legal nature and scope of their application

Digitalization and the introduction of financial technologies are fundamentally transforming the existing principles and tools in the financial markets of the economies of most countries of the world. Thanks to innovation and modern infrastructure, many operations that used to be

required a personal presence and took a lot of time, now they can be accessed, as they say, “in one click” and are completed in just a few minutes.

The principles of functioning of a number of innovations were laid down several decades ago. The idea of ​​a smart contract was first proposed in 1994 by the American scientist Nick Szabo, who described the latter as “a digital representation of a set of obligations between the parties, including a protocol for the fulfillment of these obligations.” Szabo, inspired by such researchers as David Chaum, also believed that the development of smart contracts through the execution of cryptographic protocols and other digital security mechanisms could be a significant improvement over traditional legal contracts.

Thus, a smart contract can be defined as an agreement between two or more parties on the establishment, modification or termination of legal rights and obligations, in which part or all of the conditions are recorded, executed and/or provided by a computer algorithm automatically in a specialized software environment.

“To simplify as much as possible, a smart contract works on the principle of a vending machine. I deposited money, pressed the button, and a can of Coca-Cola fell out for you, ”- explains lawyer Anton Vashkevich.

In the twenty-first century, it is possible to translate all kinds of paper contracts into digital smart contracts, and consequently, a wide range of potential applications appear. Let’s take a look at a few areas of their application below.

Payment automation: the contract can be programmed to ensure that the required amount arrives at the specified time to the specified individuals or organizations.

Registration of ownership: the necessary documents can be registered on the blockchain to establish ownership from the start and change ownership through smart contracts.

Energy transactions: it is believed that this creates a digital ecosystem for the exchange of energy. Thus, the sources of electricity or fuel will be linked to smart contracts concluded only between individuals or with organizations involved, which, in turn, can personalize the consumption of each client.

Intellectual property: it is possible to embed a smart contract in any object that is controlled by digital means. This is where “smart property” is born, which can be combined with IoT (“Internet of Things”) objects connected to the network. Thus, for example, the rental of these objects (from houses to cars) can be automated.

Financial services: The use of cryptocurrencies opens up a wide range of different use cases for smart contracts that would not otherwise be possible.

In August 2018, Alfa-Bank, together with S7 Airlines, entered into a smart contract with the aviation fuel market operator Gazpromneft-Aero. This contract contained information on the volume and cost of fuel for the airline’s aircraft. After the pilot-in-command requested from the operator the exact amount of fuel needed to operate the flight, an online application for reserving the appropriate amount was sent to Alfa-Bank. Instant confirmation from the bank launched the start of refueling. At the end of it, the funds were debited, and the commercial services of the parties received information about the closing of the transaction with all the documents. The smart contract was developed on the Hyperledger blockchain platform. The new technology made it possible to increase the speed of settlements and minimize financial risks, since it does not require an advance payment and a bank guarantee.

In the legal literature, the term “smart contract” has received a relatively recent distribution, however, it is already possible to state the existence of plurality in approaches to the definition of the above concept. So, A.A. Kartskhia believes that smart contracts represent the next step in the development of blockchain technology. These contracts are contracts in the traditional legal sense. Using computer programs, they develop a sequence of actions – a smart contract code for routine, repetitive operations (purchase and sale in exchange financial transactions, electronic payments, insurance and compensation agreements, etc.).

According to A.Yu. Churilov, a smart contract is a contractual structure concluded and existing exclusively in the blockchain network, the peculiarity of which is the impossibility of changing after entering the blockchain, as well as the automatic execution of the emerging counter contractual obligation without the need for a separate expression of the will of the parties to the contract. In the event that a smart contract does not meet these criteria, we can only talk about individual elements of the smart contract code that is used in a traditional contract.

From a doctrinal point of view, the position of D.V. Fedorov, who points out that a smart contact is a kind of contract written in a programming language, while the scientist points out that the fact that the terms of a smart contract are formulated in a programming language does not distort the contractual essence of the transaction being concluded, since the smart contract is not a secret, its terms are simply written in one of the programming languages, for which the same rules should apply as for other languages. “The contract can be concluded in any language, including a 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 itself, that is, a legal contract. Accordingly, the law can regulate only contractual relations, taking into account the technical features of a computer program, which inevitably changes contractual relations.

Therefore, one can ultimately agree with V.A. Belov, who makes a well-founded conclusion that “a smart contract in law is a special legal regime of a civil law contract. In this sense, a smart contract becomes a special non-independent contractual structure that cannot be concluded separately from the corresponding contractual type.

The contractual concept of a smart contract should be recognized as fundamental, since in essence all concepts are reduced to the contractual essence of a smart contract. Their authors point to the conditions of the smart contract, the execution of the smart contract, determining what smart contract is a contract. Recognition of a smart contract as a contract will allow recognizing the legally significant consequences resulting from its conclusion and execution in the blockchain system 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 still comes from a computer (program) code, which is subsequently adapted to the specific circumstances and needs of the participants in the turnover, including algorithms related to the fulfillment of obligations already assumed, as well as the procedure for concluding contracts in electronic form.

When considering the issue of legal regulation of a smart contract as a way to fulfill an obligation or a separate type of civil law transaction, it should be noted that in the absence of special regulation, the general provisions on obligations and contracts, which are enshrined in the first part of the Civil Code of the Russian Federation, are subject to application to these legal relations. Among them, in particular, it is permissible to single out:

At the same time, over the years, various attempts have been made to formulate and consolidate the concept of a smart contract at the legislative and law enforcement levels. So, when submitted to the State Duma draft federal law N 419059-7 “On digital financial assets, digital currency and on amendments to certain legislative acts of the Russian Federation” the following definition was proposed: “A smart contract is an agreement in electronic form, the fulfillment of rights and obligations under which is carried out by automatically making digital transactions in a distributed register of digital transactions in a sequence strictly defined by such an agreement and upon the occurrence of circumstances determined by it”, but subsequently it was excluded from the bill.

The Central Bank of the Russian Federation has also made attempts to formulate the concept of a smart contract, defining it as “a transaction executed automatically upon the occurrence of conditions predetermined by the parties. Smart contracts will be an additional functionality of the digital ruble platform.”

Summing up, the following should be noted:

1) the legal nature of a smart contract comes from a computer (software) code, which is subsequently adapted to the specific circumstances and needs of the participants in the turnover, including algorithms related to the fulfillment of obligations already assumed, as well as the procedure for concluding contracts in electronic form ;

2) there is currently no statutory definition of the term “smart contract”. However, the legal regulation of a smart contract can currently be considered through two components:

  • a smart contract as software that has a corresponding copyright holder, where the regulation of issues related to authorship and exclusive rights to the corresponding code is subject to the rules enshrined in the fourth part of the Civil Code of the Russian Federation;

  • smart contract as a way to fulfill the obligations assumed, as well as an electronic form of the contract, regulated by the general provisions on obligations and contracts;

3) legal literature and the media report on the widespread involvement of smart contracts in public relations, but it should be noted that it is too early to talk about the widespread use of such tools in household, medium and even large transactions of ordinary consumers, the smart contract is still quite alien innovation for businessmen.

“Now many business representatives are dreaming about the idea and are in fantasies regarding the introduction of a smart contract, but so far this is just talk. The interested participation of several parties to the transaction, the state, banks and others is necessary, – concludes Head of the program “LegalTech-Director” IPK Moscow State Law Academy. O. E. Kutafina Alexander Trifonov. The reason for this is most often economic unjustified. “One way or another, but one of the parties to the transaction always wants to reserve the right to make changes to business processes and avoid sanctions. In addition, the implementation forces (it forces!) to actively involve employees in changes, and this is terribly difficult, ”said Trifonov.

One way or another, for the successful development of smart contracts in the Russian Federation, it is necessary to consolidate the legal status of a smart contract, the parties to a smart contract, the procedure for organizing the protection of the interests of each party to a smart contract, and develop a unified approach to the application of relevant rules.

In conclusion, it should be noted that smart contracts should be considered as legal contracts and subject to the norms of the relevant state or international treaty.

We will return to the topic of smart contracts when we consider their regulation in the West, but this is a matter for the future. In the meantime, we will limit ourselves to stating the fact that careful attempts to introduce the concept of “smart contract” into the sphere of legal regulation of civil relations will sooner or later lead to the consolidation of the corresponding article in the Civil Code of the Russian Federation.

This publication has been prepared with the support of lawyers DRC.

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