On Nov. 27, 2018, the Commodities and Futures Trading Commission (CFTC) issued “A CFTC Primer on Smart Contracts” through LabCFTC – the agency’s financial technology (FinTech) initiative. While the primer is not a formal regulation and the CFTC does not officially endorse smart contracts, the primer is an excellent resource for the history, definitions, characteristics, potential applications and risks associated with smart contracts.
A “smart contract” is essentially one that includes a set of automated computer functions. The coding allows for certain actions to automatically take place at a specified time and/or based on the occurrence or non-occurrence of an event. The automated functions could include every aspect of a transaction or merely specific functions and actions. For example, it is possible to set up a smart contract in which prospective buyers could link the delivery of the earnest money deposit directly from their bank account to the escrow agent within a specific amount of time from the seller’s acceptance of an offer. A smart contract could be created that could automate offer, acceptance, ratification, deposit delivery, loan application, contingency removal and settlement. Further advances could also include automating the delivery of lender funds to the escrow agent once specific underwriting and closing conditions are met. Such contracts could also harness blockchain to streamline the process for sharing documents and events taking place between the parties to a contract, as well as potentially creating more reliable and searchable land records. This is just a small sampling of the various applications of smart contracts to real estate.
Continuing development of smart contracts could lead to a variety of benefits, including greater standardization of contracts and processes, enhanced security, cost savings, improved efficiency and speed, and greater certainty in transactions. As with any new technology, there are potential issues that should be monitored. Currently there is legal and regulatory uncertainty, which could lead to litigation and an inability to enforce the contracts. Ongoing concerns with blockchain applications include circumvention of rules and legal protections. Tech- savvy parties could potentially commit fraud against those with less technology experience. Computer coding could also lead to breaches of contract and unexpected complications if not performed competently.
However, with government agencies looking at the potential uses and legal framework for smart contracts and investors looking for opportunities, it is likely this technology will become a part of the real estate industry in the near future.