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Smart Blockchain contracts subject to financial laws, says CFTC Primer

One of the leading financial regulators in the United States, the Commodity Futures Trading Commission (CFTC), has published its second guide to understanding smart contracts, recalling that technology is covered by financial rules.

Announced Tuesday, the primer is part of the fintech initiative of the LabCFTC agency. Described as an "educational tool" rather than an official policy, it covers the basics of smart blockchain contracts including their history, characteristics, case studies, potential use cases and perceived risks.

Claiming that the concept of an intelligent contract was discovered about 20 years ago by the computer scientist Nick Szabo, the CFTC says that the self-executed programs are only intelligent as the "information feed that receives and the machine code that directs it".

The agency states that smart contracts can offer the benefits of reduced transaction costs and time, reduced counterparty and settlement risks, and increased security. At the same time, however, they present challenges, including operational, technical and information security risks, as well as the potential for fraud, manipulation, reduction of transparency and accountability, says the CFTC.

On the subject of regulation, the CFTC emphasizes that smart contracts are subject to applicable laws, including the rules on the Commodity Exchange Act (CEA) and anti-money laundering (AML), depending on their application or the type of product they are connected to.

"The laws and regulations in force apply in the same way regardless of what form a contract takes in. Contracts or constituents of contracts written in the code are subject to otherwise applicable laws and regulations," reads the basic document.

To protect investors and their capital, the agency said, will ensure that all transactions are subject to the CEA.

The LabCFTC initiative was launched in May of last year and the first was released in October 2017 on virtual currencies, it covers the basics of technology, as well as a series of use cases.

The guide comes just over a month after Brian Quintenz, a CFTC commissioner, warned that coding smart contracts could be held accountable if they consciously use technology to create predictive "predictive contracts".

CFTC image through Shutterstock

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