A. Definition and Key Feautures of Smart Contracts
1. What is a Smart Contract?
The concept of "smart contracts" was first introduced by legal scholar and computer scientist Nick Szabo in 1990, who described them as a series of commitments defined digitally, determining what each party must perform in the contract ("Building Blocks for Digital Markets," 1996, p. 1). Although not a new idea, smart contracts are often first exemplified by the mechanism of vending machines, where payment results in the automatic delivery of goods, much like how these contracts facilitate automated execution of commercial agreements (Çağlayan Aksoy, Pınar: Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları, İstanbul 2021, s. 16) Similarly, POS terminals, credit cards, and electronic data exchanges can be considered as early forms of smart contracts.
The development of blockchain technologies in 2008, enabling the transfer of value in a secure and decentralized manner, significantly increased the feasibility and widespread use of smart contracts. Although the concept of smart contracts pre-dates blockchain, the latter's advancements have positioned smart contracts at the core of cryptocurrency systems (Çağlayan Aksoy, p. 38-39). The creation of Ethereum, a blockchain system designed for facilitating cryptocurrency transactions and the development of other assets, led to the creation of smart contracts utilizing Ethereum's coding infrastructure, thus greatly expanding their application scope [(Kayalı, Didem: Uluslararası Özel Hukuk Perspektifinden Akıllı Sözleşmeler, TBB Dergisi, 2022(162), s. 253 ].These contracts, developed on the blockchain, automatically execute upon the fulfillment of predefined conditions encoded within the contract, removing the need for third-party intervention (Çağlayan Aksoy, p. 13; *Doğancı, Ekrem: Blokzincirine Dayalı Akıllı Sözleşmelerin Hukuki Nitelikleri, Kuruluşu Yorumu İfası ve Bazı Örnek Hukuki Uygulamalar, İstanbul, 2021, p. 32 vd.).*
Smart contracts operate on the blockchain using public and private keys. When a user creates a smart contract on the Ethereum blockchain, the transaction is temporarily placed in a transaction pool. Miners then approve the contract, and once the first miner solves the issue, the smart contract is recorded in the new block. After the smart contract is recorded, it can be executed not only by the initiating party but also by other parties with access to the contract's public key (Çağlayan Aksoy, p. 39-40). Smart contracts are typically written in a machine-readable program language, and once the conditions in the contract are met, execution is automatic (Çağlayan Aksoy, p. 39-40).
Smart contracts are currently created using custom software code, typically designed with an "if-then" logic. These programs contain instructions on how they will behave based on specific conditions and probabilities, and these instructions are placed on the blockchain network. Once the software is placed on the blockchain, it knows how to respond when it encounters a coded possibility, executing the necessary actions to facilitate the functioning of the smart contract. When these conditions are met, the software can autonomously initiate and fulfill the smart contract. Additionally, by monitoring external events, if a condition specified in the code occurs, the coded obligations are fulfilled (Çubukçu, Damla Beril: Teknik ve Hukuki Yönleriyle Akıllı Sözleşmeler, Ankara, 2021, s. 38; Erek, Gülce: Akıllı Sözleşmelerin Kuruluşu ve Hukuki Niteliği, Yapay Zeka ve Hukuk, ed. Prof. Mustafa Aksu, İstanbul, 2024, s. 398-399; Çekin, Mesut Serdar: Borçlar Hukuku ile Veri Koruma Hukuku Açısından Blockchain Teknolojisi ve Akıllı Sözleşmeler: Hukuk Düzenimizde Bir Paradigma Değişikliğine Gerek Var mı?" İstanbul Hukuk Mecmuası, C. 77, S. 1, 2019, s. 323).
Smart contracts can be produced in two different types: off-chain and on-chain.
Off-Chain Smart Contracts: These smart contracts enable obligations made through a traditional contract to be partially or fully carried out automatically on the blockchain. In this case, two different contract structures emerge: one created outside the blockchain (traditional contract) and one created within the blockchain (smart contract). These smart contracts reflect the terms of the traditional contract, but if discrepancies arise between them, the terms of the original contract prevail.
On-Chain Smart Contracts: These are contracts created entirely on the blockchain, without the need for a traditional contract, and without requiring the parties to get to know each other. In on-chain smart contracts, the offer and acceptance processes occur directly on the blockchain, meaning that there is no traditional contract. Here, the smart contract is not merely an execution tool but is considered a standalone contract. The accurate writing of these contracts requires individuals with knowledge in both law and software to properly code them.
Although there is no standardized definition of smart contracts, various definitions have been proposed, such as: "An agreement coded and guaranteed by blockchain principles, to be performed according to pre-determined conditions between one or more parties" (Çağlayan Aksoy, p. 40); "A computer program based on blockchain technology, decentralized, secured by cryptography, and ensuring automatic execution of the contract once certain conditions are met" (Müller, Les Smart Contracts, Nr. 6.); "A computer program stored on the blockchain, with pre-defined conditions between two or more parties, and executed automatically without the need for a third party" (Carron/Botteron, Smart, p. 106).
Smart contracts can only be used for electronic performance and digital assets and cannot be used for non-digital service performance. Products that are not in the digital environment can be represented as tokens and used as a performance element in smart contracts (Çağlayan Aksoy, p. 56). Furthermore, it is important to note that smart contracts cannot be used for matters involving subjective and personal judgment or value assessments.
2. Smart Contracts: Characteristics and Key Features
a. Security of Transactions, Elimination of Intermediaries, and Transparency
In blockchain-based smart contracts, parties do not have access to each other's personal or financial information and can conduct transactions anonymously. Consequently, there is no need for mutual trust between the parties, nor is there a requirement for intermediaries or third parties. The completion of cryptographic protocols validates the transaction, enabling the fulfillment of the contract without reliance on any trusted third parties (Çağlayan Aksoy, p. 43). However, certain legal scholars, such as Teomete Yalabık & Yalabık (2019), argue that the anonymity of blockchain can be compromised, and methods to do so exist. Their study discusses several techniques to challenge the anonymity of Bitcoin, including:
Clustering Bitcoin Addresses: This technique involves analyzing Bitcoin transactions to trace connections between addresses, helping uncover the assets involved.
Tracking Transaction IP Addresses: By using the IP addresses involved in transactions, one can associate them with geographical locations and real-world identities.
Behavioral Analysis of Expenditures: By analyzing how and when Bitcoin addresses are used, it is possible to group transactions by similar behaviors and associate them with specific users.
Website Tracking and Cross-Referencing: By using website analytics and cookies, it is possible to trace Bitcoin transactions back to specific users.
The transparency provided by the blockchain network, which stores transactions in up-to-date local copies held by the users that make up the system, gives users confidence (Ergün, Halit, "Akıllı Sözleşmeler." Genç Hukukçular Sempozyumu, 2. Cilt 2024, ss. 215; Çubukçu, s. 30 This transparency is also argued to prevent crimes such as fraud from being carried out through smart contracts, and since the amounts specified in sales contracts are accessible, it is also said to help in detecting compliant actions under the Turkish Competition Law No. 4054 (Erek, p. 406).
b. Non-Changeability of Smart Contracts After Formation
Like all data stored on the blockchain, once a smart contract is approved by miners and recorded on the blockchain, any changes to the contract protocol require consensus from the entire network. Therefore, a transaction added to the blockchain cannot be reversed, canceled, or modified by the contract initiator, courts, or any other third party. This non-modifiable nature is often criticized for reducing predictability for the parties, especially in the face of changing market conditions.
To address this issue, some scholars propose defining a "disconnect" feature within the contract's code that would specify conditions under which the contract would automatically cease (Çağlayan Aksoy, p. 45). In this way, parties could ensure that the contract halts under certain conditions, such as when an exchange rate exceeds a specific threshold, thereby providing more flexibility and predictability for the parties involved.
c. Automated Execution
Smart contracts are automatically executed when the predefined conditions coded into the contract are met. Even if the parties change their minds after the contract is formed and no longer wish to proceed with the action coded in the smart contract, the system will still check whether the conditions defined in the smart contract have been met. If the conditions are fulfilled, the system will automatically exchange the assets between the parties ("self-execution"). Additionally, the bankruptcy of one of the parties, or intervention by the operator creating and overseeing the blockchain, or any third-party interference, including actions by administrative or judicial authorities, does not affect the execution of the smart contract (Çağlayan Aksoy, p. 47).
The automatic execution of smart contracts also helps minimize human errors, which are common in traditional contracts, thereby ensuring greater accuracy and efficiency in the fulfillment of contractual obligations (Ergün, p. 216).
d. Reduction in Transaction and Legal Costs
Smart contracts, thanks to the automation provided by computers, are automatically executed, eliminating the role of human intent in the enforcement of the contract. As a result, the costs associated with negotiation processes, as well as the attorney and litigation fees necessary for contract enforcement, are eliminated. Additionally, since there is no need for a bank or other institutions to facilitate the execution of the contract, transaction costs are also reduced.
Smart contracts increase the traceability of transactions, reducing the costs of information acquisition and linking the process to automation, thereby reducing labor costs. Furthermore, the complete digitization of the contract process eliminates the need for physical documents, which in turn eliminates the associated costs (Çağlayan Aksoy, p. 52; Ergün, p. 217). However, while the costs of negotiating and preparing smart contracts are reduced, it should be noted that establishing the necessary infrastructure for the contract will still incur some costs (Çağlayan Aksoy, p. 52), and there are disadvantages such as longer processing times on the blockchain (Ergün, p. 217).
3. Application Areas of Smart Contracts
In principle, any contract that can be digitally created can be prepared and established using smart contract code. In this context, various types of contracts, such as general terms and conditions, sales agreements, insurance contracts, and lease agreements, can be established as smart contracts. However, the application of smart contracts is limited to asset values that can be recorded and controlled on the blockchain. It is anticipated that, with the establishment of the necessary legal and digital infrastructure, the use of smart contracts will increase in relation to the registration and transactions of central registries. For example, it may be possible to create and enforce contracts regarding the transfer of trademarks registered in the trademark registry or real estate registered in the land registry (Çağlayan Aksoy, p. 61; Doğancı, pp. 531-533).
As will be explained in the section below, current legal regulations do not permit the execution of transactions requiring a formal procedure via smart contracts (see Section B.5). For real estate transactions, it is proposed that smart contracts be used to handle agreements related to property in electronic land registries. In countries such as Sweden, the United States, Africa, the Netherlands, and the United Kingdom, it has been observed that the stages of property sales, including title registration or payment processes, are carried out through blockchain-based smart transactions (Doğancı, p. 532). If the necessary legal and technological infrastructure is established, blockchain technology and smart contracts can provide practicality, transparency, and secure record-keeping for digital records, such as the land registry.
Moreover, smart contracts can also be used for maintaining stock records, corporate governance and auditing, inheritance law for determining and distributing an estate through the population registry of the deceased, and similar processes. Additionally, blockchain and smart contracts are foreseen to be useful in the supply chain by recording steps such as orders, production, shipping, and final delivery to the end customer, allowing these steps to be transparently tracked (Çağlayan Aksoy, p. 61).
Smart contracts are also expected to have practical applications, especially in the banking and finance sectors, where automated contracts are already used for credit and collateral management. Additionally, smart contracts could find applications in alternative financing methods such as crowdfunding to raise funds.
In the field of intellectual property law, smart contracts can be used for licensing agreements and the protection of copyrights. An example from the music industry is Ujo Music, which created a smart contract to allow users to download an Imogen Heap song from its website. Under this smart contract payments made by individuals who download the song are distributed directly between the artists and musicians, without the need for an intermediary company (Çağlayan Aksoy, p. 66-67).
B. SMART CONTRACTS IN TURKISH LAW
1. General Overview
To assess the applicability of smart contracts in Turkish contract law, it is essential to examine the conditions for contract formation stipulated in the Turkish Code of Obligations ("TCO"), as any valid contract under Turkish law must comply with the requirements set out in the TCO. According to Article 1 of the TCO, a contract is a legal transaction formed when the parties exchange mutual declarations of intent. For a contract to produce legal effects, three basic conditions must be met.
First, the contract must be formed in accordance with the basic principles of contract law. For the contract to be valid, both parties must make valid declarations of intent. Today, the majority of both national and international contracts are based on the exchange of offers and acceptances. Additionally, the parties must have reached mutual agreement on both the objective and subjective elements of the contract. The interpretation of the parties' declarations plays a significant role in determining whether mutual consent has been established.
Finally, the contract must meet the conditions for validity, which includes the legal capacity of the parties, the fulfillment of any formality requirements, adherence to rules in representative relationships, the absence of any illegal subject matter (e.g., invalidating clauses), and the absence of any will defects (For detailed information on the conditions for contract formation, see Eren, Oğuzman/Öz).
This study will analyze the formation of smart contracts in the context of the TCO, focusing on the aspects of capacity, language, and form.
2. Parties' Intentions
In smart contracts, unlike traditional contracts, the parties' declarations of intent to form the contract are transmitted through software and code on the blockchain network, and the contract is established via the code developed for the smart contract. For a smart contract to be considered a contract under the Turkish Code of Obligations ("TCO"), the mutual intention of the parties must be determined. In legal doctrine, it is generally accepted that smart contract codes, which include both the objective and subjective elements of the contract, represent an intention to form a contract by uploading the code to the blockchain, thereby treating it as a proposal under the law (Erek, p. 409; Çağlayan Aksoy, p. 81, 138-139). The act of encoding the contract and recording it on the blockchain, reflecting the objective and subjective aspects of the agreement, is interpreted as the intention to be bound by the contract (Doğancı, p. 117).
Given that there is no distinction between express and implied declarations of intent in contract formation, it seems feasible for parties to declare their intentions through code and software, thus forming both on-chain and off-chain smart contracts in this manner. However, whether the parties have expressed an intention to create a legal relationship and be bound by the contract should be determined in light of the specific circumstances and the principle of good faith (Doğancı, p. 113; Çağlayan Aksoy, p. 138).
Considering that many people can simultaneously enter into contracts on the blockchain through smart contracts, there may not always be an intention to be bound by a smart contract. Under Article 8/2 of the TCO, "displaying a price" or "sending a price list or similar" is considered an offer. Therefore, the applicability of this provision to smart contracts must be assessed. Since the parties do not have the opportunity to directly see or receive the product in smart contracts, it seems difficult to conclude that such contracts are simply proposals under this rule. Thus, it remains a topic of debate whether an offer in smart contracts that involves sending a price list should be considered as a proposal. If the person preparing or commissioning the smart contract clearly expresses their intention to be bound, it can be regarded as a proposal. For example, if a digital platform is made available via a smart contract immediately, it can be seen as a clear intention to be bound. However, if an airline company offers a flight to countless passengers via a smart contract for a specific date, this would be considered an invitation to make an offer (Çağlayan Aksoy, p. 144-146).
Acceptance Intention: The acceptance intention refers to the explicit or implicit declaration of intent by the offeree regarding the proposal, and as a rule, the acceptance does not require any specific form. However, if the acceptance in a smart contract is conditioned upon a special computer code, the offeree must express their acceptance through that code. Once the acceptance intention is expressed by fulfilling the conditions set forth in the smart contract, the contract automatically executes its terms and performs actions such as the transfer of digital assets or granting access to the digital asset (Çağlayan Aksoy, p. 151, 229).
Automated and/or Autonomous Declarations of Intent in Smart Contracts: The creation of smart contracts through automated and/or autonomous declarations of intent raises important considerations regarding the determination of intent in contract law. In examples such as e-commerce sites or digital systems, the declaration of intent is automatically generated by computer software, based on data manually entered by individuals. It is accepted that smart contracts fall within this category. Since the conditions and actions of these systems are pre-determined by humans, the software cannot act independently of human intent. Therefore, automated declarations of intent in smart contracts are not drastically different from the traditional declarations of intent in contract law. In general, legal issues arising from automated declarations of intent in smart contracts are relatively rare and easier to resolve. Indeed, under the "if-then" structure of a smart contract, the program has no discretion to act independently, and thus the resulting declarations of intent and their consequences are attributed to the real parties to the contract.
However, with the advancement of artificial intelligence ("AI"), autonomous declarations of intent have become more significant and controversial. Unlike automated declarations, autonomous declarations do not rely on pre-defined data sets, algorithmic rules, or clearly defined operational scenarios set by humans. In such systems, the formation of the declaration of intent is shaped by the AI's ability to learn and make decisions independently. As such, the elements underlying the declaration may not be entirely foreseeable or controllable by the system's developers or users. In cases where an AI-generated smart contract makes autonomous decisions, the legal responsibility for any resulting consequences could become a complex and contentious issue regarding who should be held accountable (Çağlayan Aksoy, pp. 116-119, 184-186).
3. Parties' Legal Capacity
The parties to smart contracts are anonymous, and there is no examination of the legal capacity of individuals in contracts formed on the blockchain. Due to this feature, it appears possible for individuals with limited capacity, such as minors or persons lacking discernment, to become parties to smart contracts on the blockchain (Çağlayan Aksoy, p. 107; Doğancı, p. 106).
For example, a minor with limited capacity cannot enter into a contract without the consent of their legal representative (Turkish Civil Code, Article 16.1). Therefore, when a minor enters into a smart contract, the explicit or implicit consent of their guardian must be obtained. The legal act performed by the minor is not binding until approved by their legal representative. However, in smart contracts, the inability of one party to fulfill a transaction due to a lack of legal capacity contradicts the functioning of the blockchain. Indeed, a transaction performed by a person with limited or full incapacity in a smart contract will be autonomously executed when the conditions coded in the smart contract are met (Çağlayan Aksoy, p. 109).
To overcome obstacles related to legal capacity, one potential solution could be to impose an obligation on the parties to disclose and verify their identities through the blockchain. Additionally, even if the parties' identities are not fully known, it would be possible to establish a system where the identities of the parties, verified through IP wallet addresses or cryptographic keys, do not affect the validity of the contract.
In our opinion, one of the more suitable and practical solutions proposed in the doctrine, which aligns with the structure of blockchain, would be to create a system using digital signature technologies on the blockchain that would allow for the identification of the parties' ages (and consequently their legal capacity) without affecting the anonymity of individuals (Çağlayan Aksoy, p. 109; Doğancı, pp. 108-109). The doctrine suggests that to address these issues, the legal capacity of the parties could be determined through a system similar to digital signatures, where the individual's identity is kept anonymous through pseudonyms (nicknames), and connections are made to e-government and civil registries. By implementing digital identity mechanisms, parties will continue to benefit from the advantages of blockchain, while also enabling the verification of their legal capacity, thus eliminating claims regarding the invalidity of smart contracts.
4. Language of the Contract
In smart contracts, the parties to the contract agree in programming language, rather than in natural language. This is interpreted in the doctrine as a form of autonomy of will and freedom of contract, meaning that the terms of the contract can be drafted in a programming language. In this regard, when the parties are free to choose the language of the contract, it is possible for them to create smart contracts using the relevant programming languages (*Doğancı, Doğa Ekrem: Blokzincirine Dayalı Akıllı Sözleşmelerin Hukuki Nitelikleri, Kuruluşu, Yorumu, İfası ve Bazı Örnek Hukuki Uygulamalar, 2021, İstanbul, p. 120-123, Çağlayan Aksoy, p. 99).*
According to Article 1 of the Law No. 805 on the Compulsory Use of Turkish in Economic Enterprises, "All companies and institutions of Turkish nationality must keep all of their transactions, contracts, correspondence, accounts, and ledgers in Turkish, within Turkey." The penalty for violating this obligation is set out in Article 4 of the same law, which states that documents and records prepared contrary to the law will not be interpreted in favor of the party claiming rights based on them. Therefore, in the case of contracts that must be prepared in Turkish, the use of programming language rather than natural language in smart contracts could lead to claims of invalidity. To avoid such claims, it is recommended that the full version of the smart contract in Turkish be made accessible (Çağlayan Aksoy, p. 107).
5. Form of the Contract
Under Turkish law, Article 12 of the TCO establishes the principle of freedom of form, meaning that contracts are not subject to any specific form unless otherwise stipulated. However, a legal form can be required by law or agreed upon by the parties.
For smart contracts, the issue of form arises primarily with on-chain contracts. When an off-chain contract is established outside of the blockchain, the contract serves only as an instrument for the execution of the smart contract, and thus the validity condition is already met. However, the applicability of the form requirement for on-chain smart contracts must be evaluated (Çağlayan Aksoy, p. 164).
Under Article 14 of the TCO, if a contract meets the conditions of written form and signature, it is considered to have been validly executed, as the parties' intention to perform the legal act is expressed through these conditions. In smart contracts, since the agreement is created through specific code, and the declarations of intent are communicated via that code, it can be said that the written form requirement is satisfied on the blockchain. However, the issue of whether the signature requirement is met should still be evaluated. Under the Electronic Signature Law ("EİK"), an electronic signature can fulfill the requirement of written form, but it must be a secure electronic signature, meeting the conditions outlined in Article 4 of the EİK. While digital signatures are used for transactions in smart contracts, organizations with digital signature certification do not recognize the signature keys used in blockchain systems. Therefore, unless changes are made to the EİK, smart contracts will not meet the requirement for a written form (Doğancı, p. 397-398).
Considering the rule that contracts requiring a formal procedure or specific form cannot be established even with an electronic signature (Article 5/2 of the EİK), it is impossible to execute such contracts via smart contracts. Therefore, contracts such as real estate sales before a notary, promises of sale, or sales with retention of title cannot be carried out through smart contracts (Çağlayan Aksoy, p. 174).
The update of regulations regarding secure electronic signatures and the increased use and legal recognition of digital signature certification could provide a solution to ensure smart contracts meet form requirements.
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