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ISDA Releases Whitepaper Regarding Legal Perspectives on Smart Contracts and Distributed Ledger Technology (International Swaps and Derivatives Association)

On August 3, 2017, the International Swaps and Derivatives Association (“ISDA”) and Linklaters LLP released a whitepaper titled “Smart Contracts and Distributed Ledger – A Legal Perspective.” The whitepaper sets out to define the terms “smart contract” and “distributed ledger,” to analyze their applications to the derivatives industry, and to highlight potential legal issues raised by these new technologies.  Of particular interest is the inherent nature of contractual elements – whether they define conditional logical statements (“operational clauses”), or whether they define a broader legal relationship between the parties (“non-operational clauses”).  An example of an operational clause would include a provision that defines the amount of funds to be paid to one party based on a calculated amount, applicable rate, and duration.  A non-operational clause would include a provision specifying the law that governs in the event of a dispute.

The whitepaper proposes a series of distinctions in order to clarify discussions around smart contracts – most notably between “smart contract code” (programs that automatically execute certain tasks but are not contracts) and “smart legal contracts” (representation and execution of the elements of a contract via software).  Also relevant are distinctions between “external” smart contracts (in which smart contract code provides a means of automatic performance; a traditional legal agreement is used to bind the parties) and “internal” smart contracts (in which performance and the operational clauses of the agreement are built into the code, with a traditional agreement covering the non-operational aspects). The whitepaper further discusses various areas in which smart legal contracts could be beneficial to the derivatives industry (e-signing and the use of so-called oracles to ease execution, among other things), and where they have difficulty replicating the functionality of a traditional agreement (representing concepts like jurisdiction and single agreement provisions).

The paper concludes that smart contract and distributed ledger technology have great potential for use in derivatives products and ISDA documentation, but that there must be industry-wide coordination if this potential is to be realized.  ISDA’s Market Infrastructure and Technology Oversight Committee intends to facilitate such development, and other working groups have been set up to coordinate workstreams and standards.

© 2018 Covington & Burling LLP


About this Author

Jonathan Browalski, Covington Burling Law Firm, Finance Law Attorney

Jonathan Browalski is a member of the firm’s corporate practice and is a resident of our New York office.

Michael Nonaka, Covington Burling, compliance enforcement attorney, transactional matters lawyer

Michael Nonaka advises banks, financial services providers, and non-bank companies on a broad range of compliance, enforcement, transactional, and legislative matters. He has worked extensively with federal and state banking agencies and with other federal agencies authorized to regulate financial services. 

Mr. Nonaka has significant experience advising clients on issues arising under financial services legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. He has advised clients on, among other areas in Dodd-Frank, regulation as a systemically important financial institution, resolution planning, the Federal Deposit Insurance Corporation’s orderly liquidation authority under Title II, and the scope of the Consumer Financial Protection Bureau’s authority.

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David A. Stein, Covinton Burling, credit reporting attorney, retail payments systems lawyer
Of Counsel

David Stein advises clients on regulatory and compliance matters relating to consumer protection and consumer financial services, with a particular expertise in the federal regulatory framework governing credit reporting, privacy, retail payments systems, consumer credit, fair lending, unfair, deceptive, or abusive acts or practices, deposit accounts, and mortgage origination and servicing.

Drawing upon his combined 13 years of regulatory experience at the Consumer Financial Protection Bureau and the Federal Reserve Board, Mr. Stein has helped...

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