Blockchain & Legislation: Considerations on Italian Regulation.

Intro.

In the mix of Simplification Decrees, as often happens lately, the Legislator converges regulations concerning the most disparate matters. However, in this context, we are interested in discussing blockchain technology.

Therefore, if we examine the Simplification Decree of 2019, we will notice that the Italian Legislator decided to include four paragraphs in article 8-ter that were supposed to represent the first national regulation concerning blockchain.

The conditional is used on purpose because currently, this regulation remains unimplemented. Moreover, the Legislator, making a questionable choice, decided to delegate the completion of the precept to a second-level technical regulation (AgID), without considering the central impact it could have on the legal circulation of fundamental institutions such as, for example, that of the contract and its admissibility as evidence in court. This will be discussed later. For now, as a first step, we decided to report this article in full, so that the reader can compare it directly with the evaluations that will be made later.

Art. 8-ter 1: Distributed Ledger Technologies and Smart Contracts.

1. Distributed ledger technologies are defined as the computer technologies and protocols that use a shared, distributed, replicable, simultaneously accessible, architecturally decentralized register on cryptographic bases, which allow for the registration, validation, updating, and storage of data both in plain text and further protected by cryptography verifiable by each participant, unalterable and non-modifiable.
2. A “smart contract” is defined as a computer program that operates on distributed ledger technologies and whose execution automatically binds two or more parties based on predetermined effects. Smart contracts meet the requirement of written form, subject to the digital identification of the parties involved through a process with the requirements established by the Agency for Digital Italy with guidelines to be adopted within ninety days from the date of entry into force of the law converting this decree.
3. Storing an electronic document using distributed ledger technologies produces 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.
4. Within ninety days from the date of entry into force of the law converting this decree, the Agency for Digital Italy identifies the technical standards that distributed ledger technologies must meet for the purposes of producing the effects referred to in paragraph 3.

Starting from the analysis of the first paragraph, it can be understood that the Legislator’s intent was to be able to include the largest possible number of blockchain platforms within this regulation.

This objective could have been achieved quite well, provided that the fact that what is actually represented by the technology blockchain was defined as “distributed ledger technologies” is overlooked. All of this probably leaving aside the fact that blockchain is a particular species of what is defined as Distributed Ledger Technologies.

Moving on, the major problems arise when analyzing the last part of the first paragraph. It defines what a distributed ledger technology is by law: the Legislator establishes that the data saved on these registers must be unchangeable and unalterable in order to bring that data system within the scope of the regulation under consideration. However, this is not absolutely applicable to all blockchains. The larger and more widespread (famous to the public) ones guarantee a high level (but not technically absolute) of unchangeability, while smaller or less “established” ones may not guarantee it.

However, going beyond the clear reference of the legislator to the famous permissionless blockchains, the problem arises when thinking about blockchains, for example, of the permissioned type, which, given their organization, could allow for the pre-modifiability of data, for example, to certain qualified nodes or through the agreement of a given number of them. This would make the legislation examined here inapplicable in all those cases in which data modification was possible under certain conditions established in advance.

It is also noted that this section of the regulation, if not clarified by the AgID, could create many problems regarding the recognition of which blockchains could fall under the regulation and which could not. This would create a legal distinction about the data stored on different blockchains: some would be recognized (based on unspecified parameters) as full-proof evidence, while others would not.

Furthermore, it is interesting to note, for us blockchain enthusiasts, the following: if the clause were interpreted literally, not even Bitcoin, which is the blockchain that guarantees one of the highest levels of immutability of data, would fall within the parameters of the regulation.

What has been said previously is crucial because the legislator, with the third clause, attributes to the data saved on this type of registry their admissibility as evidence in judicial proceedings, recognizing, moreover, to this data the effects of electronic time validation (pursuant to art. 41 of the eIDAS Regulation).

The second clause, instead, is dedicated to smart contracts, which are rightly defined by the legislator as computer programs operating on “distributed ledger technologies.” What is less convincing from a legal point of view in this part of the regulation is the fact that these “contracts” would only become binding on the parties from the moment of their execution.

This perplexes the jurist, who, in his academic path, has learned that there are two types of contracts in our legal system: consensual contracts (which also include those with real effects) and real contracts. In the first case, the binding nature is given by the agreement between the parties, while in the second case, it is given by the delivery (traditio) of the res. However, there does not seem to be a principle of binding nature based on execution. Rather, the execution (of the program) of a smart contract makes contractual performance unstoppable and immutable (on this, one should not be so clear, as there are some computer strategies that can make execution reversible).

In fact, doctrine has rightly pointed out that from the reading of the second clause of the article (which constitutes, in fact, the Italian, unimplemented, legislation on smart contracts), the principle would emerge according to which the contract would have the force of law between the parties, pursuant to Art. 1372 of the Italian Civil Code, only from the moment it is executed. According to this interpretation, the agreement between the parties regarding the effects would be a previous event to the one in which the smart contract becomes binding for them. According to this doctrine, if this interpretation were accepted, we would be facing a tertium genus (which would be added to the mechanisms of consensuality and reality) of contract formation: the conclusion of the contract by virtue of the validation diffused by the nodes of the blockchain. Continuing to read the second clause, it can be noted that the legislator establishes that smart contracts that guarantee digital identification of the parties while respecting the unknown technical requirements of the AgID satisfy the requirement of written form. It is clear that all of this has enormous implications for the possible applications of this technology in the economic-contractual field. All of this could lead to the possible adoption of smart contracts in cases provided for by Article 1350 of the Civil Code.

Conclusions.

After this preliminary analysis of the regulatory text, unfortunately, some brief non-resolving conclusions can be drawn.

Firstly, the existence of unimplemented legislation may have created unnecessary regulatory production, which may be responsible for further expanding the gray area in which these tools still find themselves; it is therefore noted that instead of increasing legal certainty with innovative and cutting-edge regulations, the Legislature has, as often happens, further complicated the issue instead of simplifying it (presumably, a Decree with such a title was intended to have this purpose).

Finally, it could be argued that it would have been better to adapt the existing regulations, namely the Digital Administration Code and the eIDAS regulation (which contain a good and well-established regulatory framework on technology).

We can only wait for further developments and for the AgID to issue the technical standards provided for in the fourth paragraph of the article under examination.

*By Riccardo NIGRO, graduate in Law for Businesses and Institutions. Adapted and revised from my thesis: Blockchain, Cryptocurrencies and Smart Contracts. Legal Aspects.

1. https://www.gazzettaufficiale.it/eli/id/2019/02/12/19A00934/sg. Link accessed on 03/17/2021.
2. The fourth paragraph assigns AgID the task of issuing technical standards that DLTs must comply with in order to produce effects under 41 eIDAS. It should also be noted that it has not been communicated what the scope of these guidelines will be.
3. Massimo SIMBULA, Italian legislation on DLT, in Blockchain and Smart Contract, edited by Raffaele BATTAGLINI, Marco GIORDANO, Giuffrè Francis Lefebre, Milan, 2019, pp. 300-301, pp. 142-143.
4. Stefano CERRATO, Traditional contracts, contract law, and smart contracts, in Blockchain and Smart Contract, edited by Raffaele BATTAGLINI, Marco GIORDANO, Giuffrè Francis Lefebre, Milan, 2019, pp. 300-301.
5. “An ‘smart contract’ is defined as a computer program that operates on distributed ledger technologies and whose execution automatically binds two or more parties based on predetermined effects established by them. Smart contracts meet the requirement of written form through the electronic identification of the interested parties, through a process that meets the requirements set by the Agency for Digital Italy with guidelines to be adopted within ninety days from the date of entry into force of the law converting this decree.”
6. Stefano CERRATO, Traditional contracts, contract law, and smart contracts, op. cit., p. 301.