The use of distributed ledger technology and smart contracts in the financial services industry : legal implications and possible applications

Abstract

Smart contracts and decentralised or distributed ledger technology have gained significant popularity in recent years, particularly within the financial services industry. The use of such technology offers advantages which are unmatched by other types of technology or traditional means of contracting, facilitating cross-border transactions and enabling a global market.

This dissertation delves into a theoretical analysis of the meaning of a ‘smart contract’ and ‘decentralised’ or ‘distributed ledger technology’ in light of the definitions introduced into the Maltese legal framework, whilst undertaking a comparative analysis on definitions used by legislators in other jurisdictions. The Electronic Commerce Act is considered in detail in order to establish the link, if any, with smart contracts.

Two particular applications of DLT and smart contracts from the financial services industry are analysed in detail and any legislation or rules regulating the said industry, which are considered to be legal barriers for the use of the said technology, are considered at length.

This research concludes that there are various legal implications to be addressed before enabling the use of DLT and smart contracts by the industry at large without any restrictions. The major challenge identified relates to the self-enforcement function of a smart contract and the need for external intervention in case of errors or legal invalidity. An attempt is made to identify a solution to this major challenge.