Associations Publish Smart Contract Primer

The Global Financial Markets Association (GFMA) and Global Digital Finance (GDF) have collaborated to publish a smart contract Primer, providing an overview of what these contracts are, and how they are being implemented in financial markets, along with proposals over how to apply existing legal and regulatory framework to mitigate risks from their use.

The bodies say the Primer “represents the broad perspectives of industry practitioners who are pioneering both research as well as the real-world implementation of distributed ledger technology (DLT) and smart contracts within business models across the globe”.

The document lays out eight principles of best practice for smart contract implementation:

1. Development and growth of internal risk and control or compliance function with appropriate resourcing;
2. Have a clear and proportionate incident response mechanism/policy;
3. Standardized requirements for smart contract audits, while working towards a template-based approach for broader smart contract standardization;
4. Ensure smart contracts are written in clear, well-documented code that is easy to understand and audit;
5. Extensively test smart contracts before deployment using various scenarios and stress tests;
6. Implement strong access controls to restrict who can modify or interact with the smart contract;
7. Integrate smart contracts with existing workflows with human intervention at critical points for added security; and
8. Agreement of contractual obligations between relevant parties.

The document also contains what the associations term “calls to action”, in the form of recommendations for the broader industry and firms therein. These are the need to prioritise the key drivers of smart contract Interoperability through technical standards, as well as developing a template-based approach to smart contract standardisation. This will require the development of the technical standards and agreement on the standardisation, as well as the creation and deployment of best practice and risk-mitigation frameworks.

The Primer also calls for support for the utilisation of existing technology and operational risk frameworks to regulate smart contract implementation, and stresses the need to future-proof legal and regulatory regimes by providing clarity and support for responsible innovation. This will include addressing where unique risks arise without creating special new regimes for the contracts, the clarification of legal issues, jurisdictional cooperation, and the establishment of liability and intention.

“Together, these help to eliminate the need for special regimes to regulate smart contracts and/or duplicative or disproportionate requirements applicable to smart contracts,” the associations state.

The full report can be accessed here.