It’s well known that blockchain technology decentralizes decision making and fosters decision by consensus.
A big part of that is “smart contracts,” a revolutionizing aspect of this technology that automates trust and takes greater steps towards transparency, which can help with execution of supplier payments and other transactions.
Traditionally, every relationship in the financial world is bounded by legal contracts, which are executed by both parties based on a defined/expected business event. Each of us sign these various contracts in daily life for services we consume from a service provider. Most of the time we blindly sign T&Cs (which are foundation agreements and legally binding) without reading through in detail. Simply put, the end consumer has no great wisdom to interpret them effectively.
Smart contracts have been defined and interpreted differently by various communities. In the technical community, a smart contract is like a self-executing code in a given event. An example would be “Send XXX GBP to contractor on last day of month.” This similar self-executing code ability is available across existing technologies like Oracle, where Trigger objects / smart agents are executed on various events. Hence we can call this smart contract code.
In the legal community, smart contracts are known as smart legal contracts, where two or more counterparties have agreed for execution of legal terms and reflect those across their systems. They are obliged to stand by these.
One important thing to note is that these smart contracts are executed on blockchain and, inherently, they adopt the characteristics of permanence – i.e. no-reversible. This makes a compelling case for legal contracts to adopt the smart contract technology. Smart legal contracts would contain a combination of smart contract code and more traditional legal language. For instance, a supplier enters into a smart legal contract with a retailer where payment terms are defined in a code and are self-executed when a goods delivery is made but the retailer will insist on the inclusion of an indemnification clause in events of faulty material/late delivery (legal wordings). Now such a scenario can’t be coded and the matter has to be settled in court in the event of litigations.
While smart contracts sound like the answer to every problem, their real word enforcement and adoption in the legal system would be critical for its success. There’s also a couple of other issues to consider, including establishing liability in a decentralized world and flexibility where contract terms are evolved and matured over a period in business.
In the future we may see that business parties will be automating and entering in smart contracts with each other, which does not mean that the legal system would completely be eliminated. However we can regard this technology as a step towards legal system evolution.
We can imagine that there will be prescribed and acceptable smart contracts by the legal system, within a given territory or across the globe, which are interconnected and monitored through wrapped up smart contracts. The financial industry is well-poised for smart contracts considering the former is highly regulated, and operates per given legal norms. Smart contracts can facilitate the elimination of intermediaries which were established mainly to cement the trust among contract counterparties and promote greater transparency.
Anil Awasthi is global head of retail banking for VirtusaPolaris.