Break out your no. 2 pencils and graphing calculators, kiddos. The US Commodity Futures Trading Commission (CFTC) is here to guide you through the history of blockchains and EDCCs (aka smart contracts). On November 27, the CFTC announced the release of a primer as part of the agency's FinTech initiative, LabCFTC, which seeks to "engage with innovators and market participants on a range of financial technology (FinTech) topics." Yet despite the specifics within the primer, and the initiative's goal to make the CFTC more accessible to FinTech developer, regulated gray areas persist.
Intended as an "educational tool," the primer outlines the basics of smart contracts – starting with an explanation from computer scientist Nick Szabo, the term's originator: "The basic idea of smart contracts is that many kinds of contractual clauses … can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive … for the breacher."
The CFTC's primer details the history of and explanations for blockchain technology, highlighting the "continuously growing database of permanent records" that are linked together using cryptography, and noting the role it plays in EDCCs, including the benefits of reduced costs and transaction times, lowered counterparty and settlement risks, and increased security.
The space spent defining the detailed challenges users face, however, takes a back seat to the specific use cases and advantages. The CFTC's announcement states, "It is also critical to understand and mitigate risks and challenges; the primer accordingly works through a range of operational, technical, cybersecurity, fraud, and manipulation, and governance risks and challenges."
And it does do that. It lists the prohibited activities, the operational risks, and the fact that, as the primer puts it, humans can make "mi$taak3s when K0diNg." But that's sort of all it does – it presents a list of the risks one takes when using EDCCs.
Some risks are, well, riskier than others. The primer states, "Contracts or constituent parts of contracts that are written in code are subject to otherwise applicable law and regulation," pointing out that the Commodity Exchange Act (CEA) and anti-money laundering (AML) rules can be applied to EDCCs, if they are linked to certain products, which the primer lists as large and vague categories like agriculture, energy, metals, financial instruments, and digital assets.
Of course, this isn't to say that the information is impossible to find. Browse through the CFTC's website and you'd probably find a more specific list of what product an EDCC has to be linked to in order for CEA or AML regulations to be applied, but why be specific about the history of blockchains and how EDCCs can be used, only to breeze through regulations that LabCFTC is designed to make clearer for developers?
Despite some of its shortcomings, and the dated PowerPoint-to-32-page-PDF layout, the primer has been generally well-received; Vitalik Buterin posted a link to the guide on Twitter.
LabCFTC was launched in May 2017 and released its first primer on virtual currencies later in the year.