The Commodity Futures Trading Commission (CFTC) released a 32-page primer breaking down the uses, risks and challenges of blockchain-based smart contracts.
The report, a detailed educational resource, accelerates the learning curve for US regulators, policymakers and investors.
As defined by the CFTC, smart contracts are a set of coded computer functions that can self-execute actions based on criteria being met or not met. A smart contract does not have to be a legally binding contract.
There are three main attributes of a smart contract.
- Can authenticate (counter-) party identities, the ownership of assets and claims of right
- Can access or refer to outside information or data to trigger action(s)
- Can automate execution processes
The report goes on to explain how blockchain and distributed ledgers are platforms on which smart contracts can be stored and distributed.
The authors reference additional viewpoints on the nature of smart contracts, citing Ethereum co-founder Vitalik Buterin.
“A smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.”
The CFTC’s mission is “to foster open, transparent, competitive and financially sound markets.” It lists several potential benefits of smart contracts.
- Economy and speed
- Business innovation
- Regulatory innovation
Blockchain technology, particularly in tandem with smart contracts, is set to reshape commerce, logistics and business transactions by eliminating a variety of middlemen. The appeal of new blockchains is largely driven by solutions that can eliminate intervention, rooting out cheaters, skimmers and scammers who try to rig systems, transactions and agreements.
Potential risks can range from the technical to operational to cybersecurity to fraud and manipulation.
Smart contracts can use cryptocurrencies to transfer digital assets and programmable money.
CFTC chairman J. Christopher Giancarlo has been generally positive about blockchain technology and cryptocurrencies, taking a “do no harm” approach.
You can check out the full report here.