The New Primer on Smart Contracts Outlines Their Uses and The CFTC Role

Following the 2017 Primer on virtual currency, The CFTC has now published a primer on smart contracts. This aims to provide some advice and direction on the advantages and risks that can happen with smart contracts. This will be useful for anyone that is a market participant in Finanacial Technology and it will provide a start guide to blockchain technology. In particular, this primer guide on smart contracts will provide some much-needed coherence and instruction since there is little regulation for the blockchain industry at this time.

The CFTC’s LabCFTC published a 32-page document that explains smart contracts simply, including what they are all about and how they can be used. This includes their history and the characteristics that make them a smart contract. Readers will also find graphics to make explanations about the software and how they work simpler to understand. The document starts by explaining that a smart contract is a ‘set of coded computer functions’. Indeed, smart contracts can be legally binding too, as they can include elements that become binding in law in traditional contracts. In addition, the code and technology that is involved with smart contracts means that real time updates can happen, which will be authorized by the parties. There is security provided with the help of cryptography. This could be particularly useful for self-executing insurance, as well as tracking payments and transferring premiums.

Daniel Gorfine, Director for the working group LabCFTC stated that, “Smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities. This primer is focused on explaining smart contracts, exploring how they may impact our markets and highlighting potentially novel risks and challenges”

Moreover, the LabCFTC primer outlines the many benefits that are offered by smart contracts. This includes automation and how it can make creating contracts quicker and also reduce their cost. It can even mean that contracts are consistent and standardized across a business for fairness and clarity. Naturally, there are also some risks involved with smart contracts. The starter guide states that some smart contracts could have the potential to omit protections that are included with traditional contracts. This could mean there is a lack of transparency for customers, plus the opportunity for fraud through bad code. The Commission believes cyber threats could become a big problem too.

Nonetheless, the CFTC does make it clear that with good regulation and governance, most of the risks can be diminished and solved. Indeed, it is the Commission’s duty to protect participants in the market and the wider public. By having standards and certain rules available from the start with smart contracts, development can head in the right direction. In addition, this can include standards in how smart contracts are designed and operated, as well as creating ways for dispute resolution in this area. In other words, with the right rules and standards in place from the beginning, the risks and challenges that are highlighted in the LabCFTC primer can be addressed and mitigated.

The Primer on Smart Contracts outlines what a smart contract is, how it compliments Blockchain’s distributed ledger technology, the role of the CFTC as a regulator, and further:

• Overview of Challenges and Risks
• Legal Considerations and Frameworks
• Operational Risks
• Technical Risks
• Cybersecurity Risks
• Fraud and Manipulation
• Governance for Smart Contracts