- Does a country's legal system accept legal contracts written in code/programs?
Different countries have different legal requirements and all this needs to be considered before a smart contract can be built. Most legal systems are probably not fully prepared at this stage to handle smart contracts.
- How robust is the technology in terms of resisting cyber attacks?
It depends on the technology itself. There are lots of private systems like ItBit. The most common ones are BitCoin and Ethereum and they've proven to be very robust. P2P networks have changed the conversation in terms of security because if you increase redundancies among a bunch of participants in a network, you can ensure that one person cannot wrest control of what everyone else has agreed upon.
- How do you propose the auditing of these transactions?
One of the strengths of systems like this is the ability to track the information. Blockchains are open systems, everyone can see every transaction that has taken place. Participants may not know who conducted the transaction but they know what has taken place. For ItBit, for example, with a private ledger system, individual participants can control their own data and they can share some portion of that data with a regulator or other participant. I think these systems are quite strong in terms of auditing.
- Do you think the legality of smart contracts will be tested in the courts before legislation, or is legislative activity already starting? It seems we have an analog to the digital signatures legalization process a decade or more ago.
Yes, this is an apt analogy. Encoding legalese is something that will have to be worked through. We'll have to see how we can start building programs out of what is in English language today. It will be a parallel path of the legal and technology side.
- How often can these programs go awry ( assuming no cyber attacks) and do not perform as expected?
It is possible for programs to go awry because a smart contract is only as good as the code in which it is written.
- Your definition of Smart Contracts is of fully self-actuated machine-to-machine transactions that are untouched by human intervention. If we cannot do this within our own financial institutions (we do an enormous amount of reconciliation now), how will it be possible to do this across/with other institutions? Don't we first need global standards (the same language) for financial supply chain participants, products and the data elements of the instruments being transferred? Aren't we ahead of ourselves??
Great question. I’d say that asking everyone to move to a standard is really difficult. However, in a purely technical environment there has to be a standard in order to transact with each other. Rather than seeing standardization as a prerequisite to working together, I think working together may usher in standardization. But that is just my opinion, obviously.
- How important is the network effect or network externality ( as more people use, the service gets more valuable) in making this technology mainstream.
Very important. No one in the industry wants to fracture liquidity. Network effects will fight against new systems in the beginning, so it is important to push the industry until the tipping point when network effects bring participants into the market. Personally, I think this is the greatest risk of this technology not being used.
- Shouldn't we be concentrating our industry's resources on transforming legal documents (prospectuses, articles of incorporation, trusts, et al) into XBRL templates so the front end of the system is prepared properly for the smart contract world?
Standardization and digitization are both really important.
- Can a party "sell" or transfer their rights and obligations under a smart contract to another party, e.g. trade their obligations on a market? Or use the contract as collateral for a loan? Or if they sell their business or if they go into bankruptcy/liquidation?
Yes is the short answer here. I can programmatically build on top of other programs that are currently being run. Collateral is probably more of a question of will the counterparty/CCP/regulator accept it as collateral?
- How does XBRL integrate into smart contracts?
Smart contracts that facilitate financial transactions like a loan or a securities issue, typically contain provisions that call for financial data. To enable efficient automation of smart contracts requires the use of a consistent, reliable data standard like XBRL such that all parties to the contract understand the data they're using. XBRL taxonomies like the US GAAP Taxonomy have clearly defined financial terms like Assets and Revenue; they have a consistent means to explain time period, units, dimensional characteristics and reporting entity.
- Smart contracts are a combination of common IDs, standard reference data, and variable data at time of transaction order placement/execution. Blockchain seems to be ideally suited to maintain the golden copy of common IDs and standard reference data. Should we not as an industry concentrate on this first?
Great question. I’d say that asking everyone to move to a standard is really difficult. However, in a purely technical environment there has to be a standard in order to transact with each other. Rather than seeing standardization as a prerequisite to working together, I think working together may usher in standardization. But that is just my opinion, obviously.
- Can you please explain how this ties to XBRL? My understanding Smart contracts is used specifically for instant data authentication [Transactions, Trades, etc] in a "ledger" format - which XBRL is in not designed to be.
For data to be authenticated requires agreement on the data itself. Without clearly defined data standards, a fact value is simply a number. Standard data ensures that the reported value has associated metadata to explain time period, units, reporting entity and definition.
- Bitcoin is a digital store of value. So smart contract works well with that. Are there examples of Smart contracts working with stores of value associated with Bank controlled ledgers?
There are a lot of projects going on now in financial services to showcase how the technology is being used in a private environment among financial services firms. Some of these are public, many others aren’t public yet but will be soon.
- You mentioned that it removes the need for trust between counterparties. In a situation where settlement has to happen on T+2 and not immediately, how can a smart contract ensure that the counterparty has the money to pay on settlement date?
This is a key issue. In order to "trustlessly" guarantee who has the money or the asset, then it needs to be wrapped into the contract itself. That requires the counterparties to fund their transaction upfront. There are other alternatives that don’t require the upfront funding, but they require some level of trust.
- Can multiple parties under a smart contract discuss any terms during the process?
Sure, but on most platforms, once a smart contract is “loose” into the wild it can’t really be repealed. However, a new contract could be build on top of it to redirect the contract in a new way. Also keep in mind that there are no absolute rules… over the next year or two there will be dozens of platforms and they will likely come with their own sets of rules and some of those platforms may allow for live editing or reversal. But, those features come with pros and cons. Ultimately the industry will drive toward the right functionality, but these are still the early days.
.
Comment
You must be logged in to post a comment.