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Striking a balance between technology advancement and regulatory requirements
It is crucial that the implementation of smart contracts in Indonesia be thoroughly planned and executed to align with the current regulations and ensure consumer protection.
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A woman makes a transaction using an automated teller machine in Jakarta in this undated photo. (JP/Wendra Ajistyatama)
T
he new Law No. 4/2023 on the development and strengthening of the financial sector represents a major milestone for businesses in the financial service sector and the advancement of information technology in Indonesia, particularly through the introduction of the smart contract as a form of electronic contract.
While some countries may have established a framework for the regulation of smart contracts, the application can vary, making it a complex and constantly evolving area. It is crucial that the implementation of smart contracts in Indonesia be thoroughly planned and executed to align with the current regulation and ensure consumer protection.
Smart contracts differ from traditional contracts in that they are not necessarily agreements between individuals or organizations. Instead, smart contracts refer to computer programs that operate on a blockchain and automatically execute when particular conditions are fulfilled.
Ethereum, a widely adopted blockchain network, provides a framework for the development and implementation of smart contracts. According to Ethereum.org, a smart contract is a collection of code (its functions) and data (its state) that resides at a specific address on the blockchain. Further, smart contracts can define rules, like a regular contract, and automatically enforce them via the code.
This technology allows individuals or businesses to conduct transactions by embedding the terms of their agreement directly into the code, eliminating the need for intermediaries and making the process transparent, immutable and secure. The code, rather than human interpretation, determines the outcome of the agreement, ensuring that it is executed exactly as specified.
The law allows for the use of smart contracts in the capital market, money market and foreign exchange market transactions, including derivative instruments, as long as an accompanying agreement is preserved. The smart contracts must be based on this agreement, which, at a minimum, contains the terms and conditions for automating the execution of rights and obligations.
Hence, smart contracts cannot operate alone but must be supported by a natural language agreement for proper implementation of rights and obligations through programming language or code in the smart contract.
