It has been reported that this month, the global firm of market participants International Swaps and Derivatives Association (ISDA) and global law firm Linklaters released a whitepaper that details legal considerations for the application of executable distributed code contracts (EDCCs), often referred to as smart contracts.
The whitepaper, titled Smart Contracts and Distributed Ledger - A Legal Perspective, provides definitions of EDCCs as well as how they might be applied to derivatives. It defines models of EDCCs in the perspective of legal contracts as either External Models or Internal Models. External Models have logic elements outside the human language document that are embedded into code in order to automate actions, given satisfactory conditions. Internal Models utilize legal contracts in which certain logical elements are rewritten in a formal codified manner, and not in a human language; these require a computer to automatically execute the code logic. The whitepaper also draws a distinction between EDCCs, which it calls code designed to execute a specific task, and a “smart legal contract” which it refers to as elements of a contract being represented and executed by software.
According to the report, ISDA has set up working groups to manage the regulations and documentation as well as legal, technological, and reporting work-streams "in order to future-proof standard documentation and align data standards." It calls for industry-wide standards which can facilitate interoperability between firms and platforms alike.
As per the whitepaper:
“Now is a crucial time in the development of smart legal contracts. If there are to be smart legal contract standards and technologies that can viably be used for derivatives products, it is important that ISDA and the global derivatives industry play a key role in the development of these standards and work closely with utilities and service providers in their development of the applicable technologies."
In a final word, the paper looks to the next five years for the development of blockchain technology and EDCCs to rise to the demands that the industry has placed upon them; a goal which, in the timeframe proposed "is undoubtedly ambitious, but the need is pressing and the journey needs to start now."