The US Commodity Futures Trading Commission (CFTC) has tried to define what smart contracts are, one of the most interesting innovations of the blockchain.
The agency has published a 32-page report analysing the uses, risks and challenges of blockchain-based smart contracts.
The aim of the report is to be a training tool on emerging innovations in the fintech sector.
However, the purpose of the report is not to define the CFTC’s position in this regard, in fact, the premise reads: “The CFTC does not endorse the use or effectiveness of any of the financial products or technologies in this presentation”.
In addition, it is stressed that the agency cannot and will not provide legal advice because it has no independent authority or decision-making power in this field.
The CFTC defines smart contracts as a set of encrypted computer functions that can make self-executing actions based on whether criteria are met or not.
The agency also points out that a smart contract is not legally binding.
Three main attributes of a smart contract are identified:
- can authenticate counterparty identities, ownership of assets and legal claims
- can access or refer to external information or data to trigger actions
- can automate execution processes.
In the section where the report mentions external sources, a 2014 statement by Ethereum co-founder Vitalik Buterin has been cited:
“A smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated”.
According to the CFTC, smart contracts have several potential benefits, such as standardization, security, cost-effectiveness, speed, execution certainty, regulatory and business innovation.
The potential risks identified are those related to operations, technology, fraud and manipulation.
The document also reports possible hypothetical cases of use and very general examples of prohibited activities.
Reading the document, it is clear that there has been a real in-depth study behind it and this shows a clear CFTC interest in these technologies.