SMART CONTRACTS AND ITALIAN REGULATIONS
Law n.12/2019 published in the Gazzetta Ufficiale on February 12, 2019, Simplification Law, in article 8-ter paragraph 3 has, among other things, elaborated the definition of technology based on distributed ledgers and smart contracts, holding that:
Art. 8-ter (Technologies based on distributed ledgers and smart contracts):
1. The definition “technologies based on distributed ledgers” refers to those technologies and IT protocols which use a shared, distributed, copyable, simultaneously accessible ledger, architecturally decentralized on cryptographic bases, so as to allow the registration, validation, update and archiving of data, both unencrypted and protected by cryptography, verifiable by each user, neither forgeable nor modifiable.
2. The definition of “smart contract” refers to a computer program that works on technologies based on distributed ledgers and which performance automatically binds two or more parties on the basis of the effects previously defined by the parties themselves. Smart contracts fulfill the written form requirement upon prior electronic identification by the parties at hand, through a process the requirements of which are set by the Agency for Digital Italy with guidelines to be adopted within ninety days from the effective date of the entry into force of the decree hereto.
A reflection and analysis related to smart contracts warrants a brief mention on blockchain, which main objective was to allow money transfers without the intervention of intermediaries. To simplify, a blockchain may be meant as a Ledger, each unit of the ledger is a block and the blocks are connected with one another in the order in which they are created, through the cryptography method, which binds them in a virtual and non-modifiable way. Transactions are made within the chain and the data mining process is performed on the basis of mathematical calculation performed by a device.
In other words, the main blockchain functionality is that of guaranteeing that any transaction may be directly started and completed between two individuals on an open and programmable network.
It is indeed on the blockchain platform that smart contracts are saved.
The key is the idea that the blockchain transaction ledger functionality may be used to record, confirm and transfer all types of contracts and to perform ownership transfers, meaning, for example:
- Financial transactions: Stocks, private equity, crowdfunding, bonds, mutual funds, annuities, pensions and all types of derivatives;
- Public records transfers: Real estate and land ownership titles, vehicle registrations, business licenses, death certificates;
- Digital identity may not be confirmed with blockchain through a drivers license, identity card, passport;
- Financial commitments of individuals: Promissory notes, loans, bets, trusts.
In order to provide further explanation and assuming that the contract is an agreement between two or more parties, the formation of which requires that each party trusts the other party to fulfill his/her obligation, we may state that the object of smart contracts is the same type of agreement (contract), without the necessity of trust among the parties, as the contract is defined by the code and by the code it is defined automatically and without discretion. Therefore, in this context, the contract is seen a method to create blockchain-based agreements with people.
The main characteristics of smart contracts may be identified as: Autonomy , Self Sufficiency and Decentralization .
With Autonomy we mean that once the contract has been formed and is enforceable, there is no need for further contact among the parties.
With Self Sufficiency we refer to the ability to manage resources through the blockchain mechanism, namely raising finance by offering services, for example through stocks issuance, locating necessary resources, and autonomy of data processing and storage.
With Decentralization we mean the absence of a single centralized server and the distribution of data, which can self-process through the network node.
This cryptographically-activated activity system leads to a number of considerations, firstly the fact that there is a necessity to create new laws and rules to carefully regulate the new “institution”. Italy has acted accordingly to provide, for the first time, a true and proper definition of smart contracts as indicated above, with the objective of defining some fundamental aspects aimed at providing a more substantial application. The Agency for Digital Italy will identify the technical standards and the distributed ledgers-based technologies which they need to possess in order to fulfill the purposes in Paragraph 3 within ninety days from the Simplification Laws effective date.