The rapid development of digital technology has significantly transformed various sectors, including the banking industry. One emerging innovation that has garnered increasing attention is the use of smart contracts—digitally coded agreements that are automatically executed based on predefined programming conditions.
Smart contracts are seen as tools to enhance efficiency, transparency, and transactional security, especially in the financial and banking sectors. They also reduce the potential for human error in contract execution. However, their implementation presents legal challenges, particularly in terms of regulatory compliance and consumer protection.
Understanding Smart Contracts and Their Role in Securing Transactions
A smart contract is a computer program that automatically executes the terms of an agreement once predetermined conditions are met. This technology is typically built on blockchain networks, making the resulting transactions transparent and immutable. Operating on decentralized and tamper-proof systems, smart contracts cannot be unilaterally altered.
Security is one of the most valued attributes of smart contracts. Within a blockchain framework, each transaction is permanently recorded and cannot be modified without consensus from the network, thereby reducing the risk of data manipulation or fraud in digital agreements. The core objective of a smart contract is to enforce standard contractual provisions, such as payment terms, confidentiality, and other enforcement mechanisms.
Unlike conventional contracts signed by parties, smart contracts establish party relationships through cryptographic code. In simple terms, they are written in code and self-executing, functioning through complex if-then logic—only executing when predefined conditions are met. As digital agreements with executable standard clauses, smart contracts must still be afforded legal protection, especially given their increasing use in economic and banking sectors.
This is reinforced by Article 5 paragraph (1) of Law No. 1/2024 on the Second Amendment to Law No. 11/ 2008 on Electronic Information and Transactions, or better known as ITE Law, which stipulates, “Electronic Information and/or Electronic Documents and/or the printouts thereof constitute valid legal evidence”.
Similarly, Article 5 paragraph (3) of the ITE Law stipulates:
“Electronic Information and/or Electronic Documents shall be deemed valid if using an Electronic System in accordance with the provisions of this Law”.
Legal Compliance in Smart Contracts
In Indonesia’s civil law system, the validity of an agreement is governed by Article 1320 of the Civil Code, or locally known as KUHPerdata, which outlines four essential elements for a legally binding contract:
- Mutual consent. All involved parties must voluntarily agree to the contract terms, without coercion or deceit.
- Legal capacity. Parties entering into the contract must have the legal capacity to do so.
- A specific object. The subject matter of the contract must be clearly defined, such as transaction value, payment conditions, or returns.
- A lawful cause. The contract must not violate any laws or prevailing norms.
To be considered legally valid, smart contracts in banking must satisfy all four requirements. While execution is automated by a system, the initial mutual agreement between parties remains a key legal foundation. Therefore, smart contracts must be designed in compliance with applicable legal norms prior to deployment.
Consumer Protection in Contract Formation
In electronic transactions, consumer protection is a critical concern. Law No. 8/ 1999 on Consumer Protection, otherwise Consumer Protection Law, provides a legal safeguard for consumers in digital transactions, including those involving smart contracts. Article 4 of the law outlines several consumer rights.
Key principles of consumer protection in electronic transactions include:
- Right to clear information. Consumers are entitled to full and accurate information regarding the products or services offered..
- Protection of personal data. Service providers must secure consumers’ personal data against misuse.
- Dispute resolution mechanisms. Consumers have the right to lodge complaints and seek fair dispute resolution
While smart contracts offer substantial benefits for the banking sector, particularly in terms of transactional efficiency and security, their implementation must be aligned with applicable laws, including relevant statutory regulations. Furthermore, consumer protection in digital transactions must remain a top priority to ensure that consumer rights are upheld.
Also read: Implementasi dan Regulasi Teknologi Blockchain di Indonesia
Regulations:
- Undang-Undang Nomor 1 Tahun 2024 tentang Perubahan Kedua Atas Undang-Undang Nomor 11 Tahun 2008 tentang Informasi dan Transaksi Elektronik (“UU ITE”).
- Kitab Undang-Undang Hukum Perdata (“KUHPerdata”).
- Undang-Undang Nomor 8 Tahun 1999 tentang Perlindungan Konsumen (“UU Perlindungan Konsumen”).
References:
- Poernomo, S. L. (2019). Standar Kontrak dalam Perspektif Hukum Perlindungan Konsumen. Jurnal Penelitian Hukum De Jure, 19(1), 109. https://doi.org/10.30641/dejure.2019.v19.109-120. (Diakses pada 10 April 2025 pukul 10.04 WIB).