This article is reprinted with permission from Mankun Blockchain Legal Services, author: Lawyer Li Xinyi, copyright belongs to the original author.

Smart contracts are widely used in certain Web3 projects, and as a core application of blockchain technology, they are reshaping traditional transaction and trust models.

However, their characteristics of automatic execution, decentralization, and immutability also pose new compliance challenges for traditional practices: Do they count as contracts? Can they be used as evidence? Under what circumstances do they involve criminal risks? These are some of the key points most frequently asked in current practice.

A smart contract is essentially a self-executing program code stored on the blockchain, characterized by three main features: automatic execution, decentralized operation, and immutability.

From a legal perspective, determining the positioning of smart contracts should not start from technical principles but should focus on the "function" they perform in the transaction chain.

The core function of a smart contract is singular: to execute automatically when predefined conditions are met.

In handling on-chain disputes, we often encounter the following situation:

Both parties have agreed on a set of rules off-chain;

The on-chain contract has only executed part of the content;

After a dispute arises, one party attempts to use the "on-chain execution result" as the final basis.

This logic usually cannot hold in judicial practice because:

1. Smart contracts can only execute what is explicitly stated in the code, and the code may not fully cover the true intentions of both parties.

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 positioning of smart contracts is closer to "method of performance." As for whether rights and obligations are established or valid, it still requires consideration of off-chain evidence. In simple terms, smart contracts are only responsible for execution, not for defining the relationship between the parties.

Undeniably, smart contracts are disrupting traditional contract understanding. In the context of smart contracts, if the code can serve as a means of expressing intent, it is necessary to explore whether it meets the contract formation mechanisms of offer and acceptance.

Although smart contracts can be recognized as contracts under specific conditions, they still have significant differences from traditional contracts:

Different languages: code vs. text

Contracts are written in code, precise but rigid; while traditional contracts use natural language, flexible and interpretable. This leads to the possibility that code execution may deviate from the true intentions of the parties.

Different execution: automatic vs. manual

Traditional contracts rely on good faith or court enforcement; smart contracts run automatically and cannot be easily stopped. They emphasize "prevention over remedy"—avoiding risks in advance rather than remedying them afterward.

Different scopes: digital world vs. real world

Smart contracts primarily manage digital assets (such as cryptocurrencies, NFTs), and their application is mainly limited to the blockchain; while traditional contracts cover goods, rights, actions, etc.

In certain scenarios, such as when a user triggers a transaction or confirms a rule through a private key, on-chain operations can indeed reflect "expression of intent." However, judicial judgments will not change basic logic simply because of new technical means.

Courts typically focus on three points:

1. Are the parties clear about what they are doing?

Is there a rule explanation, risk warning, or user documentation that allows ordinary users to understand the main consequences?

2. Can the behavior be regarded as a genuine commitment?

When the code logic is complex, a single click or authorization cannot deduce "understanding all rules."

3. Can off-chain evidence be used to reinforce?

Chat records, business explanations, cost arrangements, etc., remain important bases for determining intent. Therefore, even if on-chain behavior has a certain expression of intent function, it usually cannot alone constitute the entirety of a contract.

On-chain operations can prove what you did, but cannot prove that you "agreed to all content."

For example, in the Nirvana Finance incident, the attacker exploited a contract vulnerability to profit approximately $3.5 million. Since the execution process cannot be interrupted, the loss became a fact in a short time, and traditional legal remedies could not intervene in time, ultimately making it difficult to recover damages. Once a smart contract has a vulnerability, it is difficult to block at the technical level, and judicial intervention is also challenging in a timely manner, which is precisely where the risk lies.

As disputes involving smart contracts increase, how on-chain data, contract code, etc., can be accepted as electronic evidence by the courts has become an unavoidable issue.

Article 16 of the "Online Litigation Rules of the People's Courts" in China clarifies the validity of blockchain evidence, stating that "if the electronic data submitted by the parties as evidence is stored through blockchain technology and has been technically verified as consistent, the people's court may determine that the electronic data has not been tampered with after being on-chain." In specific cases, courts typically review from three aspects:

1. Identity of the evidence provider: Who submitted the evidence?

2. Data source: Is the process of generating and obtaining the data complete and compliant?

3. Technical environment: Is the blockchain system that stores the data reliable?

Blockchain provides technical support for electronic evidence with "untouched" characteristics through hash values, timestamps, and distributed storage. However, even so, evidence related to smart contracts still faces two practical difficulties in judicial recognition:

1. On-chain data ≠ legal facts

The blockchain can only prove that "a certain address transferred a certain amount of USDT to another address," but it cannot explain the legal substance of this behavior—was it payment, repayment, or a gift? This must be determined in conjunction with other evidence.

2. Difficulty in allocating the burden of proof

In smart contract disputes, ordinary users often lack the technical ability to restore the flow of funds or the operation process of the contract. How to reasonably allocate the burden of proof without increasing the burden on one party, avoiding difficulties in rights protection due to technical barriers, is a practical issue faced in current judicial practice.

In the Wang Weiqing case in Hong Kong, although the court recognized the plaintiff's tracking results of the stolen cryptocurrency, the involved funds were mixed with many users' funds in a hot wallet, ultimately lifting the global asset freeze order. This also confirms that even if on-chain tracking technology itself is effective, cryptocurrency cases still have considerable complexity and uncertainty regarding the burden of proof, probative value, and purpose of proof.

In the field of criminal justice, smart contracts can both become tools for crime and serve as objects for investigation and evidence collection.

This is mainly reflected in the following aspects:

1. Functions such as mixing coins, splitting, and hiding links may involve money laundering risks

Regardless of whether the developer directly participates, once the contract is used to evade tracking or conceal sources, it may be classified as a money laundering method.

2. When smart contracts perform "matching," "exchanging," or "charging" functions, they may trigger areas of high incidence of illegal business operations

For example:

Virtual currency ↔ fiat currency exchange

Virtual currency ↔ virtual currency matching

Charging a percentage fee around transactions

These behaviors align with the legal logic of "unlicensed operations" off-chain.

3. Developers may be held accountable due to "control ability"

When developers can:

Control private keys

Modify contracts at any time

Decide the flow of funds

Charge users or share profits

They are easily recognized as having the attributes of "actual controller of business activities," rather than merely a technical role.

Similar determinations have appeared in several criminal cases involving Web3.

The risks of smart contracts mainly stem from "insufficient expression" and "irreversible mechanisms." In practice, it is recommended to address the following aspects in advance:

1. Clearly distinguish: on-chain execution vs. off-chain intent

Minimize clauses that "automatically assume responsibility" on-chain, and important matters should be fully expressed off-chain.

2. Clarify the authority structure

Avoid giving developers complete control over funds, parameters, and upgrade paths, which could lead to misinterpretation as the operating entity.

3. Preserve the evidence chain

Rule explanations, chat records, operation logs, version records, etc., are crucial for both civil and criminal cases.

4. Avoid assuming high-risk functions

Especially those involving exchange, matching, collection and payment, and leveraged automatic execution logic.

5. In the event of a dispute, promptly secure evidence

Although on-chain data is transparent, snapshots, fund paths, node records, etc., need to be preserved as early as possible.

As a product of the Web3 era, the legal classification of smart contracts is still in the exploratory stage. From a lawyer's perspective, we must affirm their value while also facing the collisions and challenges they bring to the current legal system:

At the civil level, the contractual attributes of smart contracts have been recognized within a limited scope, but their deficiencies in breach of contract remedies still need to be reconciled.

At the evidence level, while the validity of blockchain evidence has been confirmed by the judiciary, its review standards still need further improvement.

At the criminal level, smart contracts can both become new tools for crime and give rise to new investigation and proof methods.

For Web3 practitioners, compliance is no longer optional but the foundation for survival and development. We recommend proactively avoiding risks through professional technical architecture and legal design. If specific legal cases or compliance needs arise, timely consultation with a professional legal team for targeted legal advice and support is advisable.

Only by finding a balance between technological innovation and legal compliance can smart contracts truly unleash their potential and become a trustworthy cornerstone of the digital future.

Related: Cloudflare outage indicates that cryptocurrencies need end-to-end decentralization

Original article: “Legal Classification of Smart Contracts: Tool, Contract, or Judicial Evidence?”

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