To what extent are smart contracts in use in your jurisdiction? Please mention any key initiatives concerning the use of smart contracts in your jurisdiction.
Aside from a small number of pilot phase testing programs, the use of smart contracts has historically been limited to the cryptocurrency sector. This has predominantly occurred through ICOs in which smart contracts are used to automatically mint tokens upon payment. Additionally, they have also been used through numerous cryptocurrency exchanges for order matching and transaction execution.
However, the past year has witnessed an increase in institutional adoption of smart contracts to digitise readily automatable processes. This has primarily taken hold in the financial services sector with multiparty arrangements (for example, issuing bank guarantees or debt instruments through smart contracts). The most prominent implementation of smart contracts in Australia is the ASX’s proposed replacement of its clearing and settlement system with a blockchain-based system as discussed above at section 2.
There have also been a number of initiatives and consortia established that aim to develop a framework for the standardisation and regulation of smart contracts (most recently through Australia’s national science agency, CSIRO’s Data61). However, there is yet to be a widely-adopted framework.
Smart contracts are being actively developed in a range of sectors. AXA, an insurer, thus launched an insurance policy (known as Fizzy and based on the Ethereum blockchain platform) for air flights, under which indemnification is automatically triggered by reference to external data (air traffic official statistics).
Smart Contracts are useful within the task field of industries that previously functioned as trusted authorities in terms of archiving, verifying, authenticating, licencing and providing information. Besides, an implementation in classical production and distribution chains and the organisation of a company is conceivable.
Exemplary fields of application are:
– Accounting, auditing and bookkeeping: Due to the unified standards used within accountancy, any financial transaction on the Blockchain could be used as certified proof of (cost) accounting.
– Supply chain: blockchain-based applications offer shorter and more transparent distribution chains and, above all, can take over clearing tasks efficiently.
– Technologically advanced financial innovations, (“FinTech”), banks, insurance companies: Transactions amounting to billions can be transferred across continents within milliseconds.
– Energy industry: Possible applications include P2P-energy trading and the establishment of new markets. RWE is already attempting to combine Blockchain with the internet of things and physical delivery.
– Healthcare: Although the health sector is subject to numerous regulations, an implementation within process optimisation is possible, as well as optimising the billing between patients and health insurance funds.
Smart contracts are not widely used in this jurisdiction as of yet. However, one such example is the we.trade platform that is using smart contracts to launch and administer agreements between banks and clients. The platform is a blockchain based initiative based in Dublin which has been developed by a consortium of nine major European banks. ConsenSys, a global blockchain company operating in Ireland, has also established a blockchain studio in Dublin where developers are actively working on a range of smart contract projects on the Ethereum blockchain.
One of the first uses of smart contracts in Italy was by the public administration of Bari, which now uses smart contracts to issue and certify authenticity of surety policies. However, the insurance sector has witnessed the highest number of smart contract applications to date. For instance, AXA launched an insurance product called “Fizzy” that utilises smart contracts on ethereum’s public blockchain; it is a revolutionary web and mobile insurance platform that provides automatic compensation for flight delays or cancellation.
The fact that the insurance sector is the readiest for implementing to implement smart contracts was confirmed by the president of the Italian National Association of Insurance Companies (ANIA), who explained that ANIA intends to concretely and effectively test the potential offered by blockchain technology to allow the entire market to take advantage of it – not only insurance companies. Worthy of note in this respect is the creation by the Catholic university in Milan (Università Cattolica del Sacro Cuore) of the Research Centre on Technology, Innovation and Financial Services. The centre is run by a group of insurance companies and some banks and aims to implement new projects that exploit smart contract technology.
In Japan, the use of smart contract is largely still at the POC stage.
With that said, the utility of smart contracts is now being considered in a broad range of industries in Japan. For instance, in May 2019, Chubu Electric Power Co., Inc. (“CEP”) and Cryptoeconomics Lab, Inc. (“Cryptoeconomics”) announced their joint development of an electricity trading platform using blockchain technology . It is contemplated that CEP and Cryptoeconomics will use such platform to match buyers and sellers of electricity, and enable the automatic closing and enforcement of electricity sale and purchase contracts through smart contracts.
Different initiatives have taken place or are underway in various sectors of the Liechtenstein economy. These include governmental initiatives using blockchain-based platforms for storage and management of information that are automated through the use of smart contracts, linking together various actors in a particular ecosystem.
Smart contracts are used in all kinds of blockchain applications in various sectors. Historically, the financial sector has led the way in the automation of contracts. See question 1 for examples of sectors where blockchain and smart contract applications are used, and of what kind of applications we see in practice.
The amendments to the Civil Code allowing the use of smart contracts came into force in the beginning of October 2019 only, so the market players have not yet had enough time to try these new possibilities.
Meanwhile, Russian airline company “S7”, Alfa-Bank (we have already cited one of their projects in the Q.2 above) and Gazpromneft-Aero have performed in August 2018 the first refuel of an aircraft using smart contracts on blockchain. After this successful pilot project S7 declared that they will go deeper in the development of their internal blockchain system and smart contracts to reduce the expenses and optimize the processes.
The MSIT launched the “Blockchain Regulation Improvement Study Group” in May 2019 as part of its initiative to promote blockchain technology. This study group is tasked with reviewing key blockchain issues (including smart contracts) in relation to logistics and distribution, public services, healthcare, finance, and energy.
Smart contracts are not yet used in any significant scale in Sweden. To our knowledge, no key initiatives concerning the use of smart contracts have been launched.
Smart contracts are used in various expressions for the purposes of token issuances making use of a public blockchain such as the Ethereum blockchain (typically using the ERC-20 technical standard). Furthermore, the potential of smart contracts is often discussed in the area of insurance products and the cooperation between insurers and reinsurers. B3i is a notable Swiss based industry initiative aiming to apply blockchain technology to the insurance sector.
With regard to public initiatives, in particular the pilot projects of the commercial registries of the Cantons of Zug and Geneva are of note (see question 1).
Smart contracts are not yet in use in Uganda at the moment.
Although smart contract technology remains relatively nascent in the UK, a number of important initiatives are in progress, indicating that the technology is maturing.
Many UK financial services market participants, including trade associations, are proponents of the mainstream adoption of smart contract technology. The International Swaps and Derivatives Association (“ISDA”), for example, has argued that smart contracts can play a role in the derivatives market and has published guidelines that aim to support technology developers by promoting compliance with existing legal, regulatory and commercial standards, many of which are reflected within the existing ISDA documentation architecture. Firms that have participated in the FCA Regulatory Sandbox are using smart contracts for a variety of purposes, including to automate payments or the transfer of assets, to provide fully automated, decentralised flight delay insurance, or to facilitate charitable donations. Please refer to question 5 above for details of the scope of the Regulatory Sandbox.
The Accord Project is a UK-based non-profit and collaborative initiative that seeks to develop an ecosystem and open source tools for smart legal contracts. Among other things, its goal is to introduce a common format for smart agreements, reducing the need to adopt and learn different technologies and futureproofing templates.
It is worth noting a few other important smart contract projects, albeit not UK-specific. One of the most popular smart contract implementations is Ethereum which allows contracts to be written in a bespoke programming language, Solidity. There is also the R3 consortium's Corda, which aims to enable the codification of smart contracts and to provide a decentralised ledger that is authoritative and immutable. Governmental agencies and IP registers, for example the European Union Intellectual Property Office, are also looking into the capabilities of smart contract technologies.
Please also refer to question 1 above for prominent examples of applications of blockchain technologies in the UK.
One main proponent of the movement to provide a clear classification of smart contracts is the Smart Contracts Alliance, which is an initiative by the Chamber of Digital Commerce, an American advocacy group founded in 2014 that promotes the emerging industry behind blockchain technology, bitcoin, digital currency and digital assets. As illustrated in the 2018 CFTC primer on smart contracts, there is a plethora of uses for smart contacts from the very basic use in vending machines, to more complex transactions such as credit default swaps. To help navigate this technology, the CFTC issued a primer to be used as an educational tool to understand the implications as well as highlight some of the risks and challenges associated with smart contracts.
Adoption of smart contracts for transactions has been on the rise particularly where digital assets are the subject matter of the transactions. For example, we have seen remuneration to employees of blockchain companies taking the form of digital tokens which are the subject of a timed-release smart contract that implements time-based vesting and delivery of such remuneration to these employees. The purchase and sale of digital tokens for other digital tokens/stablecoins by way of smart contracts which offer escrow capabilities is another example – the agreed digital tokens of the seller and stablecoins of the buyer have to be deposited in a designated smart contract address before the smart contract automatically executes and delivers the seller’s digital tokens to the buyer and the buyer’s stablecoins to the seller.
In respect of key initiatives, please refer to the responses to question 2 relating to Project Ubin and the experiment conducted by the Bank of Canada and the MAS. Apart from the foregoing, Singapore-based on-chain liquidity protocol developer Kyber Network has developed a protocol that deploys smart contracts for digital token exchange, which protocol has been adopted by various decentralised digital token exchanges. Singapore-based blockchain firm Zilliqa has also partnered with Singapore-licensed payment solutions provider Xfers to implement distributed ledger technology in payments processing. Through partnership with Zilliqa, Xfers is able to leverage on the faster processing power offered by Zilliqa’s platform to increase the efficiency of the payments.
The HKMA noted in the Second DLT Whitepaper that smart contracts “have been singled out as requiring additional attention due to their huge potential for automating transactions in DLT”.
Smart contracts played a prominent role in one of the three use cases selected by the HKMA for PoC development in the First DLT Whitepaper, the results of which were reported on in the Second DLT Whitepaper – namely the trade finance PoC use case. The Second DLT Whitepaper reported that smart contracts had been used in a number of areas, namely: (i) to store the status of a transaction with a stated data structure so that enquiries can be made quickly; (ii) to distribute event-triggered logic among nodes so that finance can be provided to customers more promptly based on “triggering events” built into the smart contract; and (iii) to reconcile purchase orders and invoices automatically in the DLT network.
As described in the response to question 2 above, on 31 October 2018 the HKMA announced the official launch of eTradeConnect, a blockchain-based trade finance platform developed by a consortium of twelve major banks in Hong Kong.