On November 27th, the Commodity Futures Trading Commission (CFTC) has released its guide to the smart contracts and announced that they are subject to existing laws, including anti-money laundering (AML) regulations, and the Commodity Exchange Act (CEA), depending on where they’re applied. What does it mean for the companies implementing this technology?

Before we start…

Let’s refresh our knowledge of smart contracts. What is it?

In layman’s terms, a smart contract is a set of self-executed codes that can trigger some certain terms of a contract, and take action in case of occurrence, or non-occurrence of an event. For example, a smart contract can include the elements of a binding contract (offer, consideration, or acceptance).

The concept of the smart contract was first described by Nick Szabo, a computer scientist, about 20 years ago:

“A smart contract is a set of promises, specified in the digital form, including protocols within which the parties perform on the other promises…. The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.”

It means that smart contracts are nearly impossible to breach by any third-party — only the creators are able to edit the code.