The current pandemic presents a unique opportunity to revitalize traditional M&A process and provisions. While we have previously addressed how traditional M&A provisions are impacted by the pandemic, this blog post will explore the key opportunity industries and corporations alike have in improving contractual processes. Specifically, through the use of blockchain technology and smart contracts.
Smart Contract 101
First proposed thirty years ago by computer scientist Nick Szabo who coined the term, smart contracts are drafted using programming languages and software and can be made legally enforceable and binding for all parties involved. In recent years, smart contracts have been used in association with blockchain platforms and technology. The blockchain platform, which acts as a type of digital ledger, ensures that the coding used to develop the contract remains well protected and executed. When code from a smart contract is copied across a new block within the blockchain, it takes the effect of executing a provision in the contract.
The use of blockchain technology will be pivotal in expanding and increasing the use of smart contracts. In a study comprised of executives surveyed across 12 countries, 80% of respondents believed that blockchain technology is "broadly scalable and will eventually achieve mainstream adoption." Prior to the pandemic, the combination of using both blockchain technology and smart contracts became increasingly popular and this will likely continue as the markets look to new and innovative platforms to weather future pandemics and global crises. Further, PricewaterhouseCoopers estimates that by 2030, blockchain technology has the potential to add $1.76trn to the global economy.
A Chance for Take-Off
For financial institutions and businesses, smart contracts offer several specific gains, including automation, self-execution and distributed access. The Financial Inclusion, Infrastructure and Access team from the World Bank's Finance, Competitiveness and Innovation Global Practice suggests that regulators, financial institutions and smart contract developers should collaborate in creating accessible smart contract products.
An increased focus on integrating smart contract technology can address newfound vulnerabilities that have emerged over the past year. For example, the pandemic resulted in several legal issues as doctrines like force majeure became a source of debate during the initial outbreak of the pandemic. The use of smart contract coding for these provisions, through codes that are preemptively added for a number of situations that may occur, can provide a greater sense of certainty and clarity for all parties involved to account for all possible hiccups and crises. This may be executed through the addition of including consequences stemming from the suspended performance or the termination of contracts.
Given the increased appetite for automating and facilitating transparent processes that can be accessed from the well-established work-from-home set-ups, smart contract technology may experience its best renaissance yet. The circumstances of the pandemic will likely create a newfound proliferation of the use of smart contracts across various financial and supply chain industries and implementation in M&A transactions.
The author would like to thank Vahini Sathiamoorthy, Articling Student, for her contribution to this legal update.
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