One of the top U.S. financial regulators, the Commodity Futures Trading Commission (CFTC), has released its second guide to understanding smart contracts, with a reminder that the technology is covered under financial rules.

Announced

Tuesday, the primer is part of agency’s fintech initiative LabCFTC. Described as an "educational tool" rather than official policy, it covers the basics of blockchain smart contracts including their history, characteristics, case studies, potential use cases and perceived risks.

Stating that the concept of a smart contract was discovered some 20 years ago by computer scientist Nick Szabo, the CFTC states that the self-executing programs are only as smart as the “information feed it receives and the machine code that directs it.”

The agency says that smart contracts can offer the benefits of reduced costs and transaction times, lowered counterparty and settlement risks, and increased security. At the same time, though, they present challenges, including operational, technical and cybersecurity risks, alongside the potential for fraud, manipulation, reduced transparency and accountability, says the CFTC.

On the topic of regulation, the CFTC points out that that smart contracts are subject to existing laws, including the Commodity Exchange Act (CEA) and anti-money laundering (AML) rules, depending on their application or the type of product they are linked to.

“Existing law and regulation apply equally regardless what form a contract takes. Contracts or constituent parts of contracts that are written in code are subject to otherwise applicable law and regulation,” the primer reads.

In order to protect investors and their capital, the agency said, it will ensure that all transactions are subject to the CEA.

The LabCFTC initiative was launched in May last year and the first primer was released in October 2017 on virtual currencies covers the basics of the technology, as well as a number of use cases.

The guide also comes just over a month after a Brian Quintenz, a commissioner at the CFTC, warned that smart contract coders could be held liable if they knowingly use the technology to create functions that are considered predictive “event contracts.”

CFTC image via Shutterstock