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

Breakout Session # D02John Dobriansky, MS, MBA, CPCM, Fellow,

Manager, Contracts, U.S. Navy

Chris Robey, CPCM, Fellow, Retired

Date: December 5, 2017Time: 11:15 PM

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AI in Smart Contracts

• Administrative matters

• Introductions

• Debate format, rules, timing, voting

• We welcome audience participation though Q&A and your vote!

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AI in Smart Contracts• 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.

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AI in Smart Contracts•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 from

centralized master file

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AI in Smart Contracts• Blockchain Technology as the Fifth Horizon

(used with permission of MIT and VisionaryFuture.com)

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AI in Smart Contracts•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

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AI in Smart Contracts• Blockchain 2.0 - Smart Contracts

• Ethereum protocol driving smart contracting in finance (fintech)• Open source, but many proprietary flavors

• Autonomous, self-executing

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AI in Smart Contracts• Blockchain 2.0 - 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)

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AI in Smart Contracts• Blockchain 2.0 - 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)

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AI in Smart Contracts• Blockchain 2.0 - 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.,

• Separate static and dynamic data sets required to complete the transaction

• More efficient transmittals

• Improved security

Financial product specification

Currencies

Issuer detail Corporate actions

Counterparty information

Prices

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AI in Smart Contracts• 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 28000 supply chain security management systems

• Trust metrics

• Required to enter and operate in supply chain

• Industry-specific trust metrics under development

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AI in Smart Contracts• 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)

• Will carry out the bargain upon agreement

2.0 Electronic commerce

Consumer and business-to-business (B2B) protocols:

• Availability• Visibility• Security • Transaction execution

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AI in Smart Contracts•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?

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AI in Smart Contracts•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

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AI in Smart Contracts• 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)

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AI in Smart Contracts

• 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

(http://www.code-is-law.org)

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AI in Smart Contracts•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)

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AI in Smart Contracts• 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)

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AI in Smart Contracts•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 Tradeshift: invoicing, finance and procurement network

• HSBC GTNexus: global SCM platform

• Reduce head counts in back office operations

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AI in Smart Contracts• 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

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AI in Smart Contracts• 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?

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AI in Smart Contracts• 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.

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AI in Smart Contracts

• Sources

Contact Information

John Dobriansky, MS, MBA, CPCM,

Fellow, Manager, Contracts, U.S. Navyphone: (571) 217-0113

email: jsd.home1@verizon.net

Chris Robey, CPCM, Fellow, Retired email: chrisjrobey@icloud.com

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