The Italian Parliament recently introduced distributed ledger technologies (DLTs) into the Italian legal system. Law Decree No. 135/2018 – which was passed into law on February 7 by the Italian Parliament – provides a precise definition of DLTs as “technologies and IT protocols using a shared, distributed, replicable and simultaneously accessible ledger, decentralized and encrypted, which enable the registration, validation, updating and storage of data, whether encrypted or not, which cannot be modified or forged.

The new legislation provides that the storing of an electronic document by means of DLTs shall have the legal effect of an electronic time stamp, pursuant to Article 41 of EU Regulation No. 910/2014 (on electronic identification and trust services for electronic transactions in the internal market), and hence can be used as evidence in legal proceedings.

In addition, Law Decree No. 135/2018 introduces the smart contract, which is defined as “a computer program based on DLTs which execution is legally binding upon two or more parties with reference to the effects previously agreed by the same parties“.

In very simple and practical terms a smart contract is the conversion of an agreement between two or more parties into a computer program which is capable of verifying that certain conditions/events are triggered and, thus, automatically execute certain actions (e.g., the goods are shipped upon payment of the freight; settlement agreement is created and issued through a blind auction platform when the insured and insurer’s position match).

According to the new legislation, smart contracts shall satisfy the requirement that a contract be in writing upon electronic identification of the relevant parties, but that will be done in accordance with a procedure which has yet to be issued by the Agency for Digital Italy (“AgID”).

AgID is the technical agency of the Presidency of the Council of Ministers which was established for the purpose of promoting the diffusion of information and communication technologies, with the aim of fostering innovation and economic growth. AgID will also be setting the technical standards that DLTs shall meet in order to ensure that stored information can be used as evidence in legal proceedings. Such standards will be issued by AgID within 90 days from the entry into force of Law Decree 135/2018.

Law Decree 135/2018 represents a significant achievement aimed at creating the legal basis to encourage DLTs’ use to automate, decentralize and accelerate, date-driven processes and transactions.

The implementation of smart contracts will undoubtedly require thorough cooperation between IT developers, software engineers and legal practitioners. Indeed, inasmuch as smart contracts cannot, generally, be altered or modified, it is critical to ensure from the outset that all relevant legal terms and conditions are accurately considered and included in the smart contract. Consideration must also be given to unpredictable events or facts that may occur and have legal consequences on the performance of the contract itself.

For a more detailed look at issues raised in connection with litigating smart contact dispute, please see this post.

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