Archive for the 'Smart Contracts' Category

Canadian Smart Contract Law: Is it broke and do we need to fix it?

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By Richard Stobbe

The idea of a ‘smart contract’ has been a lot of things: it’s upheld as the next big thing, a beacon of change for society, a nail in the coffin of an inefficient legal services profession, and it’s criticized as a misnomer for ‘dumb code’.  Our review of smart contracts continues with this question:  Are ‘smart contracts’ in need of specific laws and regulations in Canada?

In other words, is ‘smart contract’ law broken and in need of fixing?

(Need a quick primer on smart contracts? Can Smart Contracts Really be Smart?)

For those who may recall, the advent of other technologies has caused similar hand-wringing. For example the courts have, over the years, dealt with contract formation involving the telephone, radio, telex and fax … and email … yes, and the formation of contracts by tapping “I accept” on a screen.

There is a very good argument that the existing electronic transactions laws in Canada adequately cover the most common situations where so-called ‘smart contracts’ would be used in commercial relationships. For example, the Alberta Electronic Transactions Act (a piece of legislation that was introduced almost 20 years ago, when people talked about the “information superhighway”), was intentionally designed to be technology neutral.

The term “electronic signature” is defined in that law as “electronic information that a person creates or adopts in order to sign a record and that is in, attached to or associated with the record”. It’s so broad that the term can arguably apply to any number of possible applications, including situations where someone approves a transactional step within a smart contract work flow. Of course, this still has to be tested in court, where a judge would apply the law in an assessment of the specific facts of a particular dispute.

Does that create uncertainty? Yes, to a degree.

But the risks associated with that approach are preferable to the alternative. The alternative is to go the way of Arkansas, or other jurisdictions who have decided to wade in by prescriptively defining “smart contracts”.   For example, a 2019 law in Arkansas – “An Act Concerning Blockchain Technology” HB 1944 – amends that state’s electronic transactions law by defining “blockchain distributed ledger technology,” “blockchain technology” and “smart contract.”  By imposing specific definitions, these laws may have the unintended effect of excluding certain technologies that should be included, or catching use cases that were not intended to be caught.  This would be the equivalent of trying, in 2001, to define an electronic transaction by looking at  Amazon’s 1-click checkout. Sure, it was innovative at that time, but to peg a legal definition to that technology would have been short-sighted and unnecessarily constraining.

A second problem is a lack of standardization or uniformity in how different jurisdictions are choosing to define these technologies. This creates more uncertainty than a reliance on existing electronic transactions laws.

As blockchain and smart contract technology develops, the rush to have legal definitions cast in stone is premature and unwarranted.

Related Reading:

Blockchain Legislation – Too Soon?

 

Calgary – 07:00 MST

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Are we getting Canadian Regulations for Crypto Trading?

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By Richard Stobbe

In February 2019, we reviewed the story of QuadrigaCX, and raised the question of how this would impact the adoption of cryptocurrencies or other tokens that are powered by the same blockchain or distributed ledger technologies (DLT) that underpin BitCoin. In particular we suggested that some regulatory oversight might be warranted. See: QuadrigaCX and the Missing Millions: A Crypto Cautionary Tale .

In March 2019 the Joint Canadian Securities Administrators (CSA) and IIROC (Investment Industry Regulatory Organization of Canada) issued a Proposed Framework for Crypto-Asset Trading Platforms (PDF). From a regulator’s perspective, many of these crypto-questions fall into the crack between CSA and IIROC.

Setting the stage to close that gap with regulatory engagement in Canada, the report notes that there are over 2,000 “crypto assets” in the wild, some trading for fiat currencies and others for various types of crypto-tokens, using over 200 different platforms. “Many of these Platforms,” say the report’s authors, “operate globally and without any regulatory oversight.”

There are a variety of crypto assets but currently they can generally be categorized from a regulatory perspective in one of two ways:

  1. Either they are akin to a commodity or currency, often referred to as “utility tokens”, which are created to allow holders to access or purchase goods or services on a DLT network. Crypto assets that are a “form of payment or means of exchange on a decentralized network, such as bitcoin”, says the report, “are not currently in and of themselves, securities or derivatives. Instead, they have certain features that are analogous to existing commodities such as currencies and precious metals”;
  2. Alternatively, crypto assets can be more akin to tokenized versions of traditional securities, derivatives or investment contracts, in the sense that they operate like shares in a company, or an interest in assets. If the crypto assets mimic the features of securities or derivatives, and are traded on an exchange platform, then that platform should be subject to existing securities regulatory requirements.

One of the regulatory problems is that the feature-sets of many crypto assets continually blur the lines between “currency” and “security”. Existing securities legislation may still apply to exchange platforms that offer trading of crypto assets even if those are tokens more like commodities, particularly where the investor’s contractual right to the cryptocurrency asset behaves like a security or derivative. Among the challenges that are unique to crypto exchange platforms is that these tokens and coins trade on a global basis, both on exchange platforms and off, both inside and outside regular trading hours, without any central source for pricing or reliable reference data. The values are “illiquid and highly volatile”. From a market surveillance point of view, this makes the regulatory enforcement uniquely challenging.

Essentially, the CSA/IIROC proposed platform framework would apply to “Crypto-Asset Trading Platforms” that are subject to securities legislation and that may not otherwise fit into other existing regulatory categories. Among the recommendations in the paper, crypto-trading platforms may have to become registered as investment dealers and meet compliance requirements for IIROC dealer and marketplace members.

Notably, this regulatory scheme would apply both to Platforms that operate in Canada and to those that have Canadian participants.

Enforcement is not really addressed here, but that’s another debate altogether.

The comment period is open until May 15, 2019.

 

 

Additional Reading: CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens, NI 21-101 Marketplace Operation, NI 23-101 Trading Rules and NI 23-103 Electronic Trading and Direct Access to Marketplaces.

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The law in Canada on internet contracts: Part 2

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By Richard Stobbe

Go-karting in Saskatchewan as an internet law case?  Yes, and you’ll see why. In Quilichini v Wilson’s Greenhouse, 2017 SKQB 10 (CanLII), a go-kart participant is injured and sues the service provider. The service provider holds up the waiver as a complete defence, saying it contains a release of all claims.

In this case, the waiver is  provided to all participants through a kiosk system, where an electronic waiver is presented in a series of electronic pages on a computer screen. Participants have to click “next” to move from one page to the next; and finally click the “I agree” button on the electronic waiver before they can participate in the activity.

Variations of this happen everyday across Canada when users click “I agree”, “I accept” or some variation of a click, tap or swipe to indicate assent to a set of terms.

  • Can legally binding contracts be formed in this way?
  • And another question, even if it works for common-place transactions like a shopping-cart check-out, does it work for something as important as a release and waiver of the right to sue for personal injury?

The answer is a clear yes, according to the facts of this case. The judge in Quilichini had no trouble finding that the participant’s electronic agreement was just as effective as a signed hard-copy of the agreement. The participant had a full opportunity to read the waiver, and there was nothing obscure in the presentation of the waiver, or the choice whether or not to accept it. The court concluded: “there can be no question but that when the plaintiff clicked ‘I agree’, he was intending to accept and assume responsibility for any possible risk involved and knew he was agreeing to discharge or release the defendants from all claims or liabilities arising, in any way, from his participation.”

This conclusion is based in part on Canadian provincial laws such as Alberta’s Electronic Transactions Act, SA 2001, c E-5.5, (there’s an equivalent in Saskatchewan and other provinces), which generally indicate that if there is a legal requirement that a record be signed, that requirement is satisfied by an electronic signature. There are exceptions of course, such as wills or transfers of land.

In the Quilichini  decision, the court didn’t look outside the Saskatchewan Electronic Information and Documents Act, 2000. But there are other authorities to support the proposition that binding contracts can be formed online in a number of ways. Decisions such as Kanitz v. Rogers Cable Inc., 2002 CanLII 49415 (ON SC), even deal with passive assent, where a user is deemed to be bound by something even absent a formal “click-through” button. Kanitz dealt with the question of whether internet service subscribers were bound by a subscription agreement, where that agreement was amended, then merely posted to the service provider’s site, rather than requiring a new signature or a fresh “click-through”. The subscribers were bound by the terms merely by continuing to use the service after the amended terms were posted.

In considering this, the Court in Kanitz said: “…we are dealing in this case with a different mode of doing business than has heretofore been generally considered by the courts. [remember… this was 2002] We are here dealing with people who wish to avail themselves of an electronic environment and the electronic services that are available through it. It does not seem unreasonable for persons who are seeking electronic access to all manner of goods, services and products, along with information, communication, entertainment and other resources, to have the legal attributes of their relationship with the very entity that is providing such electronic access, defined and communicated to them through that electronic format. I conclude, therefore, that there was adequate notice given to customers of the changes to the user agreement which then bound the plaintiffs when they continued to use the defendant’s service.” [Emphasis added]

This is not to say that ALL electronic contracts are always enforceable, or that all amendments will be enforceable even without a proper mechanism to collect the consent of users. However, it does provide a measure of confidence for Canadian internet business, that the underlying legal foundation will support the enforceability of contractual relationships when business is conducted online.

Want to review your own internet agreements and electronic contracting workflows to ensure they are binding and enforceable? Contact Richard Stobbe.

 

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Smart Contracts (Part 4): Ricardian Contracts and the Internet of Agreements

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By Richard Stobbe

As we’ve reviewed before, the term “smart contract” is a misnomer. (For background, see Smart Contracts (Part 3): Opportunities & Limits of Smart Contracts.) The so-called smart contract isn’t really a “contract” at all : it’s the portion of the transaction that can be automated and executed through software code. Hence, we prefer the term “programmatically executed transactions” — not as catchy, but maybe more accurate.

The written legal prose, or what we might think of as a ‘traditional contract’, sets out a bunch of contract terms, usually in arcane legalese, that describe certain elements of the relationship. Parts of that ‘traditional contract’ can be automated and delegated to software. However, once concluded, the traditional legal contract usually sits in one silo, and the software code is developed and sits in another silo, completely divorced one from the other.

The evolution of research and software tools has permitted the so-called Ricardian contract to function as a bridge between these silos. Based on the work of Ian Grigg, a Ricardian contract is conceived as a single document that has a number of elements that permit it (1) to function as a “contract” in the way the law would recognize a contract, so the thing has legal integrity, (2) to be readable by humans, in legal prose, (3) to be readable by software, like software reads a database or a input fields, (4) to be signed digitally, and (5) to be integrated with cryptographic identifiers that imbue the transaction process with technical integrity and verifiability. This is where blockchain or distributed ledger technology comes in handy.

The document should be readable by both humans and machines. It integrates the ‘traditional contract’ with the ‘smart contract’, since the elements or parameters that can be automated and implemented by software are read into the code straight from the contract terms.

Can this form the basis for software developers and lawyers to play in the same sandbox?

There are a number of developments in this arena where “legal” and “software” overlap, and Ricardian contracts are merely one iteration of this concept: for more background, Meng Wong’s presentation on Computable Contracts is a must-see.  His Legalese contracts are intended to allow legal terms and conditions to be represented in machine-understandable way, with or without a blockchain deployment. OpenLaw is another version of this approach : blockchain-enabled contracts that delegate certain functions to software. There are a whole range of options and variations of this.

In theory, this sets up an “Internet of Agreements” system that is designed to execute deals and transactions automatically with distributed ledger ecommerce technology through interwoven contracts and software across disparate platforms.

How far away is this legal-techno-dream?

For some applications, particularly in financial services, it’s much closer. Versions of these technologies are being beta-tested and implemented by global banks.  Since many of these implementations will be between entities in back rooms of the financial services industry, they will be invisible to the average consumer.  For many sectors – let’s say for example, the development of a full-stack land transfer technology – where smart contracts have to interface with existing immovable legal or institutional structures, this is a long way off.

 

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QuadrigaCX and the Missing Millions: A Crypto Cautionary Tale

By Richard Stobbe

For those who want blockchain-enabled cryptocurrencies to be deployed in mature, mainstream industry sectors (energy, insurance, financial services), it doesn’t help to have headlines like “How crypto exchange QuadrigaCX lost access to $190 million of customers’ money” (from Global News), or “Crypto CEO Dies Holding Only Passwords That Can Unlock Millions in Customer Coins” (that one from Bloomberg).

But let’s face it: those headlines appear to capture the essence of the current cloud of uncertainty that shrouds QuadrigaCX, a well-known Vancouver-based cryptocurrency exchange.

The company recently filed for creditor protection in a Nova Scotia court, after the reported sudden death of founder and CEO Gerald Cotten.  From reports of the company’s court filings, Mr. Cotten died with the recovery codes to the offline “cold storage” vaults containing access to customers’ cryptocurrency assets.

On February 5, 2019, the Nova Scotia court granted bankruptcy protection under the CCAA (Companies’ Creditors Arrangement Act) and appointed Ernst & Young as monitors to investigate the accessibility of any funds to reimburse the approximately 115,000 customers. A 30-day stay of proceedings was ordered, effectively shielding the company from further lawsuits as this investigation continues.

If no-one knows the access codes aside from the deceased founder, then the offline accounts, which reportedly hold millions of dollars worth of crypto assets, may be irretrievably lost.

What does this mean for the adoption of cryptocurrencies or other tokens that are powered by the same blockchain technologies that underpin BitCoin?

Cryptocurrency had a spotty reputation to begin with, and the current speculation and various internet-fuelled conspiracy theories surrounding QuadrigaCX do not give a person confidence.  You mean, I can take a risk by buying cryptocurrency hoping it’s going to rise in value, and then face the added risk that even if the value does increase, the multimillion dollar asset might suddenly disappear because one person held all the passwords? Apparently, yes.

Can one also lose millions in highly regulated industries by buying stocks or investing with Ponzi schemes?  Undoubtedly, yes. Somehow, the loss of traditional dollars does not shake investor confidence the way the collapse of QuadrigaCX might shake consumer confidence in BitCoin.

Maybe that’s because the history of crypto is a blip when compared to fiat currency. And maybe it’s because banks and others who handle consumer investments are subject to complex regulation, insurance requirements, registration requirements, securities commissions, financial superintendents, regulatory reporting and compliance obligations, and a system of censure in the case of a breach of those regulations.  After all, the QuadrigaCX exchange was not so much an investment vehicle; it was more akin to a bank.  When banks fail, confidence is understandably shaken.

The real cautionary tale may be that a mature and measured approach to cryptocurrency regulation may help instill confidence in the sector, and this may help pave the way for the strategic use of distributed-ledger technologies that are associated with cryptocurrency coins and tokens.

 

Calgary – 07:00 MST

 

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Smart Contracts (Part 3): Opportunities & Limits of Smart Contracts

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By Richard Stobbe

In Part 1 (Can Smart Contracts Really be Smart?), we looked at “smart contracts”, what might be called “programmatically executed transactions” or PETs. This concept refers to computers programmed to automatically executes certain transaction steps, provided certain conditions are met, illustrated by the vending machine analogy.

In Part 2 (Smart Contracts (Part 2): Intermediaries? We Don’t Need No Stinkin’ Intermediaries!), we pointed out that users of private shared (DLT) ledger systems must be aware of the attendant costs of switching to new intermediaries, and the legacy costs of continued dependence on old intermediaries.  To borrow a phrase from The Who, “Meet the new boss… same as the old boss.”  In other words, don’t be fooled into thinking that intermediaries will disappear; they merely change. Managing the intermediaries remains a challenge.

In this final instalment of our series, we look at the opportunities and limits of smart contracts. I want to emphasize a few points:

  1. Placing Smart Contracts in Context: First, it’s worth emphasizing that smart contracts or PETs are merely one element of the whole DLT permissioned ledger ecosystem. The smart contract enables and implements certain important transactional steps, but those steps fit within the broader context of a matrix of contractual relations between the participants. Many of those relationships will be governed by “traditional” contracts. This traditional contract architecture enables the smart contract workflow.  The take-home point here is that traditional contracts will remain a part of these business relationships, just as intermediaries will remain part of business relations. Let me provide an example: the Apple iTunes ecosystem contains a number of programmatically executed transactions. When a consumer chooses a movie rental, a song download or a music subscription, the order fulfilment and payment processing is entirely automated by software. However, users cannot participate in that ecosystem, nor can Apple obtain content from content producers, without an overarching set of traditional contracts: end user license agreements, royalty agreements, content licenses, agreements with payment providers. Those traditional contracts enable the PET, just as the PET enables the final transaction fulfillment.
  2. Changing Smart Contracts:  Once a PET is set loose, we think of it as a self-actuating contract: it cannot be changed or altered or stopped by humans.  The inability of humans to intervene is seen as a positive attribute – it removes the capriciousness of individuals and guarantees a specific pre-determined machine-driven outcome. But what if the parties decide (humans being humans) that they want the contract to be suspended or altered? Where humans control the progression of steps, they can decide to change, stop or reverse at any point in the workflow. Of course we’re assuming that this is a change or reversal to which both parties agree. But what is the mechanism to hit “pause”, or change a smart contract once it’s in midflight?  That remains a challenge of smart contracts, particularly as PET workflows gain complexity using blockchain-based technologies.
    • One solution may be found within those traditional contracts, which can be drafted in such a way that they allow for a remedy in the event of a change in circumstances to which both sides agree, even after the PET has started executing the steps it was told to execute. In other words, the machine may complete the tasks it was told to do, but the humans may decide (contractually) to control the ultimate outcome, based on a consensus mechanism that can override the machine after the fact.  This does have risks – it injects uncertainty into the final outcome. It also carries benefits – it adds flexibility to the process.
    • Another solution may be found in the notion of “hybrid contracts” which are composed in both machine-readable form (code) and human-readable form (legal prose).  This allows the parties to implement the consensus using a smart contract mechanism, and at the same time allows the parties to open up and change the contract terms using more traditional contract methods.
  3. Terminating Smart Contracts:  Finally, consider how one party might terminate the smart contract relationship. If the process is delegated to self-executing blockchain code, how can the relationship be terminated?  Again, where one party retains the ability to unilaterally terminate a PET, the final outcome is uncertain, and one of the chief benefits of smart contracts is lost. Too much flexibility will undermine the integrity of the process.  On the other hand, too much rigidity might slow adoption of certain smart-contract workflows, especially as transaction value increases. A multilateral permissioned mechanism to terminate the smart contract must be considered within the system. Participants in a smart contract permissioned ledger will also have to consider what happens with the data that sits on the (permanent, immutable) ledger after termination. When building the contract matrix, consider what is “ledgerized”, what remains in non-ledgerized participant databases, and what happens to the ledgerized data after contract termination.

 

If you need advice in this area, please get in touch with our Emerging Technology Group.

 

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Cryptocurrency Decision: Enforcing Blockchain Rights

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By Richard Stobbe

A seemingly simple dispute lands on the desk of a judge in Vancouver, BC. By analogy, it could be described like this:

  • A Canadian purchased 530 units of foreign currency #1 from a Singapore-based currency trader.
  • By mistake, the currency trader transferred 530 units of currency #2 to the account of the Canadian.
  • It turns out that 530 units of currency #1 are worth $780.
  • You guessed it, 530 units of currency #2 are worth $495,000.
  • Whoops.
  • The Singaporean currency trader immediately contacts the Canadian and asks that the currency be returned, to correct the mistake.

Seems simple, right? The Canadian is only entitled to keep the currency worth $780, and he should be ordered to return the balance.

Now, let’s complicate matters somewhat. The recent decision in Copytrack Pte Ltd. v Wall, 2018 BCSC 1709 (CanLII), one of the early decisions dealing directly with blockchain rights, addresses this scenario but with a few twists:

Copytrack is a Singapore-based company which has established a service to allow copyright owners, such as photographers, to enforce their copyrights internationally. Copyright owners do this by registering their images with Copytrack, and then deploying software to detect instances of online infringement. When infringement is detected, the copyright owner extracts a payment from the infringer, and Copytrack earns a fee.  This copyright enforcement business is not new. However, riding the wave of interest in blockchain and smart contracts, Copytrack has launched a new blockchain-based copyright registry coupled with a set of cryptocurrency tokens, to permit the tracking of copyrights using a blockchain ledger, and payments using blockchain-based cryptocurrency.  Therefore, instead of traditional fiat currency, like US dollars and Euros, which is underpinned by a highly regulated international financial services industry, this case involves different cryptocurrency tokens.

When Copytrack started selling CPY tokens to support their new system, a Canadian, Mr. Wall, subscribed for 580 CPY tokens at a price of about $780.  Copytrack transferred 580 Ether tokens to his online wallet by mistake, enriching the account with almost half a million dollars worth of cryptocurrency.  Mr. Wall essentially argued that someone hacked into his account and transferred those 530 Ether tokens out of his virtual wallet.  Since he lacked control over those units of cryptocurrency, he was unable to return them to Copytrack.

The argument by Copytrack was based in an old legal principle of conversion – this is the idea that an owner has certain rights in a situation where goods (including funds) are wrongfully disposed of, which has the effect of denying the rightful owner of the benefit of those goods.  With a stretch, the court seemed prepared to apply this legal principle to intangible cryptocurrency tokens, even though the issue was not really argued, legal research was apparently not presented, the proper characterization of cryptocurrency tokens was unclear to the court, the evidentiary record was inadequate, and in the words of the judge the whole thing “is a complex and as of yet undecided question that is not suitable for determination by way of a summary judgment application.”

Nevertheless, the court made an order on this summary judgement application. Perhaps this illustrates how usefully flexible the law can be, when it wants to be. The court ordered “that Copytrack be entitled to trace and recover the 529.8273791 Ether Tokens received by Wall from Copytrack on 15 February 2018 in whatsoever hands those Ether Tokens may currently be held.”

How, exactly, this order will be enforced remains to be seen. It is likely that the resolution of this particular dispute will move out of the courts and into a private settlement, with the result that these issues will remain complex and undecided as far as the court is concerned. A few takeaways from this decision:

  1. As with all new technologies, the court requires support and, in some cases, expert evidence, to understand the technical background and place things in context. This case is no different, but the comments from the court suggest something was lacking here: “Nowhere in its submission did Copytrack address the question of whether cryptocurrency, including the Ether Tokens, are in fact goods or the question of if or how cryptocurrency could be subject to claims for conversion and wrongful detention.”
  2. It is interesting to note that blockchain-based currencies, such as the CPY and Ether tokens at issue in this case, are susceptible to claims of hacking. “The evidence of what has happened to the Ether Tokens since is somewhat murky”, the court notes dryly. This flies in the face of one of the central claims advanced by blockchain advocates: transactions are stored on an immutable open ledger that tracks every step in a traceable, transparent and irreversible record. If the records are open and immutable, how can there be any confusion about these transfers? How do we reconcile these two seemingly contradictory positions?  The answer is somewhere in the ‘last mile’ between the ledgerized tokens (which sit on a blockchain), and the cryptocurrency exchanges and virtual wallets (using ‘non-blockchain’ user-interface software for the trading and management of various cryptocurrency accounts). It may be infeasible to hack blockchain ledgers, but it’s relatively feasible to hack the exchange or wallet. This remains a vulnerability in existing systems.
  3. Lastly, this decision is one of the first in Canada directly addressing the enforcement of rights to ownership of cryptocurrency. Clearly, the law in this area requires further development – even in answering the basic questions of whether cryptocurrency qualifies as an asset covered by the doctrines of conversion and detinue (answer: it probably does). This also illustrates the requirement for traditional dispute resolution mechanisms between international parties, even in disputes involving a smart-contract company such as Copytrack. The fine-print in agreements between industry players will remain important when resolving such disputes in the future.

Seek experienced counsel when confronting cryptocurrency issues, smart contracts and blockchain-based rights.

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Smart Contracts (Part 2): Intermediaries? We don’t need no stinkin’ intermediaries!

By Richard Stobbe

In Part 1 (Can Smart Contracts Really be Smart?), we looked at smart contracts, and how “smart” they really are – if you need some background, start there.

Smart contracts (or “programmatically executed transactions”) have been touted as a possible solution to a range of business problems, as well as the death knell for intermediaries. By deploying DLT on a private shared ledger, the power of the blockchain is harnessed to leapfrog past traditional intermediaries. This enables more efficient transactions, free from the constraints and incremental expenses imposed by banks, auditors, governments, regulators, lawyers, accountants and others who take a pound of flesh from the transaction workflow.

By shuffling off the intermediaries, the smart contract is free to move efficiently in the economy, saving time and money for participants. To adapt a phrase from the Humphrey Bogart vehicle The Treasure of Sierra Madre: Intermediaries? We don’t need no stinkin’ intermediaries! At least… that’s the current hope for blockchain-powered smart contracts.

Are there any concerns with this vision?  One of the current constraints in the smart contract ecosystem is the gap between tokenized indicators of value on the ledger, and the almighty dollar. Or the euro. The pound sterling. The yen. The yuan. Or whatever fiat currency you may wish to use to transact business in the real world. As much as we’d like to envision a post-money world, the reality is like the QWERTY keyboard. Or the Microsoft operating system. It may not be the best. But it’s got massive market penetration. In the case of the QWERTY keyboard, we’ve been stuck with it since the 1800s. In the case of  money as a currency, since the 11th century.

Ten centuries of market inertia is not easy to shift.

That gap – between the digital representations of value, and real world money – must be efficiently closed for smart contracts to gain widespread traction. Maybe eventually we’ll move past “money” in the way voice-activation moves past the QWERTY keyboard. But that’s a long way off.

In the meantime, smart contracts powered by DLT will have to peg a tokenized “dollar” to a real dollar in the sense that the token is backed by the dollar: this is the concept of a fiat-collateralized digital representation of a real dollar, or a stablecoin.  “You deposit dollars into a bank account and issue stablecoins 1:1 against those dollars.” This has obvious advantages over a crypto-collateralized coin, which suffers from wildly unpredictable price fluctuations. A stablecoin is simple and resistant to price-volatility. However, “It requires centralization in that you have to trust the custodian, so the custodian must be trustworthy. You’ll also want auditors to periodically audit the custodian, which can be expensive.”

But wait, we already have a trusted centralized custodian of collateralized digital representations of value: It’s called a bank!

As noted in Blockchain and Shared Ledgers: “You could say that the technology service provider is replacing the traditional third party intermediary on a private shared ledger – in the way that they are maintaining and operating the shared ledger technology systems …” (My emphasis).

To put this another way, does this mean software companies are the new banks? The concern here is that users of private shared ledgers will not shuffle off intermediaries; rather they’ll swap one intermediary for another.

I’m just as happy as the next guy to grumble about banks, but they will likely be with us for a while, complete with the government regulatory environment, the industry watchdogs, the legacy payment rails, and centuries of inertia. I’m not saying the banks can’t be disrupted. But the disruptors will also take their pound of flesh.

Ok, maybe we do need intermediaries after all. Users of private shared ledger systems must be aware of the attendant costs of switching to new intermediaries, and the legacy costs of continued dependence on old intermediaries.  Where smart contracts on private shared ledger platforms can efficiently bridge the gap with traditional payment ecosystems , there will be some fruitful opportunities.

 

Looking for legal advice on smart contracts, DLT and private ledger consortium? Contact the Field Law Emerging Technology Group.

Calgary – 07:00 MT

 

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