Page 154 - ITU-T Focus Group Digital Financial Services – Technology, innovation and competition

ITU-T Focus Group Digital Financial Services
Technology, Innovation and Competition

• trade finance

• clearing houses 54
• share registries
• property registration

• notarization of data 55
• supply chains
• correspondent banking. 56

Further applications of DLTs to financial inclusion and DFS are explored in Section 7.

4 Smart contracts

4.1 Overview

Some DLT implementations have built-in intelligence, setting (business logic) rules about a transaction as
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part of what is called a ‘smart contract. The smart contract can execute in minutes.
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4.2 Nature of smart contracts

Smart contracts are contracts whose terms are recorded in blockchain code and which can be automatically
executed. The instructions embedded within blocks ‒ such as ‘if’ this ‘then’ do that ‘else’ do this ‒ allow
transactions or other actions to be carried out only if certain conditions are met. Smart contracts are – and
must be ‒ executed independently by (user) every node on a chain.

Smart contracts are tied to the blockchain-driven transaction itself. For example, in the Ethereum blockchain,
its EtherScript programming language allows the use of natural language ‘notes’ in an EtherScript that helps
improve human readability in smart contracts. These notes are analogous to the wording in a separate (physical)
legal contract. The physical contract signature is replaced by the use of cryptographic keys that indicate assent
by participant nodes to the ‘legal’ terms embedded in the blockchain by the EtherScript.

In all then, a legal contract is replaced by computer code, and consequently the need for lawyers to be involved
in the chain of execution of the smart contract is mistakenly thought by some to be redundant. However,
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compliance rules with one or more of the counterparties – or through peremptory regulations such as those
dealing with anti-money laundering (AML) rules or the implication of tax laws – would probably require proper
legal counsel.

54 The Depository Trust and Clearing Corporation, the company that serves as the back end for much Wall Street trading and which
records information about every credit default swap trade, is replacing its central databases as used by the largest banks in the
world with blockchain technology from IBM. See NY Times (2017) Wall Street Clearinghouse to Adopt Bitcoin Technology, avail-
able at http:// nyti. ms/ 2iac0iM.
55 Bitcoin Magazine (2015) Estonian Government Partners with Bitnation to Offer Blockchain Notarization Services to e-Residents,
available at https:// goo. gl/ YdoYKq .
56 See, for example, US Bank Wells Fargo and Australia's ANZ who have built a shared distributed ledger platform prototype for cor-
respondent banking payment reconciliation and settlement. Wells Fargo (2016) Distributed Ledger Technology and Opportunities
in Correspondent Banking, available form https:// goo. gl/ X0gmS6 .
57 Not all DLTs support smart contracts. Bitcoin, for example, does not support smart contracts. The Ethereum DLT is the prime
exemplar of the use of smart contracts.
58 Smart contracts were first described in 1997, relating to vending machines. See Szabo, N (1997) Smart Contracts: Building Blocks
for Digital Markets.
59 PWC (2016) Blockchain and smart contract Automation: How smart contracts Automate Digital Business, available at http:// www.
pwc. com/ us/ en/ technology- forecast/ blockchain/ digital- business. html Etherscripter (2016) What is Ethereum, available at http://
etherscripter. com/ what_ is_ ethereum. html.

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