The Potential of Smart Treaties

commentary

Apr 8, 2024

Closeup of people wearing suits putting their hands together on top of a digital globe, photo by GIANT7/Getty Images

Photo by GIANT7/Getty Images

Blockchain technology—a decentralized digital ledger system that enables secure and verifiable transaction records—presents numerous opportunities for the development of trade and commerce. One particularly interesting opportunity is smart contracts, an application that could have broad geopolitical implications if applied to treaties.

Smart contracts are self-executing agreements triggered when certain conditions are met. Multiple parties can agree to the nature of a transaction, which can then be programmed into a smart contract.

As blockchain technology matures, networks of smart contracts could produce sophisticated trading apparatuses that enable agreements to be executed almost instantly across the globe. This includes the ability to construct complex agreements, such as those in insurance, debt issuance, or even international treaties.

As policymakers explore central bank digital currencies (CBDCs), public attention has focused on “retail CBDCs” intended for everyday consumers. The electronic Chinese Yuan (e-CNY) provides a notable example of a retail CBDC in use by millions of Chinese consumers, a topic we discuss in our recent report, Central Bank Digital Currencies and U.S. Strategic Competition with China.

CBDCs could not only redefine the nature of money, they also could reshape diplomacy.

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But CBDCs could not only redefine the nature of money, they also could reshape diplomacy. Similar to how programmable digital currencies paved the way for smart contracts, programmable wholesale CBDCs could give rise to smart treaties. We use the term smart treaties to refer to agreements where programmable reserves, facilitated by CBDCs, enforce the terms of an international agreement automatically.

Smart treaties in bilateral trade agreements, for example, could bind both parties by the treaty terms through programmable CBDC reserves. If either party violates the terms, the smart treaty would automatically execute consequences (e.g., penalties, tariffs, quotas). This could also be implemented multilaterally, incentivizing all parties to a multilateral trade agreement to adhere to established rules rather than pursuing detrimental “beggar thy neighbor” policies.

Another example where smart treaties could be employed is in agreements concerning the environment, which have been notoriously difficult to enforce. In the event that a party violates the terms of an environmental agreement, the smart treaty can automatically execute consequences. Programmable wholesale CBDCs would enable each party's central bank to allocate treaty-specific reserves that could be tracked and traced worldwide and linked to real-time data such as emissions or conservation efforts.

The most consequential international agreements pertain to war and peace. When a country violates international peace and security, and its elites are punished with financial sanctions, those sanctions are often crude, ineffective, or even counterproductive. Freezing assets of those associated with the aggressor raises concerns about property rights and the rule of law, undermining trust in the sanctioning parties' financial institutions. Smart treaties could serve as a more sophisticated, predictable, and internationally agreed deterrent against aggression.

Smart treaties could serve as a more sophisticated, predictable, and internationally agreed deterrent against aggression.

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A smart peace and nonaggression treaty could take the form of pooled programmable reserves allocated by parties to the treaty. In the event of aggression, the smart treaty could automatically trigger a depreciation of the aggressor nation's reserves. Furthermore, the transparency afforded by blockchain technology would allow the international community to monitor compliance in real-time, reinforcing the credibility of deterrence.

In each case, smart treaties could involve even greater sophistication, such as graduated responses that throttle consequences in proportion to the level of violation, or positive incentives for persistent compliance.

As policymakers grapple with the applications and implications of blockchain technology, we encourage those engaged to think imaginatively. Redefining global finance and diplomacy through smart treaties is one way to stretch the imagination.


Max Rangeley is manager of The Cobden Centre. Jim Mignano is an assistant policy researcher at RAND and a Ph.D. student at Pardee RAND Graduate School.

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