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LEGAL SPECIFICITY OF SMART CONTRACTS AND THEIR LEGAL
REGULATION
Today, smart contracts and blockchain systems are rapidly developing. The entire world community faces the problem of legal regulation of the concept, conditions and features of development, operation and areas of application, integration into other systems and control over the use of smart contracts. This article states what smart contracts are and what level of development has he reached today, and we also discussed the main doctrinal approaches to the problem of determining the legal nature of smart contracts. With the development of science and technology smart contracts have gradually gained ability to take action independently including legally significant. Additionally, in this article we discuss legal specificity of smart contracts and also the actions taken by the government of Uzbekistan in the regulation of smart contracts.
The key words: smart contracts, blockchain systems, features of development, doctrinal approaches, legal nature, regulation.
The term "smart contract" was coined about 20 years ago by computer scientist cryptographer Nick Szabo, who was then a graduate student at the University of Washington:
Thanks to the digital revolution, new state institutions and new ways of formalizing the relationships that shape these institutions have become possible. I call these contracts "smart" because they are much more functional than their lifeless paper predecessors. They do not use artificial intelligence. A smart contract is a set of digitally defined promises, including protocols for the fulfilment by the parties of these promises[1].
Another source of modern smart contracts is the Ricardian Contract. This idea appeared in 1996 in the work of Ian Grigg (Ian Grigg) and Gary Howland (Gary Howland), dedicated to the Ricardo payment system. Grigg envisioned the Ricardian contract as a bridge between text contracts and code with the following parameters:
> a single document - a contract that the issuer offers to holders;
> to the property right of the holders managed by the issuer;
> easily recognized by people (like a regular paper contract);
Shakhzod Farhodjon og'li Siddikov
Student of Tashkent State University of Law siddikovs2616 @gmail .com
ABSTRACT
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> read by programs (parsed as a database);
> digitally signed;
> contains keys and information about the server;
> combined with a unique and secure identifier[2]
In addition to these, it should be noted, that before the compiled smart contract is executed, it is required to pay a transaction fee for adding the contract to the blockchain. For example, in the Ethereum blockchain, smart contracts are executed in the Ethereum Virtual Machine (EVM), and the commission in the ether (ether) cryptocurrency is called gas (gas, although a more correct translation is "fuel"). The more complex the smart contract, the more gas you have to pay. That is, gas is a kind of gateway that protects the EVM from the execution of too complex or numerous smart contracts [3].
The study is determined by a wide range of studied problems and disputes, both ethical and legal and contributed by the author, theoretically substantiated proposals for improvement legislation in the field of smart contracts. As smart contracts becoming popular, their legal regulation is also important for the worldwide use because it makes them safe and reliable. Uzbekistan has not yet taken appropriate legal action regulation, whereas new technologies are already being used in the country. Moreover, active measures are taken to improve the skills of the blockchain specialists working in the country but anyway there are huge problems in the regulation of smart contracts for the world community.
Since the concept of a smart contract contains the term "contract", the legal definition of the new phenomenon aroused particular interest among legal science. And, the question of whether smart contracts are comparable to traditional legal contracts or not is highly debatable. In world of science, there are countless opinions about the concept of smart contract and its legal nature: from those who question the connection between smart contracts and legal contracts [4] to those who equate smart contracts and traditional legal contracts. However, no less mixed approaches are common. Depending on each position, there are different approaches to defining the nature of smart contracts. The first group of scientists believe that smart contracts can be used only to automate certain processes or collect some data, and in these cases, they are simply a code that cannot be read legally binding contract. The term "contract" itself is used regardless of its legal significance, indicating rather an agreement on it's self-fulfillment. From this point of view, a smart contract is just a piece of code designed to perform a series of tasks, subject to certain precondition without human intervention.
These comments are partly correct. Indeed, not each "smart contract" resembles an agreement. Smart contract can be used simply as a means of communication, for example, for sending cryptocurrencies between their wallets. Smart contracts that are
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used to achieve technical goals, are not related to legal contracts and are only a computer program. In this case, smart contracts are not something new for jurisprudence. However, this does not mean that a smart contract cannot be legal contract. This rather indicates that smart contracts can be considered legal contracts only if they meet all the requirements of contract law in general.
The second group of scientists does not deny the possibility of regulating the relationship between the parties by smart contracts [5]. However, due to the technical nature of smart contracts, they may not fit the legislation, which means that such relations should not be regulated by law. This approach either eliminates or significantly limits the possibility application of legal norms to regulate public relations, arising from the use of a smart contract. Lyudmila Efimova in her article quotes the British scholar Imran Bashir[6]: "For execution of a smart contract does not require mediation. The real smart contract must be executed without any intervention of third parties, exactly computer code becomes its legal basis and provides conditions transactions. Customary law is outside the scope of a smart contract. Smart contract, cryptographically protected from external interference or hacking, executed without recourse to notaries, courts, registrars or other persons, which is what makes it different from a regular contract." This position is bright an example of the "Code is law" approach (code is law).
An intermediate position was taken by Robert Herian, who expressed doubts about that a smart contract can be considered a full-fledged contract. His position based on the impossibility of spreading traditional norms of contractual rights to smart contracts. According to him, "smart contract is only a program that checks and fulfils its conditions when it occurs in advance certain events." In order for a smart contract to be considered he has to overcome a number of difficulties with a legal contract. For example, such problems like: the anonymous nature of smart contracts and the resulting the possibility of their imprisonment by incompetent persons, the impossibility of restitution, "indifference" to the vices of the will, etc.
He also emphasizes certain problems that arise when trying to "translate" complex nuances traditional contract for the language of the program code, as well as the shortage of specialists who can do this, as well as the difficulty of interpreting smart contract in court. However, R. Herian points out that with proper technical implementation, these difficulties can be successfully levelled.
Despite the fact that smart contracts can hardly be called a new phenomenon, only the German government decided to wait for the future government regulation. This can be explained by the fact that smart contracts today applied only to a very limited extent and are rarely perceived as contract designs. Therefore, it can be said that those states
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that research settled the legal nature of smart contracts, made stake on future relationships.
Several states were among the first jurisdictions to take this step. USA: Arizona[7] , Tennessee[8] and Ohio[9].
All three states passed similar regulations in areas of regulation of smart contracts. According to the general definition, a smart contract acts as an "event-driven computer program that operates on the basis of a distributed, decentralized, shared and replicated ledger, which is able to automatically control the assets accounted for in such registry, initiate their transfer, and also gives instructions for the execution pre-agreed conditions".
Following this, each of the documents states:
"(A) An electronic signature cryptographically encrypted using Blockchain technology is recognized as an electronic signature and will be fully meet all legal requirements. Such an electronic signature cannot be invalidated only because of its technical nature.
(B) The contract itself or its separate terms, drawn up in the form of a smart contract and protected using Blockchain technology, are recognized electronic form of the contract. If the law requires that the contract be in writing, the smart contract will comply with the law.
(C) Smart contract can be used in commercial legal relations. A contract concluded in the form of a smart contract cannot be invalidated or non-executable only because the contract or its individual terms concluded on the software.
(D) Notwithstanding any other law, a person who uses Blockchain technology for interstate or foreign trade in order to protection of information belonging to him or ownership of digital assets, cannot be limited in their rights only due to technical nature of Blockchain and smart contracts".
We see that the above States use a rather bold and dispositive approach to the regulation of smart contracts. Regulations recognize the technical nature of Blockchain technology and smart contracts, but point to the prohibition of any legal discrimination of these technologies. The conclusion of smart contracts in the language of program code within the Blockchain itself does not in itself entail the invalidity of such an agreement. Is it worth saying that It is in the United States that the "lion's share" of all smart contracts takes place.
If we move to the territory of the European Union, we can also see examples of successful legal regulation of smart contracts. At the moment, the most striking examples are Italy and Malta. Long time they were the only ones in the EU who legally regulated this area.
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On February 7, 2019, the Italian Parliament approved a regulation aimed at improving commercial legislation in order to simplifying the activities of commercial and state enterprises . This law also provided for the first time a legal definition of technology distributed ledger and smart contracts. The law officially recognized the full the legal force of smart contracts and the possibility of their application in Italy.
Thus, according to Italian law (clause 2, article 8 of Law No. 12/2019), a smart contract is a "computer program that runs on the basis of distributed registry technology, the execution of which is automatically binds two or more parties in accordance with the terms, in advance certain parties. Smart contracts fulfill all requirements written form of the contract subject to prior identification parties involved." Such identification must comply with the technical requirements to be set by Ministry of Digital Development of Italy. The Italian Ministry of Digital Development has set up a working group to developing guidelines and technical standards related to technologies based on distributed registries and smart contract registries, which have not yet been published[10].
As we can see, our Italian colleagues also proceed from a dispositive principle of regulation of smart contracts. Italian law supports the principle of autonomy of the will, but highlights a very important requirement on the mandatory identification of counterparties. Noteworthy is the definition proposed in the legislation of Malta, including legal and technological content. So, The Maltese VFA (Virtual Financial Assets) Act defines a smart contract as:
"Technological arrangement form, consisting of:
> computer protocol; or
> an agreement entered into in whole or in part in an electronic form that can be automated and ensured by compulsory execution using computer code, in certain cases allowing participation and control of a person in order to perform certain parts of such an agreement. Such agreements are legally binding and all legal remedies
apply"[11] .
Thus, the Maltese legislator indicated that the smart contract can be considered as a technological solution, including computer protocol and (or) agreement in electronic form, having legal force. This definition differs from others in that it emphasis is placed on the admissibility of human intervention in seemingly automatic execution of a smart contract.
In the CIS, the first state that legislatively settled smart contracts was the Republic of Belarus. Legislative the definition of a smart contract is contained in Decree No. 8 "On the development of digital economy", where a smart contract is understood as "program code, designed to function in the ledger of transaction blocks (Blockchain),
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another distributed information system for the purpose of automated execution and (or) execution of transactions or other legally significant actions"[12].
The legal nature of a smart contract is ambiguous. No wonder that most states of the world still have not settled in any way legally this issue. The acts of international rights. However, technologies do not stand still, and digitalization processes are beginning to have a significant impact on international commerce. Some scientists and even argue that the emergence of cryptocurrency and Blockchain challenges fundamental principles of jurisprudence. With the development of technology, it is inevitable the transformation of law itself follows, and the processes of globalization will inevitably lead to narrowing the gap between common law and private law countries [13].
In Uzbekistan, the blockchain revolution began on July 3, 2018, when a resolution of President of the Republic of Uzbekistan "On measures to develop digital economy in the Republic of Uzbekistan" was adopted. However, after that there was not enough increase in the regulation of smart contracts and blockchain systems.
Smart contracts meet all the requirements of traditional contracts, such as an offer, acceptance, consideration and due acceptance, including payment, initiated by intelligent code, as opposed to instructions for agents escrow or solicitation for the purpose of that third party. Once smart contracts become the basis for transactional lawyers, it is possible that the emergence of smart transactions will be completely automatic process.
Let's start with the fact that the law governing the blockchain platform is not yet formed in other countries, with the exception of some that are on completion stage of this process. It is important to understand that the right to regulate the blockchain platform, smart contracts includes several major areas of law. First of all, it is a contract law, since all operations and transactions based on the blockchain platform, are based on contract law. Second, it is the law governing securities, since cryptocurrencies in many countries are equated to securities. Thirdly, it is legal compliance, since all operations, based on the blockchain carry certain risks associated with money laundering and illegal transactions.
Taking into account these aspects, it is necessary to understand that for legislation in this area, the legislator will have to change many legislative acts. Blockchain platform and smart contracts should be regulated separately law, and be considered as a separate system on which not only operations with cryptocurrency, but also other kinds of operations and transactions. In that respect, it would be appropriate to cite as an example telecommunications, based on which or by means of which various kinds of
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activities such as telephone communication, radio communication, Internet communication, etc.
Having defined the blockchain as a legitimate platform, the legislator must determine all activities that can be carried out on this platform and allow the use of other species that may arise. And the most important thing is to adapt the Civil Law of the Republic of Uzbekistan to the needs and realities of blockchain platforms. This is, first of all, fixing the smart contract with another legitimate form of execution of the contract in civil circulation. Smart contracts (smart contracts) - computer protocols that emulate logic contractual provisions are a way of implementing an agreement between parties by executing the inherent algorithm, excluding human factor.
After all, a smart contract is one of the best achievements of the platform blockchain, and thanks to the smart contract, we are and are expecting a revolution in digital economy. Compliance procedures for operations and transactions made on blockchain platform should be issued as circulars and instructions by the authorities concerned, because they tend to frequent changes.
In the field of blockchain system and smart contracts, Uzbekistan definitely has great potential for development. Also, taking into account the fact that the current President of Uzbekistan Sh.M. Mirziyoyev is taking comprehensive measures to develop the digital economy, it can be confidently stated that in the next few years and Uzbekistan will start practicing in the economy the smart contracts and their regulations will also be granted by our politicians.
For this reason, the legislators of Uzbekistan should promptly and carefully develop regulations that can easily control the realtionship based on smart contracts and blockchain system.
Timely developed regulatory documents will serve due measure of protection of the rights of citizens and will not allow gaps and contradictions that always arise when the state is belated responds to emerging and rapidly developing social relations.
REFERENCE LIST
1) Nick Szabo. Smart Contracts: Building Blocks for Digital Market. 1996
2) Ian Grigg. The Ricardian Contract.
3) What is the «Gas» in Ethereum? Cryptocompare, 18 november 2016.
4) De Caria R. Blockchain and Smart Contracts: Legal Issues and Regulatory Responses between Public and Private Economic Law // Italian Law Journal. 2020. Vol. 6. P. 363379
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5) Woebbeking M.K. The Impact of Smart Contracts on Traditional Concepts of Contract Law // Journal of Intellectual Property, Information Technology and Electronic Commerce Law. 2019. Vol. 10. P.105
6) Bashir I. Mastering Blockchain Distributed Ledgers, Decentralization and Smart Contracts Explained. Packt Publishing Ltd., March 2017. P. 53.
7) Arizona State Bill No. HB 2417 [Electronic resource]. URL: https://www.azleg.gov/legtext/53leg/1r/bills/hb2417p.pdf
8) Tennessee State Bill No. 1662 [Electronic resource]. URL: https://www.capitol.tn.gov/Bills/110/Bill/SB1662.pdf
9) Ohio State Bill No. SB 300 [Electronic resource]. URL:https://searchprod.lis.state.oh.us/solarapi/v1/general assembly 132/bills/sb300/IN /00?format=pdf
10) Italy defines "distributed ledger technology" and "smart contract" // Clifford law firm official website Chance: [portal]. URL: https://talkingtech.cliffordchance.com/en/emerging-technologies/smart-contracts/italy-defines-distributed-ledger-technology-and-smart-contrac.html
11) Law of the Republic of Malta No. 590 "On virtual financial assets" [Electronic resource]. URL: https://legislation.mt/eli/cap/590/eng/pdf
12) Reyes C. L. Conceptualizing Cryptolaw // Nebraska Law Review. 2017. №96 (2). P.384-445.
