In a newly published "Primer on Smart Contracts," LabCFTC, a CFTC FinTech initiative, described risks, challenges and governance issues related to the new technology.
LabCFTC defined a smart contract as a "set of coded computer functions" that allows "self-executing computer code to take actions at specific times and/or based on reference to the occurrence or non-occurrence of an action or event."
LabCFTC provided several examples of smart contracts, including a purchase from a vending machine, insurance against a weather event, and a credit default swap.
LabCFTC also discussed a broad range of legal frameworks that apply to smart contracts and how, depending on the facts and circumstances, a smart contract may be subject to CFTC regulations.
LabCFTC highlighted the efficiency and innovation that smart contracts could facilitate in the derivatives markets, but also warned of several challenges. LabCFTC warned that (i) smart contracts and the sources of information they reference may be manipulated for fraudulent purposes, and (ii) smart contract execution is subject to a variety of operational, technical and cybersecurity risks. LabCFTC asserted that good governance standards for smart contracts may help to address these challenges.
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