SSRN 3350128
SSRN 3350128
Oscar BORGOGNO*
Abstract: The public debate about smart contracts, meant as self-help remedies grounded on distributed ledger
technology, is filled with alarms and high expectations. They have been praised by the tech community as
infallible software able to carry out the whole contractual cycle, from formation to enforcement. Conversely,
several legal scholars have raised concerns regarding both smart contracts inability to reflect relational aspects
of contract governance and the augmented complexity generated by the translation of an agreement into
computer code. By building on the extant literature and avoiding any premature enthusiasm, this article focuses
the discussion on the potential areas which could effectively benefit from smart contracts implementation.
Firstly, it argues that smart contracts might be a viable tool to tackle effectively consumers inertia in triggering
and enforcing their kinds of rights which are standardized and easily verifiable. Secondly, smart contracts have
the potential to foster commercial relationships by lowering down transaction costs arising from lack of trust
between merchants. Thus, smart contracts are likely to provide better alternatives to traditional tools of
business practice, such as letters of credit and escrow agreements. Lastly, the article points out that, while
businesses already have commercial incentives to implement smart contracts on their own, when it comes to
consumer protection, regulators shall take the lead by testing, through regulatory sand-boxes, smart contracts
potential.
1. Introduction
The pace of technology innovation and the development of new solutions applied to trade and
commercial practices has increased exponentially in the last years.1 Hence, the legal instruments
which have traditionally been deployed in those areas, such as contracts, need to be duly investigated
to assess whether they can be further enhanced or even radically changed. In this respect, smart
contracts, agreements executed automatically through a software run on a blockchain (or, more
correctly, a distributed ledger), are currently among the most debated topics in the legal arena. A great
part of the hype surrounding smart contracts is mainly due to the praises and the excitement of
computer scientists who first have presented it to the public.2 To the contrary, several legal scholars
questioned the true potential of smart contracts, highlighting the huge difficulties in adapting their
* PhD Candidate, University of Turin; MSc Candidate, University of Oxford; TILT Fellow, University of Tilburg;
https://orcid.org/0000-0003-0721-4442; [email protected]. The author would like to thank Professor Tjong Tjin
Tai, Piergiuseppe Pusceddu and Tommaso Crepax for their valuable comments.
1
See CB Insights, The Global Fintech Report Q2, 2017, www.cbinsights.com/research/report/fintech-trends-q2-2017/;
M. Carney (Governor of the Bank of England), ‘The promise of FinTech – Something New Under the Sun?’, Speech at
the Deutsche Bundesbank G20 Conference on ‘Digitalising finance, financial inclusion and financial literacy’
(Wiesbaden, DE), 25 January 2017, www.bankofengland.co.uk/-/media/boe/files/speech/2017/the-promise-of-fintech-
something-new-under-the-sun.pdf?la=en&hash=0C2E1BBF1AA5CE510BD5DF40EB5D1711E4DC560F.
2
For an overview about the rise of blockchain and its legal implications, see: M. Finck, ‘Blockchain Regulation’, 13. Max
Planck Institute for Innovation & Competition Research Paper 2017, DOI: http://10.2139/ssrn.3014641; UK Government
- Office of Science, Distributed Ledger Technology: beyond block chain 2016,
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-
distributed-ledger-technology.pdf.
The purpose of this article is to provide an early overview of the cases where smart contracts
usage may prove significantly beneficial, both for consumers and businesses. Section 2 illustrates the
key aspects of smart contracts and the impulse they received through the rise of distributed ledger
technology. Section 3 investigates, avoiding premature enthusiasm and exaggerated expectations, the
essential conditions under which might be convenient to smart up a contract. By building upon the
extant legal literature on the topic, sections 4 and 5 focus the discussion on the capacity of smart
contracts to mitigate some of the well-known problems affecting B2C and B2B relationships. Section
6 argues that, unlike the current developments in the business sector driven by efficiency
considerations, in the consumer protection realm a public policy intervention is crucial to unlock
smart contracts potential. In this respect, the adoption of regulatory sandboxes in the rail and air
sectors will be put forward as a first testing ground to evaluate the envisaged potential of smart
contracts. The conclusions are summarized in section 7.
The debate around smart contracts is filled with ambiguities and misunderstandings. A great deal of
this confusion stems from the fact that the expression was coined in the mid-90s pre-internet era
dominated by the alluring rhetoric of the “digital revolution”.5 At the time, smart contracts were meant
as a computerized protocol that executes the terms of a contract.6 According to this view, the humble
vending machine could have been seen as a basic example of smart contract. However, as known, a
vending machine is just a tool which allows the conclusion and the performance of a contract between
two parties (the buyer and the vendor) in an automatic way.7 In fact, since their very beginning, smart
contracts have never had the requirements needed to be qualified as proper contracts from a legal
perspective. 8
Since then, technology innovation has evolved at a rapid pace, opening the doors to e-commerce
and online markets. It is worth pointing out that, according to the original definition, smart contracts
do not necessarily need to be based on a blockchain. Interestingly, the business model of platforms
such as Amazon, Netflix and iTunes, which automate contract formation and performance by digital
means, fully meet the original definition of smart contracts. As the old-fashioned vending machine,
they ensure that commercial transaction occur as agreed by the parties. Moreover, their structure is
specifically designed to follow a particular procedure in the event of non-performance by one party.
For instance, in case of a non-payment, they react by suspending the supply of the digital content to
the user. In this way, service providers avoid triggering the time-consuming remedies provided by
3
See E. Mik, ‘Smart Contracts: Terminology, Technical Limitations and Real World Complexity’, 9. Law Innovation
and Technology 2017, p 269, DOI: http://10.1080/17579961.2017.1378468; E. Tjong Tjin Tai, ‘Formalizing Contract
Law for Smart Contracts’, 6. Tilburg Private Law Working Paper Series 2017, DOI http://10.2139/ssrn.3038800.
4
Alexander Savelyev, ‘Contract Law 2.0: “Smart” Contracts as the Beginning of the End of Classic Contract Law’
(2017) 26 Information and Communications Technology Law at 10.
5
E. Mik, ‘Smart Contracts: Terminology, Technical Limitations and Real World Complexity’, 273.
6
N. Szabo, ‘Smart Contracts: Formalizing and Securing Relationships on Public Networks’, 2 (9) First Monday 1997,
http://ojphi.org/ojs/index.php/fm/article/view/548/469.
7
E. Mik, ‘Smart Contracts: Terminology, Technical Limitations and Real World Complexity’, 274.
8
From a legal perspective, a contract can be defined as an agreement reached between two or more parties capable of
enforcement by the public authority. See: J. M. Smits, Contract Law: a Comparative Introduction, (Cheltenham: Edward
Elgar Pub 2017), p. 3.
Nevertheless, it would not be possible to understand the current new interest around smart
contracts without referring to blockchain and, more appropriately, distributed ledger technology
(hereinafter, referred to as DLT).10 In fact, it’s correct to speak of DLT instead of blockchain because
the former is a broader category which encompasses all the potential application of smart contracts.11
A distributed ledger is a decentralized, peer-validated crypto-ledger network of nodes that provides a
permanent chronological record of all prior changes in states. DLT holds the promise of substituting
commercial trust in intermediaries with trust in distributed technology and computer code.12
Further, depending on the nature of DLT adopted, the records can be visible to the public or to a
limited group of authorized users.13 For the purpose of this article, it is worth highlighting the two
main distinctions in the realm of DLT: unrestricted-restricted and public-private ledgers. Unrestricted
(or permission-less) ledgers allow all those with the necessary technical capacity to take part in them,
updating and validating new transactions. On the contrary, restricted ledgers (or permissioned) are
open only to pre-defined subjects. Public and private ledger, instead, differ in terms of access rights
and visibility to third parties. Anyone can have access to the transactions updated in a public ledger,
whereas a private one can be read only by predetermined subjects (may they be actual participants,
third-parties or supervisory authorities).
One can opt for a particular type of distributed ledger depending on his preferences and aims.
Fully decentralized ledgers are slow and deeply inefficient. This is due to the shared computing
activity carried out simultaneously by all the participants of the underlying peer-to-peer network.
Cost-related and efficiency considerations aside, the choice between setting up an unrestricted versus
a restricted blockchain need to be evaluated considering many aspects.14 First, the level of
9
See: M. Raskin, ‘The Law and Legality of Smart Contracts’, 1. Geo. L. Tech. Rev. (The Georgetown Law Technology
Review) 2017, 305-341 at 306, DOI http://10.2139/ssrn.2842258; P. Cuccuru, ‘Beyond bitcoin: an early overview on
smart contracts’, 25. International Journal of Law and Information Technology 2017 (3) 179-195 at 185, DOI
http://10.1093/ijlit/eax003. The Authors argue that smart contracts are simply a new form of self-help measures aimed at
ensuring the performance of an agreement without the need of judicial enforcement.
10
For an overview of technical and business literature on distributed ledger technology, see: J. Maupin, ‘Mapping the
Global Legal Landscape of Blockchain and Other Distributed Ledger Technologies’, 149. CIGI Papers 2017,
www.cigionline.org/publications/mapping-global-legal-landscape-blockchain-and-other-distributed-ledger-
technologies; G. Hileman and M. Rauchs, Global Blockchain Benchmarking Study, Cambridge Centre for Alternative
Finance Report 2017, ssrn.com/abstract=3040224; D. S. Evans, ‘Economic Aspects of Bitcoin and Other Decentralized
Public-Ledger Currency Platforms’, 685. University of Chicago Coase-Sandor Institute for Law & Economics Research
Paper 2014, DOI http://10.2139/ssrn.2424516; F. Boucher, ‘How blockchain technology could change our lives’,
European Parlamentary Research Analysis (STOA) 2017, DOI http://10.2861/926645.
11
See: UK Government - Office of Science, Distributed Ledger Technology: beyond block chain 2016; P. Athanassiou,
‘Impact of digital innovation on the processing of electronic payments and contracting: an overview of legal risks’, 16.
ECB Legal Working Paper Series 2017, p. 14, DOI http://10.2866/201593
12
The expression of “trust-less trust” has been advanced by K. D. Werbach, ‘Trust, But Verify: Why the Blockchain
Needs the Law’, Berkeley Technology Law Journal 2018 (forthcoming), DOI http://10.2139/ssrn.2844409.
13
See: P. Athanassiou, ‘Impact of digital innovation on the processing of electronic payments and contracting: an
overview of legal risks’, 28.
14
For an in-depth analysis, see: H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a
safeguard for implementing smart contracts in no-trust environments’, 3. EUI Department of Law Research Paper 2017,
p. 10, DOI http://10.2139/ssrn.3100181.
Transacting parties can decide to make use of smart contracts by leaving the duty to perform the
contract to the software.16 Clearly, the mere fact that certain aspects of a contract are performed
automatically does not mean that the transaction is “free from the reach of regulation”. 17 The
agreement still needs to be compatible with the relevant jurisdiction-specific legal framework.18
According to the vast majorities of legal systems, an essential element for the formation of a contract
is the “meeting of the minds” between the transacting parties.19 In short, all the parties need to be
spontaneously willing to enter into the contract. In most cases such a reciprocal intention can be
expressed freely without any formal constraints. As known, a contract can be formed by either spoken
or written words and even by the mere conduct of the parties. Thus, there is no legal obstacle
preventing two parties from expressing their agreement in code or availing themselves of a software
running on a blockchain to execute their agreement.
The working definition of smart contracts used in the present paper lies at the intersection of the
mid-90s concept of a computerized protocol that execute the terms of a contract and the opportunities
arising from distributed ledger technology. In short, a smart contract is meant as a piece of software
run on a distributed ledger enabling automatic execution of an agreement -regardless if lawfully or
not - reached between two or more parties. 20 In this way, each asset transfer is time-stamped and
publicly recorded on the ledger. This article refers, therefore, to distributed ledger-based smart
contracts (or, for the sake of brevity, smart contracts).21
15
For a similar view, see: P. Athanassiou, ‘Impact of digital innovation on the processing of electronic payments and
contracting: an overview of legal risks’, 29.
16
M.L. Perugini and P. Dal Checco, ‘Smart Contracts: A Preliminary Evaluation’, SSRN Paper 2015, p. 9 DOI
http://10.2139/ssrn.2729548.
17
A. Wright and P. Filippi, ‘Decentralized Blockchain Technology and the Rise of Lex Cryptographia’, p. 2, SSRN Paper
2015, DOI http://10.2139/ssrn.2580664.
18
As in the case of a vending machine selling prohibited drugs, the relevant law would still be applicable and enforceable.
On this point, see: H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for
implementing smart contracts in no-trust environments’, 42.
19
See: J. M. Smits, Contract Law: a Comparative Introduction, (Cheltenham: Edward Elgar Pub 2017), p 37.
20
In this sense, for example, R. De Caria, ‘A digital revolution in international trade? The international legal framework
for blockchain technologies, virtual currencies and smart contracts: challenges and opportunities’, Vienna, 4-6 July 2017,
hdl.handle.net/2318/1632525.
21
Similarly, this article is not about so-called “algorithmic contracts” (agreements in which an algorithm determine the
responsivities and rights of one or both parties by acting indirectly as gap-filler or negotiator). It is possible that smart
contracts are used in complementarity with algorithmic contracts. For an overview on this topic, see: L. H. Scholz,
‘Algorithmic Contracts’, 20. Stanford Technology Law Review (Stan. Tech. L. Rev.) 2017, p. 128, A. Ezrachi and M.E.
Stucke, Virtual Competition. The Promise and Perils of the Algorithm-Driven Economy (Harvard University Press 2016),
56-81; See also: L. H. Scholz, ‘Toward a Consumer Contract Law for an Algorithmic Age’, Oxford Business Law Blog -
Law and Autonomous Systems Series (17 April 2018), www.law.ox.ac.uk/business-law-blog/blog/2018/04/law-and-
autonomous-systems-series-toward-consumer-contract-law.
Smart contracts ensure “ex ante” the performance of a contract by eliminating the default risk at
almost no cost without any external human intervention.22 Thus, they allow the parties of a contract
to set-aside the enforcement-related costs in case of breach. By definition, smart contracts render
enforcement actions unnecessary since they execute mechanically what the parties agreed on. It could
be said that, whenever the expected costs of non-compliance (due to either potential litigation or for
the search of alternatives) outweigh the expected value of the agreement, smart contracts are a more
desirable option than traditional enforcement tools. Further, the activities performed through a smart
contract cannot be reversed or cancelled by reason of the blockchain environment in which they are
recorded. To put it briefly, the chief advantage of smart contracts is represented by the substantial
reduction of the costs related to the exercise as well as the verification of rights.
As a consequence, smart contracts have the potential to unlock trade in contexts where until today
no exchange have been carried out.23 Similarly, they can boost commercial exchanges in extant
markets by both reducing transaction costs and extending the level of trust between players. By
ensuring the automatic performance of the contract, smart contracts remove the need of the parties to
trust each other’s satisfactory performance. In addition, parties would not even need to place reliance
on the jurisdiction-specific legal enforcement framework. Both consumers and merchants could, thus,
avoid the uncertainties arising from civil procedure. As a matter of fact, indeed, resorting to litigation
is a resource-intensive and time-consuming process.24
By virtue of their tamper-proof, time-stamped and immutable character, smart contracts offer a
viable option to create and strengthen trade relationships. As the performance of a particular
agreement is ensured, transacting parties would not need to trust each other, but instead they would
just need to rely on the correct functioning of the smart contract.25 A new contractual crypto-proof
environment based on automated contractual performance has thus the potential to boost commercial
relations among unknown market players.
22
On the assumption that the software code does not contain bugs and it reflects truly the parties’ intention. Similarly, the
article does not consider environmental costs as well as the power-intensive nature of DLT. For a brief overview on the
topic, see: N. Popper, ‘There Is Nothing Virtual About Bitcoin’s Energy Appetite’, The New York Times 21 January 2018,
www.nytimes.com/2018/01/21/technology/bitcoin-mining-energy-consumption.html.
23
See: H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for implementing
smart contracts in no-trust environments’, 35; K. D. Werbach and N. Cornell, ‘Contracts Ex Machina’, 67. Duke Law
Journal 2017, p. 313, scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3913&context=dlj.
24
On the costs arising from litigation, see: R. Posner, ‘The Costs of Enforcing Legal Rights’, 4. East European
Constitutional Review 1995, 71-83,
chicagounbound.uchicago.edu/cgi/viewcontent.cgi?referer=https://www.google.nl/&httpsredir=1&article=3471&contex
t=journal_articles; P. Paula Hannaford-Agor, ‘Measuring the cost of civil litigation’, 20. Center for Jury Studies for the
National Center for State Courts 2013,
www.ncsc.org/~/media/Files/PDF/Services%20and%20Experts/Areas%20of%20expertise/Civil%20Justice/Measuring-
cost-civil-litigation.ashx.
25
H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for implementing smart
contracts in no-trust environments’, 37 point out that, with smart contracts, “trusting a central authority is not necessary,
because the technology will take care that the other party performs her obligation”.
Many scholars warned that the automatic character of smart contracts can prove incompatible
with the contractual business practice.26 As demonstrated by the relational contractual theory, rights
and obligation laid down in a written contract are just a part of the broader relationship between two
transacting parties.27 Thus, these provisions are not always meant to be executed and performed
according to their literal meaning. Performance of traditional contracts can be stopped voluntarily by
the parties, whether in agreement or not. It is often the case that parties decide not to enforce certain
contractual rights to further nurture business relationships. After all, it is a common understanding in
the business practice that contracts are merely the formal side of an agreement whilst the substantial
side is the one arising from the daily commercial relations. Accordingly, contractual parties often
amend and modify previous agreements so as to address new circumstances arisen after the
conclusion of the contract. Hence, smart contracts would likely preclude those kinds of adjustments.28
The rigidity of a pre-programmed software code excludes by definition the possibility to coordinate
an agreement with the mutability of business contractual relationships.
Admittedly, one of the major drawbacks in the use of smart contracts is the expression of
contractual obligations in software code.30 Only certain kinds of contracts can be easily designed as
a series of “running circumstances through conditional statements”.31 Due to its inherent ambiguity,
not always contractual language can be reduced to binary algorithmic code. So far, legal contractual
26
For a thorough analysis, see: E. Mik, ‘Smart Contracts: Terminology, Technical Limitations and Real World
Complexity’, 284.
27
For an overview on the clash between smart contracts and relational contracts, see: K. E.C. Levy, ‘Book-Smart, Not
Street-Smart: Blockchain-Based Smart Contracts and The Social Workings of Law’, 3 Engaging Science, Technology,
and Society 2017, pp 1-15, DOI: http://10.17351/ests2017. For an in-depth analysis on the relational theory of contracts,
see: A. Dixit, Lawlessness and Economics: Alternative Modes of Governance (Princeton University Press, 2007); J. M.
Feinman, ‘Relational Contract Theory in Context’, 94. Northwester University Law Review 2000 (3), 737-748,
heinonline.org/HOL/Page?handle=hein.journals/illlr94&div=30&gsent=1&casa _token=&collection= journals#.
28 J. Sklaroff, ‘Smart Contracts and the Cost of Inflexibility’, 166. UPLR (University of Pennsylvania Law Review)
Both computing and legal reasoning can be boiled down to a series of conditional statements.
Legal reasoning often hinges on conditional statements and can be easily reflected by the “if, then,
else” logic. However, it is important to point out that only in specific circumstances legal conditionals
are capable of reduction to code. For instance, when a contract relies on theoretical concepts such as
“force majeure” and “good faith” it may be impossible to encompass it into an algorithmic code. 35
Thus, it is clear that only some particular kinds of agreements are eligible to be combined with smart
contracts.
In the light of all the above, it is worth to provide an early overview of the conditions under
which smart contracts can prove useful and cost-efficient. First, the original agreement must rely on
unambiguous and exact terms. Only in this way, it can be easily reduced to programming language.
Furthermore, when a variable depends on an event in the outside world, it would be crucial the
coordination between the smart contract and the so-called oracles. They are trusted data feeds that
interface smart contracts with the external world, thus allowing a smart contract to work without
human intervention and inputs.36 Second, transacting parties shall be willing to maintain immutable
the contractual provisions and effects within the “four corners” of the formal agreement, being aware
of the impossibility to resort to any relational remedy as far as the smart contract is involved. Third,
in order to repay the resources needed to draft and design effective smart contracts, it is likely that
32
For an in-depth overview on the topic, see: S. J. Burton, Elements of contract interpretation (Oxford University
Press: Scholarship Online 2009), 13, para. 1.2.2. DOI http://10.1093/acprof:oso/9780195337495.001.0001; S.
Grammond, ‘Reasonable Expectations and the Interpretation of Contracts Across Legal Traditions’, 48. Canadian
Business Law Journal 2010, 345-365, ssrn.com/abstract=1474266.
33
As highlighted by J. Sklaroff, ‘Smart Contracts and the Cost of Inflexibility’, 277, smart contracts shift the costs of
contracting to the pre-contracting stage, as everything has to be drafted in the contract; E. Mik, ‘Smart Contracts:
Terminology, Technical Limitations and Real World Complexity’, 289 outlines that “developers fail to recognize that in
contract law, ambiguity is a feature, not a bug”.
34
It is highly likely that in the following years lawyers will need to develop new skills in the field of computer sciences
(such as coding) so as to be able to design and understand sophisticated smart contracts. This issue will be developed in
a separate paper.
35
For a similar view, see: M. Gianscaspro, ‘Is a ‘smart contract’ really a smart idea? Insights from a legal perspective’,
33. Computer Law & Security Review 2017, pp 825-835; E. Mik, ‘Smart Contracts: Terminology, Technical Limitations
and Real World Complexity’, 289; M. Raskin, ‘The Law and Legality of Smart Contracts’, 312.
36
The trustworthiness of oracles and the related sources of information is crucial for the correct functioning of smart
contracts. Since oracles are not part of the distributed ledger, they need to be designed and programmed in such a way to
be sufficiently reliable. Even if the issue represents an important challenge to smart contracts functioning, I bracket it
from my analysis since it is more about technology than law.
It is, therefore, apparent that those agreements used on a mass-scale containing standardized
terms and conditions are the most appropriate to be optimized through smart contracts. Furthermore,
when complex and large scope agreements are at stake, it is likely that only certain clauses and
conditions are suitable for automatic performance on a distributed ledger. Accordingly, the following
sections provide an overview of some of the most promising applications of smart contracts with
reference to B2C and B2B relationships.
The debate around smart contracts and consumer protection is filled with alarms and high
expectations. On the one hand, they have the true potential to ease consumer rights protection.38 On
the other hand, their high level of complexity and rigidity raised several concerns regarding their
implementation in B2C relationships. Nevertheless, several scholars raised concerns regarding the
potential negative effects of smart contracts on consumer protection.39 How to ensure a sound
implementation of consumer protection provisions in the light of smart contracts formalized and
deterministic nature? Shouldn’t they be accessible only to some sophisticated parties (i.e.
businesses)? In fact, legal interpretation of contracts has traditionally aimed at restoring fairness
between parties’ obligation. It is not unusual for courts to make use of concepts as good faith,
protection of the weaker party and reasonable expectations in order to interpret contracts against their
literal meaning.40 As smart contracts run automatically on top of a distributed ledger, which it is
supposed to be immutable, all those legal remedies risk to become generally obsolete.
Policy makers, especially in the European Union, have developed over the years a vast array of
contractual rights to protect consumers in the light of their (economic) weak position comparing to
businesses.41 However, it is worth pointing out that the mere automatization of contract performance
on a tamper-proof distributed ledger does not hamper per se consumers. Indeed, the protection of
weaker parties’ position is not hindered by the automatic performance of a contract which is
compliant to the relevant law. Rather, the procedural terms and conditions embodied within a contract
or the obstacles to trigger specific rights can jeopardize consumers. In this respect, smart contracts
can prove to be a useful self-help remedy for those consumers who, so far, despite the rights granted
to them, have been effectively defenceless in the face of business unilateral practices. In fact, unlike
what happens nowadays, under the smart contract logic, businesses could not rely anymore on
consumer inertia as their rights would automatically be triggered.
37
It is possible that technological innovation will allow in the immediate future parties to easily design all the elements
and features of a smart contract. However, it is likely that, at least for the moment, smart contracts would consist in default
templates of general terms and conditions adaptable to the essential elements of each agreement (name of the parties,
quantities of the goods transacted, consideration, and so forth).
38
For instance, see: J. A. T. Fairfield, ‘Smart Contracts, Bitcoin Bots, and Consumer Protection’ , 71. Washington and
Lee Law Review Online 2014, 35-50, scholarlycommons.law.wlu.edu/wlulr-online/vol71/iss2/3, arguing that smart
contracts have the potential to strengthen the bargaining position of consumers. However, the Author confuse smart
contracts with algorithmic contracts (see note 21).
39
See, for instance: A. Wright and P. Filippi, 2015, 26; P. Athanassiou, ‘Impact of digital innovation on the processing
of electronic payments and contracting: an overview of legal risks’, 47; P. Cuccuru, ‘Beyond bitcoin: an early overview
on smart contracts’, 191.
40
On this point, see: E. Tjong Tjin Tai, ‘Formalizing Contract Law for Smart Contracts’, par 3.1.
41
On this point, see paragraph 4.1.
Over the years, EU legislator tried to protect consumers with a broad set of mandatory consumer
rights.42 From information duties and shift of proof, to remedies, withdrawal rights and disclosure
rules, consumers are now empowered with several provisions aimed at ensuring protection against
abuses and exploitative practices carried out by merchants. However, as already highlighted by many
scholars and lawyers, consumers still are prevented from exercising effectively all those rights
provided by the law.43 As known, many consumers are not aware of their rights or, even if they are,
find it difficult to enforce them. In fact, the true problem with B2C contracts is represented by
enforcing those rights. Standardized contracts usually contain plenty of mandatory pro-consumers
terms, which unfortunately often turn out to be difficult to be exercised.
Only a tiny minority of consumers is willing or has the means to overcome the obstacles
surreptitiously posed by businesses in order to hinder consumer rights exercise. Enforcements costs
are generally overwhelmingly high and time consuming for individuals. As most of consumer
contractual claims are of negligible value, potential reimbursements for consumers are so
insignificant to discourage costly suits. To counteract such a problem, the European Union has
introduced over the years small claims procedures and encouraged the adoption of collective redress
mechanisms by the Member States.44 However, due to the efforts to avoid the disadvantages of class
actions in the United States, collective redress has proven so far flawed and ineffective. 45 On top of
that, the majority of consumers is further hampered by the fact that the costs arising from the actions
brought by the active minority are distributed (through pricing mechanisms) on the whole spectrum
of the demand side. The outcome of such a lack of significant threats for businesses is an incentive
not to take consumer rights seriously.46
Apart from the above-mentioned troubles surrounding consumer protection policies, the utmost
problem still is represented by the very low thresholds of cost tolerance consumers are willing to bear.
In many cases, even when free of charge enforcement mechanisms are in place, consumers are likely
to be discouraged by the efforts required to find out whether they are entitled to trigger any right and
how to embark into a claim procedure.47 Against this background, it is clear that an almost automated
self-performing process would improve the systematic functioning of consumer rights protection
apparatus.
42
For an overview on this topic in the realm of European Private Law, see: E. Hondius, ‘The protection of the Weak Party
in a Harmonised European Contract Law: A Synthesis’, 27. Journal of Consumer Policy 2004, pp 245–251, DOI
http://10.1023/B:COPO.0000040520.48379.60; European Parliamentary Research Service, Consumer protection in the
EU, 2015, DOI http://10.2861/575862.
43
See, in this sense: I. Benöhrp, EU Consumer Law and Human Rights (Oxford University Press: Scholarship Online
2013), 44, para. 5, DOI http://10.1093/acprof:oso/9780199651979.001.0001; O. Ben-Shahar, ‘One-way contracts:
consumer protection without law’, 484. John M. Olin Law & Economics Working Paper 2009,
chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5068&context=journal_articles.
44
See, for instance: Commission Recommendation of 11 June 2013 on common principles for injunctive and
compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union
Law, OJ L 201, 26 July 2013, eur-
lex.europa.eu/legalcontent/EN/TXT/?qid=1398263020823&uri=OJ:JOL_2013_201_R_NS0013.
45
As pointed out by D. Geradin, ‘Collective Redress for Antitrust Damages in the European Union: Is This a Reality
Now?’, 16. George Mason Law & Economics Research Paper 2015, p. 3, ssrn.com/abstract=2593746, EU antitrust
authorities took the view that US class action mechanism risk to trigger unmeritorious litigation to the detriment of society
as a whole.
46
See, in this sense: O. Ben-Shahar and O. Bar-Gill, 50. Common Market Law Review 2013, 109-126,
chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5068&context=journal_articles.
47
Reference is made to legal technology companies which collect consumer claims online and enforce them by benefitting
from economies of scales.
Smart contracts have the potential to be implemented in such a way which could finally unlock
consumer protection rights.48 As we have seen, smart contracts allow rights enforcements at almost
no cost. Since smart contracts are by definition self-executing, they significantly reduce the need to
seek ex-post enforcement. If consumer protection mechanisms (such as statutory warranties, claims
for compensation due to impaired performance, cancellation rights) are incorporated into the code of
smart contracts, they will be automatically executed whenever their requirements will be met. In this
way, consumers would not need to spend resources to ascertain whether they are entitled to any
compensation or to sustain additional expenses arising from the dispute resolution procedure.
This use would prove useful as far as smart contracts manage to anticipate at least a broad array
of possible events that could intervene and provide for different outcomes. The contractual
relationship between the merchant and the consumer would need to be deterministically translated
into code. Theoretically, an ideal would be creating a smart contract embodying the endless series of
variables and external combinations of the outside world.49 This is, of course, practically impossible.
As already pointed out, it would be naïve to think that a smart contract could anticipate any possible
future event which may arise during the life of the contract. However, such a limit does not mean that
the most common breaches of contract or violations of consumer rights could not be embedded into
a self-performing mechanism. Therefore, whenever the conditions stated by law are fulfilled, the
smart contract would automatically trigger the related rights and procedure in order to reimburse each
entitled consumer. In such a case, any issue of enforceability would not even arise as the smart
contract would comprehensively reflect the agreement between the parties, also including all the
mandatory relevant rules. Consumers would not be even expected to be aware of all their rights: the
machine would trigger the appropriate remedies on their behalf.
In order to assess when consumer rights can be properly optimized through smart contracts, a
preliminary assessment regarding the fulfilment of the three main conditions listed in the previous
section is needed.50 First, only those consumer rights that do not rely on ambiguous or abstract terms
can be translated into code. Second, they must be independent from any relational expectation
between the parties. Third, they must be triggered on a large scale and in an identical (or, at least,
standardized) form. Since the likelihood of malfunction and discrepancies is serious, it would be
necessary to perform an in-depth analysis of the proper functioning of the smart contract before
making it available on the market.51
Against this background, a first overview of the most viable implementations of smart contracts
with reference to consumer protection can be provided. Since smart contracts are likely to be used
with reference to those consumer rights that meet the above-mentioned conditions, passenger rights
appear to be an excellent testing ground. Clearly, such a mechanism would require a high level of
coordination with external sources of information. For the purpose of this article, the case of
passengers’ rights is the most readily viable from a practical perspective, since delays and
48
See also: M. Fries, ‘Smart consumer contracts - The end of civil procedure?’, Oxford Business Law Blog - Law and
Autonomous Systems Series (29 March 2018), www.law.ox.ac.uk/business-law-blog/blog/2018/03/smart-consumer-
contracts-end-civil-procedure.
49
K. Jacob, ‘Smart Contracting Can Reduce Legal and Operating Costs’, Oxford Business Law Blog - Law and
Autonomous Systems Series (5 April 2018), www.law.ox.ac.uk/business-law-blog/blog/2018/04/law-and-autonomous-
systems-series-smart-contracting-can-reduce-legal, highlights that ultimately smart contracts would require the
digitalization of the world (in the so-called Internet of Things).
50
See section 3.3.
51
Regulatory strategies to set up appropriate precautions are illustrated in Section 6.2.
10
Over the years, European Union had set up a general framework for the protection of passengers
moving within the Internal Market by rail, bus/coach, ferry or air transports.54 They all provide for a
reimbursement right in case of delay or cancellation. For the purpose of this article, the focus will be
maintained on rail, ship and air passenger rights.55 In February 2005, the European Regulation (EC)
No. 261/2004 on compensation and assistance to passengers in the event of denied boarding and of
cancellation or long delay of flights came into force, entitling air passengers to a compensation
ranging from Euros 125 to Euros 600 (depending on the flight length) in the event of long delay of
flights, denied boarding or cancellation.56 In December 2009, the European Regulation (EC) No.
1371/2007 on rail passengers’ rights and obligations entered into force providing for compensation
rights ranging from 25% to 50% of fare depending on the length of the delay.57 In December 2012,
the European Regulation (EC) No. 1177/2010 concerning the rights of passengers when travelling by
sea and inland waterway came into force, giving a compensation right to sea and inland waterway
travellers amounting to 25% of the ticket price for long delays comparing to the travel length. Further,
passengers are entitled to a reimbursement amounting to 50% of the ticket price if the delay is
doubled.58
52
See section 5.1.
53
European Parliamentary Research Service, Consumer protection in the EU, 2015, p 4, highlighting that there is not a
consistent and uniform definition of consumer in EU law.
54
See J. Luzak, 'Vulnerable travellers in the digital age', 5. Journal of European Consumer and Market Law 2016, pp
130–135, www.kluwerlawonline.com/document.php?id=EuCML2016027, arguing that the notion of passenger falls
within the scope of the consumer acquis as the Directive 2015/2302 refers to article 114 TFEU.
55
For the sake of simplicity, coach passenger rights will not be considered. However, the proposal put forward in this
article theoretically might be applied also to that sector: in March 2013, the European Regulation (EC) No. 181/2011
concerning the rights of passengers in bus and coach transport entered into force, entitling bus and coach passengers of
long-distance routes to a compensation up to 50% of the ticket price if the carrier failed to provide a choice between
refund or re-routing (art. 19).
56
EC Reg. 2004/261 of 11 February 2004 establishing common rules on compensation and assistance to passengers in
the event of denied boarding and of cancellation or long delay of flights, eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX%3A32004R0261, art. 7-8. On 10 June 2016, the European Commission (EC) published
the ‘Interpretative Guidelines on Regulation (EC) No 261/2004 of the European Parliament and of the Council
establishing common rules on compensation and assistance to passengers in the event of denied boarding and of
cancellation or long delay of flights’, ec.europa.eu/transport/sites/transport/files/themes/passengers/news/doc/2016-06-
10-better-enforcement-pax-rights/c%282016%293502_en.pdf, aimed at providing EU National Enforcement Bodies of
EU member states with a blueprint document tackling issues most frequently raised by passengers, and in an attempt to
give clarity to the enforcement of existing passenger rights legislation.
57
EC Reg. 2007/1371 of 23 October 2007 on rail passengers’ rights and obligations, eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32007R1371&from=en, art. 17.
58
EU Reg. 2010/177 of 24 November 2010 concerning the rights of passengers when travelling by sea and inland
waterway, eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R1177&from=EN, art. 19.
11
Against this background, a smart contract mechanism aimed at automatizing the reimbursement
procedure could be envisaged. However, to make this idea viable, a trustworthy and reliable
environment of interfaces need to be set up. Often the need to integrate smart contracts with the real
world is mentioned as one of the major obstacles to the rise of DLT enabled contracting systems. 61
In fact, a trust-less and incorruptible net of oracles is as important as a comprehensive code for the
proper functioning of a smart contract.62 Contrary to other industries, travel sector has the potential
to be complemented with automatization.63 Air traffic is highly controlled trough advanced
computerized systems run by airport authorities. Similarly, rail sector is already overseen throughout
the Internal Market and, in any case, it is not unrealistic envisaging a network of oracles able to track
departure and arrival times of trains. The same is true for the cruise and ferry transport sector.
Smart contract systems, therefore, would automatically verify whether the legal requirements for
compensation have been met and, if so, carry out the payment of the amounts as set by the relevant
legal framework. Admittedly, the extant structure of the law is not the most suitable for a smooth and
effective translation into code.64 Take, for example, the concept of “extraordinary circumstances” in
the air passengers’ rights legislation. Pursuant to Article 5(3) of the Regulation No. 261/2004, an air
carrier shall be exempted from paying compensation in case of delay at arrival or cancellation upon
proof that the delay or cancellation were caused by extraordinary circumstances which could not have
been avoided even if all reasonable measures had been taken. In the light of its inherent qualitative
nature, it is unlikely that this assessment can be made through an algorithmic process. However, the
legislator could provide a non-exhaustive list of narrowly defined cases that should be presumably be
considered extraordinary (such as, for instance, airport congestion due to bad weather conditions).65
Therefore, it would be well feasible to incorporate within the smart contract, as complemented by the
oracles network, many, if not all, the exceptional circumstances preventing an automatic
compensation. The traditional system based on traditional handling complaints procedure (such as
Alternative Dispute Resolution and litigation) would not be rendered wholly obsolete. Rather, it
59
European Consumer Centres Network, ‘Revision of EU air passengers’ rights legislation’, Position paper, p 2,
www.europe-consommateurs.eu/fileadmin/user_upload/eu-consommateurs/PDFs/PDF_EN/Revision_of
_EU_air_passengers_rights_legislation_-__European_Consumer_Centres-Network_position_FINAL.pdf.
60
On this point, see: M. Fries, Oxford Business Law Blog - Law and Autonomous Systems Series (29 March 2018,
highlighting that whilst some companies, like the Spanish Renfe, voluntarily comply with the relevant legislation by
adopting an effective customer service strategy, others, like the German Deutsche Bahn, set up troublesome procedures
to discourage consumers from claiming reimbursements.
61
See: E. Mik, 9. Law Inn. and Tec. 2017, p 269 at 297.
62
For the purposes of the present article, technical problems arising from the implementation of oracles are bracketed as
they represent a technical issue.
63
The establishment of trans-European networks (TENs) in the areas of transport has always been one of the main goal
of the European Union policies. For instance, in the rail transport sector, European Union has developed the so-called
‘European Railway Traffic Management System’ (ERTMS): a European standard for the Automatic Train Protection
(ATP) that allows an interoperable railway system in Europe and enforces compliance by the train with speed restrictions
and signalling status. See: https://ec.europa.eu/transport/modes/rail/ertms_en. Similarly, in the air sector the Single
European Sky initiative has been established. See: https://ec.europa.eu/transport/modes/air/single_european_sky_en. For
a general overview (comprehensive of the ship sector), see:
http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_3.5.1.html.
64
E. Tjong Tjin Tai, ‘Formalizing Contract Law for Smart Contracts’, 4, argues that smart contracts give occasion to
reconsider the formalities and rules of contract law.
65
See: Interpretative Guidelines on Regulation (EC) No 261/2004.
12
Turning now the attention on business trading practices, it becomes apparent that other
implementations of smart contract might prove useful in this context as well. Moreover, they seem to
be even more easily feasible than in the B2C realm. Smart contracts have the inherent potential to
reduce transaction costs and even to enable trading where before no market would have flourished.66
By virtue of their ability to generate trust between market players, in the immediate future they are
most suited to be implemented in B2B relationships.67 In this respect, international trade sector offers
a terrific opportunity to test smart contracts potential to knock down transaction costs. It is worth
pointing out that these kinds of smart contracts applications can be beneficial with reference to both
one-shot atomic transactions and more sophisticated ones. Whereas the former could be completely
automatized through a software, as it is likely with B2C contracts, the latter could be “smarted up”
only to a certain extent (such as an escrow related to a broader supply contract).
Take the example of trade financing contracts. According to the last WTO insight, world exports
of manufactured goods amounts to more than USD 11 Trillion.68 Despite the pace of technological
innovation in finance, international business practice is still significantly paper-based and highly
cumbersome. So far, the need to provide trust between parties in long distance sales contracts has
been traditionally satisfied using instruments such as letters of credit and escrow agreements.
However, a large set of inefficiencies and obstacles arise from the interaction between players seated
in different jurisdictions. Further, documentary processes of banking verification are extremely time-
consuming and prone to human errors throughout the supply chain.69 Against this background, smart
contracts can be deployed to alleviate the hardships and inefficiencies which affect the current state
of international trade.
The business practice appears to be, alongside banking and financial sector, one of the most
promising application of distributed ledger enabled smart contracts. Business relationships can
provide an ideal ground to assess whether smart contracts ability to provide trust-less trust are indeed
a significant incentive to foster commercial relationships.70 In a broad array of cases, indeed, they
seem to fulfil all the three conditions stated in the previous section.71
First, international sales contracts often contain highly standardized terms and conditions based
on variables that are easily verifiable (shipment, delivery, timing, etc.). Furthermore, by adopting a
reliable network of oracles, verification activities can be digitalized and commoditized (a process
which is already under way).
66
For an in-depth analysis on the potential of smart contracts to create markets in “no-trust” environments, see: H.
Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for implementing smart contracts
in no-trust environments’.
67
Allen and Overy LLP, Smart Contracts For Finance Parties, 2017,
www.allenovery.com/SiteCollectionDocuments/Smart_contracts_for_finance_parties.pdf.
68
World Trade Organization Report 2017, www.wto.org/english/res_e/booksp_ e/world_trade_report17_e.pdf.
69
See L. W. Cong and Z. He, ‘Blockchain Disruption and Smart Contracts’, SSRN Paper 2017, DOI
http://10.2139/ssrn.2985764, highlighting that a deal could not be reached if the bank issuing a letter of credit is not trusted
by the counter-party banks or is not part of the trustworthy banking network.
70
H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for implementing smart
contracts in no-trust environments’, p 35.
71
See section 3.3.
13
The letter of credit can be a good example of smart contract optimization of international business
practice.73 In the international sale of goods, a seller needs to be ensured that he will be paid upon
delivery of the goods. On the contrary, the buyer does not feel confident in paying before the receipt
of the commodities. Therefore, whilst the former (exporter) is likely to require the purchaser
(importer) to make payment in advance, the latter may try to reduce its risk by requiring a proof of
dispatch as well as assurances about the quality of the goods. By making use of the system
underpinning letters of credit, banks can act as intermediaries to provide trust between contracting
parties. Thus, the buyer’s bank should handle to the seller a letter of credit that ensure the payment
of the amount agreed upon presentation of certain documents, such as a bill of landing. In the event
the exporter needs the money immediately, its own bank could offer him a loan that will be eventually
offset against the payment of buyer. On the one hand, this mechanism allows businesses to trade by
providing them the necessary level of trust. On the other hand, transaction costs necessary to pay
banking fees and interest rates as well as waiting time for payments raise the threshold under which
trade is not efficient.74
Smart contracts based on a distributed ledger can represent an effective and efficient tool to
minimize those transaction costs. A smart sales contract would, upon fulfilment of certain
requirements, authorize the release of the sum agreed directly on the vendor’s account. The benefits
of such a mechanism are two-folds. First, parties are better suited to keep track of the flow of goods
without fear of frauds: shipment, storing and delivering activities would all be duly recorded and
time-stamped on the distributed ledger. As stated above, oracles and Internet of Things integrated
networks would play a key role in ensuring the reliability of the system. Parties would still need to
trust such external sources of information.75 By virtue of tamper-proof character of the distributed
72
The “four corners rule” implies that a document's meaning should be excerpted from the textual content of the document
itself, without any external reference. See, for instance, G. Cuniberti, ‘The International Market for Contracts: The Most
Attractive Contract Laws’, 34. Northwestern Journal of International Law & Business (Nw. J. Int'l L. & Bus.) 2014,
scholarlycommons.law.northwestern.edu/njilb/vol34/iss3/3; I. MacNeil, ‘Uncertainty in Commercial Law’, 13.
Edinburgh Law Review 2009, pp 68-99, DOI: http://10.3366/ E1364980908000966
http://scholarlycommons.law.northwestern.edu/njilb/vol34/iss3/3
73
For an overview on letter of credits, see: R. A. August, D. Mayer and M. Bixby, International Business Law (London:
Pearson Education, 6th edn 2012), 662.
74
Small companies face waiting periods ranging from 60 to 90 days before getting a payment for the goods delivered:
this hinders their ability to deploy financial resource for other purposes.
75
Even now, it must be said, the process of verification and authentication need to be delegated to third parties.
14
Similarly, escrow agreements may represent another optimal testing ground for smart contracts
in B2B relationships. A smart contract can easily be deployed as escrow account linked to an
exchange between two parties. The buyer of some commodities or services would transfer the
consideration to the smart contract’s account. The oracles (such as geo-tagging devices) connected to
the smart contract, in turn, would monitor the performance and, upon delivery of the goods to the
buyer, the contract would automatically authorise the release of the agreed sum to the seller.
As shown above, smart contracts based on distributed ledgers have the true potential to create
new markets and expanding existing ones by reducing transaction costs and revolutionizing the way
businesses practice is used to sustain trading activities.77 They can be structured in platforms capable
to manage sophisticated multiple operations, minimizing human errors and risk of frauds as well as
cutting costs and processing time. Unlike the B2C scenario, therefore, businesses are naturally
inclined to develop smart contracts applications in order to reduce transaction costs and strengthen
their trading activities. 78
6. Looking ahead
Even if distributed ledger technology has been around for more than a decade, business
implementations are still in their early stages. The aim of this section is twofold. First, it sheds some
light on which typology of distributed ledger best fits smart contracts’ features. Second, it investigates
which regulatory strategy policy makers and regulators should adopt in order to facilitate a safe
experimentation of smart contracts in the B2C environment as well as in the B2B one.
Distributed ledgers can take a wide range of different forms, depending on their degree of
decentralization.79 Thus, smart contracts therein embedded can be characterized by different levels of
rigidity, accountability and stability. Even though they are often celebrated as innovative and
76
In 2016 Barclays and the FinTech start-up Wave declared to have executed a global trade transaction using a smart
letter of credit run on a distribute ledger (www.barclayscorporate.com/insight-and-research/trading-and-
exporting/blockchain-revolution-in-trade-finance.html). Further, Bank of America Merrill Lynch, in partnership with
Microsoft Treasury, recently received industry praise for their blockchain-powered trade finance application which
optimizes the standby letter of credit process, reducing issuance time from several weeks to potentially just several hours
(news.microsoft.com/2016/09/27/microsoft-and-bank-of-america-merrill-lynch-collaborate-to-transform-trade-finance-
transacting-with-azure-blockchain-as-a-service/).
77
For the sake of brevity, the article focuses the discussion only on two examples in order to provide an overview of
smart contracts potential benefits and on the main difference with the B2C relationships.
78
Currently, R3 Corda consortium represents one of the most far-reaching and advanced implementation of a distributed
ledger. It gathers more than 40 top banks around the world and it is aimed at developing a standardized, private, global
blockchain for the managing of financial services. For an in-depth analysis of its structure, see: R. G. Brown, ‘Introducing
R3 Corda: A Distributed Ledger Designed for Financial Services’, Blog Post, 5 April 2017,
www.r3cev.com/blog/2016/4/4/introducing-r3-corda-a-distributed-ledger-designed-for-financial-services.
79
See Section 2.
15
In the light of the above, the evidence would seem to suggest that only a mitigated form of
decentralization is desirable as far as any form of trade is involved, irrespective of B2C and B2B
environments. In order to be widely adopted by market players, smart contracts need to be open to
the possibility of granting access to public policy enforcement and traditional private law remedies.82
It come as no surprise that the major technology companies are currently developing smart contracts
platforms prototypes based on permissioned ledgers so as to overcome the shortcoming deriving from
the rigidity of public and permission-less blockchains.83 This does not mean that the intrinsic potential
of smart contracts, such as incorruptibility and trust-worthiness, shall be watered down. Instead, we
should strike a proper balance between the features of decentralization and the regulatory concerns
(such as legal compliance, data protection, financial stability, and so forth).
Even though the challenge to design smart contracting systems based on distributed ledger
technology is primarily on the shoulders of computer scientists, a general preliminary remark can be
put forward. The advantages and benefits of smart contracts vary depending on the nature and needs
of the transacting parties. Therefore, features as the automatization, the immutability or the
incorruptibility should be refined according to the specific needs of each business case. For instance,
a platform running thousands of B2C smart contracts need to ensure automatic exercise of consumer
rights on a large scale instead of broadening the network of nodes of the ledger. On the contrary, long
distance B2B sales contracts need to be run on tamper-proof ledger as reliable as possible and, thus,
with an underlying community of nodes that cannot be biased by some transacting parties or a cyber-
attack.
It is now worth to assess which regulatory strategies policy makers and regulators should adopt with
reference to smart contracts usages by businesses and consumers. As already pointed out by the legal
scholarship, the range of possible approaches available is quite wide and ranges from a “wait-and-
see” tactic to the issuance of guidelines or even new legislation to tackle potential problems.84 As a
preliminary remark, it should be clear that the burden of shaping new rules rest not only on the public
legislators themselves, but also on market players and public interest groups of stakeholders.85 It is
crucial, indeed, that policy makers seek interaction and dialogue with undertakings in order to target
80
P. Cuccuru, ‘Beyond bitcoin: an early overview on smart contracts’, 192.
81
P. Athanassiou, ‘Impact of digital innovation on the processing of electronic payments and contracting: an overview of
legal risks’, 28.
82
Of course, for their part, also private law remedies and forms policy enforcement need to be up-dated and adapted to
a smart contracts environment.
83
See, for instance: S. Mery and D. Selman, ‘Make your blockchain smart contracts smarter with business rules’, IBM
Developer Works, www.ibm.com/developerworks/library/mw-1708-mery-blockchain/1708-mery.html; M. Gray,
‘Enterprise Smart Contracts: resolving the truth for blockchains’, Microsoft Azure Blog, 30 October 2017.
84
For a first overview of the possible regulatory approaches for DLT enabled activities, see: K. D. Werbach, Berkeley
Technology Law Journal 2018 (forthcoming); M. Finck, ‘Blockchain Regulation’, 11; G. A. Gabison, ‘Policy
considerations for the Blockchain Public and private Applications’, 19. SMU Science and Technology Law Review 2016,
scholar.smu.edu/ scitech/vol19/iss3/4.
85
M. Finck, ‘Blockchain Regulation’, 20.
16
The experimentation of smart contracts in B2B relationships has been going on for some years
through the joint effort of software developers and merchants. 86 Since the economic benefits arising
from smart contracts in international trade and finance are evident, there is no need to call for a
resolute state intervention.87 On the contrary, the success of smart contracts as a tool to enable
consumer rights enforcement will highly depend on the approach that policy makers will adopt to
support their implementation. Indeed, it would not be realistic to imagine that businesses will
voluntarily avail themselves of such an instrument. As already pointed out, those rights are largely
neglected as usually consumers do not have enough incentive to trigger them (at least when they
involve small amounts of money). On the contrary, the automatic triggering of those rights to the
benefit of consumers in their entirety would unavoidably force businesses to take consumer rights
more seriously than in the past, ensuring a full compliance. It is, therefore, clear that the only way to
avail consumers of this self-help tool is to oblige businesses to adopt it. In this respect, two main
questions arise: which typologies of merchants should be forced to implement smart contracts? How
can public bodies ensure the soundness of such a new mechanism?
Since both distributed ledger technology and smart consumer contracts are still in their infancy,
it would not be realistic to require all merchants to implement this new system.88 As analysed above,
passengers’ rights could offer a good testing ground to assess the functioning of smart contracts.
Furthermore, rail and air sectors are already highly digitalized: this would allow an easy coordination
with a smart contract platform. Even though the focus has been reduced, many complexities would
remain to be faced in order to ensure a first early experimentation of smart contracts. Therefore, given
that the above-mentioned task is an uphill one, a wise first move may be represented by the adoption
of so-called regulatory sandboxes. 89 They can be defined as legal tools that allow undertakings to
test specific services, products or business practices under a legal framework which is different from
the one they would otherwise need to comply with under normal circumstances.
This technique permits regulators to test different forms of regulations and assess which one is
more effective. Similarly, businesses are given the possibility to develop new activities without the
risks arising from legal uncertainty. In this respect, there would be room to develop carefully a
permissioned distributed ledger with a consumer contract therein embedded. The contract should be
structured in a way to provide for the triggering of reimbursement rights to the benefit of the
passengers whenever the relevant legal conditions were met. Besides, the distributed ledger
underlying the mechanism should be a permissioned one, formed by consumer organizations, rail
service providers and governmental authorities. In this way, the reliability of the system would be
ensured by the presence of regulators and consumer associations. Finally, from this first activity,
public authorities and businesses would have the chance to learn how to further improve the
effectiveness of consumers’ rights optimized through smart contracts.
Regulatory experimentation aside, the theme of the neutrality of the computer code is likely to
play a key role in the world of smart contracts. Whilst rights enforcements would be ensured, parties
86
See notes 75 and 77.
87
Public authorities would still need to oversee the process in order to ensure public policy objects such as financial
stability, data protection and so forth. However, the public intervention would not be essential to nudge or mandate the
adoption of smart contracts. On this point, see: Financial Conduct Authority, Distributed Ledger Technology
Feedback Statement on Discussion Paper, 2017, www.fca.org.uk/publication/feedback/fs17-04.pdf.
88
As pointed out also by M. Fries, Oxford Business Law Blog - Law and Autonomous Systems Series (29 March 2018).
89
M. Finck, ‘Blockchain Regulation’, 14, argues for the need of a process of polycentric co-regulation based on a continue
dialogue between policy makers and stakeholders instead of a top-down approach.
17
7. Conclusion
The present analysis has provided an early overview of the areas where smart contracts could
successfully optimize current contractual practices. After having clarified that smart contracts are a
tamper-proof tool aimed at ensuring contract performance, the article carried out an analysis of their
main characteristics. The inherent features of smart contracts, such as the impossibility to adapt the
agreement to new situations and the complexities arising from the translation into code, suggest that
they are currently suited just for a narrow set of cases. In particular, rights and obligations embodied
in smart contracts need to be standardized and replicable on a large scale. Furthermore, smart
contracts exclude by definition any relational remedy of the day-by-day commercial practice.
Therefore, current possible applications of smart contract need to be carefully identified.
First, the substantial reduction of enforcement costs to zero would allow the wide-spread and
systematic exercise of consumer rights, particularly when involving economically small claims.
Businesses, thus, could not rely anymore on consumer inertia and would be incentivized to comply
with all the consumer protection rules which, so far, have largely remained dead letter. In this respect,
the case of passengers’ rights has been taken as an example to demonstrate that such a new mechanism
could finally restore a fairer balance of powers between merchants and consumers. Second, smart
contracts have the capacity to enable trade exchanges in those environments affected by lack of trust
among potential transacting parties (so-called “no-trust contracting environments”).92 Indeed, by their
tamper-proof and self-performing character, smart contracts can prove incomparably more effective
than traditional tools used so far in international trade, such as letter of credits and escrow agreements.
As shown, barriers to trade may be substantially decreased, fostering existent trade relations and
enabling the rise of new markets.
Nevertheless, the integration of smart contracts with the complexities of real world is not an easy
task. By definition, they require the drafting and the related encoding of comprehensive agreements
90
Depending on the importance of the matter, the state could decide to intervene by issuing specific form of regulation
so as to ensure the reliability of the network of the certification bodies. It seems, however, too early to assess whether
such an initiative will be necessary or not. It is worth highlighting that any attempt of fraud and abusive conduct would
still be prohibited under the current law.
91
As a corollary, we should wonder whether a potential liability for inadequate controls on smart contracts could arise
towards market players. This requires further research.
92
See: H. Eenmaa-Dimitrieva and M. J. Schmidt-Kessen, ‘Regulation through code as a safeguard for implementing
smart contracts in no-trust environments’, 27.
18
19