This smart contract Primer (referred to henceforth as this “Primer”) provides an initial overview of what smart contracts are, how they are being implemented within financial services and proposes how to apply existing legal and regulatory frameworks to mitigate risks from utilizing such technology. Developed by the members of Global Financial Markets Association (“GFMA”) and Global Digital Finance (“GDF”), this Primer represents the broad perspectives of industry practitioners who are pioneering both research as well as the real-world implementation of distributed ledger technology (“DLT”) and smart contracts within business models across the globe.
In May 2023, the GFMA together with Boston Consulting Group (BCG), Clifford Chance, and Cravath, Swaine & Moore LLP, published a seminal report, “The Impact of Distributed Ledger Technology in Global Capital Markets1” referred to henceforth as ‘The DLT Report’, which evaluates the opportunities and risks of DLT and DLT-based securities, and assesses the applicability of existing legal, regulatory, and risk management frameworks. Building upon the findings in this report, as well as the findings from GDF reports and technical programs, GFMA and GDF are partnering to provide this Primer as a next step towards supporting consistent and responsible implementation of smart contracts within capital markets infrastructure. This Primer does not intend to cover all uses of smart contracts, rather, it primarily assesses smart contract usage within the regulated financial services industry to identify best practices as a first step towards global interoperability of DLT and standardization of smart contracts.
Smart Contracts are a Key Concept for the Evolution of the Financial System
Smart contracts are fundamentally software code. The standardization and ledger interoperability of smart contracts will be critical factors in the digitization and evolution of financial services. Crucially, as DLT scaling is already underway across financial services, this Primer also sets out practical examples of best practices within the industry, including how existing regulation for operational and technology risk management can be utilized to mitigate risks. The best practices presented are technology-neutral and supportive of appropriate future-proof regulation.
As regulators globally are forming policy to govern smart contracts as a technical aspect of the ecosystem, it is essential that policymaking works towards appropriate outcomes that mitigate risks, while also encouraging innovation and the updating and improvement or transformation of existing processes where new, enhanced outcomes can be achieved with technology.
This Primer advocates that regulators need not start from scratch when building frameworks for smart contracts. Market participants clearly articulated through the course of the engagement on this Primer that similar to implementing other new technologies through the years (e.g., cloud) there are tried and tested methodologies in place for change management and technology transformation. As with any technology change management program, this Primer acknowledges that there will be some risks unique to smart contracts needing specific mitigations. It is this Primer’s aim, however, to discuss how both traditional technology risks and unique challenges are already being addressed, and can be comprehensively covered through existing regulatory frameworks, to support smart contract and DLT scaling in the financial services ecosystem in a compliant and responsible manner.
Source: Global Financial Markets Association