On August 3, 2017, the International Swaps and Derivatives Association (“ISDA”) and Linklaters LLP released a whitepaper titled “Smart Contracts and Distributed Ledger – A Legal Perspective.” The whitepaper sets out to define the terms “smart contract” and “distributed ledger,” to analyze their applications to the derivatives industry, and to highlight potential legal issues raised by these new technologies.  Of particular interest is the inherent nature of contractual elements – whether they define conditional logical statements (“operational clauses”), or whether they define a broader legal relationship between the parties (“non-operational clauses”).  An example of an operational clause would include a provision that defines the amount of funds to be paid to one party based on a calculated amount, applicable rate, and duration.  A non-operational clause would include a provision specifying the law that governs in the event of a dispute.

The whitepaper proposes a series of distinctions in order to clarify discussions around smart contracts – most notably between “smart contract code” (programs that automatically execute certain tasks but are not contracts) and “smart legal contracts” (representation and execution of the elements of a contract via software).  Also relevant are distinctions between “external” smart contracts (in which smart contract code provides a means of automatic performance; a traditional legal agreement is used to bind the parties) and “internal” smart contracts (in which performance and the operational clauses of the agreement are built into the code, with a traditional agreement covering the non-operational aspects).  The whitepaper further discusses various areas in which smart legal contracts could be beneficial to the derivatives industry (e-signing and the use of so-called oracles to ease execution, among other things), and where they have difficulty replicating the functionality of a traditional agreement (representing concepts like jurisdiction and single agreement provisions).

The paper concludes that smart contract and distributed ledger technology have great potential for use in derivatives products and ISDA documentation, but that there must be industry-wide coordination if this potential is to be realized.  ISDA’s Market Infrastructure and Technology Oversight Committee intends to facilitate such development, and other working groups have been set up to coordinate workstreams and standards.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Mike Nonaka Mike Nonaka

Michael Nonaka is a partner in the firm’s Financial Institutions practice group. He represents banks and other financial institutions on a wide variety of bank regulatory, enforcement, legislative and policy issues.  Mr. Nonaka also is co-chair of the firm’s Fintech Initiative and works…

Michael Nonaka is a partner in the firm’s Financial Institutions practice group. He represents banks and other financial institutions on a wide variety of bank regulatory, enforcement, legislative and policy issues.  Mr. Nonaka also is co-chair of the firm’s Fintech Initiative and works with a number of banks, lending companies, money transmitters, payments firms, technology companies, and service providers on innovative technologies such as big data, blockchain and related technologies, bitcoin and other virtual currencies, same day payments, and online lending.

Photo of David Stein David Stein

David Stein advises clients on credit reporting, financial privacy, financial technology, payments, retail financial services, and fair lending issues. He assists a broad range of financial services firms, consumer reporting agencies, financial technology companies, and their vendors with regulatory, compliance, supervision, enforcement, and…

David Stein advises clients on credit reporting, financial privacy, financial technology, payments, retail financial services, and fair lending issues. He assists a broad range of financial services firms, consumer reporting agencies, financial technology companies, and their vendors with regulatory, compliance, supervision, enforcement, and transactional matters.

Mr. Stein has significant experience advising clients on compliance with the FCRA, GLBA, ECOA, EFTA, E-Sign Act, TILA, TISA, FDCPA, Dodd-Frank Wall Street Reform and Consumer Protection Act, and FTC Act, as well as state financial privacy laws. Mr. Stein is a member of the firm’s fintech and artificial intelligence initiatives and works with clients on issues related to cutting edge technologies, such as blockchain, virtual currencies, big data and data analytics, artificial intelligence, online lending, and payments technology.

Mr. Stein previously served in senior regulatory, policy-making, and management positions at the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve Board (FRB). He played a significant role in developing regulations and policy on credit reporting, financial privacy, retail payments systems, consumer credit, fair lending, overdraft services, debit interchange, unfair or deceptive acts or practices, and mortgage origination and servicing. Mr. Stein draws upon his government experience in representing clients before the CFPB, the FRB, and other regulatory agencies and leverages his insights into the regulatory process to provide clients with practical, actionable advice.