Italy affirms legal effectiveness of DLTs and smart contracts

With its Law No 12/2019 - published on Tuesday’s Official Gazette – the Italian Parliament has completed the conversion procedure of Law Decree No 135/2018, better known as Decreto Semplificazioni. This law introduces a definition of Distributed Ledger Technologies and Smart Contracts and sets out the legal effects of adopting such technologies.

Definition of DLT

In relation to Distributed registers-based technologies (including blockchain), Article 8-ter of Law Decree No 135/2018 for the first time provides a definition of DLTs, as follows:

“technologies and information protocols that use a shared, distributed, replicable, simultaneously accessible, architecturally decentralized registry on a cryptographic basis, such as to allow registration, validation, updating and archiving of data, both in clear and further protected by cryptography, that are verifiable by each participant, are not alterable and not modifiable”.

Legal effects of adopting DLT

The law then goes on to set out the legal effects which arise from the adoption of such technologies.

Electronic time stamp

In particular, paragraph 3 states that storing a “documento informatico” – which we will refer to as “data” in this specific publication – in a DLT shall produce the legal effects of an “electronic time stamp” under Article 41 of Regulation (EU) No 910/2014 on electronic identification (so called eIDAS Regulation), which reads that “an electronic time stamp shall not be denied legal effect and admissibility as evidence in legal proceedings solely on the grounds that it is in an electronic form or that it does not meet the requirements of the qualified electronic time stamp”.

DLT data valid evidence in proceedings

Accordingly, by way of this cross-reference it has been made possible for data stored in a DLT to be used as evidence in legal proceedings.

This is a significant development as it will encourage the adoption of blockchain in those sectors where, to obtain certain legal consequences, is fundamental that the existence of a data or information at a certain point in time (date/hour) can be enforced against third parties.

Burden of proof

However, it is worth mentioning that, in the event of a challenge by a third party, the burden of proof of the accuracy of the date and time indicated in the DLT and the integrity of the data stored therein remains on the person submitting such data in the legal proceedings.

This burden of proof may only be reversed in the event of “qualified” electronic time stamp (under Article 42 of eIDAS Regulation), which complies with certain specific requirements and accordingly enjoys a presumption of accuracy/integrity.

In the DLT world, this presumption could be enjoyed only if there was, for instance, the possibility of providing an advanced electronic signature or the advanced electronic seal of a qualified trust service provider, features until now unusual for most blockchains.

Definition of smart contracts

Article 8-ter(2) defines smart contracts as “computer programs that operate on distributed registers-based technologies and whose execution automatically binds two or more parties according to the effects predefined by said parties”.

Satisfaction of requirement for written form

The same provision adds that, upon the digital identification (“identificazione informatica”) of the contracting parties, smart contracts will satisfy the requirement of the written form (forma scritta).

Although the Italian legal system embraces the principle of freedom of contract forms, many transactions require written form for their validity or probation. The confirmation that smart contracts satisfy the requirement of written form, together with the legal recognition of DLTs gives legal validity to the dynamic aspect of blockchains.

What happens next?

The AgID has 90 days from entry into force of law n. 12/2019 (i.e. from 13 February 2019) to lay down both the technical standards that DLTs will have to meet to produce the legal effects described in Article 8-ter(3), and the requirements of the process for the digital identification of the parties of smart contracts.

The recognition of smart contracts as satisfying the requirement for written form - when combined with the electronic time-stamp recognition of blockchain storage - could open the door to the digitisation and automation of agreements in different industries, reducing costs and creating opportunities until now unconceivable.

However, a more in-depth analysis of the potential developments will only be possible (and appropriate) once the AgID will have outlined the technical requirements for both DLTs and smart contracts. We will report on this in due course.