Blockchain and smart contracts
Blockchain will do for contracts what email did for communications. Or it won't. Blockchain is one of the most polarising of the current emerging technologies, not just because of the range of views on its use in Bitcoin and other crypto, but also because of its potential application in contracts. So why are people so exercised about something which is fundamentally just another information technology?
Smart contracts are one of the reasons. A smart contract is one which is self-executing. In other words, once it is programmed, the parties' obligations are performed automatically. Payments are made, assets are transferred without human intervention. Not all blockchain use cases involve smart contracts. Many current blockchain applications relate to payments, supply chain optimisation and licensing. Most of these still require human input. The latest use cases look beyond this, however, and consumer applications are developing.
There are two kinds of contracts: ones that are completed immediately (like buying an ice cream) and ones that are completed over time (like borrowing money). In the second type, there is a relationship between the parties.
People who work with contracts normally work on the second type because those contracts need somebody to describe (and predict) the relationship between the parties. These people point out that the contracts are hard to put on a blockchain. If the contract says: "do something if there is a material change", or "do something if LIBOR hits x%" we have a problem. In the first case, the blockchain technology doesn't know what ‘material’ is. In the second case, it doesn't know what to do when LIBOR is replaced. So people who work in contracts say that blockchain technology is a bit binary. Complex commercial arrangements aren't simply about title transfer or recording information. They also don't operate automatically. People still have to make judgments and decisions and, whatever a contract says, context and fairness are important.
When we think like this we miss some of the point:
- Many consumer-facing transactions are binary – there are far more transactions involving selling ice-cream than there are making loans
- The internet of things, another emerging technology which is disrupting business at the same time as blockchain technology, is automatic – when connected machines talk to each other there is simply too much information for it to be mediated through humans
- Everything gets commoditised – arrangements that used to take time and be individually negotiated become standardised
We saw a similar trajectory in the early days of digital money. The business imperative here was always about removing friction from transactions. That was what customers wanted. Payments should be invisible (subject to assurance that the customer intended to make the payment). e-commerce was the same. As businesses moved on-line they could see that removing "clicks" from their sale administration process increased their conversion rate.
Blockchain technology brings real benefits in reducing friction. Transactions, which are synchronised, verified and secure, are highly efficient. More efficiency still will be delivered by building artificial intelligence into the systems so that they are able to react dynamically to circumstances and, ultimately, start to learn to deal without examples of materiality and replacement oracles.
We sometimes see objections that blockchain is too open: you don’t need all your customers on your network. Or that smart contracts aren’t needed for simple transactions. These points are functionally true but ignore a different point: repeat customers, network effects, communities, and positive brand association are common features of each generation of successful companies in the digital economy.
Clearly there are challenges. In addition to the points noted above around concepts such as materiality and obsolete references, blockchains throw up questions of data protection. In addition, where a blockchain is used for consumer sales, we need to work in rules from sale of goods legislation and the like. That doesn't mean that businesses won't use blockchain. Reducing friction, increasing brand value through "community" programmes and being able to update legal and accounting records in real time are the kind of improvements that digital businesses are continually looking to make. That is what blockchain technology can help to do. We can expect to see a next wave of applications in consumer-facing businesses alongside those in industry.
Charles Kerrigan is a partner at CMS Cameron McKenna Nabarro Olswang LLP. The views expressed here are his own
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