Citation[]
International Swaps and Derivatives Association ("ISDA") & Linklaters LLP, Smart Contracts and Distributed Ledger–A Legal Perspective (Aug. 2017) (full-text).
Overview[]
Smart contracts and distributed ledger technology (DLT) are increasingly being seen as a way for the derivatives industry to realise operational efficiencies and cut costs. With these new technologies potentially transforming how derivatives are executed and managed through the entire lifecycle, it seems the derivatives market is on the cusp of significant modernisation.
But these technologies are at the relatively early stage of development, and there is still a lack of agreement on what a smart contract is, what role it can play in the derivatives market, and how it might interact with existing legal standards and documentation. Could a smart contract ultimately replace an existing legal contract in its entirety, or will it only automate the execution of certain actions specified within the contract?
This paper sets out what smart contracts and DLT are, how they might be used in a derivatives context, and what the legal considerations are. Key points include:
- There is a difference between smart contract code, which refers to code that is designed to execute certain tasks, and a smart legal contract, which refers to elements of a legal contract being represented and executed by software.
- Certain operational clauses within legal contracts lend themselves to being [[automated]. Other non-operational clauses — for instance, the governing law of a contract — are less susceptible to being expressed in machine-readable code. Some legal clauses are subjective or require interpretation, which also creates challenges.
- A possible near-term application of a smart contract is for the legal contract to remain in natural legal language, but for certain actions to be automated via a smart contract.
- This would require those actions — for instance, payments and deliveries — to be represented in a more formal, standard way within the ISDA Definitions, enabling them to be read by machines.
- Transaction data could be held on a permissioned, private distributed ledger that would be available to regulators. This would ensure there is a single, shared representation of each trade.
- Industry wide standards are required to ensure smart contracts are interoperable across firms and platforms. ISDA is working to develop these standards.