According to someone more boned up on the topic than your columnist, self-executing digital contracts have been around since at least 1994 - when Paul Keating still ruled the land with his colourful invective.
It’s just that these days they’re known as blockchain contracts.
As we opined recently, blockchain – the underlying platform for cryptocurrencies – looks to be more useful than the ‘cryptos’ themselves.
The premise of a blockchain contract is that if a prescribed event occurs, then a certain action is taken.
Unlike a standard paper contract that is enforceable by law, such smart contracts are enforced by cryptographic code and are executed in line with predetermined, programmable rules.
One example is estate planning: a will could be programmed as a smart contract, which on the demise of the subject would takes action immediately to transfer assets to the prescribed beneficiaries.
That’s one way to prevent squabbles among long-lost relatives.
In this case, the family benefits from reduced processing fees, the elimination of lawyers and trustees from the process and increased transparency and reduced human error.
This means smart contracts can disrupt existing services that have speed bottlenecks (such as international monetary transfer), or act as intermediaries in complex situations involving regulation and numerous parties (such as an advertising buying agency).
Blockchain is also relevant for trusted intermediaries, such as trustees and public sector services.
It’s not so relevant for companies with bespoke offerings, or labour-intensive ones such as mining and construction contractors.
Still, it’s a dead cert that much like the internet did, smart contracts will improve service quality and change the way that services are provided.
Although predicting the future remains the domain of clairvoyants, we do our best to identify the winners and losers over the medium term.
For the banking sector, the banks are likely to be on the winner’s list as well as customers and bank regulators.
Blockchain means there’s room to explore efficiencies on the funding side, with the Commonwealth Bank of Australia (CBA) already completing tests with the Queensland Treasury Corporation.
For banking customers, the speed to settlement is a major drawcard of smart contracts. Aligning loan approval with drawdown access will be of great benefit in a variety of consumer use cases.
The government’s ‘open banking’ data initiative – requiring banks to share customer information with accredited rivals – promises to put the power of data into consumer’s hands.
A likely scenario is that consumers will hold smart contracts containing their personal data, along with encryption keys to share that data with other providers.
Another benefit is that credit checks would be verified through a decentralised ledger and consumers with a stronger credit history (that is, about half the population) would receive more competitive offerings.
Companies that are dominant in their market have an incumbency advantage over new entrants when it comes to developing smart contract technology.
The obvious winner is the blockchain zealot ASX Limited (ASX), which is replacing its CHESS settlement system with smart contracts.
This will reduce trading costs and settlement time, while accentuating barriers to entry for aspiring rivals.
In the digital classified sector REA (REA), Domain (DHG) and Carsales.com (CAR) have the opportunity to use smart contracts to become a trusted marketplace for direct transactions between buyers and vendors.
Property owners will be able to connect directly with prospective tenants and verify their identity, rental history and financial means.
Similarly, car buyers can verify a car’s service history, odometer reading and even cloud-based data such as fuel consumption and emission rates.
Companies such as Freelancer.com (FLN) can become a more trusted supplier of outsourced work services. That’s because the freelancers could offer a verifiable work history, eliminating spam and fake reviews and making the overall hiring process smoother and more trustworthy for employers.
Other winners are those who build IT and telco networks, given the need for more computer power and data transfer. Think of NEXTDC (NXT), Superloop (SLC), and Vocus (VOC).
So too will the need for advancement in semiconductor technology be a boon for 4DS Memory Limited (4DS).
IT consultants such as DigitalX (DCC), Data#3 (DTL), DWS Limited (DWS) and the challenged RXP Services (RXP) are likely to benefit from increased technology budgets.
On the flipside, likely losers are service companies that are a conduit between customer and supplier. This is especially the case when the intermediary is providing a high-volume service with a focus on compliance and/or trust.
Another one to watch is Property Exchange Australia (PEXA), an online property settlements company backed by Macquarie Group (MQG) and Link Administration (LNK).
PEXA, which plans to list this year, has done a good job in disrupting an archaic property transfer market. But it may face headwinds if legal software house InfoTrack decides to invest in an electronic property settlement platform, based on smart contract technology.
The share registries Computershare (CPU) and Link Administration face clear and present pain if private ledgers become the norm.
Both companies have taken steps to try to weather the oncoming smart contract storm, but it remains to be seen what role a third-party ledger administrator would play between market participants and exchange operators.
Through standardised technology approved by the regulator, companies may be able issue smart contract shares directly to shareholders.
Each smart contract would correspond to one share and would have the same existing shareholder rights written into its code (such as voting, dividends and transfers).
Intellectual property companies had better watch their backs too, because the recurring fees charged over the life of a trademark and patent could vanish.
That’s because smart contracts could reduce complex filing procedures with a transparent global IP register, simplified registration and automated compliance.
Thus IPH Limited (IPH), Xenith IP Group (XIP) and QANTM Intellectual Property Ltd (QIP) may find the complexity of their operations -- and their ability to charge –will diminish.
Of course revolutions usually don’t pan out as expected. But there’s a strong sense we’ll still be hearing about blockchain long after everyone’s stopped punting on bitcoin.
Tim Boreham edits The New Criterion
Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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