Questions are still being asked around the ability of smart contracts to fulfil financial transactions.
“This is a big thing, it is much more difficult than you might think,” said Dr Christopher Clack, associate professor in the department of computer science, UCL, on a panel at the International Swaps and Derivatives Association (Isda)'s technology forum in London this week. “We have seen examples of legal text containing embedded parameters, those parameters can then pass information down to the code, but then the code does something with that data, and what it is doing is enacting some of the provisions in the legal contract. But how do we know that it is enacting those things in the right way? In a way that is faithful to the contract? That turns out to be pretty difficult.
“Trying to figure out whether code is faithful to the contract requires you to know first of all what does the code mean? What is it really doing? How do actually set out formally what that code is really doing? And then what does the contract mean? If we look at the legal agreement what do all of those provisions really mean? So, this is really getting into the area of semantics.”
Isda will set out standard-form drafting options for the most common clauses and clause variants for contracts in its Taxonomy and Clause Library that will be completed for the Isda Master Agreement by the end of this year. That will be expanded upon in early 2020 to include the association's collateral documentation.
But Clack said there are still issues to be resolved around the timing in smart contracts.
“There is this fundamental problem between scientists and lawyers [around time]. Scientists are pretty literal about an interpretation about what time is, and we have this idea that there is this linear sequence of events,” said Clack.
“But if it is a lawyer, and you ask, ‘did the payment happen after the deadline?’ ‘Well, it depends.’ Ok, well it may have happened a nanosecond afterwards but really from a legal perspective that would be an unreasonable thing, you wouldn’t actually say that that happened too late. It might be an hour late so is that still reasonable? Or is it material, could something have happened in between in that time that would impact one part or another? The more we go into understanding how lawyers understand time, the more difficulty we find.”
For Dr Florian Herzog, chief technology officer and founder of Deon Digital there are still fundamental problems around applying the correct definition to the technology.
“There is still this huge confusion around smart contracts and self-executing contracts, with smart being in the sense of analysable and machine representable. So, you can have something that is not self-executing and still a smart contract being machine representable,” he said.