At what point is the regulation of Smart Contracts in Italy?
As we had extensively discussed in the article “Smart Contract: What it is, how it works“, so-called smart contracts are one of the central tools in the debate regarding the transition to digital. In the aforementioned article, we had already explained their advantages and mechanisms of operation. Here, we will focus on the legal implications of this new form of contract.
Smart Contracts in blockchain come into being thanks to the Ethereum platform, which allows through these to distribute revenue as a result of the sale of an NFT, to create other tokens starting from the platform itself, as well as to put in place an agreement with legal validity between the parties.
Smart Contract: the regulatory situation in Italy
Do Smart Contracts have legal validity? Is there a regulation in our legal system?
Italy in this case moved ahead of other European countries and in February 2019, with the conversion law of the simplification decree 135/2018, formulated a definition of Smart Contract by placing discriminants between those that aspire to legal value and those that cannot hold it. An excerpt from the said decree reads:
“A ‘smart contract’ is defined as a computer program that operates on Technologies based on distributed registers and whose execution automatically binds two or more parties based on effects predefined by them.”
The standards also define that in order to meet the requirement of a written contract form, one needs the prior computer identification of the parties following the process outlined by the Agency for Digital Italy (AgID).
Smart Contract, the neuralgic role of data and oracles
Smart Contracts extrude their usefulness to the fullest by having the calling function perform operations automatically. In order for this to happen, each Smart Contract must be linked to oracles, whose name might call to mind something mystical, but which essentially turn out to be programs that collect and process data.
The role of the latter is of paramount importance; untrue data transmitted by an oracle would undermine the proper functioning of Smart Contracts, at which point legal disputes would eventually escalate, triggering the opposite effect of what these tools were born to do. The report “Smart Contracts and the Digital Single Market Through the Lens of a “Law + Technology Approach” presented to the European Commission by Thibault Schrepel suggests incentivizing the use of reliable oracles.
The task of the legislature is to introduce a regulatory framework without burdening these tools with excessive red tape that would debase the use of Smart Contracts from meaning. Introducing and promoting Smart Contract standards according to scope, translating contract law into computer language are other interesting proposals introduced in Schrepel’s report. Proper regulation would allow Smart Contracts to relieve ordinary justice from resolving several disputes. A case in point is that of Etherisc, an insurance protocol that through an oracle tracks flight takeoff and landing times and provides reimbursement to customers in case of delays.
Smart Contract: the regulatory situation in the EU and the US
The European Parliament has passed a resolution called the Blockchain Strategy to direct the work of the Commission. The goal is to create a shared pan-European legal framework that gives legal certainty to Smart Contracts in all European states.
The transnational characteristics of blockchain, and therefore also of Smart Contracts, require shared rules to promote the use of these tools. The resolution openly states that the aim of the European Commission’s work should be to avoid fragmentation of the regulatory framework.
The European Blockchain Services Institute (EBSI), introduced in 2021, is to be the entity that, with technical and legal awareness, will be tasked with building its own blockchain that connects the states, fostering interoperability among the continent’s business actors. In Europe, only Malta has given a legal definition of Smart Contracts, calling them Innovative Technology Arrangements. Currently, Smart Contracts entered into between two parties belonging to two different countries must rely on the EU Rome I Regulation to establish jurisdiction.
Another regulatory framework to consider is that of the US. Notoriously, North American technological innovations influence trends on the Old Continent and so do the resulting regulatory solutions. Obviously, the U.S. enjoys a more liberal system, and the various states enjoy broad regulatory autonomy. In 2018, Tennessee, through Senate Bill No. 1662, enshrined the legal validity of Smart Contracts with the following rationale: “it is not possible to deny legal effectiveness to a contract just because it is executed through a smart contract.” The same line has been adopted by Arizona, and Wyoming has implemented several laws aimed at promoting blockchain technology in the legal sphere as well.
Regulation as much as possible shared among European states and non-European states, at least among the main trading partners, would make it possible to promote models and solve ex-ante issues that due to the characteristics of Smart Contracts cannot be solved ex-post.