What we can learn from the Legal Framework for distributed ledger technology and blockchain in Switzerland?

Couple of days ago the Swiss Federal Council published a report on Blockchain. Interestingly the report focus on the fundamentals of this technology and the way it can interact with the Financial Industry.

It’s the legal framework which should accompany other FINMA regulations on ICOs and FinTechs already published in the past months.

The 160 pages document has as objective providing an official Overview on the understanding and current state of the applications of the Blockchain Technology, specially in the area of Finance.

The second major objective of the report is to signalize that Switzerland is open to technological developments such DLT ( Distributed Ledger Technology) and blockchain, and that the existing legal framework is suited to deal with business models based on such technologies.

The document aims to clearly show that openness to technological development and innovation should not be misunderstood with opportunity for abuse and that the Regulatory and surveillance authorities are determined to combat abuse rigorously.

In this post, I want to highlight one of the key concepts of the Blockchain, and the clever way they are presented and explained in the document.

Smart Contracts for the dummies

1. Firstly, Smart Contracts, in despite as its name suggests, and as the doctrine largely agrees, is not a contract in the sense of the Swiss Code of Obligations, but rather a computer “technology” for contract execution. Three characteristics can influence its qualification and legal effects are mentioned.

2. No human intervention is required. The terms of the contract are programmed and then converted into machine-readable form so that performance and all other conditions are programmed and automatically verified by the system (computer routine). An example is provided like bet systems between two parties, where the wagered amount is transferred automatically in electronic money from the loser to the winner as soon as the results of the game have been autonomously retrieved by the system on sports information websites. This means that BLOCKCHAIN is not a magic bullet which solves any possible or imaginable interaction: like with any other technology, the use cases must be understood, validated, the code must be specified and coded.

3. Secondly, the smart contract is immutable, i.e. code cannot be changed by any party. Here it’s important to understand clearly: the code stipulating the contract. Any business data related to the contract can be of course be changed, and the underlying contract won’t be valid, but the myth that a business data will be forever somewhere published is wrong.

4. The most important, I think, it’s the third characteristic, the smart contract is limited to the digital world. Typically, only electronic good/services (exchange of digital goods, transfer of money, etc.) can be the subject of a smart contract. Furthermore, the programmed conditions for contract execution must be digitally verifiable (true/false). So clearly all business models linking Blockchain to wine handling, pet care or precious wood from the rain forest are probably to be examined with extra care.

 

 

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