Blockchain and the future of the legal system

An instrument of certainty of legal relationships

Introduction

As is well known, blockchain is a particular type of database characterized by its main features of certainty and immutability of entries. This makes it ideal today for certifying the circulation of so-called crypto-assets because it offers the maximum possible protection regarding their creation and each subsequent transfer of ownership. However, it is evident that such technology is suitable for various other uses. It seems reasonably certain that blockchain can prove to be extraordinarily useful in all those areas where the legal system requires a degree of certainty in legal relationships.

To achieve such a result, however, it is necessary for the laws to adapt to technological advancements, and in this process, one cannot help but notice a certain delay, especially in Italy. Nevertheless, it is worth attempting to provide an overview of the potential, aiming to enhance the possible synergy between law and new digital tools, by incorporating a tool of such extraordinary effectiveness into the framework of economic activities, thus achieving greater certainty, speed of action, and simplicity in managing relationships.

Blockchain in Law Today

Currently, Italian law provides a definition of blockchain in Article 8-ter of Decree Law 135/2018.

According to this provision, “technologies based on distributed ledgers” are defined as technologies and computer protocols that use a shared, distributed, replicable, simultaneously accessible, architecturally decentralized ledger based on cryptographic foundations, allowing the recording, validation, updating, and storage of data both in clear and further protected by encryption, verifiable by each participant, unalterable, and unmodifiable.

It is worth noting that in the third paragraph, the Decree adds that “the storage of an electronic document through the use of technologies based on distributed ledgers has the legal effects of electronic time validation referred to in Article 41 of Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014.”

The mentioned Article 41 of Regulation 910/2014 deserves to be cited in full:

The first paragraph states: “Electronic time validation shall not be denied legal effects and admissibility as evidence in legal proceedings solely on the grounds that it is in electronic form or that it does not meet the requirements of qualified electronic time validation.”

The second paragraph states: “Qualified electronic time validation shall enjoy the presumption of the accuracy of the date and time indicated and of the integrity of the data to which that date and time are associated.“

Finally, according to the third paragraph, “an electronic time validation issued in a Member State shall be recognized as a qualified electronic time validation in all Member States.”

This is not the place for an in-depth analysis of the referenced provisions. It is sufficient to observe that the prevailing trend, especially in the European context, seems to be towards recognizing the value of using technologies known as DLT (Distributed Ledger Technologies) – including blockchain – as a means to ensure legal certainty in legal relationships, as mentioned at the beginning.

However, it appears that these interventions are largely undersized compared to the existing potential. For this reason, it is worth mentioning some opportunities that could be seized today with some minor revisions to existing regulations.

Blockchain in the Near Future: Some Proposals – Circulation of Assets

Blockchain as a tool for ensuring legal certainty seems functional, first and foremost, in all cases where it is legally necessary to certify the stages of the circulation of a particular type of asset.

The first obvious example is real estate transactions.
Currently, immovable property can only circulate through registration in the Public Real Estate Registers. This is a procedure that remains Byzantine and outdated despite being largely digitized.
It is evident that tokenizing and transferring the certification of ownership of real estate on the blockchain would greatly simplify and make not only the transfer but also the compliance with the principle of continuity of registrations more economical. This principle requires the ability to reconstruct the previous ownership transfers of any property.

A similar discussion can be applied to registered movable assets, as well as certain categories of unregistered movable assets.
Think of artworks, jewelry, or even collectible watches. Instead of certifying their origin and circulation with paper certificates, digitalization and certification of ownership and authenticity on the blockchain would be simple and provide greater protection.

Blockchain in the Near Future: Some Proposals – Circulation of Financial Instruments

Another area of economic activity where the beneficial use of blockchain is easily identifiable is in the case of negotiable instruments or various types of certificates.
In this case, several examples can be suggested. The first is that of promissory notes and the need for a continuous series of endorsements for the holder to proceed with collection.

But consider bearer bonds or shares. These instruments, which are by definition intended for circulation but also serve the purpose of granting voting rights in assembly, would undoubtedly benefit from the ability to circulate on the blockchain. This would, for example, help overcome the problem of opposability of transfers and precisely identify the moment of ownership change for all cases where this is relevant within administration.

Furthermore, within the realm of financial instruments, blockchain, especially when used in conjunction with smart contracts, appears ideal for a range of specific contracts. First and foremost, there are standardized contracts in the Civil Code: the transfer and sale of credit instruments.

But even derivative contracts seem entirely suitable for negotiation and, more importantly, execution through a tool that can both certify circulation and automate transfers under specific conditions.

Blockchain in the Near Future: Some Proposals – Certainty of Timing

Finally, it is worth mentioning some cases where the certainty of the timing of a specific legal act becomes critically relevant. Several scenarios can be imagined.
First and foremost, the conclusion of a contract, which occurs when acceptance becomes known to the proposer.

In cases where proposals and counter-proposals overlap, or where text modifications are requested, or even when the performance of certain obligations begins before the conclusion of the contract, having certainty about the timing of these various actions becomes absolutely necessary.

Regarding testamentary dispositions, the timing of the drafting of a document is of paramount importance. It is not uncommon to find oneself discussing, even in court, the date of a modification to a will or the drafting of a subsequent will in relation to an already existing one.

Furthermore, the submission of a bid at an auction, whether public or private, or the conclusion of an activity that requires a statutory rendering within a certain timeframe, or the submission of an application for a public tender, all these situations, where the ability to indisputably certify the legally completed timing of a legally relevant act, would provide a significant advantage, including a reduction in litigation.

Blockchain in the Near Future: Concluding Remarks

The overview attempted here does not claim to be exhaustive, of course, but aims to give an idea of how a tool like blockchain could prove useful in producing legal certainty in both public and private, negotiable, and non-negotiable legal relationships. There is a concrete possibility of achieving greater stability in actions and contracts, resolving issues related to the difficulty of providing adequate proof of certain behaviors.

This would make it easier for professionals in various sectors and could reduce litigation more than any reform of procedural law. Moreover, unlike the latter, an extension of blockchain usage would not carry the risk of compromising the right to defense or the right to full adversarial proceedings.

However, from a technological perspective, there do not seem to be any significant obstacles to proceeding in the indicated direction today. It is from a legal perspective that much progress is still needed.

Despite the timid first steps mentioned above, it is necessary to stimulate significant innovations in the relevant regulations to achieve the goal, which according to the writer, is no longer postponable, of greater interplay between (legal) policy and technological progress.

From the Civil Code to the Financial Market Consolidation Act (TUF), from the Bills of Exchange Act to the Digital Administration Code, many regulations would require a legislative intervention focused on evolution and innovation.

One can only hope that the debate among professionals from various fields will push in this direction.