UK Law Commission Gives Smart Contracts a Thumbs Up as US Congress Begins Crypto Dialogue
In late November 2021, the blockchain ecosystem reached a significant milestone in the United Kingdom when the UK Law Commission concluded that the law of England and Wales can accommodate the use of smart contracts. They confirmed that no statutory law reform was needed to apply to smart contracts.
One of the most compelling, yet largely unfulfilled promises of blockchain technology is the seamless transfer of goods and capital from one entity to another using smart contracts. A smart contract is a program that has been deployed to a decentralized blockchain, where its code will execute autonomously without any human intervention. This includes non-fungible tokens (NFTs), tokens, and decentralized applications. Because smart contracts are deployed to the blockchain, they will remain on the blockchain for as long as it exists, providing an unalterable public record of the contract and its execution.
Smart contracts have the potential to disrupt how value currently moves around the world, particularly in trade finance where processes are surprisingly antiquated. By eliminating all of the paperwork and red tape that now define this process, blockchain technology has the potential to reduce fraud, cut costs, and lessen wait times — improving overall efficiency in trade finance.
Financial institutions are increasingly interested in the promise that blockchain holds, and in August of 2021, XinFin’s XDC Network became the first blockchain member of the Trade Finance Distribution (TFD) Initiative, a consortium of trade originators, credit insurers, and institutional funders.
Use of even the most efficient blockchain technology, however, is still subject to the whims of regulatory agencies across the globe, and cross-border payments only complicate things more.
Many observers speculate that laws will have to be clarified in order to usher in the era of blockchain utility in the financial sector. On November 25th, the United Kingdom Law Commission, which is tasked with monitoring the laws in England and Wales and suggesting reforms, issued such a clarification.
“The current legal framework [of England and Wales],” said the Commission’s November 25 statement, “is sufficiently robust and adaptable so as to facilitate and support the use of smart legal contracts.”
Professor Sarah Green, UK Law Commissioner for Commercial and Common Law, went a step further, proclaiming that smart contracts would “revolutionize the way we do business, particularly by increasing efficiency and transparency in transactions.” On back of the XDC Network’s election as a member of the Trade Finance Distribution, she also said, “To ensure that the jurisdiction of England and Wales remains a competitive choice for business, there is a compelling case for reviewing the current legal framework in England and Wales to ensure that it facilitates the use of smart contracts.”
She went on to say that the work of this commission will establish England and Wales as a “global leader for technological innovations in the digital sphere”. This is significant, as London is once again ranked as the second most competitive financial center on the planet, behind only New York City as detailed in the March 2021 biannual Global Financial Centres Index compiled by the Z/Yen Group in cooperation with the China Development Institute. The UK Law Commission has proven to exert its influence on the UK Parliament since its establishment in 1965.
This encouraging recommendation came only two months after the first ever trade finance-based non-fungible token transaction, which was completed by United Kingdom-based asset distributor Tradeteq. It took place on the aforementioned XDC Network. The asset originator for this transaction was Dublin-based Accelerated Payments, and the trade finance assets were repackaged into NFTs — unique units of data, or tokens, stored on the network.
Regulatory agencies, and bodies like the UK Law Commission who advise lawmakers, are tasked with reducing risk for the public at large. The highest legal interpreters in England and Wales have decided that the benefits of smart contracts greatly outweigh any potential shortfalls, and that they comply with existing law. The same argument was recently made to US lawmakers on December 8, 2021 during a landmark Congressional hearing.
When asked about enforcement of laws on blockchain activity, Bitfury CEO Brian Brooks told the US Congress, “To the extent that the activity that happens [on blockchains] is parallel to what happens in our supervised [financial] systems, my question is, why not allow [blockchain] in the supervised system?” Brooks argued that decentralization protocols are built to solve the exact problems that create the need for enforcement in the first place. “Most enforcement in the securities and banking system is about some combination of human error, human negligence, human greed, or human bias,” explained Brooks. Blockchain greatly reduces those threats, as recognized by the UK Law Commission, which does recognize that the law will have to adapt incrementally to smart contracts in specific contexts. You can read the full report or a 34-page summary.
The report did come with one legal caveat: concerns about jurisdiction and the location of digital assets that don’t exist in the real world, which the UK Law Commission considers one of the most significant challenges that will face private international law. The Commission says it may propose solutions in the future as it continues to explore emerging technology. As blockchain has such revolutionary potential, I’m confident reasonable solutions around digital jurisdiction will be found.
As governments and lawyers figure out how to regulate new technology, blockchain projects continue to innovate in ways that only make them more ready for high level use. On December 1, 2021 — barely two months after its groundbreaking trade finance-based transaction — the XDC Network implemented a major upgrade. The result of years of study and development by a team of PhD professors, this upgrade notably brought “military-grade” security to an already airtight blockchain. It also makes the XDC Network more accommodating for a wide range of use-cases and Layer-2 projects, including evolving NFT technologies. This bodes well for the expanded use of smart contracts on the XDC Network, which is already compatible with the ISO 20022 International Standards in finance.
