Can Smart Contracts Outsmart Commercial Agreements?
What in heavens is a “smart contract”?
Imagine a commercial agreement that is able to enforce and execute itself, leave little room for breach by parties, is cost-effective and resolves disputes in an efficient way. This is not wishful thinking. It’s what the world is calling smart contracts.
The State Bank of India Ltd. announced that it will launch blockchain-enabled smart contracts by next month. This begs the question that can smart contracts eventually outsmart commercial agreements?
The biggest benefit of blockchain-based contracting is that it allows immutability which is difficult to achieve in any other construct, Rahul Matthan who leads the technology practice at law firm Trilegal explained.
The reason why blockchain was developed as a technology was because of the distributed ledger format that it proposed. For instance, the traditional banking system requires a single central ledger which, in the Indian context, is maintained by the Reserve Bank of India that reconciles the individual customers of all the banks and their individual branches etc – all of that builds up to a single register. What blockchain does is it distributes this ledger and every single person who is on a given blockchain has a complete record of every other transaction that has taken place on that blockchain.Rahul Matthan, Partner, Trilegal
So, if you add a transaction to that, you add it to the chain, everyone has a copy of it which it makes it difficult to dispute the fact that you did enter into this transaction and this irrefutability is the biggest benefit of smart contracts, he added.
It is this benefit that BankChain- an alliance of 23 banks from India and 7 from the Middle-East- is hoping to bring to contracts such as non-disclosure agreements and know-your-customer agreements to start with and potentially extend to home loan agreements, consortium lending etc, Sudin Baraokar, head of innovation at State Bank of India explained.
The aim is develop blockchain technology for various banking services and solutions and you cannot do that in isolation. We’re currently working on about eight pilots; two of which we want to take into production in December. We’re focusing on secured documents or smart contracts which are less regulatory heavy; they don’t necessarily have a financial impact.Sudin Baraokar, Head - Innovation, State Bank of India
Matthan added that until the regulators come up with specific laws to regulate blockchain technology, smart contracts will continue to be governed by existing laws; for instance, smart contracts for KYC will have to abide by the RBI’s rules on that.
I think, for now, smart contracts will be used in areas with low regulatory touch points and which don’t have an element of subjectivity. For instance,representations and warranties in commercial agreements is a classic subjective determination and if you have a contract with such clauses, it will not lend itself to a smart contract.Rahul Matthan, Partner, Trilegal
If you’ve got contracts that are very clear in terms of what needs to be done or an objective, clearly defined trigger for a certain action to follow, that’s an ideal subject for a smart contract, for instance, procurement of goods, he added.
Watch the discussion with Rahul Matthan and Sudin Baraokar here.