The challenge of the digital economy: smart contracts and digital rights

There is a rapid development of the technologies that have an impact on the society as a whole in the current fast-developing world. People come in contact with digital rights daily, and the public relations arising in connection with the use of new technologies need the legal regulation. The legal system is in a constant development in order to keep up with the technical progress: creating new or changing existing norms to fill in the gaps that have occurred in the legislation. Due to the rapid growth in the popularity of using the digital technology, the blockchain technology (Blockchain) and smart contracts all over the world, our legislation has experienced a need to be updated in order to regulate the market for new subject matters of economic relations. Thus, on March 18, 2019, Russia adopted Federal Law No. 34-FZ of March 18, 2019 “On Amending Parts One, Two, and Article 1124 of Part Three of the Civil Code of the Russian Federation” (hereinafter referred to as the Federal Law), amending the Civil Code of the Russian Federation (hereinafter referred to as the C.C.R.F.) on the digital rights, which will enter into force only since October 1, 2019.

The adopted Federal Law introduces only basic provisions in the C.C.R.F., such as: a “digital right” concept, the norms on the person who is recognized the holder of the digital right, the norms on the form of a transaction and the requirements to it; the norms on the use of smart contracts are also stipulated. These provisions will be further disclosed in more detail and settled in other special acts.

“The mandatory and other rights, the content and conditions of the performance of which shall be determined in accordance with the rules of the information system that meets the features established by the law” shall be recognized the digital right according to this Federal Law. Fixing this category of rights in the C.C.R.F. allows:

• determining their place in the system of the subject matters of the civil rights;
• indicating the circulability of such subject matters;
• providing defence to the individuals and legal entities in the transactions with this subject matter.

The form of the transaction is deemed to be observed, if it is made in a simple written form, as well as in the case of a transaction performed “using electronic or other technical means.” However, there are two more conditions:

1. The use of electronic or technical means at the conclusion of an agreement should allow “reproducing a content of the transaction in an unchanged form on a material medium.”
2. When concluding such agreement, the signature must be made in the way to “determine reliably the person, who has expressed his will,” for example, a biometric identification or an electronic signature (a reinforced unqualified signature) may be used.[1]

This Federal Law also introduces changes into the field of the creation and use of smart contracts. However, before talking about the adopted provisions, let us talk about what a smart contract is and how it has appeared.

The blockchain technology (Blockchain), that is, a continuous sequential, built according to certain rules chain of the blocks containing the information, has been developed in the last 10 years. The definition of the blockchain technology has also been given in the report of the World Economic Forum, namely: this is a technological protocol that allows the data exchange directly between various contracting parties within the network without the need for intermediaries[2]. The Blockchain is based on a system of the distributed registry management in which there is no the centralized data storage, what makes this technology one of the safest means for storing, transferring the information and performing various operations, including in the field of cryptocurrencies. In addition to a financial field, the Blockchain has found its application in many other fields of activities, including intellectual property.

The idea of the first smart contract was offered in 1994 by Nick Szabo – a scientist in the field of information science, cryptography and law. It consisted in the fact that the description of all conditions of a smart contract should be performed by means of mathematical tools and programming languages. The smart contract itself was described by Nick Szabo in his works as an electronic algorithm designed to automate the process of performing contracts in the Blockchain[3]. However, the practical implementation of such contract was impossible in those years, as the blockchain concept was offered only in 2008 by Satoshi Nakamoto, and it was implemented in practice in 2009.

The principle of the smart contract operation is as follows: such contracts are recorded in the form of a code in the computer program that monitors and ensures the performance of obligations. The parties to the transaction write conditions in such contract, as well as sanctions for the failure to perform them. According to the new provisions of the C.C.R.F., the expression by the person of his will through electronic or other similar technical means, such as, for example, filling in a form in the Internet, is equated to a simple written form of the transaction. In addition, the parties to the transaction may decide: whether they should write all conditions of the transaction or only some certain parts. Depending on the volume of the recorded data, smart contracts are divided into:

• fully automated ones, that is, absolutely all conditions of the transaction are written in the program;
• partially automated ones, that is, a part of the conditions is written in the program, and a part of them is written on paper.

 The confirmation of the fact of the conclusion of the agreement in the form of a smart contract, as well as the means of identification of the parties will be determined according to the general provisions of the Federal Law described above. If the smart contract requires an interaction with third-party programs, organizations (such as banks), different registries, then the special services are used, through which the smart contract gains access to the information in the online mode. In addition, such special services transfer the information about the occurrence of one or another event that is important for its performance. Based on this, the smart contract determines independently whether everything has been performed, whether all conditions have been performed, whether there have been any violations on any party, and it makes a decision whether to complete the transaction and to give out, for example, money, or to impose sanctions on the party for the violation of the conditions of the transaction. For purposes of the legal regulation of the operation of smart contracts, the Federal Law introduces a provision that the transaction can be performed by the parties “in the event of the occurrence of some certain circumstances without an additional will of its parties expressed separately and aimed at the performance of the obligation through the application of the information technologies.”

According to experts, it is possible to automate everything; however, you should not do it, because it is senseless and unprofitable. Smart contracts are suitable most of all for standard, frequently repeated transactions, such as a delivery, a lease, license agreements with an open license, and so on. Despite the fact that the introduction and use of smart contracts is very perspective, such contracts are practically not common in Russia. Currently, the only major and successful project for the introduction of smart contracts in the Russian business is the smart contract concluded in 2018 for automating the trade operations between “S7 Airlines” together with “Alfa-Bank” and the operator of the aviation fuel business “Gazpromneft-Aero.” This experience of using the blockchain technology and smart contracts is the first in the Russian and international aviation fuel market, which allows paying immediately for the fuel, directly when refueling aircraft without a prepayment.

Smart contracts have advantages over conventional contracts, such as:

• self-performing as the main objective of this technology;
• a transparency of the transaction, because it is possible to track all actions connected with the performance of the smart contract;
• a defence against the amendments not approved by the parties;
• a possibility to make transactions anonymously.

However, despite all advantages there are disadvantages, namely:

• smart contracts are still a program code; hence, there may be errors and crashes in the program. Who in this case will be responsible for the smart contract?
• the lack of a detailed settlement of the issue with smart contracts, since only basic provisions were adopted;
• the creation of a smart contract will require the involvement of an IT-technology specialist, as well as to pay for his services;
• currently, there is no a judicial practice in case of disputes;
• low prevalence in Russia, due to the need to duplicate the majority of documents on paper media, what contradicts the idea of smart contracts, which is in getting away from paper in a document circulation.

Despite all difficulties in the early days, the new technologies will penetrate increasingly into the society and public relations protected by law, and in the future they will take its weighty niche in the civil law of our country.