LabCFTC, the FinTech engagement arm of the Commodity Futures Trading Commission (CFTC), this week released a primer on smart contracts that provides examples of contract logic, describes a decentralized blockchain, and details applications. The primer also highlights potential operational and regulatory challenges and risks.

The primer acknowledges that a smart contract potentially can be a binding legal contract subject to a variety of legal frameworks. Among them are the CFTC, federal and state securities, tax, and money transmission laws and regulations, the Uniform Commercial Code (UCC), Uniform Electronic Transactions Act (UETA), Electronic Signatures in Global and National Commerce Act (ESIGN Act), the Bank Secrecy Act, the USA Patriot Act, and other Anti-Money Laundering (AML) laws and regulations.

The primer cautions that derivatives contracts, including smart contracts on a blockchain, must not:

  • Perpetuate or effect fraud or manipulation (e.g., through nefarious code, backdoors, kill switches, or solicitation fraud);
  • Be traded on or processed by a facility that is not appropriately registered;
  • Violate the CEA or CFTC regulations, including:
      • Disruptive trading practices (e.g., spoofing);
      • Failing to maintain records or reporting violations; or
      • Failing to supervise appropriately or satisfy financial integrity requirements.
  • Be traded or executed by individuals or firms that are required to b registered with the CFTC but are not and do not have an exception or exemption from registration.
  • Violate the Bank Secrecy or USA PATRIOT Act.
  • Additionally, the primer highlights operational risks such as forks, operational failure, and poor governance, among others. The CFTC also mentions specific technical and cybersecurity risks.

The primer is the second educational piece released by LabCFTC. The first detailed virtual currencies and was released last October. The primer includes a disclaimer that it is not intended to be the official policy or position of the CFTC. LabCFTC’s mission is the focal point for the CFTC’s efforts to promote FinTech innovation and serves as a hub for the agency’s public engagement with the FinTech community, and additional resources are located here.

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