Expert opinions, LAW

Smart contracts and Russia’s contractual laws

Dmitry Skvortsov – PhD in Law, independent expert

In October 2017, Russia’s president approved a list of instructions in the follow-up to the October 10 meeting on using digital technology in finance. The said instructions relate to the main aspects of the digital currencies legalization.

The government and the Central Bank of Russia were instructed to draft by July 1, 2018 amendments to the national laws intended to legally define such terms as digital pledge instrument, cryptocurrency, token, smart contract, etc.

At the moment, a number of initiatives intended for the said instructions implementation are underway.

The Ministry of Finance has for instance submitted a draft federal law On Digital Financial Assets which defines a smart contract as “an agreement in an electronic format, under which the rights and obligations are defined and executed by automatically making digital entries in a preset sequence and subject to commencement of envisaged circumstances”.

Draft federal law On Alternative Ways of Raising Investments (Crowdfunding) contains a reference that the smart contract term is employed in the said draft in the meaning specified by draft federal law On Digital Financial Assets, but it additionally notes that in respect of smart contracts certain actions can be made, intending to ascertain, amend or terminate the rights and obligations of an investment platform participants.

In its draft federal law On Digital Financial Assets, Finance Ministry came up with a smart contract definition of its own. It defines a smart contract as “an agreement in an electronic format, under which rights and obligations are effected through automatic performance of digital transactions within distributed ledger of digital transactions in a strictly prescribed sequence and subject to occurrence of predefined circumstances”.

No other versions of legal definitions of a smart contract are now in existence since Russia’s Central Bank and Finance Ministry are the leading experts in shaping legislative opinions.

Meanwhile, Vyacheslav Volodin and Pavel Krasheninnikov, deputies of the Russian Federation State Duma (lower house of parliament) have submitted for further review draft federal law No 424632-7 of March 26, 2018 On Amendments to Parts One, Two and Four of the Civil Code of the Russian Federation, which contains and defines such terms as digital right and digital money.

It is specified in the above draft law that in cases provided for by the laws, titles to the objects of civil law, save for intangible benefits, can be authenticated by a digital data totality (a digital code or identification) available in an information system which has characteristics of a decentralized information system, specified by the laws, and subject to the conditions that information technologies and technical means of such an information system can ascertain that a person holding a unique access to the digital code or identification can at any moment become familiarized with the description of a respective civil rights object. The said digital code or identification are viewed as digital rights.

Along with that, digital money can be understood as the aggregate of electronic data (digital code or identification) which does not certify a title to some object of civil rights but is set within an information system which meets the decentralized information system characteristics prescribed by laws and is used by the system users for effecting payments.

Memorandum to the said draft law specifies that the fact of a deal execution is not contested by the parties. Once the users are identified within the system, their further steps follow an algorithm of a software program which shapes the network, whereas a person buying one digital item or another (digital right) obtains the item in question automatically once specified circumstances take place.

In an information system, a deal with such an item will be executed automatically, with no further instructions or other volition by the parties thereto. Once a deal is accomplished, the seller’s digital right will be cancelled while the buyer’s money will be withdrawnб and under the general law the fact may not be challenged thereafter.

In fact, the will aimed at making a contract, within the deal includes the will aimed at performing an obligation thereunder. It is essential though that parties to such deals should be fully aware of their actions. No other legislative norms are required for execution of smart contracts. The relationships of the parties thereunder can be governed by the Civil Code currently in force.

For a more profound understanding of the subject, it is worth reviewing general norms contained in part 1 of Russia’s Civil Code which defines the notion of a contract and specifies contract types and means (forms) of its making.

Part 1 article 420 of the Russian Federation Civil Code understands a contract as an agreement of two or more parties on establishing, amending or terminating civil rights and obligations.

As per part 1 article 432 of the Civil Code of Russia, a contract is deemed made if the parties thereto have reached an agreement on all material provisions of the contract in a prescribed and appropriate format.

A contract is made by an offer (proposal to conclude a contract) being forwarded by one of the parties and accepted (acceptance of a proposal) by the other (part 2 article 432 of the Russian Civil Code).

Under part 1 article 433 of the Civil Code, a contract is considered being made upon receipt of its acceptance by the party which made an offer.

According to part 1 article 434 of the Civil Code of the Russian Federation, a contract may be made in any format provided for in respect of making such deals, unless contractual law on contracts of that kind prescribes a specific format.

In line with part 2 article 434 of the Civil Code, a contract in writing can be made by making a single document signed by the parties, as well as by way of exchanging letters, telegrams, telex messages, telefaxes or other documents including electronic documents transmitted by communication channels allowing to reliably ascertain that a document originated from a party to the contract.

An electronic document transmitted via information channels means the information was prepared, dispatched, received and stored through use of electronic, magnetic, optic or other similar means, including an e-mail and an e-format information exchange.

Subject to the aforesaid, it appears appropriate and expedient to have the smart contract term defined most objectively and lawfully.

A smart contract should be understood as an agreement by two or more parties intended to establish, amend or terminate civil rights and obligations thereunder, made in an electronic format by entering to a decentralized information system information on the terms and conditions of the deal, employing digital money as the payment means, and executed automatically in a set sequence envisaged by a mathematic algorithm.

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