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Blockchain and Smart Contracts (Series: Blockchain Basics 2020)

Blockchain is a tool. Samson Williams likens blockchain to a group text message, in which each participant receives a distributed, time-stamped, tamper-resistant (and encrypted) record of data transactions. Each group text has these characteristics. Everyone in the group “sees” the data, and none can change or gainsay any group message. Smart contracts are computer code put on the blockchain (how, exactly?) that establishes self-executing terms and conditions of a transaction. Are smart contracts smart? If certain data comes in and fulfills a pre-set term or condition, then rights and responsibilities are formed, terminated, modified, or shifted among the parties. Ah certainty and transparency, but also ah garbage in and garbage out. Are some contractual terms not amenable to smart contracting? And are smart contracts necessarily contracts? If not, can they still be useful?  If a smart contract is a contract, what is the governing document? Is it the words business people and lawyers use, or is it the code that is supposed to reflect the words? 

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/blockchain-and-smart-contracts-2020/

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Blockchain and Smart Contracts (Series: Blockchain Basics 2020)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsor
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Chris Cahill - L&G Law Group LLP PANELISTS: Maureen Murat - Crowdie Advisors, LLC Clayton Lowery - Armanino LLP Nelson Rosario - Smolinski Rosario Law 6
  6. 6. About This Webinar – Blockchain and Smart Contracts Blockchain is a tool. Samson Williams likens blockchain to a group text message, in which each participant receives a distributed, time-stamped, tamper-resistant (and encrypted) record of data transactions. Each group text has these characteristics. Everyone in the group “sees” the data, and none can change or gainsay any group message. Smart contracts are computer code put on the blockchain (how, exactly?) that establishes self-executing terms and conditions of a transaction. Are smart contracts smart? If certain data comes in and fulfills a pre-set term or condition, then rights and responsibilities are formed, terminated, modified, or shifted among the parties. Ah certainty and transparency, but also ah garbage in and garbage out. Are some contractual terms not amenable to smart contracting? And are smart contracts necessarily contracts? If not, can they still be useful? If a smart contract is a contract, what is the governing document? Is it the words business people and lawyers use, or is it the code that is supposed to reflect the words? 7
  7. 7. About This Series – Blockchain Basics In Dr. Strangelove, a party created a “doomsday machine” that would automatically destroy all life if the machine detected a nuclear attack on that party. There was no override, and, well, let’s just say that the film is hilarious but probably not a comedy in a conventional sense. There, if the “network” received certain information, the device would activate. Like a smart contract on a blockchain. The problem in Dr. Strangelove was that the party that created the doomsday machine activated it before telling its adversary (i.e., the other network participant). That “smart contract” was critically not smart. Blockchain smart contracts (with much smaller but still meaningful stakes) are computer code designed to adjust automatically the rights and obligations of network participants based upon the inputting of information to the network, with such information visible to all and inputted per means and procedures agreed upon by all before the contracts become effective. And thus paper-intensive, multi-step and multi-party transactions, like securities sales, supply chain coordination, and supply chain finance, might proceed with greater ease and security. Costs could be lowered, transactional speed quickened, and litigation simplified or evaded entirely. We will examine these areas of promise. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Blockchain and Smart Contracts Premiere date: 7/23/20 #2: Blockchain and Supply Chain Premiere date: 8/20/20 #3: Evolution of Trade Finance Technology Premiere date: 9/17/20 9
  9. 9. Episode #1 Blockchain and Smart Contracts 10
  10. 10. What is Blockchain? • A ledger • Not stored in any one place • Composed of a decentralized network of nodes • New data on the blockchain must be verified by a majority of nodes • Verification occurs by executing energy-intensive cryptographic calculations • Once validated, a block of data is added to the chain • Blocks may never be removed or edited 11
  11. 11. What is Blockchain? • Decentralized – data on the blockchain is not stored in any single place but distributed across many nodes • Immutable – once data is added to the blockchain, it cannot be removed, edited or backdated 12
  12. 12. Types of Blockchains • Public Blockchains (permission-less) • Private Blockchains (permissioned) 13
  13. 13. From Centralized Ledger to Decentralized • Blockchain establishes a decentralized ledger, by contrast to the familiar centralized ledger, with a custodian or administrator being trusted to process monetary transactions and manage the transfer of property • See the two diagram on the following pages, from David Sneyd, “Blockchain solutions to ESG problems” (BMO Global Asset Management, Oct. 2018) 14
  14. 14. 15 From Centralized Ledger to Decentralized
  15. 15. How Does Blockchain Establish a Decentralized Ledger? • Participant makes an entry, i.e., creates a new block • Proposed transaction is broadcast to each participant on the network • Validity of the new block is subject to pre-set criteria and a complex algorithm called “proof of work” • A majority of miners conclude that transaction is valid • New block is created and time-stamped • All are provided with an updated version of the ledger 16
  16. 16. How Does Blockchain Establish a Decentralized Ledger? 17
  17. 17. Some Components of a Blockchain • Each block contains:  A “hash,” which is a digital fingerprint or unique identifier  Time-stamped batches of recent valid transactions  And the hash of the previous block • The previous block hash links the blocks together and prevents the past form being altered or rewritten • Each subsequent block strengthens the verification of previous blocks (and the entire blockchain) 18
  18. 18. Some Components of a Blockchain, 2 • Proof of work requires high computational capacity, provided by “miners” • Miners supply the network with computing power, to allow the updating of the database • A majority of mining power must be able to confirm the new blocks by decrypting the data • Once a “block” (a record of a purchases and sales created by miners by solving a mathematical puzzle that validates the transactions) is added to the network ledger of older transaction (the “chain”), such record on the blockchain can’t be changed or reversed (i.e., the transaction is immutable) • Thus a blockchain, to be non-falsifiable, must not have any operator holding at any time more than half of the computational power of the chain 19
  19. 19. So What is Gained by Going from a Centralized to a Decentralized Ledger? • If a bank or credit card company keeping a centralized ledger is hacked, then other participants lose access to their data • With a decentralized ledger, all participants keep a copy of the data • With a decentralized ledger, there is no extra cost of (or litigation from) efforts to synchronize records kept by counterparties to a transaction 20
  20. 20. Smart Contracts Defined • Smart contracts are “self-executing contracts with the terms of the agreement between [a] buyer and seller being directly written into lines of code. Once a smart contract has been created, computer transaction protocols will execute the terms of a contract automatically based on a set of conditions.” Rensel v. Centra Tech, Inc., 2018 WL 4410110 at *10 (S.D. Fla. June 14, 2018). The promise re smart contracts:  Self-executing  Additional parties not needed to monitor the transactions  Greater cost efficiency and faster transaction speed • To determine whether contractual conditions are met, smart contracts use “oracles,” which are agreed-upon real-time data providers which confirm triggering events 21
  21. 21. Smart Contracts Defined 2 • Per the Smart Contract Alliance (an initiative of the Chamber of Digital Commerce): • A smart contract is “computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to pre-specified functions. The code can be stored and processed on a distributed ledger and would write any resulting change into the distributed ledger.” • Mark Higgins, “Blockchain in Energy: Smart Contracts on the Rise,” https://www.mintz.com/insights-center/viewpoints/2151/2019-07-24-blockchain-energy-smart- legal-contracts-rise (visited July 22, 2020) 22
  22. 22. Smart Contracts: Whence? • In 1996, computer scientist Nick Szabo defined a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises” 23
  23. 23. Smart Contracts: A Set of Promises • Such promises may be contractual or non-contractual • Such promises may consist of contractual terms or rules-based operations designed to carry out business logic, or both 24
  24. 24. Smart Contracts: Within which the Parties Perform on these Promises • Automated performance is at the heart of a smart contract • When hosted by blockchain, smart contracts are usually regarded as irrevocable • Once initiated, the outcomes for which a smart contract is encoded to perform cannot typically be stopped (unless an outcome depends on an unmet condition) • This definitional discussion is derived from “Smart Contracts: 12 Use Cases for Business & Beyond,” published by the Chamber of Digital Commerce (Dec. 2016) (Smart) 25
  25. 25. How Much Code? • A smart contract may consist entirely of code, or • Consist of code with a separate natural language version, or • Consist of a natural language contract with encoded performance, or • Consist of a natural language contract with an encoded payment mechanism 26
  26. 26. Driving Advancements in Smart Contracts • OpenLaw: builds programming interfaces to enable smart legal contracts to be incorporated into blockchain-based applications (and maintains an open source library) • The Accord Project: a non-profit focused on developing open source tools to enable anyone to build smart legal contracts • Clause: builds services to automate business processes and contract management by connecting the two (DocuSign has invested) 27
  27. 27. Smart Contract: Mortgages • Automated release of liens form land records when note is paid in full • Visibility of servicer records to all interested parties, enabling payment verification and tracking • Fewer manual process, fewer errors, reduced costs • Requires interface among contract, mortgagor payment account, and real estate title record service • Adoption of public key infrastructure among mortgagor, mortgagee, and other parties 28
  28. 28. Smart Contract: Land Title Recordation • Higher confidence in identity of parties, streamlined processes, reduction in auditing and assurance costs  Reduce land title conveyance fraud  Automated notifications, incorporation of record integrity protections  Enhanced liquidity 29
  29. 29. Smart Contract: Smart Invoices • Euler Hermes has provided trade credit insurance for over 100 years, and is looking at blockchain- based “smart invoices” (to help manage transaction for which it provides insurance) • I experimented with having companies upload their invoices onto the Ethereum “Smart Contract” blockchain • When a supplier’s invoice is uploaded, the smart contract “reads” it to learn payment due date, amount, and the purchaser’s identity • Smart contract then identifies the network of suppliers for that purchaser • If the supplier is not paid timely, the smart contract can “decide” (based upon rules coded into it), whether to send an alert (and what kind of alert) to the other suppliers in the network • PURPOSE: to forestall other payment defaults, lessen trading with insolvent purchaser, and lower risk of insurable events • Pierre Sein, “Invoices on Blockchain at EHDA” (Medium, July 27, 2017) at https://medium.com/@pierresein/invoices-on-blockchain-at-ehda-85d03a929062 (visited Aug. 21, 2019) 30
  30. 30. For More Information • Smart Contract Alliance • Digital Chamber of Commerce • Blockchain Association • Wall Street Blockchain Alliance • Ethereum Enterprise Alliance • Virtual Commodity Association • Coin Center 31
  31. 31. About the Faculty 32
  32. 32. About The Faculty Chris Cahill - ccahill@lgcounsel.com Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market share, return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter 11 cases and advised more generally on corporate restructuring, including workouts, loan forbearance, assignments for the benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation. Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction issues. He is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2020), a comprehensive treatise that is updated annually and published by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a weekly interview and commentary podcast for investors and other market participants, with 100 episodes and counting. 33
  33. 33. About The Faculty Maureen Murat - maureen@crowdieadvisors.com Maureen L. Murat is an Assistant General Counsel with the D.C. Department of Insurance, Securities and Banking where she provides legal advice and guidance on regulatory matters relating to banking, finance and fintech. Maureen is an Adjunct Professor at the University of New Hampshire, Franklin Pierce School of Law, where she teaches Tokenomics and Cryptocurrency Regulations and Smart Cities, Smart Government. She is also a summer instructor at Columbia University, School of Professional Studies and teaches in the courses: Blockchain, Cryptocurrencies, AI and Beyond; Understanding Blockchain, AI and Machine Learning. In her spare time, Maureen serves as principal of Crowdie Advisors, LLC, a business consulting firm dedicated to helping entrepreneurs and small businesses form business entities, transact business (strategy, planning and problem-solving), and obtain financing via equity crowdfunding. She is a partner with Axes and Eggs, a blockchain think tank and digital advisory firm that focuses on blockchain consulting, education courses for executives and digital advisory services. Find more information about Maureen onLinkedIn: https://www.linkedin.com/in/maureen-l-murat-esq/. 34
  34. 34. About The Faculty Clayton Lowery - Clayton.Lowery@armaninoLLP.com Clayton Lowery is a Senior Consultant in Armanino’s Blockchain practice. He provides subject matter expertise to the traditional accounting firm service lines, develops custom blockchain and digital asset solutions for companies looking to enter the space, and acts as a product manager on TrustExplorer, Armanino’s real- time assurance software. 35
  35. 35. About The Faculty Nelson Rosario - nelson@smoroslaw.com Nelson M. Rosario Mr. Rosario is an intellectual property attorney whose practice is focused on working with technology companies to protect their property, manage their contracts, and deal with privacy issues. In addition, Mr. Rosario helps companies with legal issues related to blockchain and cryptocurrency, and he is an adjunct law professor at Illinois Tech where he teaches a class called Blockchain, Cryptocurrency and the Law. Mr. Rosario regularly writes and speaks on emerging technology issues relevant to attorneys and entrepreneurs, and his quotes and analysis have been featured in Law360, Coindesk, American Banker, as well as other publications. 36
  36. 36. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 37
  37. 37. About Financial Poise 38 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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