UBS creates Smart Bonds on Ethereum. Is this possible?

In november 2015, Stephan Karpischek, and Ian Cusden from UBS presented a prototype for an Ethereum smart contract that represented a bond issuance.

I’m interested in Bond issuances on the blockchain, as I think it could bring many interesting use cases for small and medium companies to raise money.

However I don’t understand one thing: How can the smart contract guarantee payment of coupons, or principal at maturity? one way would be for the smart contract to block enough cryptocurrency to pay back all the coupons and the principal at the end, but this would render the bond useless. The only possible alternative is that the smart bond can fail to pay back either coupons or principal at maturity. This must be the case, and it changes a big preconception I had about smart contracts, that they guaranteed payment and that this would avoid litigation.

Smart contracts don’t guarantee payment. Now that I think about it, smart contracts don’t even guarantee that they’ll have enough gas to keep running until the maturity of the bond. Smart contracts just automate execution and settlement, which is already pretty cool. đŸ™‚