Digital Rights CenterIT – Corporate blog. In our days, the processes of digitalization and deployment of fintech solutions lead to a fundamental transformation of the legacy principles and tools used in the financial markets of most economies in the world. Due to innovations and infrastructure development, many operations that in the past required a personal presence and a huge amount of time can now be accessed “in just one click” and take only a few minutes.

The principles of functioning for some innovations were laid down decades ago. The idea of a smart contract was initially proposed in 1994 by American scientist Nick Sabo, who described it as “a digital representation of a set of obligations between the parties, including a protocol for the fulfillment of these obligations.” Szabo was inspired by such researchers as David Chaum and believed that the development of smart contracts with the addition of cryptographic protocols and other digital security mechanisms will be a significant improvement compared to traditional legal contracts.

So, a smart contract can be defined as an agreement between two or more parties with the aim to establish, change or terminate legal rights and obligations, and part or all of the conditions are recorded, executed and/or supported by a computer algorithm in a specialized environment.

“In simple words, smart contracts work similarly to a vending machine. You put money inside, press the button, and a can of Coca-Cola falls into your hands,” [explains Anton Vashkevich, a certified lawyer] (https://pravo.ru/story/205151/).

In the twenty-first century, we have an opportunity to convert all legacy contracts into digital smart contracts, therefore, the range of potential applications is expanding significantly. Let’s look at some areas where they could be useful.

Payment automation: a contract can be programmed in such a way that the required amount is guaranteed to arrive to the specified persons or organizations at the specified time.

Ownership registration: You can register the documents required to establish or change ownership using electronic smart contracts on the blockchain.

Energy transactions: thanks to smart contracts, it becomes possible to create a digital ecosystem where people will exchange energy. In such systems, the sources of electricity or fuel will be linked to smart contracts concluded between individuals or with the participation of some involved organizations able to personalize each customer’s consumption.

Intellectual property: a smart contract can be embedded in any object that is controlled digitally. This is where the concept of “smart property” comes from, which can be combined with IoT (“Internet of Things”) objects connected to the web. For example, you can use it to automate the rental of some objects (from houses to cars).

Financial services: cryptocurrencies open up a wide range of different use cases for smart contracts that would otherwise be impossible.

In August 2018, Alfa Bank together with S7 Airlines concluded a smart contract with Gazpromneft-Aero, one of Russia’s largest aviation fuel market operators. The contract contained information on the volume and price of fuel for the airline’s aircraft. The aircraft commander requests the amount of fuel required to perform the flight from the operator, and after that an application for reserving the relevant amount of money goes online to Alfa-Bank. The bank sends instant confirmation, which triggers the refueling process. At the end of it, the funds were debited from the account, and the commercial services of both parties receive information about closing of the transaction with all the documents. The smart contract was based on the Hyperledger blockchain platform. This innovative technology has increased the speed of transactions and minimized financial risks, since it does not require any prepayments or bank guarantees.

In the legal literature, the term “smart contract” is relatively new, but it is already possible to state the existence of many approaches to this concept definition. So, Kartskhia A.A. believes that smart contracts represent the next step in blockchain technology. These contracts are inherently analogues of traditional contracts in a legal sense. With the help of computer programs, people create a sequence of actions that represents a smart contract code for some repetitive operations (buying and sales in financial transactions, electronic payments, insurance agreements, etc.).

According to Churilov A.Yu., a smart contract is a contractual structure that is signed and exists exclusively in the blockchain network, and its distinctive features are the impossibility of changing after getting to the blockchain, and the automatic fulfillment of the arising contractual obligation without any required separate expression of the will of the parties. If the smart contract does not meet these criteria, we can only talk about some elements of the smart contract code that is used in a traditional contract.

From the point of view of the doctrine, the position of D.V. Fedorova looks very remarkable. He points out that a smart contact is a kind of agreement written in a programming language, and the scientist points out that the use of a programming language to formulate the terms of a smart contract does not distort the contractual essence of the deal being concluded, since a smart contract is public in nature, and its conditions are written in one of the programming languages to which the same rules apply as for human languages. “A contract may be concluded in any language, including any programming language,” he says.

However, when using a smart contract, it is still necessary to distinguish between a computer program for concluding contracts and the legal relationship, which represents a legal contract. So, the law can govern only contractual relations, and we should take into account the technical features of the computer program that can change the contractual relations.

Therefore, we can agree with Belov V.A., who makes a well-founded conclusion that “a smart contract in the legal sphere is a special legal regime of a civil law agreement. In this sense, a smart contract becomes a special non-independent contractual structure that cannot be considered separately from the traditional contract attached to it.”

In the case of a smart contract, its contractual concept should be recognized as fundamental, since in essence all existing concepts can be reduced to the contractual nature of a smart contract. Their authors put stress on the terms of a smart contract and its execution, emphasizing, first of all, the fact that a smart contract is a contract.The recognition of a smart contract as a contract will also make it possible to recognize the legally significant consequences resulting from its conclusion and execution on the blockchain using cryptographic methods (i.e. transfer of rights to digital financial assets).

At the same time, it seems that the original legal nature of a smart contract is still based on its program code, which is then adapted to the specific circumstances and needs of the participants, to the algorithms associated with the fulfillment of previously accepted obligations, as well as to the routines of concluding contracts in electronic form.

When considering the issue of legal regulation of a smart contract as a way of fulfilling obligations or a separate type of civil law transaction, it should be noted that due to the lack of special regulation, it is the general provisions on obligations and contracts enshrined in the first part of the Russian Civil Code that will be applied to these relationships. Among them, we can distinguish, in particular:

• part 2 of art. 309 of the Civil Code of the Russian Federation: “The terms of the transaction may stipulate how the parties must fulfill the obligations arising from it upon the occurrence of certain circumstances in the absence of a separately expressed additional will of the parties aimed at fulfilling obligations, by using information technologies defined by the terms of the transaction… “;
• part 2 of art. 434 of the Civil Code of the Russian Federation: “An agreement in writing may be concluded in the form of a single document (including electronic) signed by the parties, or in the form of an exchange of letters, telegrams, electronic or other documents in accordance with paragraph 2 of paragraph 1 of Article 160 of this Code.”

Over the past few years, however, there have been many different attempts to formulate and consolidate the concept of a smart contract at the legislative and law enforcement levels. So, when the federal law N 419059-7 “On Digital Financial Assets, Digital Currencies and on Amendments to Certain Legislative Acts of the Russian Federation” was submitted to the State Duma, the following definition was proposed: “Smart contract is an electronic contract, where the fulfillment of rights and obligations is carried out automatically by executing digital transactions in a distributed register in the sequence strictly determined in the contract and upon the occurrence of circumstances determined by the contract”. However, this definition was subsequently excluded from the draft law. The Central Bank of the Russian Federation also made attempts to formulate the concept of a smart contract, defining it as “a transaction that is executed automatically upon the occurrence of conditions predetermined by the parties. The smart contracts will serve as an additional functionality of the digital ruble platform. “ In summary, the following points should be noted:

1) the legal nature of smart contracts is based on the program code, which is then adapted to the specific circumstances and needs of the participants, to the algorithms associated with the fulfillment of previously accepted obligations, as well as to the routines of concluding contracts in electronic form;

2) currently there is no legally approved definition of the term “smart contract”. However, the legal regulation of a smart contract is now viewed as a combination of two components:

• smart contract as software that belongs to a specific copyright holder, where the regulation related to authorship and exclusive rights to the corresponding code is subject to the rules described in the fourth part of the Civil Code of the Russian Federation;
• smart contract as a way to fulfill obligations, as well as an electronic form of a regular contract, regulated by general acts on obligations and contracts;

3) in the legal literature and the media there is a lot of talk about the wide involvement of smart contracts in public relations, however, it should be noted that it is too early to declare the widespread use of such tools in household, medium and even large transactions of ordinary consumers, smart contracts are still a rather abstract innovation for merchants.

“These days, many business owners are obsessed with the idea of introducing a smart contract into their technologies, but so far all this is just conversations and fantasy. For their success, the interested participation of several parties to the transaction, as well as the state, banks, etc., is necessary”, concludes Alexander Trifonov, the head of the LegalTech-Director program at the IPK Moscow State Law Academy of O. E. Kutafin. The reason for this in most cases is the lack of economic feasibility. “In any situation, at least one of the parties to the transaction wants to reserve the right to make changes to business processes, while not being hit by sanctions. In addition, when implementing blockchain, you have to make significant efforts to involve employees in changes, and this is terribly difficult,” said Trifonov.

In any case, for the successful development of smart contracts in the Russian Federation, it is necessary to accept the legal status of both the concept of a smart contract and the parties to a smart contract, to approve the procedure for organizing the protection of the interests of all parties and to develop a unified approach to the application of relevant rules.

In conclusion, it is worth noting that smart contracts should be considered as legal contracts and be subject to the laws of the respective state or some international treaties.

We’ll return to the topic of smart contracts when we consider the issue of their regulation in Western countries, but that will be later. In the meantime, let us confine ourselves to stating the fact that attempts to carefully introduce the concept of “smart contract” into the field of civil legal relations will sooner or later become the reason for adding the corresponding article to the Civil Code of the Russian Federation. The publication was prepared with the support of DRC lawyers.

https://habr.com/en/company/digitalrightscenter/blog/680692/