Artificial Intelligence (AI) in Smart Contracts: Legal Aspects Going Forward

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2 Artificial Intelligence (AI) in Smart Contracts: Legal Aspects Going Forward Breakout Session # D02 John Dobriansky, MS, MBA, CPCM, Fellow, Manager, Contracts, U.S. Navy Chris Robey, CPCM, Fellow, Retired Date: December 5, 2017 Time: 11:15 PM 2

3 Administrative matters Introductions Debate format, rules, timing, voting We welcome audience participation though Q&A and your vote! 3

4 Debate proposition AI-driven business processes will make significant inroads into procurement activities through adoption of blockchain technology and smart contracts. Enabled by the Internet of Things (IoT) and the maturation of AI business agents, blockchain applications will have significant effects on commercial organizational structures, as well as the legal basis of contract formation. 4

5 What is blockchain? Derived from cryptocurrency technology General ledger recording all transactions between blockchain members; a.k.a. Distributed Ledger Technology (DLT) Periodically updated and distributed on peer-to-peer (P2P) basis All members required to concur to prior release before next iteration Authentication derived from consensus, not from centralized authority Security derived from distributed record, not centralized master file from 5

6 Blockchain Technology as the Fifth Horizon (used with permission of MIT and VisionaryFuture.com) 6

7 State of the Art Deep learning business applications go mainstream Beyond decision support to autonomy e.g., Oracle Database 18c Oracle Autonomous Database Cloud Blockchain business applications go mainstream Beyond bitcoin to finance applications (fintech) Beyond sandboxes to production applications Beyond algorithm-driven trading Credit swaps, CDO s, London and New York 7

8 Blockchain Smart Contracts Ethereum protocol driving smart contracting in finance (fintech) Open source, but many proprietary flavors Autonomous, self-executing 8

9 Blockchain Smart Contracts Use software code to implement human intentions Carry out instructions embedded in tokens associated with a contract Rather than rely on legal texts interpreted by courts, regulatory bodies or other legal institutions (used with permission of NCMA) 9

10 Blockchain Smart Contracts Digital form Code, data and running programs Embedded Contractual clauses (or equivalent functional outcomes) are embedded as computer code in software Performance mediated by technological means Release of payments and other actions are enabled by technology and rules-based operations Irrevocable Once initiated, outcomes for which a smart contract is encoded to perform cannot typically be stopped Unless an outcome depends on an unmet condition (Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, 1996) 10

11 Blockchain Smart Contracts In current fintech applications, blockchain protocols Alleviate problems inherent to back-office reference data management Separate nontransactional data that support, but are not specific to, a transaction, i.e., Financial product specification Issuer detail Currencies Corporate actions Counterparty information Prices Separate static and dynamic data sets required to complete the transaction More efficient transmittals Improved security 11

12 IoT in Supply Chain Management (SCM) AICPA and international securities trading associations actively setting standards for fintech NIST/Commerce very active at consumer/citizen level National Strategy for Trusted Identities in Cyberspace (NSTIC, 2011) Establish an identity ecosystem Improve the privacy, security and convenience of online transactions International Standards Organization (ISO, current) ISO 9000 quality management systems standards ISO supply chain security management systems Trust metrics Required to enter and operate in supply chain Industry-specific trust metrics under development 12

13 Trust Models - Current 1.0 Human/legal Assume that counterparty: Has authority as legal agent to represent his or her principal Will provide accurate/truthful responses to factual queries (i.e., has no fraudulent intent) 2.0 Electronic commerce Consumer and business-tobusiness (B2B) protocols: Availability Visibility Security Transaction execution Will carry out the bargain upon agreement 13

14 Trust Models - Future 3.0 IoT tech driving industrial supply chains Autonomous and highly granular communication between supply chain components - condition, status, ownership.... Do you trust the data structures of your transaction partners? How will certification/accreditation processes evolve with the threat environment? (very dynamic!) What arbitration protocols and legal recourse will be available? What happens when AI business agents go mainstream? 14

15 Who writes the rules? Autonomy in IoT commerce An object that is not trusted will be rejected by the other objects automatically without having to check with a central authority. Carlos Moreira, CEO, WISeKey Devices... are empowered to autonomously execute digital contracts such as agreements, payments, and barters with peer devices by searching for their own software updates, verifying trustworthiness with peers, and paying for and exchanging resources and services. Veena Pureswaran and Paul Brody, both of IBM 15

16 Spectrum of smart contract models From: Code is contract Entirety of a natural language contract can be encoded To: Digitizing performance of business logic, e.g., payment May or may not be associated with a natural language contract (Used with permission of Norton Rose Fulbright) 16

17 Code is Law Just as we should worry about the bad regulations of law, so too should we worry about the bad regulations of code. Lawrence Lessig, Harvard Law School ( 17

18 Code is Law Concurrence required to enter blockchain-driven supply chains Permissioned vs. permissonless blockchain types Access will determine enforceability of smart contracts Concurrence by default? How required? How given? How signified? Beyond rubrics... signage? e.g., INCOTERMS - International Commercial Terms, series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) (World Trade Press Illustrated Guide to Incoterms 2010) 18

19 AI Business Agents - Roles and Missions AI agents submerge into the process Customer entering blockchain not aware of AI agent embedded into smart contract system connected to IoT supply chain Will complete transaction on behalf of AI business agent principal AI agents to the front-end, visible to the customer, to engage human customer and engender sufficient trust to complete transaction Context-aware, conversational business agents, driven by AI (ipsoft.com) 19

20 Organizational Effects - Private Sector Will get there first, will write the rules for IoT-driven SCM procurement As IoT supports SCM in physical world, blockchain to Provide trust in cyber finance to accelerate commerce through IoT Align flow of data and money to flow of goods HSBC and Santander procurement network Tradeshift: invoicing, finance and HSBC GTNexus: global SCM platform Reduce head counts in back office operations 20

21 Organizational Effects - Public Sector Has unique authorities and constraints e.g., fiduciary, regulatory, data ownership/custody, data domain issues from AI autonomy and potential contractor use/misuse FARA/FASA 1990 s procurement reforms Contractor contact with financial cycle 21

22 Conclusion The future is already here it's just not very evenly distributed. William Ford Gibson, Science Fiction Writer Does government have a role? How to engage in standard setting and regulation? Are current risk management protocols and contract types adequate? 22

23 Debate proposition AI-driven business processes will make significant inroads into procurement activities through adoption of blockchain technology and smart contracts. Enabled by the Internet of Things (IoT) and the maturation of AI business agents, blockchain applications will have significant effects on commercial organizational structures, as well as the legal basis of contract formation. 23

24 Sources 24

25 Contact Information John Dobriansky, MS, MBA, CPCM, Fellow, Manager, Contracts, U.S. Navy phone: (571) Chris Robey, CPCM, Fellow, Retired 25