The Commissioner for the U.S. Commodity Futures Trading Commission (CFTC) Brian Quintenz gave a speech on the regulation of intellectual contracts at the GITEX Technology Week in Dubai. He has acknowledged that there are still many problems in the field of smart contracts that need to be resolved, and therefore market participants are unlikely to avoid CFTC control.
Commissioner Quintenz explained that the first step that the CFTC should take when reviewing a smart contract is to understand the essential nature of the contract and whether it is under CFTC jurisdiction. For example, is the contract a commodity that must be traded on the exchange? Does the protocol itself perform the exchange function, which may entail a registration requirement? While the answers will naturally be different for each smart contract, Commissioner Quintenz made it clear that existing CFTC rules can and should apply to such contracts when necessary.
According to Brian Quintenz, the main task of the Commission at the moment is to determine the circle of persons responsible for the legality of blockchain and smart contracts. Since an innovative technology is based on the absence of all kinds of intermediaries who are responsible for compliance with the rules in traditional models, the question looks logical: Who is to blame for violations of the law?
Commissioner Quintenz enjoys well-deserved respect among the players of the crypto market as a competent and insightful professional, leading a balanced policy toward cryptocurrency and blockchain technology. Therefore, it is worth listening to his opinion, but one cannot agree with him on everything.
On the one hand, the high-ranking official claims that neither the leading developers of blockchain platforms nor the miners as a whole should be held responsible for illegal activities within a specific project. But, on the other hand, Brian Quintenz assumes that the creators of smart contracts will be held accountable if they could “reasonably foresee” that the code they write and the tools they create are used for illegal purposes.
Who Is Not Responsible for the Illegal Use of Smart Contracts?
The Commissioner identified players who could theoretically be brought to justice in the framework of the blockchain project: the main developers, users, miners, and the developers of “smart contracts.” According to the CFTC, these parties are responsible for executing intellectual contracts (for example, a protocol) in market forecasting (event futures, event futures markets, swap contracts).
But the main developers are not involved in writing the illegally used code of a smart contract and may not even know that a particular smart contract is deployed and used by attackers.
Miners and users are also unable to assess the legality of each particular blockchain application when they check signatures and execution in transactions or use different applications.
And blaming all sorts of illegal actions on developers, miners, and regular users would be unfair because people cannot be punished for actions that they did not commit and which they could not even know about. Moreover, such an approach is hugely detrimental to progress and science, as it can halt the development of innovative tools used by society for legitimate purposes.
Thus, the best way to prevent the illegal use of open blockchain platforms is the participation of regulators, but not pressure on developers. Commissioner Quintenz believes that in this case, regulatory flexibility is justified and new technologies require the Commodity Futures Trading Commission to rethink existing rules and develop non-standard regulatory measures.
Are Smart Contract Developers Responsible If They Could Have “Reasonably Foreseen” Illegal Use?
Arguing about the responsibility before the law, Commissioner Quintenz said that at the moment, the question of the possible guilt of the developers of smart contracts is under discussion, and “nothing is obvious or decided yet.” Moreover, the official hopes for the help of the crypto community in the development of a single standard for the crypto industry in general and blockchain technology in particular.
The situation is somewhat ambiguous since, on the one hand, the code developers can argue that they merely created a protocol and did not have control over how the blockchain-based tool will be used later. In this case, it is logical to assign responsibility for illegal actions to individual users who are the actual creators and counterparties of smart contracts. On the other hand, however, the code developers can “reasonably foresee” that the tool they created will be used by individuals in violation of CFTC rules.
The smart contract code is the same as almost any other tool—a hammer, a pistol, or a web browser. And no one can guarantee its use strictly within the law. This is easily predictable.
As Commissioner Quintenz noted, “If a contract is a product in the CFTC jurisdiction, regardless of whether it is fulfilled through written confirmation by ISDA (International Swaps and Derivatives Association) or software code, it is subject to CFTC regulation.”
But likewise, the author of the protocol is not guilty of abuse, if the Commission is unable to prove something more substantial than just publishing the tool.
When applied to daily realities, the situation is as follows: someone asks the owner of the keys to the car to rob a bank. As a result of a bank robbery, it is reasonable to bring the car owner to partial liability, and it is unfair toward the automaker.
Most developers of smart contracts, like automakers, do not take part in crimes, but simply publish code. Therefore, bringing them to justice does not make sense.
The head of the Commodity Futures Trading Commission is awaiting feedback from the crypto community in order to solve this complex but very urgent problem finally.