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How Blockchain Technology Will Change Commercial Contracts

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How Blockchain Technology Will Change Commercial Contracts
By: Contributor

Two years ago, when Daniel Nossa first started learning about blockchain technology, which is at the base of cryptocurrencies such as bitcoin, it all seemed pretty esoteric—something that enthralled hardcore techies and a few financiers.

In the time since, Nossa — an attorney at Steptoe & Johnson PLLC’s Houston office who shifted his focus from credit default swaps to the energy sector following the financial crisis of 2008 — has seen finance firms, and more recently giant energy companies, explore the uses of the technology beyond its application to bitcoin and other cryptocurrencies. He says he could see blockchain technology having an impact on business as powerful as the advent of the internet.

“Blockchain goes well beyond cryptocurrency applications,” he says. Those applications include revolutionizing the commercial contracts that govern the energy industry and other sectors.

That’s because a blockchain is a shared record of transactions, updated by a network of computers instead of a central authority, that is cryptographically secure. “Imagine a large spreadsheet,” Nossa says, a ledger that stores a record of every transaction and makes that record available to everybody with access to the ledger. Every new transaction creates a timestamped block distributed across the network and linked to previous blocks, creating a chain through which a sequence of events can be traced.

“This creates a kind of golden record,” Nossa says.

With the golden record comes transparency and immutability. Data entered into the blockchain is virtually immutable; it can be changed, but requires great computational effort and collaboration between those with access to the blockchain. Further, settlements between parties with access to the blockchain are near instantaneous, eliminating the lag between traditional delivery of a good or service and payment.

“That can be extremely valuable to many industries,” Nossa says. “It can create a lot of liquidity.”

Finally, “ smart contracts” can become a feature of blockchain technology, Nossa says. Those “contracts” are actually logic in the blockchain computer code that executes transactions if certain conditions are met.

“This is a very powerful feature of blockchain,” he says.

Right now, he says, the term “smart contract,” is somewhat misleading, since a legally enforceable contract requires the elements of offer, intent, and consideration. But programmers writing code for the contracts are working to create code that does meet such criteria.

“They will need assistance,” he says. “I’ve already been getting calls from startup companies.”

And, Nossa says, powerful organizations within the financial world are putting their muscle behind the technology. Nossa spoke about blockchain technology at a recent Houston Business Journal forum.

In derivatives trading, one of the biggest bodies, the International Swaps and Derivatives Association (ISDA), which prepares master agreements for the derivatives space, is exploring the development of smart contracts. “They want to be a leader,” he says.

That, says Nossa, is highly significant for the energy industry, since energy companies use derivatives to hedge risk and traders use them to speculate on fluctuations in the energy market.

Despite such far-reaching implications, the application of blockchain technology is still in its infancy, especially in sectors such as energy that fall outside the finance industry, and there are some major obstacles the technology will have to overcome.

For mass adoption, Nossa says, major players will have to get comfortable with the technology. He likens the state of the blockchain today with the early days of the internet. In its early days, relatively few transactions occurred on the internet. But as people grew comfortable with the technology, online commerce exploded.

If the internet’s evolution is any indicator of things to come, Nossa says, “We may be using blockchain technology every day.” For the energy industry, as we’ll find out in our next article, the applications of the technology reach well beyond contracts, into the physical world.

To learn more about blockchain technology’s impact on the energy sector and the importance of being an early adopter, contact Daniel Nossa.

Steptoe & Johnson PLLC is a U.S. law firm with core strengths in energy, labor and employment, litigation and transactional law, serving clients from its 13 strategic locations across the nation. In 2013, Steptoe & Johnson celebrated 100 years of helping clients reach their goals.

Kent Bernhard is a free-lance writer for The Business Journals.

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