It is essential to affirm their value while also confronting the conflicts and challenges they pose to the existing legal framework.
Introduction
Smart contracts are widely used in certain Web3 projects. As a core application of blockchain technology, they are reshaping traditional transaction and trust models.
However, theirautomatic execution, decentralizationandimmutabilitypresent numerous new compliance challenges: Do they constitute contracts? Can they serve as evidence? Under what circumstances might they trigger criminal liability? These are among the most frequently asked questions in current practice.
Smart Contracts Are Primarily an "Execution Tool"
In essence, a smart contract is self-executing program code stored on a blockchain, characterized by three features: automatic execution, decentralized operation, and immutability.
From a legal perspective, determining the status of a smart contract should not begin with its technical principles, but rather with the "function" it performs within the transaction chain.
The core function of a smart contract is singular: to automatically execute upon the triggering of predefined conditions.
In handling on-chain disputes, we commonly encounter situations where:
- Parties agree on a set of rules off-chain;
- The on-chain contract executes only part of these rules;
- When a dispute arises, one party attempts to rely on the "on-chain execution result" as the final basis.
This logic generally does not hold in judicial practice because:
1. Smart contracts can only execute what is coded, and the code may not fully capture the parties' true intentions.
2. Automatic execution does not equate to legal "irrevocability."
3. The execution mechanism itself does not constitute the source of rights and obligations.
Therefore, in most cases, the role of a smart contract is closer to that of a"method of performance". Whether rights and obligations are established or valid still requires assessment based on off-chain evidence. Simply put, smart contracts are responsible for execution, not for defining the relationship between the parties.
Whether It Constitutes a Contract Depends on the Clarity of "Declaration of Intent"
It is undeniable that smart contracts are disrupting traditional perceptions of contracts. In smart contract scenarios, if code can serve as a means of expressing mutual assent, it becomes necessary to explore whether it satisfies the contractual formation mechanisms of offer and acceptance.
Although smart contracts may be recognized as contracts under specific conditions, they remain distinctlydifferent from traditional contracts:
- Different Languages: Code vs. Text
Contracts written in code are precise but rigid; traditional contracts use natural language, which is flexible and interpretable. This discrepancy means that code execution may deviate from the parties' true intentions.
- Different Execution: Automatic vs. Manual
Traditional contracts rely on good faith or court-enforced execution; smart contracts operate automatically and cannot be easily stopped. They emphasize "prevention over remedy"—avoiding risks in advance rather than providing post-hoc remedies.
- Different Scope: Digital World vs. Real World
Smart contracts primarily manage digital assets (such as cryptocurrencies and NFTs), with applications largely confined to the blockchain; traditional contracts cover goods, rights, behaviors, and more.
In certain scenarios, such as when a user triggers a transaction or confirms a rule via a private key, the on-chain operation may indeed reflect a"declaration of intent". However, judicial determination does not alter basic legal logic merely due to novel technological means.
Courts typically focus on three points:
1. Did the parties clearly understand what they were doing?
Are there rule explanations, risk warnings, and user documentation that enable ordinary users to understand the main consequences?
2. Can the behavior be regarded as a genuine commitment?
When code logic is complex, a single click or authorization cannot imply an "understanding of all rules."
3. Can off-chain evidence reinforce the case?
Chat records, business descriptions, fee arrangements, and other materials remain important bases for determining mutual assent. Therefore, even if on-chain actions possess some function of declaring intent, they usually cannot alone constitute the entire content of a contract.
On-chain operations can prove what you did, but they cannot prove that you "agreed to all terms."
For example, in theNirvana Finance incident, attackers exploited a contract vulnerability to profit approximately USD 3.5 million. Because the execution process could not be halted, the loss became a fait accompli within a short time, and traditional legal remedies could not intervene promptly, ultimately making the damages difficult to recover. Once a smart contract has a vulnerability, it is difficult to block at the technical level and difficult to intervene in at the judicial level in a timely manner, which constitutes its inherent risk.
The Evidentiary Nature of Smart Contracts
As disputes involving smart contracts increase, how on-chain data and contract code are accepted by courts as electronic evidence has become an unavoidable issue.
Article 16 of China's "Rules of the People's Courts on Online Litigation" clarifies the validity of blockchain-stored evidence, stipulating that "if electronic data submitted by a party as evidence is stored via blockchain technology and verified to be consistent through technical verification, the People's Court may determine that the electronic data has not been tampered with after being recorded on the chain." In specific cases, courts typically examine three aspects:
1. Identity of the Evidence Preserver: Who submitted the evidence?
2. Source of Data: Was the generation and acquisition process of the data complete and compliant?
3. Technical Environment: Is the blockchain system storing the data reliable?
Blockchain provides technical support for the integrity of electronic evidence through hash values, timestamps, and distributed storage. Nevertheless, there are two practical difficulties in the judicial recognition of evidence related to smart contracts:
1. On-Chain Data ≠ Legal Facts
Blockchain can only prove that "a certain address transferred a sum of USDT to another address," but it cannot explain the legal substance of this act—whether it constitutes payment for goods, repayment of debt, or a gift. This requires comprehensive determination in conjunction with other evidence.
2. Challenges in Allocating the Burden of Proof
In smart contract disputes, ordinary users often lack the technical capability to reconstruct fund paths or contract execution processes on their own. How to reasonably allocate the burden of proof without unduly burdening one party, thereby avoiding difficulties in rights protection due to technical barriers, is a practical issue currently facing judicial practice.
In a case in Hong KongWang Weiqing, although the court acknowledged the plaintiff's tracking results for stolen cryptocurrencies, it ultimately lifted the global asset freezing order because the funds involved were mixed with those of numerous users in a hot wallet. This confirms that even if on-chain tracking technology itself is effective, cryptocurrency cases remain considerably complex and uncertain regarding the burden of proof, probative value, and purpose of proof.
The Role of Smart Contracts in Criminal Cases
In the field of criminal justice, smart contracts may serve either as instruments of crime or as objects of investigation and evidence collection.
This is mainly reflected in the following aspects:
1. Functions such as mixing, splitting, and hiding transaction trails may trigger money laundering risks
Regardless of whether developers directly participate, once a contract is used to evade tracking or conceal sources, it may be classified as a money laundering method.
2. When smart contracts perform "matching," "exchange," or "fee collection" functions, they may touch upon areas with high incidence of illegal business operations
For example:
- Cryptocurrency ↔ Fiat currency exchange
- Cryptocurrency ↔ Cryptocurrency matching
- Charging proportional fees around transactions
These behaviors align with the legal logic of "unlicensed operation" off-chain.
3. Developers may be held liable due to "control capabilities"
When developers can:
- Control private keys
- Modify contracts at any time
- Determine the flow of funds
- Charge users or take revenue shares
They are likely to be deemed to possess the attributes of an"actual controller of business operations", rather than merely playing a technical role.
Similar determinations have appeared in several criminal cases involving Web3.
Recommendations for Enterprises and Development Teams
The risks of smart contracts mainly stem from"insufficient expression"and"non-reversible mechanisms". In practice, it is advisable to address these proactively in the following ways:
1. Clearly Distinguish: On-Chain Execution vs. Off-Chain Mutual Assent
Minimize clauses that "automatically assume liability" on-chain; important matters should be fully stated off-chain.
2. Clarify Permission Structures
Avoid giving developers complete control over funds, parameters, and upgrade paths, which could lead to them being mistaken for operating entities.
3. Preserve the Chain of Evidence
Rule explanations, chat records, operation logs, version histories, etc., are crucial for both civil and criminal cases.
4. Avoid Assuming High-Risk Functions
Especially exchanges, matching, collection and payment on behalf of others, and automatic execution logic involving leverage.
5. Secure Evidence Promptly in Case of Disputes
Although on-chain data is transparent, snapshots, fund paths, node records, etc., need to be preserved as early as possible.
Conclusion
As a product of the Web3 era, the legal characterization of smart contracts is still in an exploratory stage. From a lawyer's perspective, we must affirm their value while also confronting the conflicts and challenges they pose to the existing legal framework:
- At thecivillevel, the contractual nature of smart contracts has gained recognition within limited scopes, but their deficiencies in remedies for breach of contract still need to be reconciled.
- At theevidentiarylevel, while the validity of blockchain-stored evidence has received judicial confirmation, its review standards still require further refinement.
- At thecriminallevel, smart contracts may become tools for new types of crimes, while also spawning new methods of investigation and proof.
For Web3 practitioners, compliance is no longer optional but fundamental to survival and development. We recommend proactively mitigating risks through professional technical architecture and legal design. If specific legal cases or compliance needs arise, please consult a professional legal team promptly to obtain targeted legal advice and support.
Only by finding a balance between technological innovation and legal compliance can smart contracts truly unleash their potential and become a trusted cornerstone of the digital future.
