The E-SIGN Act in the Age of Smart Contracts and AI: Challenges and Opportunities

Porter Richards, Contributing Member 2024-2025

Intellectual Property and Computer Law Journal

I. Introduction

The Electronic Signatures in Global and National Commerce Act (E-SIGN Act), enacted in 2000, is foundational to modern commerce.[1] The E-SIGN Act provides the legal framework that validates electronic signatures and records, giving them the same standing as traditional paper contracts.[2] In today’s digital economy, where transactions are increasingly conducted online and across borders, the E-SIGN Act enables businesses and consumers to enter legally binding agreements quickly and efficiently without the need for physical paperwork.[3] This has been instrumental in supporting e-commerce, digital banking, and the broader trend of remote work, allowing industries to streamline operations and improve access to services.[4] However, with the emergence of smart contracts and AI-driven agreements, questions arise regarding the Act’s adequacy for supporting these advanced, automated forms of contracting. The Act’s provisions for consent, signature, and record retention may require reinterpretation or amendment to ensure that it continues to serve as a robust foundation for the next generation of digital agreements, where transactions are often executed autonomously by software without direct human input. This blog delves into the E-SIGN Act and its counterpart, the Uniform Electronic Transactions Act (UETA), followed by an analysis of whether the current legal framework is adequate for the implementation of smart contracts, particularly those driven by AI.

II. Discussion

E-SIGN Act

The E-SIGN Act was signed into federal law in 2000- at a time when digital transactions were gaining momentum but lacked a consistent- legally recognized framework across the United States.[5] The E-SIGN Act was enacted to facilitate the use of electronic records and signatures while establishing a uniform legal standard for their acceptance.[6] In Section 101 of the E-SIGN Act, the foundation of E-SIGN is defined as a signature, contract, or any related record for a transaction is not denied legal effect or enforceability solely due to its electronic form.[7] Similarly, a contract for such a transaction remains legally valid and enforceable even if an electronic signature or record was used in its creation.[8]

One of the key provisions of the E-SIGN Act is the legal recognition of electronic signatures. Under the Act, an electronic signature—defined broadly to include a “sound, symbol, or process” associated with an electronic record—holds the same validity as a handwritten signature, as long as it reflects the intent of the signing party.[9] This broad definition allows for flexibility in various online transactions, from simple “click-to-accept” methods used in online forms to more secure digital signatures utilizing encryption technologies.[10] The E-SIGN Act includes consumer protections to prevent individuals from entering into a contract unintentionally.[11]

The E-SIGN Act also established clear requirements for obtaining consent to use electronic records. Consumers must be given the option to consent to electronic forms and have the choice to receive records in paper form if they prefer.[12] This requirement protects individuals by ensuring they are fully aware that they are entering into an agreement electronically and provides them with the option to use traditional paper methods if desired.[13] The Act further states that consumers have the right to withdrawal their consent to use electronic records or signatures at any time and establishes the consequences and/or fee in such an event.[14] Additionally, the Act mandates that institutions maintain electronic records that accurately reflect the information in relevant contracts, notices, or disclosures.[15] These records must remain accessible to all legally entitled individuals for the legally required retention period and be preserved in a format that allows accurate reproduction for future reference. [16]

To establish a consistent national standard, the E-SIGN Act preempts conflicting state laws, ensuring uniformity and preventing regulatory inconsistencies that could complicate interstate transactions.[17] However, states can avoid preemption if they adopt UETA.[18] UETA is a state-level initiative aimed at standardizing and aligning laws governing the retention of electronic records and the validity of electronic signatures.[19] UETA seeks to promote the growth of the information economy, particularly its role in commercial transactions across states.[20] Many states adopted UETA, allowing them to maintain control over electronic transactions while aligning with federal standards. This dual framework of federal preemption and the option to adopt UETA helped balance the need for uniformity with respect for state law.

Smart Contracts

With the recent rise in blockchain technology[21] and the growing use of smart contracts, questions have emerged about whether the E-SIGN Act fully encompasses smart contracts and ensures their enforceability. To understand how the E-SIGN Act impacts this area of law, one has to grasp what smart contracts are.

Smart contracts are digital programs encoded and stored on a blockchain, enabling parties to exchange money, property, shares, or other forms of value.[22] Legally, smart contracts are an automated agreement between parties that executes actions based on the objective fulfillment or non-fulfillment of predefined conditions, as determined by code.[23] Unlike traditional contracts, which are expressed in natural language and rely on human or institutional enforcement, smart contracts execute automatically once predetermined conditions are met.[24] These digital contracts are commonly built on blockchain technology, which provides a decentralized, secure, and immutable ledger for recording and verifying transactions. In essence, smart contracts act as if/then statements embedded in code, ensuring that, if specific conditions are satisfied, then the contract automatically performs the agreed-upon actions.[25] This feature of self-execution makes smart contracts highly efficient, eliminating the need for manual oversight or third-party involvement to carry out contractual obligations.

Smart contracts offer considerable benefits, including enhanced efficiency through streamlined processes, reduced delays, greater security and transparency, faster transactions, assured execution of terms, and lower administrative costs.[26] However, they also present challenges, such as the inherent rigidity of code compared to the flexibility typically desired in contracts, the complexity of computer coding, and questions surrounding the application of traditional legal safeguards and conflict-of-laws principles.[27]

While there are numerous legal challenges associated with smart contracts that warrant in-depth discussion, this analysis will focus specifically on the applicability of the E-SIGN Act and UETA to smart contracts.

E-SIGN/UETA Applicability to Smart Contracts

Smart contracts differ from traditional contracts in that they can operate without explicit signatures, relying instead on common tools designed for advanced, qualified digital signatures cryptographic keys or blockchain-based verification.[28] Similar to digitally signed contracts, these signatures offer a high level of authenticity that is challenging to dispute.[29] While traditional contracts, validated under the E-SIGN Act, require a signature to bind the parties, smart contracts execute automatically when preset conditions are met.[30] There is not a final act of assent.[31] This raises questions about whether a party’s involvement, such as programming or deploying the contract, satisfies the E-SIGN Act’s signature requirement.

Many argue that the ESIGN Act and UETA already recognize, enable, and validate the use and enforceability of both smart contracts and electronic records and signatures created, secured, or retained by utilizing a blockchain platform.[32] The E-SIGN Act broadly defines an electronic signature as any “sound, symbol, or process” indicating consent.[33] It ensures that for transactions involving interstate or foreign commerce, a signature, contract, or other record cannot be considered legally invalid simply because it is in electronic form.[34] In addition, the Act affirms that a contract related to such a transaction cannot be denied legal effect just because it was created using an electronic signature or record.[35]

Both the E-SIGN Act and UETA recognize the legitimacy of electronic signatures and records, treating them as equivalent to their traditional counterparts. In the context of smart contracts, digital signatures, such as private keys or digital wallet approvals, are generally accepted as long as they reflect the intent to consent to the contract.[36] UETA specifically provides that “a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”[37]

In smart contracts, a private key or digital wallet approval may satisfy this requirement, assuming it reflects intent to consent to the contract. [38] However, challenges arise with more complex, AI-driven smart contracts, where the terms may evolve based on data inputs and real-time conditions. This dynamic component can limit users’ understanding of the contract’s full scope, raising concerns about informed consent. While the E-SIGN Act requires that users be informed and agree to use electronic records, the shifting terms of AI-driven contracts may lead to disputes over whether users fully understood and consented to the evolving nature of the agreement.

AI and E-SIGN/UETA

AI-driven contracts, where AI autonomously updates or enforces terms, raise complex issues regarding consent and enforceability, particularly under the ESIGN Act and UETA. As with traditional contract law, these acts rely on clear intent to be bound, typically signified by a signature.[39] However, AI-driven contracts challenge this framework. Parties to an AI-based contract might only provide initial consent to a broad framework, with the AI later making real-time modifications or decisions.[40] This evolving nature complicates the traditional concept of a “signature,” as parties delegate authority to the AI, which may act unpredictably. Consequently, determining when an agreement is formed becomes ambiguous, raising challenges around enforceability and consent.

The issue of consent is further complicated in AI-driven contracts, as parties may not fully grasp the scope of AI’s role. For instance, in supply chain agreements where AI autonomously adjusts schedules, parties may consent to a general framework without understanding the full extent of the AI’s potential actions, resulting in unanticipated obligations. To address these concerns, clearer standards for disclosure and transparency are crucial to ensure informed consent, protect parties’ rights, and preserve the integrity of digital agreements under the ESIGN Act and UETA.

III. Conclusion

In conclusion, while the ESIGN Act and UETA have established a solid foundation for validating electronic signatures and records, the rise of AI-driven smart contracts presents new challenges that these frameworks were not designed to address. As technology advances, the existing legal framework needs to be re-examined and adapted to ensure that digital agreements- including those involving AI- are transparent, enforceable, and protective of the rights of all parties involved. For AI-driven contracts to remain valid under the ESIGN Act and UETA, clearer standards for disclosure and consent are essential. Without these adjustments, the current legal structure may not adequately support the full scope of emerging technologies- especially as AI continues to shape the future of digital contracts.

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[1] Federal Deposit Insurance Corporation, Consumer Compliance Examination Manual: E-Sign Act – Overview, at [pg. 3.1] https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/10/x-3-1.pdf [https://perma.cc/X4BM-DHC6].

[2] Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, 114 Stat. 464 (2000) (codified as amended at 15 U.S.C. §§ 7001–7006 (2024)).

[3] Federal Deposit Insurance Corporation, supra note 1.

[4] Ty Livingston, Understanding the E-SIGN Act: Legal Framework and Impact on Digital Business Transactions, BlueNotary (2024) https://bluenotary.us/esign-act/#:~:text=Legal%20Recognition,faster%20interactions%20without%20sacrificing%20security [https://perma.cc/RBV2-ZXC7%5D.

[5] Bryan Gibson, Electronic Signatures: Review and Analysis, Kentucky Transportation Center Technical Assistance Report, University of Kentucky (2015) https://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1003&context=ktc_technicalassistancereports [https://perma.cc/36AA-FXWD].

[6] Id.

[7] Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, 114 Stat. 464 (2000) (codified as amended at 15 U.S.C. §§ 7001–7006 (2024)).

[8] Id.

[9] Gibson, supra note 5 at pg 3.

[10] Id.

[11] Id.

[12] Federal Deposit Insurance Corporation, supra note 1.

[13] See Federal Deposit Insurance Corporation, Consumer Compliance Examination Manual: E-Sign Act – Overview, at 3.1 (noting the consent requirement under the E-SIGN Act).

[14] Id.

[15] Id.

[16] Id.  

[17] Gibson, supra note 5 at pg 8.

[18] Id.

[19] Id.

[20] Id.

[21] Blockchain technology, a decentralized digital ledger that connects blocks in sequential order using cryptographic techniques like hash functions and timestamps, ensures immutability by linking each block’s hash to the previous one, making tampering evident, and is particularly suited for applications such as copyright registration, ownership tracking, and licensing records by offering enhanced transparency, security, efficiency, and cost-effectiveness compared to traditional methods. See Yanhui Liu et al., Research on digital copyright protection based on the Hyperledger fabric blockchain network technology, PEERJ. COMPUTER SCIENCE (Sept. 17,2021) https://www.ncbi.nml.nih.gov/pmc/articles/PMC8459789/ [https://perma.cc/2TTX-KMHZ].

[22] Jared Arcari, Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity, 24 Fordham J. Corp. & Fin. L. 3 (2019).

[23] Id.

[24] Fabio Bassan et al., From smart legal contracts to contracts on blockchain: An empirical investigation, 55 Comput. Law & Secur. Rev., 106035 (2024) https://www.sciencedirect.com/science/article/pii/S0267364924001018 [https://perma.cc/XA9G-H4HW].

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Smart Contracts: Is the Law Ready?, Lowell Milken Institute for Business Law and Policy, at 1 (2018) https://lowellmilkeninstitute.law.ucla.edu/wp-content/uploads/2018/08/Smart-Contracts-Whitepaper.pdf [https://perma.cc/V9C6-F2RF].

[33] Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, 114 Stat. 464 (2000) (codified as amended at 15 U.S.C. §§ 7001–7006 (2024)).

[34] Smart Contracts: Is the Law Ready?, supra note 32 at pg 6.

[35] Id.

[36] Id.

[37] Uniform Electronic Transactions Act § 7(a), 7A U.L.A. 266 (1999).

[38] Smart Contracts: Is the Law Ready?, supra note 32 at pg 6.

[39] Rithanya M, The Impact of AI in Contract Formation and Enforcement, 7 Int. J. Law Manag. Humanit. 951(2024). 

[40] Id.