The idea of smart contracts has been around since the 1990s, but recently the implications for their use for criminal activity has come under scrutiny of financial institutions and scientific research.
A smart contract is basically a program that executes a pre-set command once the terms of the contract are fulfilled.
It is based on similar rules and blockchain as Bitcoin, and a recent paper, cited in the MIT Technology Review, puts the idea of it being an easy and lucrative target for criminals forward. Smart contracts act like lawyers in many ways, they mediate between two parties and enforce the contract to be fulfilled – there’s no backdoor, no negotiation. It’s a binary system: it’s either done or it isn’t.
And if the two parties who form the initial contract do not trust each other, a smart contract which is enforced by a neutral computer must seem a very logical choice. Judges and lawyers normally enforce the fulfillment of business contracts – but if you are a criminal that option is not open to you. Therefore, in order to ensure that your terms are fulfilled, why not create a binding contract that will automatically deliver whatever the prize is once the task has been done. All the while, the contract was encrypted so only the two parties know what exactly the terms were, or even what the outcome was. Take for example a legitimate business trade: Business A promises to deliver software to business B. A smart contract is setup to detect when the software has been installed on business B’s servers. Once the smart contract program detects the software has been installed, the money transfer is automatically triggered.
Bitcoin and the surrounding systems have always had a dark and edgy side to it – an encrypted currency that does not really leave a “trace” which can be followed, and a money transfer which does not require exchange or bank fees, and is not associated with anyone’s personal details on a bank account. It is, essentially, a criminal mind’s dream.
Put the layer of a smart contract on top of this and you have the perfect network for criminal activity: a preinstalled encryption and secrecy by nature, a contract that you cannot be cheated out of, terms that cannot be amended, close to zero traceability of where you are and what you are attempting to do and a currency which is not traceable to your name or even location.
Smart contracts and Bitcoin have always had great potential to make business life much easier and make certain transactions run a lot smoother. However, the dark side here is potentially huge. And since the encryption is such a basic part of it, it will be hard, even for law enforcement, to see how much is really going on behind the curtains.