Written by Chelsea Chan | Edited by Amelia Chew & Irene Ng

LawTech.Asia had the privilege of being a media partner for TechLaw.Fest 2018. The inaugural TechLaw.Fest held from 4 to 6 April 2018 saw the convergence of legal professionals, technologists, entrepreneurs and policy makers, conversant and passionate about Technology Law and Legal Technology, coming together to discuss the future of Singapore’s technology scene. This article summarises one of the panel discussions held on 5 April 2018 titled “The Power and Pitfalls of Smart Contracts”.

The discussion was chaired by Joyce A. Tan (Joyce A. Tan & Partners); and the panel comprised of Ashton Addison (CEO and Founder, Eventchain.io), Sopnendu Mohanty (Chief Fintech Officer, Monetary Authority of Singapore), Hirofumi Aihara (General Manager of Digital Innovation, Mitsubishi UFJ Financial Group), Tomasz Kurcyzk (Digital Transformation Director, AXA Singapore) and Stella Cramer (APAC Head of Technology & Innovation, Norton Rose Fulbright).

After the introduction by Joyce Tan, Ashton Addison elaborated on the basics of a smart contract and potential technological pitfalls. A Smart Contract is an agreement converted into a small piece of software, which stores the rules and terms of the agreement and when met automatically executes exactly how it was coded. The appeal of a Smart Contract lies in its automation and that it is fully transparent, so the code reflecting contractual terms can be seen by anyone regardless of privity to contract. However, bugs in the code may lead to loss of funds. Further, large transactions are currently not possible since Ethereum can only handle 13 transactions per second, potentially creating a significant backlog if applied to current business transactions.

Sopnendu Mohanty then took us through the approach of the Monetary Authority of Singapore to deal with Smart Contracts in Singapore. MAS has embarked on a public-private partnership that explore the tokenisation of the Singapore dollar, Project Ubin, to help regulators understand how Cryptocurrencies and Smart Contracts function. MAS currently approaches Smart Contracts and Cryptocurrencies in terms of three layers: the role of money and how transfers and settlement of money can be conducted on a blockchain; how to ascertain whether data entered in the blockchain can be trusted, and whether data can be transferred across jurisdictions in light of data protection laws; and how we can apply blockchain to conduct cross-border trade and trade finance. An example of the third layer is MAS’s partnership with the Hong Kong Monetary Authority to jointly develop the Global Trade Connectivity Network. Navigating these three areas is critical in determining appropriate regulations for Smart Contracts. Mohanty ended off by saying that “if Smart Contracts becomes a part of our lives, it could become a public utility”.

Hirofumi Aihara proceeded to introduce Mitsubishi UFJ Financial Group (MUFG) and its Smart Contract and Blockchain initiatives. MUFG currently ties up with IBM to build a project on the Hyperledger project fabric, an open-source blockchain platform which uses blockchain and Smart Contracts for contract management. Where current contract execution delivery process is cumbersome, involves numerous intermediaries and is extremely lengthy, Smart Contracts can be used to overcome these problems. With Smart Contracts, the company can reduce overheads by removing intermediaries and reduce errors and inconsistencies, thereby reducing processing time from days to near real time.

Tomasz Kurcyzk continued by introducing another application of Smart Contracts – in the Insurance industry. Smart Contracts can facilitate the development of insurance contracts, termed “Insurance 2.0”, which can provide real time processing, personalised protection, smart pricing and transparency in insurance contracts. Further, the transparency, immutability and automation of Smart Contracts aims to solve the problem of trust, or lack thereof, in insurance contracts. Tomasz then introduced AXA’s fizzy, an insurance solution running on blockchain technology that provides automatic compensation to policyholders whose flights are delayed.

Finally, Stella Cramer took us through the legal issues surrounding Smart Contracts. Technically, Smart Contracts lie on a spectrum between the contract being 100% code and automated performance. The Smart Contracts we typically use fall in the middle. Known as a “split contract”, this type of Smart Contract combines a natural language contract with encoded performance of non-human aspects. When dealing with such Smart Contracts, the question is not whether normal contractual rules apply but how they apply. Potential issues include the legal enforceability and certainty of terms in a contract partially in code and partially in natural language, whether follow-on contracts (i.e. separate contract brought about by performance of an earlier Smart Contract) are legally enforceable, and who should be held accountable if Smart Contracts are erroneously coded (i.e. ICO issuers or buyers and sellers of tokens, etc).

A number of interesting issues were raised when the floor was opened to questions. Regarding the issue of data privacy and protection, Mohanty expressed his concern about how data privacy laws in various jurisdictions may potentially undermine the viability of blockchains, and thus argued against the policy approach of restricting access to data. Cramer agreed, adding that data protection principles, such as rules on retention of data, restrictions on transfer of data and data localisation, conflict with the fundamental nature of blockchain that makes it so attractive. Nonetheless, Mohanty expressed optimism in the growth of Smart Contracts to automate operational fields, which do not conflict with data protection laws, rather than the commercial fields.

Mirroring a real-life scenario that happened on the Bitcoin blockchain, a member of the audience raised the question of whether, if someone uploads child pornography, legal liability lies with the owner who owns a copy of the blockchain. Addison first clarified that all information on the blockchain is stored in byte code (i.e. binaries of 1 and 0), encrypted by a hash function such that owners of the blockchain not privy to the information cannot uncover its contents. On the legal aspect, Cramer noted that there is no right answer. Instead, one must consider several points, such as the laws of the relevant countries, whether the actor can be identified and whether the blockchain was permissioned or permissionless.

Ultimately, it is clear that Smart Contracts present to us significant business transformation opportunities. It can be used in various industries to optimise and automate workflows, whilst reducing costs and risks associated with intermediation. However, regulations and laws behind it are currently unclear. As we embrace Smart Contracts and distributed ledger technologies, policymakers, legal professionals and technologists need to work together to tackle important legal and technological considerations to regulate its use without inhibiting its functionality.