This Client Alert provides a brief introduction to smart contracts.
More specifically, it addresses the meaning of this neologism, the legal considerations surrounding smart contracts, and the developments in Singapore of smart contracts and blockchain technology in the context of physical commodities.
The meaning of the term “smart contract”, which is also known as a crypto-contract, has generated considerable debate since it was first conceived by cryptographer Nick Szabo in the 1990’s.
There is no single, broadly accepted definition of the term in the market. A lawyer and a computer programmer for example are likely to have quite different perspectives:
- A lawyer would tend to take the position that, whatever its other attributes (e.g. as to automation), a smart contract has to mean an agreement between two parties that is validly recognised by a particular legal jurisdiction and gives rise to enforceable legal obligations.
- A coder, on the other hand, would be inclined to view a smart contract in the context of computer code. The coder would see code as having a wider and all-embracing role; namely, as the means of facilitating, executing, and enforcing the performance of contractual provisions, without having to seek redress through the courts or under arbitration.
To a lawyer and a coder this is where there is some degree of commonality, as a smart contract does operate automatically. This is what is meant by the widely used term “smart”. This is consistent with the definition of “smart” given under Lexico as “(of a device) programmed so as to be capable of some independent action”.
Smart contracts are stored using blockchain technology. Blockchain is a decentralised ledger that forms the basis of Bitcoin and other cryptocurrencies.
Relevant Legal Considerations
What constitutes a contract under English law?
Under English law, a contract is a legally binding promise made by one party to another party to fulfil an obligation in return for consideration. Every contract must comprise four elements: (i) an offer by one party; (ii) an acceptance of that offer by the other party; (iii) an exchange of legal consideration between the parties; and (iv) an intention by the parties to create legal relations. A smart contract would be treated no differently from any other contract to determine whether it is legally binding. (The law of contract in Singapore is largely based on English law).
Can code be a binding contract?
Computer code is not in itself a legally binding contract in the sense of the preceding paragraph. A legally binding contract can of course include computer code that automates certain actions upon relevant conditions being met. In this instance, it is the code that automatically effectuates some or all of the underlying contractual provisions.
Developments in Smart Contracts & Blockchain Technology in the Physical Commodity Markets
There have been a recent number of developments in smart contracts and blockchain technology relating to physical commodities in Singapore.
Singapore is one of the world’s leading commodity trading hubs and is the home to the many global commodities players across energy, metals and minerals, agricultural products and chemicals. Enterprise Singapore, the Government agency that promotes trade, is actively involved in supporting a number of new initiatives in Singapore to develop smart contracts and blockchain technology.
Here are some examples:
- Commodities Intelligence Centre (CIC) was launched in October 2018. CIC is a global trading platform for physical commodities including metals, chemicals & plastics, oil/ oil products, and agricultural products. CIC aims to revolutionise commodity trading and facilitate cross-border trade through deal matching, trade finance, supply chain logistics, track & trace and global trade compliance. According to their website, “CIC has since achieved a turnover of more than US$3.7bn, with over 4,200 registered users covering markets including China, Switzerland, Australia, India, Malaysia, and other countries within Asia.”
- Other blockchain-based platforms for the physical trading of commodities include ChainTrade and Kratos.
As announced at the Global Trader’s Summit in May 2019, Enterprise Singapore is providing strategic, funding and network support for Perlin to establish a Centre for Future Trade (CoFT). The CoFT will operate as an open digital platform to develop and deploy pilots for new technologies, innovation and adoption in the commodities industry and international trade. Perlin intends to launch blockchain, smart contract and tokenised pilots across different products including agriculture, metals, minerals, energy, chemicals and household goods.
In the words of Mr. Satvinder Singh, Assistant CEO of Enterprise Singapore, “Enterprise Singapore is pleased to see the ICC and Perlin working together on the CoFT, which embraces the use of innovation and technology as drivers of transformation for the commodities trading sector. The Centre capitalises on Singapore’s strengths as a leading trading hub, its skilled talent pool, and strong connectivity to the rest of the world. With CoFT, Singapore-based international trading companies will have more opportunities to test and develop strategies and new technologies that will put them in good stead to succeed in the ever-evolving trading industry.”
About the Author
Justin Boyd has over 28 years’ legal and regulatory experience in commodities trading, origination and financing, wholesale banking, bank regulation, energy project development, financial derivatives and corporate transactions.
He has held senior in-house legal and regulatory risk positions, and has been a partner of an international law firm. Most recently, he was the Global Co-Head (Legal) of Financial Markets, and the Head of Global Regulatory Reform, both at Standard Chartered Bank.
The information contained in this Client Alert is intended to be a general guide only and not to be comprehensive, nor to provide legal advice. You should not rely on the information contained in this Client Alert as if it were legal or other professional advice.
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