In August, we reported on the challenges and opportunities discussed at the roundtable summit on smart contract templates. The second summit on 16 November was again held simultaneously in London and New York, and hosted by Barclays and blockchain technology company R3CEV LLC, which now leads a consortium of around 70 global financial services companies. There were many experienced attendees, including investment banks, ISDA, FIA, and UCL’s computer science unit, amongst others.
Smart contracts promise much: they simplify and automate, increase standardisation, offer electronic execution, provide immediate integration of contracts into data pools, and self-execute. Easier said than done; how do you simplify complex multilateral agreements?
Inevitably, much of the language and discussion remains intellectual and techy, so we’ve pulled out some of the key themes from this summit. For those that want to get into the detail the presentations from the event are now publically available
The requirements for smart legal agreements?
The first research paper by Barclays and UCL on the foundations, design landscape and research directions of smart contract templates, looked at nailing down the key requirements for smart legal agreements to become reality:
- methods for creating and editing
- standard formats for storing, exchange and retrieval
- methods to add signatures
- methods to link legal prose and smart contract code
- methods to engage with a dispute resolution process.
Standards, interoperability & avoiding unnecessary variation
Interoperability is still (and will continue to be) an ongoing theme. The standardisation of language, templates and underlying tech is still a long way off and there is plenty of variation in the markets for various financial products (derivatives, trade finance, etc). The issues are ultimately business (not academic) problems, so standardisation will therefore require a change in business culture, as well as the legal framework with the ultimate form of smart contracts decided by the community.
There are now discussions about whether we can have multiple standards - to reflect multiple financial products – connected by an interchange format. ISDA is already engaged in respect of OTC derivatives and the FIA is putting smart contracts on the 2017 agenda. And more wide-spread collaboration between 20-odd trade associations is also on the horizon.
Lawyers need to engage (and disrupt themselves?)
As for legal prose templates for particular financial products, law firms have been heralded as a great source - but, before we can glow with pride, it was noted that we’re still far too slow and cumbersome, and need to engage on developing and rationalising the legal prose aspects to match developments on the code developer side. Though, we have (rightly) been warned to leave our precious egos at the door when it comes to pushing style over substance in potential templates.
The evolving role of discretion and data vendors
Discretion is still a concern, especially in the multi-lateral context of cleared derivatives; it has been called ‘the enemy of smart contracts’. Oracles are a popular potential solution to act as a "single source of truth" and could perhaps be built into the core processing of smart contracts to ensure automation, especially when combined with AI (although this is still the realm of future tech). But there are questions as to whether the use of oracles perhaps unnecessarily centralises data sources which may introduce legacy and cost issues down the line. The challenge here is for data vendors to collaborate.
Approaches to dispute resolution
Dispute resolution wasn’t discussed in detail during the first conference but was a major part of the second and the drive was that this should be considered in parallel with questions of enforceability and determining appropriate templates.
There were strong reminders (e.g. from the Ethereum DAO) that a smart dispute resolution mechanism needs to be built into the contracts. Potential options included negotiation, mediation, arbitration and the courts (in order of increasing formality, time, cost and complexity). Ultimately, arbitration (e.g. by the Electronic Data Interchange, etc) is seen as a natural fit for borderless and automated contracting thanks to the availability of expert tech knowledge and reduced costs compared to the courts.
2017 is the year to make things real
A phenomenal amount has already been accomplished since the first summit in June. Though much remains to be done:
- Following the first Barclays/UCL research paper, a second is expected to be released soon and there is a need to expand the range of research papers, both on developing code and dealing with outstanding conceptual issues.
- Explore evolving Financial products Markup Language (FpML), including legal prose and in parallel with code.
- Push for better collaboration across financial services companies, trade bodies, data vendors, ratings agencies and lawyers with emphasis on standardisation. Banks should catalyse a lawyer forum to containerise terms (and leave gold-plating at the door!).
- Explore the use of oracles and aggregators of feeds.
- Work needs to be done to explore whether and how code can replace legal prose (for example literate script to embed code in text).
- It may be useful to have a straw man forum, user group and mock court with use cases to help smart contracts work streams mature.
- New tech will need to run alongside the old for quite some time, and we need to find points for interaction between them.