What Lawyers Can Learn From the CFTC Starter Guide for Smart Contracts

The U.S. Commodity Futures Trading Commission (CFTC) on November
27 released a public guide to explain the uses, risks and benefits
of smart contracts. The guide aims to provide practical information
for in-house lawyers and others interested in learning more about
successfully implementing the technology.

The 32-page document, called “A CFTC Primer on Smart Contracts^[1],”
was developed by the LabCFTC. It outlines the fundamentals of what
smart contracts are, their potential applications across various
industries, along with the pros and cons of using them.

The CFTC defines smart contracts as “a set of coded computer
functions.” They are built on the same blockchain technology that
powers Bitcoin and other cryptocurrencies.

The blockchain platform has evolved so that it can be applied in
a business transaction capacity across many major industries
including real estate, government, health care and financial
services.

Smart contracts rely on computers to automatically enforce the
terms of an agreement based upon a set of predetermined conditions.
Their key feature is that they are self-executing, which eliminates
the need for an intermediary when negotiating deals. As a result,
smart contracts have the potential to boost efficiency by
significantly reducing the amount of time spend on paper processes.
They can also decrease the risk of disputes because the code will
execute the parties’ intent without any need for intervention.

Smart contracts are a combination of traditional legally binding
contracts and self-executing code. Blockchain technology can
provide security via cryptography and enable involved parties to
sanction real-time updates. The CFTC guide cites tracking
transportation rentals and payments, self-executing insurance and
other examples in which such technology could be beneficial.

The commission has released the guide at a time of regulatory
uncertainty for the blockchain industry. Although the technology is
still in early stages, it is growing quickly as large companies
actively invest in and explore the use of smart contracts and other
blockchain-backed mechanisms to streamline their businesses.

The guide emphasized that smart contracts must operate within
the U.S. legal framework including regulations laid out by the
CFTC, the Commodity Exchange Act, the Bank Secrecy Act, and federal
and state securities laws, among others. The document states that
they “apply equally regardless what form a contract takes.
Contracts or constituent parts of contracts that are written in
code are subject to otherwise applicable law and regulation.”

The CFTC’s primer outlines the various benefits of smart
contracts. Automation can serve as a time-saving, cost-effective
means of creating contracts. It can also help standardization
across a business and enhance clarity around execution.

“Smart contracts are being used to drive further automation
in our markets and may have an impact across a range of economic
activities,” said LabCFTC Director Daniel Gorfine.

He added that along with explaining how smart contracts work,
the guide focuses on discussing “how they may impact our
markets.”

LabCFTC pointed out that while there are numerous advantages to
using smart contracts, they also present several unique challenges
such as a heightened risk of cybersecurity threats and fraud
through malicious code. In addition, smart contracts could sidestep
protections available in traditional contracts. However, the guide
highlighted that good governance standards for smart contracts
could mitigate many of the risks.

As interest in blockchain technology continues to grow across
major industries, authorities are exploring ways to make it safer
for the end user. Lawyers can keep up with changes that may impact
their clients by educating themselves about the technical aspects
of smart contracts. Understanding this important new technology is
the first step to incorporating it into a legal practice.

Culled from biggerlawfirm.com

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