts are enforceable by the Courts.
How might such technology affect real estate?
The impact of technologies like blockchain and smart contracts on the real estate sector is yet to be fully realized. Changes could be gradual or swift, with limited or extensive implications. Possible developments include:
- Blockchain could underpin larger registration systems.
- Real estate transactions might occur via blockchain-based smart contracts or use digital documents as dictated by the Land Registry.
- Cryptocurrencies may become standard payment forms.
- Properties could be tokenized, where each token represents various interests in a property such as ownership or leasehold rights. These tokens could be traded on blockchain platforms, enhancing property investment liquidity. Some tokens might even denote shares in management or controlling companies, or entitlement to property-related profits.
- To facilitate smart contract usage, sellers may preemptively provide legal information packs and standard contracts, reducing negotiation times. While this accelerates the sales process, it could put buyers at risk if legal issues are overlooked or unfavourable terms are accepted.
- Blockchain might eventually streamline all stages of a transaction, including initial property advertisement, heads of terms agreement, and potential buyer or tenant checks.
Ideally, to enable a fully digital approach for real estate transactions, the Land Registry will also need to support whatever system is introduced to enable payment of stamp duty tax, transfer of immovable property tax or any other tax due within the same digital system. Until a digital approach to real estate is implemented in Cyprus that is supported by the Land Registry, any advancements are likely to be limited.
How could a new digital system impact transactions?
Transitioning to a blockchain-based system employing smart contracts could raise several new concerns, including:
- Who will be trained to code the smart contracts?
- Who will be liable in the event there is an error in the code?
- How will blockchain’s permanent data storage align with the GDPR regulation?
- How will tried and tested practices change (such as the process for transferring funds or the undertakings given on exchange or completion by lawyers)?
- Can a self-executing contract be overridden if needed?
- How can a contract, once exchanged or completed, be shown on the blockchain as amended?
- If blockchain is being used for property management purposes, how can details be updated, for example, to take into account a lease assignment or change of registered address?
- Will parties agree for the service of notices via the blockchain system or will notices still need to be served by hand or post or email?
- Will the technology provide new ways to store and protect rent deposits?
It might be necessary for an independent third party, like the Land Registry, to possess the capability to override a smart contract under specific circumstances, such as:
- Adjusting the pre-determined triggers, for example, if an error or omission is spotted (in the legal agreement or in the code) before the contract is exchanged or completed, to address a change (such as a change in directors), or to address clients’ last-minute requests.
- Prevent the contract from self-executing if circumstances change in an unplanned way (such as on the death of one of the contracting parties), if a contracting company becomes insolvent, or if the property is destroyed.
If the override is not possible, those agreeing on the self-executing code may need to try and plan for all such eventualities, or at least ensure the code is written in such a way that applying an authorised “signature” is one of the last required triggers, allowing a transaction to be stopped if needed.
Property transactions can be complex, making it challenging to pre-plan for every eventuality. Clients change their minds, properties are damaged or unexpectedly occupied, and vacant possession is not provided. Trying to programme a computer to account for the unexpected might prove difficult and we will have to adapt to ensure that we adequately advise on the more rigid framework that such a system might bring. Equally, the restrictions might provide many clients with more trust and certainty and make it less likely for clients to withdraw from a transaction on a whim.
In the event of dispute, how can a contract stored on a blockchain be presented in court?
Presenting a contract stored on the blockchain in court would involve converting the blockchain data into a format that can be understood and verified in a court setting.
This may require the assistance of a digital forensics expert or a blockchain expert to explain the underlying technology, validate the integrity of the blockchain data, and verify the transaction details. The key factor is that the court needs to be able to verify the authenticity and integrity of the data presented.
The involved parties would need to provide evidence that the blockchain transaction is an accurate representation of the contract, potentially by linking the digital signatures used in the transaction to the parties involved. The timestamps on the transaction could be used to provide evidence of when the agreement was entered into.
Blockchain data is typically hashed and timestamped, which can provide powerful evidence of the content of the contract at a specific point in time. However, all this may still require extensive explanation to be understood in a court setting.
In the future, the Cypriot courts might develop more standardized procedures for dealing with blockchain contracts as their use becomes more commonplace.
Who is who
Klitos Platis is an Advocate, Legal Consultant and Partner at Kleanthous & Platis law firm. He is primarily engaged in litigation, real estate, energy and fintech sectors. With a strong academic background including a BSc in Economics and the completion of the Bar Professional Training Course (BPTC) in England and Wales, Klitos applies an integrative understanding of legal and economic principles to his work. Beyond his legal practice, he contributes to the legal field as a trainer under the Human Resource Development Authority of Cyprus.
