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Trust Law/Level IX · Trusts on chain/9.3 Full circle/Lesson 1

What smart contracts cannot replace

Code can enforce rules; it cannot exercise judgement, conscience or mercy

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Use code only for routine fixed payments and keep a human trustee for discretionary decisions, avoiding costly complex contracts that cannot weigh unforeseen needs. Catch: the trustee remains liable for whatever automation pays out (UTC §1001).
  2. A free time-locked or multisig release can fund fixed sums, but capacity, age and undue-influence questions still need a person and evidence, which a key cannot supply. Catch: give the trustee written power to pause or override automated payments.
  3. Keep property where a court can help: equity can order key holders to act, correct mistakes and remove trustees. Catch: confirmed transactions cannot be reversed by any court, as the contested 2016 hard fork after The DAO hack showed.
  4. Prefer fixed dates or co-signatures over oracle-dependent conditions for family payouts; they cost less and are harder to manipulate. Catch: if an oracle feed is wrong or manipulated, the contract still executes on false facts.

MaterialsNotes from lesson 1.1.6 on fiduciary dutyA simple description of an escrow or payment smart contractA list of decisions a trustee might face in a year

Wonder

  1. Could software ever do a trustee’s job?
  2. What happens when a program does exactly what it says, and that is the wrong result?
  3. Who is responsible when code fails?

Explore

  1. A smart contract is software that carries out agreed steps automatically when its conditions are met, such as releasing funds on a date or when several parties sign. It can make simple arrangements cheaper and more transparent, and English law reformers have said that smart legal contracts can be enforceable. But a trust is more than a set of conditions. It is a relationship of confidence in which a person must use judgement for others, and that is the part code handles worst.
  2. Many trusts give the trustee discretion: to pay for a beneficiary’s education, health or support, to choose among beneficiaries, or to respond to an emergency. Discretion means weighing facts that the settlor could not foresee. A program can only follow conditions written in advance. If the conditions miss a situation, such as an illness, a disability or a family crisis, the code either does nothing or does the wrong thing, and it cannot ask what the settlor would have wanted.
  3. Trusts also live inside a legal system. Courts can interpret unclear terms, correct mistakes, remove a trustee, order repayment and adjust a trust when circumstances change. On a blockchain, a transaction that has been confirmed is very hard to reverse. The DAO hack in 2016 showed what happens when code behaves as written but not as intended: the remedy came from a contested change to the network itself, not from a court applying settled rules.
  4. Smart contracts also struggle with identity and capacity. A key proves that someone controls an address, not who they are, whether they are an adult, or whether they understand what they are doing. Trust law cares about all three. It asks whether a settlor had capacity, whether a beneficiary is a minor or vulnerable, and whether someone was pressured or deceived. Those questions need evidence and human judgement.
  5. Finally, code depends on outside information, often supplied by ‘oracles’ that report prices, dates or events. If an oracle is wrong or manipulated, the contract acts on false facts. A trustee who relied on obviously false information would be expected to notice and stop. Software does not notice unless someone has written that check in advance, and even then it can only check for the problems its authors imagined.
  6. None of this means smart contracts have no place in trust administration. They can automate routine payments, keep transparent records and reduce some kinds of error. The point is that they are tools a trustee uses, not a replacement for the trustee. Responsibility, judgement and accountability still rest with people, and with the courts that supervise them.

Key facts

  • A smart contract executes pre-written steps automatically when its conditions are met.
  • Discretionary trust decisions require judgement about circumstances the settlor could not foresee.
  • Confirmed blockchain transactions are very hard to reverse; courts can correct and adjust trusts.
  • The DAO hack (2016) showed code behaving as written but not as intended.
  • A private key proves control of an address, not identity, age or capacity.
  • Smart contracts that rely on oracles can act on false or manipulated information.

Exercise nine, six, three, one

9CollectGather 9 decisions a trustee might make in a year, from routine payments to unexpected requests.
6ClusterSort the 9 into 6 groups: fully automatable, automatable with a human check, needs judgement, needs evidence about a person, needs legal advice, needs a court.
3DistillReduce the 6 groups to 3 roles that software could support and 3 that must stay with people.
1CrystallizeWrite 1 sentence explaining why a trustee is a person and not only a set of rules.

Fact check

Dates, figures and claims checked against the published sources listed below.

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