Smart Contracts: The Agreement Of The Future

Blockchain can make supply chain and trade finance documentation more efficient by streamlining processes previously spread across multiple parties and databases on a single shared ledger. All too often, supply chains are hampered by paper-based systems reliant on trading parties and banks around the world physically transferring documents, a process that can take weeks for a single transaction. Letters of credit and bills of lading must be signed and referenced by a multitude of parties, increasing exposure to loss and fraud. Current technologies haven’t addressed this issue because digital documents are easy to forge; even current IT systems at banks simply track the logistics of physical documents for trade finance. A blockchain can provide secure, accessible digital versions to all parties in a transaction, and smart contracts can be used to manage the workflow of approvals and automatically transfer payment upon all signatures being collected.

Because current paper systems drive $18 trillion in transactions per year, there’s an attractive opportunity to decrease costs and improve reliability in supply chain and trade finance. Four start-ups have emerged in this area, all of which have noted engagement with banks in proof-of-concept activities. Funding has not been disclosed, but backers include three respected venture funds in addition to Barclays Corporate Bank.

Several corporations have also shown mounting interest in this area. Seven banks have revealed proof-of-concept testing, and the numbers noted by start-ups indicate more that haven’t been publicly revealed. One start-up in particular noted an implementation roadmap with five banks as well as a major insurer. Barclays Corporate Bank recently partnered with one of the start-ups, Wave, a platform that stores bill-of-lading documents in the blockchain and uses smart contracts to log change of ownership, and automatically transfer payments to ports upon arrival. Bank of America, Standard Chartered, and the Development Bank of Singapore are also among the banks pursuing proof-of-concepts of their own.

Though there is currently no federal case law precedent directly addressing the enforceability of smart contracts, outside of a handful of state statutes, the agreed terms not represented in a natural language should not impact the general principle of enforceability around contracts. As a safe measure, smart contracts must comply with state writing and signing requirements dictated by the Uniform Commercial Code (UCC) and by state laws (Statute of Frauds). Additionally, the International Swaps and Derivatives Association (ISDA) notes any use of smart contracts must comply with existing legal requirements such as ISDA’s documentation standard [AS1].

Have you taken notice of the attention surrounding assets like Bitcoin or Ethereum but don’t have a sound grasp on the foundation of the technology? Take a look at an earlier blog of ours, The Future of Blockchain and Real Estate Tokenization Blog, where we break down the basics of blockchain. Have other questions around blockchain or another topic? Connect with us on Social Media or our Website!