Worldwide: Who Should Be Smart About Smart Contracts?

Smart contracts are digitally signed promises, which are executed automatically by software code built on blockchain technology.

But what are the features of smart contracts that make them more suitable to some sectors than others?

Smart opportunities

Smart contracts have a number of benefits, including:

  • Creating an immutable record (although there are still cyber security concerns)
  • Creating trust between parties as the contract will be automatically executed upon the conditions being met so there is no possibility of non-payment
  • Having a transparent central record, auditable by all, which again creates trust
  • Removing middle men, particularly in financial services and creative industries, and allowing peer to peer transactions
  • Very low cost of transacting which enables trades and exchanges, which would previously have been prohibitive due to the cost of effecting the transaction itself

Based on these advantages over traditional contracts, the following sectors are most likely to use smart contracts. Some already have real-world application or companies trading in that area, but the use of smart contracts is still in its infancy.

Financial services

This sector has been the early adopter of this technology, spurred on by estimates that smart contracts could reduce infrastructure costs by €13.8-18.4bn per annum by 2022 (report by InnoVenture, Santander's fund). No wonder then that major banks are piloting this technology as a way to win the battle over their unwieldy, creaking mainframe systems. Looking to trading, smart contracts could enable trades at a much smaller scale than was previously viable due to the cost of middle men and could bring efficiencies to cross-border payment systems.

Digital content

The purchase of a song or film could take place with a smart contract which uses blockchain technology to instantly divide the purchase price to pay royalties to the multiple parties entitled to receive it.

Supply chain and trade finance

Combining the use of the Internet of Things (IoT) and sensors, cargo deliveries can be verified and can trigger automatic payment through a smart contract to the purchaser. In May 2016, Wells Fargo, Commonwealth Bank of Australia and Brighann Cotton conducted the world's first interbank trade transaction using IoT and smart contracts for a delivery of cotton bales from Texas to China. Even goods which might otherwise require inspection to verify that they have been delivered in a particular condition can be verified, e.g. if temperature sensors in containers with foods which require refrigeration have been reading at the required temperature throughout the journey, then the purchaser knows that their consignment is not ruined, and there will be no insurance claim.

Provenance

For goods where identity is key e.g. diamonds or high value artwork, blockchain provides an ideal register of provenance that enables trading. Everledger is a diamond trading system to allow traders to track individual stones, identify conflict stones and have confidence that the stone being traded actually has the properties with which it is advertised.

Land transactions

The blockchain is ideally suited to keeping a record of landownership - smart contracts could then be used to buy and sell.

Government

The Estonian government is already looking to set up a blockchain for voting to reduce electoral fraud.

Machine to machine transactions

The IoT is gaining traction with sensors being embedded in bins, fridges, wearable devices and buildings. In complex infrastructure, such as smart cities, machine to machine transactions are likely to pay a key role in unlocking efficiencies for traffic management, waste management and energy management.

Challenges to going smart

Remember though, there are limitations and disadvantages to smart contracts that prevent them from becoming a direct replacement for many of the commercial contracts we use today. Here are a few challenges that can arise for different sectors.

  • Immutable record - what if a mistake is made when the record is created? How do you manage change in large projects where project plans and scope of functionality of systems is a fluid conversation
  • Transparent central record - this will not always be appropriate. Private blockchains can resolve the issue of the lack of privacy, but all parties to the blockchain will still be able to inspect the register. Any industry which processes personal data could face issues with using blockchains if the personal data is visible
  • Jurisdiction - there are rules for international contracts, but when a contract is executed in multiple locations at once on a blockchain, if there is an issue with that execution, it will be impossible to know in which country the error occurred and therefore which jurisdiction applies to tortious issues
  • Binary inputs only - a smart contract can only execute a binary yes/no action. Have the goods been delivered? Yes, then make the payment. No, then withhold payment. They cannot make subjective decisions, e.g. has a party met a reasonable endeavours obligation to obtain planning consent?

With all this in mind, it seems that contracts based on words cannot be totally dislodged and replaced by software code. However, it is still important to understand blockchain technology, how smart contracts can take advantage of that technology and who can verify that the terms translated into software are the same as those written in roman characters.

This article originally published by Financial Director in March 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
3 Oct 2017, Seminar, London, UK

Join us over breakfast for our third retail-focused seminar.

10 Oct 2017, Other, London, UK

Join us for our Real Estate Sector Next Generation networking drinks evening.

12 Oct 2017, Webinar, Birmingham, UK

Join us for an interactive evening exploring the possibilities of implementing digital construction in real life projects.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.