Georgia Eases into Smart Contracts

Georgia’s embrace of crypto currency has not translated into the wide introduction of other new technologies. The National Agency of Public Registry’s new Smart Contract System is a step toward more breakthroughs that could open new opportunities for business.

Georgia has emerged as one of the top crypto-friendly countries, so it would be logical to think that it was equally advanced in other elements of Web 3, the latest iteration of the internet. Far from it! The launch of a new piece of commercial technology, a “Smart Contract” for Georgian real estate transactions a few weeks ago was a rare sign of momentum. But it is at least a concrete first step.

Web 3 incorporates concepts such as decentralization, blockchain technology, and tokenized systems. Probably the most popular of its features is Smart Contracts—the piece of code that runs on a blockchain and automatically executes a specific contractual clause when a defined condition is met. Internationally it is being used across the economy, including the commerce, banking, finance, industry, healthcare systems, royalties, election management sectors as it is secure and cuts time and costs. Almost all processes concerning business transactions or admin can be mapped digitally.

The leader on Georgia’s new “Smart Contract System” is the Ministry of Justice’s National Agency of Public Registry (NAPR).

“This system redefines traditional transaction processes, allowing payment and property registration to happen simultaneously. Buyers and sellers can now finalize sales agreements remotely by signing them digitally through any internet-connected device. Additionally, the Smart Contract enables users to register a mortgage using the same method,” NAPR said in a statement when the system was announced.

Smart Contracts automate various stages of the property registration process. This will significantly reduce manual intervention, paperwork, and associated delays, ensuring a more efficient and streamlined experience.

“The announcement by the NAPR in Georgia regarding remote property registration is a progressive step toward modernizing public services. However, the lack of key features associated with pure Smart Contracts highlights several areas where the current system could be further improved,” commented Mari Tsutskiridze, a consultant on digital transformation who has worked on a number of Georgian international assistance projects.

Several of Georgia’s institutions, from the Business Association of Georgia and the Ministry of Foreign Affairs and Ministry of Economy and Sustainable Development to the National Bank (NBG) have been involved in this launch. The latter, in cooperation with donors, has been spearheading the initiative to develop a legal and regulatory framework for Smart Contracts as these revolutionize the way in which parties make legal agreements. Smart Contracts themselves are (despite the name) not contracts in the legal sense.

Neither lawyers nor estate agents are likely to be replaced by Smart Contracts. These are a tool, and have neither the expertise, capacity to negotiate nor can they give advice and they need to be written by experts. Estate agents’ roles are also secure, given the need there to be street savvy, to provide clients with tailored assistance, and to be able to handle complicated legal and financial matters with confidence.

One promising area for Smart Contract application in Georgia on the grounds of the cost cutting it provides is tourism. “Smart contracts could enable tourism service providers to trade directly with customers bypassing some intermediaries,” states a study in the International Journal of Technology Management & Sustainable Development. It also suggests possible applications in tourism areas such as hotel reservations, airline tickets, car rentals, payment management, reward programmes, traveler identity, luggage tracking, validity of reviews and ratings and more.

Another potential sector is retailing. Automated payments between suppliers and retailers based on predefined conditions could minimize delays. Also, Smart Contracts can automate loyalty programs, rewarding customers for their patronage and driving customer engagement.

For supply chains, paper-based forms traditionally pass through multiple channels to get approvals, increasing the risk of fraud and loss. Th blockchain can nullify such risks by delivering an accessible and secure digital version to parties involved in the chain. Smart Contracts can be used for inventory management and the automation of payments and tasks.

“Smart Contracts help transform traditional financial services in multiple way,” points out Canadian banking and finance consultants CFI. “In the case of insurance claims, they perform error checking, routing, and transfer payments to the user if everything is found appropriate. Smart Contracts incorporate critical tools for bookkeeping and eliminate the possibility of infiltration of accounting records.

“They enable shareholders to take part in decision-making in a transparent way. Also, they help in trade clearing, where the funds are transferred once the amounts of trade settlements are calculated.”

There is no shortage of platforms set up by major companies for the use of Smart Contracts, as US consultants Modern Web point out. For a start, IBM has produced a revolutionary blockchain-based platform, IBM Blockchain, to give companies the ability to create and execute intelligent agreements for various applications such as inventory management and digital identity confirmation. Microsoft has created the Azure Blockchain Workbench, a platform that makes it possible for companies to generate and launch Smart Contracts with various blockchain technologies.

In the financial sphere, US-based international bankers JPMorgan Chase have revolutionized the blockchain industry with their pioneering Quorum platform, allowing companies to craft and deploy Smart Contracts for multiple purposes – from managing supply chains to conducting financial transactions.

For logistics, global shipping group Maersk has constructed a blockchain-based platform called TradeLens to revolutionize their supply chain processes. By leveraging Smart Contracts and automation capabilities, they have been able to increase efficiency across the entire process while simultaneously optimizing costs. Mega-retailer Walmart is using blockchain technology and Smart Contracts via IBM’s Food Trust platform, to create a cutting-edge platform that can trace the supply chain for food products. Their objective is to combat waste while also improving overall food safety standards.

No one, however, claims that Smart Contracts are without their limitations. For a start, Smart Contracts cannot always handle terms and conditions that are vague, and contracts are only as good as they are written. Then, using Smart Contracts makes it difficult to operate on the “good faith” concept on meeting of terms. And there are currently no uniform standards for Smart Contracts, so compatibility issues may arise.

“Smart Contracts are often complex, involving intricate code that must be error-free to function correctly. Any vulnerability in the code can be exploited, leading to significant financial losses or security breaches. Ensuring the security and reliability of Smart Contracts requires rigorous testing and auditing by experienced developers,” cautions Delaware-based contract management platform Legittai.AI. Correcting any errors in the code is time-consuming and expensive.

Most of this lies ahead for Georgian business. But, in a world rife with bureaucratic red tape and often cumbersome legal processes, Smart Contracts offer an attractively streamlined alternative.

In Georgia, the capital markets sector will probably move first, following on real estate. The NBG’s current Supervisory Strategy 2023-25 report contains several references to Smart Contracts in relation to the financial sector and names insurance, banking and fintech. It states:. “……. the idea of Smart Contracts is a cornerstone of the digital GEL ecosystem initiated by the NBG. The ability to use these contracts is crucial for various fintech companies to offer innovative products to customers. Local and foreign experts, actively collaborating with the NBG…are conducting this research.”

Back in 2023 the NBG contracted San Francisco technology group Ripple Labs to implement various real-life test scenarios in Georgia, including with Smart Contracts, under the heading of “Encouraging Financial Innovation….”. The result of its assessments should be available this summer.

In addition, notes consultant Mari Tsutskidze, workshops are being held across the financial sector to “to address challenges and define actionable recommendations on using Smart Contracts effectively.” All of this, she says, should help build confidence in their use.