Commissioner Brian Quintenz Comments On The Liability Of Smart Contract Developers For Uses In Violation of CFTC Regulations
Monday, October 22, 2018

Recently, Commissioner Brian Quintenz of the US Commodity Futures Trading Commission (CFTC) commented that smart contracts that have the defining features of a swap, future or option are subject to CFTC regulation. The Commissioner posited the hypothetical that, after appropriate analysis, the CFTC has concluded that a particular smart contract, e.g., a binary option executed on a blockchain, is within its jurisdiction. He queried: If that contract is executed in violation of CFTC regulations, then against whom should the CFTC bring enforcement action?

Commissioner Quintenz believes it is unreasonable to hold the core developers of the blockchain, the miners, and the general users responsible because they are not in a position to assess or police the legality of each application or transaction on the blockchain. Instead, the Commissioner suggests that both the particular users and the developers of the improper smart contract should be subject to enforcement action.

Commissioner Quintenz suggests that smart contract developers should be liable if, when they created the code, they could reasonably foresee that their smart contract would likely be used by U.S. persons in violation of CFTC regulations. In the absence of efforts to prevent use by U.S. persons, the commissioner believes that “a strong case could be made that the code developers aided and abetted violations of CFTC regulations.”

The Commissioner believes that, rather than face possible liability, smart contract developers should engage, and collaborate, with the CFTC. One potential solution of interest would be the integration of regulatory requirements into the code of the smart contract such that the code would not execute until applicable regulatory requirements are satisfied.

Notably, these issues are not limited to CFTC regulations. In particular, the question of liability for regulatory violations, and the possibility of embedded regulatory compliance are crucial to both securities laws and Know-Your-Customer / Anti-money Laundering laws.

Click here to view the transcript of the remarks by Commissioner Quintenz.

Russell Deutsch contributed to this post.

 

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