CFTC’s LabCFTC Releases Primer About Smart Contracts

The Primer Helps To Explain Smart Contract Technology And Related Risks And Challenges

The Primer Helps To Explain Smart Contract Technology And Related Risks And Challenges

The Commodity Futures Trading Commission’s LabCFTC today released, “A CFTC Primer on Smart Contracts.” This primer is part of LabCFTC’s effort to engage with innovators and market participants on a range of financial technology (FinTech) topics, and follows on a 2017 primer on virtual currencies and the agency’s recent FinTech Forward conference.

“Smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities,” said LabCFTC Director Daniel Gorfine.  “This primer is focused on explaining smart contracts, exploring how they may impact our markets and highlighting potentially novel risks and challenges.”

In a 32-page document, the CFTC outlines the basics of smart contracts — starting with what they are. According to the CFTC, which regulates futures and option markets, smart contracts are “a set of coded computer functions.”

Smart contracts may include elements of a traditional binding contracts as well as self-executing code that pushes different actions based on changes to terms in the contract, such as fluxes in weather or reference rate. They can be legally binding.

The primer sets out to define “smart contracts,” including by exploring their history, characteristics, and potential applications that may eventually impact daily life. The primer includes graphics to help explain early self-executing software logic evolving into current smart contract technology – for example, starting with a simple vending machine illustration and then discussing more complex examples, including credit default swap contracts.

As with other areas of innovation, while there are many potential benefits, it is also critical to understand and mitigate risks and challenges; the primer accordingly works through a range of operational, technical, cybersecurity, fraud and manipulation, and governance risks and challenges.

The primer goes on to speak to the CFTC’s role to protect market users and their funds, consumers, and the public.