It's a bird... It's a plane... It's a CFTC Primer on Smart Contracts!
I'm back (again)! If you are as annoyed with me as I am, know that I've officially committed to more consistent posting in 2019. Now on to the news...
One of our favorite regulators decided to give us an early Christmas gift this year. On November 27, the Commodities Future Trading Commission issued A Primer on Smart Contracts. This 32-slide presentation highlights some of the risks, challenges and governance issues surrounding smart contracts. We touched on some of the misperceptions surrounding smart contracts a few months ago. Well, this guidance focuses on smart contracts in the context of regulated markets and, specifically, when those contracts become financial products themselves (i.e., commodity, forward contract, future contract, option on future contract, swap). Automation, centralization, digitization, efficiency...DLT makes perfect sense for the swaps market!
The presentation is pretty easy to read so I encourage you to give it a once-over. It doesn't contain anything earth-shattering but there are some great reminders that have broad applicability. Here are some good ones:
1. If you're going to memorialize an agreement on a distributed ledger (i.e., create a smart contract), make sure you use a reputable platform that has quality safeguards and customer protections. If using blockchain, contemplate what will happen in the event of a fork. Do your research!
2. Account for oracle errors or outright failures. When the execution of an agreement is contingent upon receiving certain information from a third-party, it is important to have contractual provisions that account for errors or failures in the transmittal of that information.
3. Any smart contract is only as good as its code. And "Humans! – make mi$taak3s when K0diNg." Plan accordingly.