Smart Contract and Blockchain: what they are, how they work and their compliance with GDPR.

According to the definition of art. 1321 of the Civil Code, a contract is "the agreement between two or more parties to establish, modify or terminate a legal asset relationship". A smart contract is instead a "piece of code" - a software - that executes an agreement between its parties if certain conditions are met.

On the basis of these simple definitions it is easy to note that while contracts in the legal sense of the term require the parties to play an active role - i.e. the performance of specific actions for the fulfilment of obligations - smart contracts are "self-executing" because, once the conditions are met, the outcome of the desired transaction is automatically obtained on the basis of the terms incorporated in the code. It is therefore possible to see that in a smart contract - unlike what might happen in a legal contract - a delay or failure to fulfil obligations is technically impossible.

On the basis of these considerations it can be argued that in a smart contract it is not necessary that there is a prior trust between the parties and that there is a third party who is entrusted with the power to coercively impose performance in the event of a breach. All this is possible because the trust component - at the heart of the legal contract - is replaced by the implicit transparency of the Blockchain infrastructure on which the smart contracts are placed and operate.

Blockchain: transparency and lack of authority

The Blockchain can be defined as a set of blocks linked together in an immutable way and that record information using a cryptographic system. This infrastructure allows parties with no previous contractual (and therefore trusted) relationships to carry out transactions securely and without the supervision or control of a centralized authority.

The development of blockchain technology has contributed to the spread of smart contracts by enhancing some of their fundamental characteristics.

Being stored in the public system and distributed, transactions that take place in Blockchain can be verified and validated by all participants in the network. From this it follows that the security of the system is greatly increased, since any change, alteration, deletion of a transaction should be replicated in each distributed registry. Therefore, the smart contacts implemented on Blockchain are virtually unchangeable and are not subject to any external interference.

These mechanisms also allow unknown parties to carry out transactions without the need for a trusted third party on which network participants should otherwise rely to perform and enforce mutual obligations. The lack of a centralized third party also leads to a reduction in transaction costs, as no fees are retained by any intermediary (e.g. financial institutions).

Using smart contracts implemented on blockchain is now a reality in many sectors, including financial and insurance markets, real estate, commercial agreements and copyright management.

Leases could also benefit from blockchain technology: the lessor could provide the lessee with a digital key to be delivered in exchange for an electronic payment. The operation would be considered extraordinarily secure because only if both the electronic key and the payment are actually made available (as verified by hundreds of participants in the blockchain system) the transaction will be carried out.

Oracle: bridge between virtual and real

In most cases, the execution of smart contracts is activated through the reception of information collected from institutional sources located in the real world and which is entered into the Blockchain system through a "bridge" - called oracle.

Oracle is a structure that connects what is in the chain of blocks from what is outside it, acting as a bridge between off-chain and on-chain events. The external data used by an oracle can derive both from events in the "real" world (for example, tracking a shipment) and from the digital environment (stock market data and other public indexes).

To understand how Oracle works, it is interesting to analyze the use of smart contracts in the insurance market. A policy designed to ensure coverage of losses resulting from earthquakes could benefit from a smart contract component. In this situation, the oracle would have the function of retrieving relevant information in the real world - for example, the seismic magnitude value directly from official government sources - and feeding it into Blockchain. In this way, the amount of compensation to be paid to the insured could be determined automatically without the need for any documentation to be produced by the insured. This mechanism is also suitable for reproduction in other contexts such as delayed or cancelled flights insurance.

Blockchain, Smart Contract and GDPR

All data entered into Blockchain are pseudonymized (suitable for revealing the identity of users through a reidentification process) and therefore fall within the scope of recital 26 of the GDPR, which requires the application of the European Regulation to all information relating to identifiable persons.

Despite the provisions of the regulation, it is easy to see that the effective application of the GDPR provisions to the Blockhchain infrastructure raises a number of issues.

One of the main aspects of the Blockchain is the lack of a centralized authority: each participant has the ability to create, verify and have access to the public register of transactions and all relevant data. In a decentralised context such as that of the Blockchain, it is therefore impossible to define the roles of data controller and data controller (key figures in European legislation).

It should also be noted that the data entered in Blockchain are by nature immutable, while the GDPR assumes that any data can be modified or deleted at the request of the data subject, when he wants to exercise the right to rectification of information or the right to be forgotten, under Articles 16 and 17.

Not even the principle of data minimization can be easily applied to the blockchain system: the records in fact include data from all previous transactions that are constantly expanding and are stored in the devices of all participants in the network. This is in open contrast to the provisions of the GDPR that provide that personal data are processed only when necessary for specific purposes previously identified.

How Blockchain can help the Protection of Unregistered Trademarks.

As many may know, blockchain shares the task of recording transactions among the people making them, and the underlying technology verify that all users are keeping matching records.

However, the registration of a Trademark can imply high costs if the application is filed in different jurisdictions.

Trademark law recognizes rights to unregistered trademarks, that is to say those trademarks used to distinguish products and services, but never filed nor registered.

Trademark holders are beginning to leverage blockchain technology to secure and document proof of first and continuous use.

In the trademark area, Blockchain technology seems to have at least two immediately applicable uses:

• Creating blockchain-based records as a more secure and trustworthy recordkeeping system to prove trademark use; and

• Proving the provenance and legitimacy of goods in anticounterfeiting efforts.

There is unequivocal evidence of use in case of infringement for holders of unregistered trademarks as the blockchain technology can create immutable timestamps that can provide proof of first use, continuous use filing and lock in a highly credible date on which certain information related to a trademark was captured.

This can bring to the creation of a record of unregistered trademarks on the same distributed ledger, creating a comprehensive picture of all trademarks in use and the extent of use in a particular jurisdiction.

Blockchain records can be made for trademark use in any jurisdiction, that are quick to obtain and always accessible.

Nike Shoes will be Protected by the Blockchain

Nike has been recently awarded a blockchain patent by the USPTO to create digital versions of its shoes. Nike said that its customers will now be able to register the purchase of their shoes with a unique identification number.

An equivalent digital version of the shoe will be created through a cryptocurrency wallet connected with the user’s unique ID. The Blockchain will help users verify the authenticity of the shoes that the customers are purchasing.

The digital version of the shoes will contain a cryptographic token based on the Ethereum platform. In addition, it will also have information about the physical features of the product, including color, the material used, manufacturing details, and their “eco-sustainability” factor.

The registration of the product on blockchain would allow users to “securely sell or trade” the tangible form of the shoes.

It is noted that the “rights” to sneakers can be stored in a digital wallet along with the cryptocurrency. Also, with the help of digital media, Nike will be able to control sales volumes of CryptoKicks. The company has not yet announced the launch date.

How is Blockchain Technology going to change the Legal Industry?

Blockchain is a public ledger which can be applied to almost anything that you would normally save to a database or spreadsheet.

Fundamentally, blockchain is a program from which to build a system of accounting or process. One network called Ethereum, which has been described as a “decentralized virtual machine that can execute peer-to-peer contracts” is leading the charge with smart contracts and the law.

Creation of contracts

The blockchain could alter the landscape of contract attorneys. Part of what makes the blockchain so special is that not only does it keep records which are immutable, it also creates a process around that.

For example, I could create a contract which stipulates that when my patent was approved by the Patent and Trademark Office (PTO), my four partners would receive a 10 percent share in my company. How would that work? The contract on the blockchain would check to see if the patent was approved, then trigger a process releasing the shares to the partners.

All of this would be automated and fall outside of human legal action. Indeed, you could go one step further and tie in a payment system so that when that patent was granted, bonus funds could be dispersed automatically into the accounts of said partners.

Intellectual property

If blockchain is ripe for anything, it is IP. This technology creates a publicly accessible, indisputable ledger of each filing which could be held not solely by jurisdiction but on a global scale benefiting everyone.

This information would offer clean and clear rights of use for all parties. You could even submit your trademark through the system. Leveraging an algorithm identifying any likeness to the trademark, the system could then grant or dismiss it. All of which would become part of the public ledger for anyone to review.

Land registry

Wealth is created through ownership, and one of the most challenging aspects of developing countries is determining who owns a piece of land. Disputes often occur because of corrupt governments or individuals taking advantage of the under-educated.

Having a public blockchain ledger would allow for everyone to be aware of who owns which parcel of land; and it would make the exchange of those plots much easier and more equitable.

If a family were to buy a plot of land that could be registered on the legal blockchain, it would be much more verifiable than even perhaps government records. All parties would be able to authenticate this as compared to one entity (the government) holding onto all the records. This process would even create a better base for the government to fairly tax individuals and businesses.

Some Latin American countries are beginning to use blockchain as a means to keep track of who owns which land deeds.

Establishing records

In some African countries they are looking at using blockchain technology to keep census information. Voter records could also be added to this process as a means to have a central repository of eligible citizens. In this area, which is currently under development, blockchain seems primed for tremendous growth.

Financial service industry

The banking industry also is jumping into this arena. The theory is that our stock exchanges will become blockchain-enabled. The idea is simply that every stock bought or sold would be on the ledger. You could trace back your own ownership of that equity and even tie that to your estate-planning documents.

Extrapolating this out, those documents also could be housed on a blockchain with respective triggers for when you eventually die. Ultimately that information is then released to your beneficiaries based on that event (Date of Death) recording by the Social Security Administration (SSA).