The Capital
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The Capital

Smart Contracts in the International Legal Space

By IMBA-Exchange on Altcoin Academy

In this article, we will consider the approaches of some states to the formation of a system of legal regulation of new technologies — smart contracts and blockchain technology. We would like to note that not all countries of the world have legislatively fixed these terms, and also not all countries of the world have defined the procedure for concluding smart contracts, resolved the issue of recognizing their legal force and the possibility of using such contracts as evidence in resolving court disputes.

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In the article, we will pay special attention to the legal regulation of this problem in the legislation of Italy as a state, which was one of the first in the world to legally define smart contracts and distributed registry technology, as well as determine the procedure for concluding contracts.

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The article indicates the directions in which the legislation on smart contracts and distributed registry technologies in different countries can be further developed, namely: amending the legislation on electronic commerce, on contracts, on information technologies, adoption of an independent regulatory legal act that regulated would be the given sphere of legal relations. At the same time, the most promising is the change in legislation on electronic commerce and contracts.

The issue of the need for the legal regulation of smart contracts, distributed registry technologies, cryptocurrencies, and financial technologies has been on the agenda for more than a year now. And so far in the practice of various states, there are no unified approaches to solving this problem.

Currently, legislative regulation and the practice of applying network contracts (smart contracts) in many countries are in the process of formation. This is due to some extent to the fact that many scientists consider smart contracts, including from the point of view of the element of legal registration of a transaction using blockchain technologies.
Current smart contract use cases include proprietary platforms offered as software as services and not offered as software as services, serve as a proxy for a traditional legal contract.

Various U.S. lawmakers have enacted laws to clarify that smart contracts cannot be invalidated, enforced, or enforced only because the contract is processed, executed, or otherwise enforced through an intellectual contract — computer code.

The states that have passed or are considering such laws are Arizona, California, Florida, Nebraska, Nevada, and New York. Some of them contain definitions of terms such as “blockchain”, “distributed accounting technologies” and “smart contracts”, which have undergone significant discussion and debate.

For example, the Arizona State Law, passed in 2017, defines blockchain technology as a “distributed accounting technology that uses a distributed, decentralized, general, and replicated ledger that can be public or private, can be managed by the tokenized cryptographic economy or without her”. The definition also states that “the data stored in the book is protected by cryptography, is immutable, subject to audit and is reliable”.

There are several options for applying such contracts:

  • smart contracts for the sale of tokens (sale of digital assets);
  • smart contracts in the capital market (issue of digital securities);
  • smart contracts for supply chain management (continuous supply chain of raw materials to sales);
  • smart contracts for the government and smart cities (accounting systems using the blockchain system in the UK, Estonia, Dubai, USA);
  • smart contracts for real estate (land) registers;
  • smart contracts for identity management (security when handling personal data).

In addition, the election sphere is being considered as one of the possible applications for smart contracts and blockchain technologies in the future.

In addition to creating a legislative framework in some countries of the world, for example, in the USA, judicial practice in relation to smart contracts and legal relations for self-defense of rights is beginning to take shape, which some researchers recognize as the legal precursor of smart contracts (for example, Max Raskin. The Law and Legality of Smart Contracts. 1Geo. L. Tech. Rev. 305 (2017)).

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With the development of trading activities through Internet resources, a form of concluding an agreement through the network becomes widespread through certain specific actions: clickwrap agreement (agreement concluded by clicking the mouse) and browsewrap agreement (agreement concluded by using the website). Moreover, in the legislation of many countries, there are no special rules governing such methods of concluding agreements (for example, Russia). In this connection, general provisions on the contract should apply to them. The clickwrap agreement is an agreement concluded in electronic form by clicking on one of the parties to the agreement by clicking the “I agree” button that accompanies the text of such an agreement (England, Germany, Italy, USA, as well as a number of other countries recognize the validity of such an agreement). The UNCITRAL Model Law on Electronic Commerce equates electronic contracts and the procedure for concluding them (in particular, through the clickwrap agreement) by legal force with written contracts.

In many countries, the basis for the subsequent formation of the legal framework for smart contracts can be laws on electronic transactions, such as in Australia (Electronic Transactions Act 1999) and New Zealand (Electronic Transactions Act 2002). In particular, the Australian Electronic Transaction Act, although it does not contain a legal definition of a smart contract, does not invalidate it if entered into.

Italy was the first country in the world in which the terms “smart contract” and “distributed registry technology” were enshrined in law.

This law was introduced into the Italian parliament as a decree in 2018, after passing the approval procedure by the country’s parliament, it was given the status of the Law “On urgent provisions regarding the support and simplification of the business system and public administration”, which was published on February 12, 2019, in the “Official Gazette of Italy” (Decreto-legge 14 dicembre 2018, n. 135 Disposizioni urgenti in materia di sostegno e semplificazione per le imprese e per la pubblica amministrazione).
Thus, the technologies of the distributed registry in this Italian law are defined as technologies and information protocols that use separate, distributed, reproducible and simultaneously accessible registries, decentralized and encrypted, which allow you to register, authenticate, update and store data, regardless of whether it is encrypted or not, and which cannot be changed or tampered with.

This Law provides that the storage of electronic documents using distributed registry technologies takes legal effect from the moment the electronic time stamp appears, as provided for in Article 41 of EU Regulation N 910/2014 on electronic identification and trust services for electronic transactions in the domestic market, and therefore may apply as evidence in court.

The second term, which is introduced into legal circulation by the Italian Law, is a smart contract.

A smart contract refers to a computer program based on distributed registry technologies, the use of which is legally determined by two or more parties based on previously concluded agreements. That is, in other words, a smart contract is a translation of an agreement or an agreement of two or more persons into a computer program that is able to verify that certain conditions are initiated and automatically executed (for example, goods are delivered after payment, a dispute settlement agreement is created and executed in the case when the positions of both sides coincide, etc.).

In accordance with the new Law of Italy, smart contracts must meet the conditions stipulated by law for contracts concluded in writing, and also comply with the procedure established by the Agency for Digital Italy.

Prerequisites for legislative securing the possibility of concluding smart contracts also exist in India, where contracts concluded in electronic form are recognized equal to their paper counterparts, starting in 2009. This norm is enshrined in the Information Technology Act 2000, which contains a large number of definitions of terms, relevant to the development of legal regulation of distributed registry technologies and smart contracts directly. At the same time, the prospect of adopting a special normative act on smart contracts in this state is doubtful due to the fact that Indian lawyers consider a smart contract nothing more than a form of concluding an agreement. Thus, when legalizing the term “smart contract”, changes will be made to the legislative acts regulating contractual relations.

Due to the lack of consensus on the nature and essence of smart contracts, the problem of their legal regulation will face lawmakers for some time to come. At the same time, based on an analysis of the practices of some countries, it can be concluded that the most promising way to consolidate their legal status will nevertheless be amendments to the legislation on contracts, procedural legislation regarding recognition of smart contracts as capable of becoming evidence in resolving legal disputes along with other ways of filling out contractual obligations between the parties, in regulatory legal acts on information technologies and other acts than the adoption of independent law.

Material developed by experts IMBA-Exchange

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