The Commodity Futures Trading Commission (CFTC), one of the top U.S. financial regulators, has just released a guide to understanding Smart Contracts. The primer is part of efforts to educate and engage innovators and market participants.
According to a press release, the primer “is part of LabCFTC’s effort to engage with innovators and market participants on a range of financial technology (FinTech) topics.” LabCFTC is the FinTech innovation hub of the U.S. Commodity Futures Trading Commission (CFTC).
The primer is LabCFTC’s second FinTech publication, the first being one in October 2017 primer on virtual currencies. However, the latest one covers the basics of blockchain Smart Contracts including their history, characteristics, case studies, potential use cases, and perceived risks.
LabCFTC Director, Daniel Gorfine, notes that “smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities.”
What are Smart Contracts?
The primer opens with a definition of smart contracts as “a set of coded computer functions” that allow “self-executing computer code to take actions at specified times and/or based on reference to the occurrence or non-occurrence of an action or event.” However, the CFTC says the self-executing programs are only as smart as the “information feed it receives and the machine code that directs it.”
It stated that the concept of a smart contract was developed some 20 years ago by computer scientist Nick Szabo.
The agency points out that smart contracts can offer the benefits of reduced costs and transaction times. It can also lower counterparty and settlement risks, and improve security.
Risks in Adopting Smart Contracts
Although, Smart Contracts present risks too. Some of those include: operational, technical and cybersecurity risks. There’s also the potential for fraud, manipulation, reduced transparency, and accountability, says the CFTC.
The CFTC explains that measures to mitigate their potential use for the illegal circumvention of rules. Also, liability mechanisms and good governance standards require to accurately attribute accountability and tackle dispute resolution in the case of misconduct.
The primer outlines the role and mission of the CFTC. It’s mission “is to foster open, transparent, competitive, and financially sound markets.”
The lab also spoke about the applicability of existing legal frameworks to Smart Contracts. It explained that “existing law and regulation apply equally regardless what form a contract takes.”
The LabCFTC initiative came into existence in May 2017. It aims to help the CFTC become proactive and forward-thinking with FinTech applications.