Can Smart Contracts Fully Replace Legal Contracts for Derivatives Agreements?
Smart contracts can automate the execution and settlement of derivatives agreements, handling functions like collateral management and margin calls with deterministic certainty. However, they cannot fully replace legal contracts, as they lack the legal enforceability to handle off-chain disputes, regulatory compliance, or situations not explicitly coded.
A hybrid approach, often called a "Ricardian Contract," is typically necessary to bridge the technical automation with legal certainty.
Glossar
Legal Contracts
Documentation ⎊ The written agreements that define the rights, obligations, and recourse mechanisms associated with a financial derivative, which must be translated into executable smart contract code.
Legal Enforceability
Jurisdiction ⎊ Legal enforceability within cryptocurrency, options trading, and financial derivatives is fundamentally constrained by jurisdictional boundaries, creating a complex interplay between national laws and the decentralized nature of these instruments.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.