On Lawfare Sarah Tate Chambers gives some good coverage to banks around the world, SWIFT, and how the technology behind the digital currency bitcoin is playing into the banking future:
However, some financial groups are looking to systems beyond SWIFT to secure their transfers. After 18 months of preliminary work, Visa has invited a small number of European banks to join in a project that uses a blockchain for interbank transfers. A blockchain is a distributed ledger born in the Bitcoin system that allows a network of computers to contribute to it as well as verify it, negating the need for a central authority. Visa’s project also uses smart contracts, self-executing computer protocols that carry out or enforce contractual obligations. This combination allows for simultaneous transfers with heightened security.
Rather than creating its own system, J.P. Morgan Chase is using Ethereum, a publically accessible blockchain-based platform, to develop its own project, Quorum. While running off of a public system, Quorum limits access to transactions to those who need to know the details, known as permissioned blockchain technology.
Four big banks—UBS, BY Mellon, Santander, and Deutsche Bank—have banded together with ICAP, a broker, and Clearmatics, a London-based blockchain company, to explore blockchain transfers. Rather than using bitcoin, they created their own cryptocurrency, the Utility Settlement Coin (USC), which can be exchanged between banks and is the equivalent of its paired real world currency. USCs will be backed by cash in a central bank. They have proposed the project to central banks with an expected roll-out date of early 2018.
I’d never heard the term ‘smart contract’ before. While Wikipedia has a definition, I thought this discussion by Ledger Labs‘ head of operations Josh Stark on CoinDesk was more interesting:
They are defined variously as “autonomous machines”, “contracts between parties stored on a blockchain” or “any computation that takes place on a blockchain”. Many debates about the nature of smart contracts are really just contests between competing terminology.
The different definitions usually fall into one of two categories. Sometimes the term is used to identify a specific technology – code that is stored, verified and executed on a blockchain. Let’s call this type of definition “smart contract code”.
Other times, the term is used to refer to a specific application of that technology: as a complement, or substitute, for legal contracts. Let’s name these “smart legal contracts”.
Using the same term to refer to distinct concepts makes answering even simple questions impossible. For instance, one question I’m often asked is simply: what are the capabilities of a smart contract?
If we are talking about smart contract code, then the answer depends on the capabilities of the language used to express the contract and the technical features of the blockchain on which it operates.
But if we are asking about using that technology to create a binding legal agreement, or an effective substitute for a binding legal agreement, the answer depends on far more than the technology. This answer depends on existing legal doctrine and how our legal, political and commercial institutions decide to treat the technology. If businesspeople don’t trust it, the legislature doesn’t recognize it and the courts can’t interpret it, then it won’t be a very practically useful “contract”.
This remark suggests that either I don’t fully comprehend the nature of blockchains, or Josh is being sloppy as well:
Blockchains can run code. While the first blockchains were designed to perform a small set of simple operations – mainly, transactions of a currency-like token – techniques have been developed to allow blockchains to perform more complex operations, defined in full-fledged programming languages.
Because these programs are run on a blockchain, they have unique characteristics compared to other types of software. First, the program itself is recorded on the blockchain, which gives it a blockchain’s characteristic permanence and censorship resistance. Second, the program can itself control blockchain assets – i.e., it can store and transfer amounts of cryptocurrency. Third, the program is executed by the blockchain, meaning it will always execute as written and no one can interfere with its operation.
He later mentions storing programs on the blockchain, so perhaps I’m just ignorant. Ah, yes:
Smart contract programs can themselves hold balances of cryptocurrency, or even control other smart contract programs. Once they are created, they can act autonomously when called to perform an action. For this reason, many prefer the term “smart agent”, analogous to the more general concept of a software agent.
So this is interesting and making more sense. And Josh wrote a good piece. His speculation on a new kind of contract was thought-provoking:
The most widely discussed opportunity of this type is machine-to-machine commerce. The growing ecosystem of smart devices – particularly those that are in some fashion autonomous – will eventually need a way to engage in basic commercial interactions with one another. For instance, a washer that buys its own detergent or a car that can pay to recharge itself.
These transactions still require a minimum level of trust to be commercially viable, but are ill-suited for legal contracts, which are comparatively expensive and require the involvement of legal persons like a corporation or human. Smart alternative contracts might enable an entirely new type of commerce carried out between our computers, cars, phones, and appliances.
In this particular example, I could see dishwashers sold with a lifetime supply of detergent – perhaps not requiring legal attention in and of of itself, as it’s part of the deal for the dishwasher. But that doesn’t invalidate Josh’s larger point.
