Projects

Over the years, the exponential development of the Internet has affected and revolutionized our lives. We have always been able to discern and divide the virtual world from the real world, but as we go on, this distinction fades more and more. On the Internet, we spend a large part of our days. During this activity, however, we leave “traces”. These traces are, quite simply, our data: information of different types and importance that is collected and used by the parties we interface with in the virtual world.

The collection and use for business purposes of our data by third parties has led to ever-increasing importance of data and the resulting sensitivity about it. The totality of this data reveals, on closer inspection, who we really are; our identity. As a result, consumers, governments, and the marketplace are demanding greater control over the data they generate and process. With identity theft occurring every 22 seconds, users today question whether a third-party system should have such extensive control over their personal data, in particular, identity-related data. In this system, possible solutions are offered by the growing use of Blockchain and DLTs.

In the ‘blockchain’ the data, entered through asymmetric cryptography, are allocated in blocks, accompanied by hashes and temporal validation, concatenated between them through the recall of the hash of the previous block in the next one: from this aspect derives the characteristic of unilateral immutability. Since each hash contains the hash of the previous block, an attempt to modify one block of the chain.

With blockchain, using asymmetric encryption would ensure selective data access, respectful of what users have consented to because of the purpose of processing.

It follows that the practical applications of blockchain can potentially be many.

However, such technology brings with it a number of dangers and issues that have yet to be resurrected. These mainly include:

• Identity fraud
• Data breaches
• Lack of reusability of identities
• Right to be forgotten

In particular, precisely the latter issue is closely related to the balance between the use of Blockchain and the processing of data and the guarantee of rights regarding individual identity in light of current regulations (i.e. GDPR, eIDAS).

In the regulatory framework, a new regulation will have a huge impact in the next years: the eIDAS 2.0 regulation. eIDAS 2.0 introduces the EU Digital Wallet as the eID mean including not only the PID (eID Scheme) but also additional attributes like (qualified) attestation of attributes and gives the control over its identity back to the user in regulated approach. This means that eIDAS 2.0 gives the possibility to provide legal trust on decentralized digital identities in self-sovereign manner by combining existing trust model from eIDAS 1.0 with SSI-approach

In this situation, a new technology is gaining ground and deserves to be studied: decentralized identity (DID), also known as “self-sovereign identity” (SSI) or distributed identity. This aims to help establish unique and secure access connections between parties or systems, without the need for a third-party “connection broker.” SSI promise identity owner full control over its identity and attributes. With the SSI principles some possible rules for decentralized digital identities were developed. All identity information is stored decentralized and only the holder should decide whom he`ll give access or transmit identification information. One main postulate is that in SSI a trusted 3rd party might not be necessary anymore since DLT is used as decentralized PKI and immutable by design – so SSI may be trustworthy by itself.

The DID is designed to simulate a kind of digital wallet, in which users store their identity or requests. Individuals are solely responsible for their security and release only the minimum information necessary to establish a secure and reliable connection. There is no password exchange, but biometric authentication such as fingerprint or facial recognition is used. Meanwhile, the underlying decentralized blockchain technology works to ensure that requests are cryptographically authentic and tamper-proof, significantly reducing the risk of fraud.

Currently SSI lacks the legal trust because current eIDAS1 mainly focused on government eID not integrating the new SSI-paradigm. There`s no trust by default as expected in the fundamental idea of SSI and DLT – only by proof of a trusted 3rd party. With the eIDAS Bridge the EU just developed possible legal and technical solution to bridge centralized approach of [eIDAS] referenced to government eID and (qualified) trust services with decentralized manner of DLT and possibly SSI.

The decentralized identity space is still in its infancy; however, it is clear that it has the potential to change existing identity management for the better. Now, with eIDAS 2, the EU hope is to take another step forward to develop a unique system of digital identity all the EU.

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In the wake of the 2008 global financial crisis, a mysterious figure known as Satoshi Nakamoto proposed the concept of Bitcoin as an innovative solution to the inadequacies and vulnerabilities of traditional banking systems. These systems, Nakamoto argued, were overly reliant on trust and, as such, susceptible to catastrophic failure. This marked the beginning of cryptocurrencies, a novel form of currency that leveraged the power of distributed ledger technology (DLT) and the secure encoding techniques of cryptography.

Cryptocurrencies were designed with the goal of addressing several complex issues plaguing the financial industry such as deficits in trust, inefficiency in transactions, and overall financial instability. DLT, a key component of cryptocurrencies, is unique in its decentralized nature, offering a groundbreaking approach to governance. Unlike traditional systems, where power is concentrated in the hands of a few, DLT distributes power evenly among all network participants, fostering a more democratic and equitable structure.

The transparency inherent in DLT serves as an effective tool in the fight against corruption, enhancing the accountability of those in power and, in turn, rebuilding trust and efficiency in governance processes. Furthermore, DLT increases accessibility by making information readily available to all participants. It also reduces costs by cutting out intermediaries and promotes automation through the use of smart contracts. All these factors contribute to fostering active participation in governance, strengthening the democratic process.

However, as is often the case with revolutionary technology, DLT is not without its risks and legal challenges. As such, it necessitates careful consideration and regulatory intervention at every step. In the U.S., states like Vermont, Wyoming, and Tennessee have taken the lead in recognizing DLT-based governance tools. Yet, to fully unlock the potential of this transformative technology, a more comprehensive regulatory framework is required.

DLT holds significant promise beyond its financial applications, particularly in governance and democracy. Realizing this potential requires a comprehensive grasp of the technology, including its advantages and limitations, a careful consideration of potential applications, and the establishment of a robust regulatory framework.

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Financial technology, as well known as “FinTech”, is an umbrella term related to a wide range of services for business and private individuals, including banking, financial and insurance services.

Information technologies (IT) on this matter are used for the implementation of monetary transactions and financial risk management. A greater efficiency of market services was mainly due to the global economic and financial crisis in 2009, which prompted investors to find new forms of financial intermediation.

The creation of an alternative model of finance has permitted not only the introduction of an effective tool to improve investor confidence, but also the implementation of new technologies that can likewise be used in other sectors. A key role in this context was played by start-up companies that provided innovative products and solutions for banks and investors.

In this frame, the creation of the Distributed Ledger Technology (DLT) represented the keystone of the whole economic market (r)evolution.

The creation of Distributed Ledger Technology took place due to the necessity of an alternative financial pattern. In this context, Blockchain technology has allowed private individuals, not only professional investors, to approach the world of finance and generate profit.

Financial instruments traded in these markets are cryptocurrencies: a particular kind of virtual value that cannot be considered as legal tender, but only an instrument for speculative activities. The absence of a stable value has led institutions to mistrust the phenomenon, especially to protect consumers from possible fraud and risky investments.

The latest advances in technology have led to a rapid evolution of FinTech. In particular, the following step in the development of crypto assets may be identified with the inception of Decentralised Finance (DeFi): a new shape of decentralized financial intermediation empowered by smart contracts and based on decentralization.

The interest of the European regulators on the matter is evidenced by the numerous acts adopted in recent years. In particular, the European Commission’s “FinTech Action plan: For a more competitive and innovative European financial sector” of 2018 expresses the importance of the development of financial technology and the importance of the continued monitoring of such activities and the creation of common standards. In 2020 the “Digital financial strategy” was adopted to define measures of promotion and regulation for digital finance.

Lastly, European regulators adopted two significant legislative acts to discipline the phenomenon: Regulation 2022/858 of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology and Regulation 2023/1114 of 31 May 2023 on markets in crypto assets (MiCA).

The first one (MiCA) regulates cryptocurrency activities that are not financial transactions; the pilot regime is indeed a complementary regulation that provides regulation for financial products exchanged in DLTs.

Another element of innovation is represented by the proposal for the establishment of a “digital euro”: an electronic means of payment that would enable people to use digital payment easily as cash.

In conclusion, the current legislative acts and initiatives demonstrate how digital financial innovation is fundamental for the competitiveness and evolution of the European market, and how the regulation and innovation of such economies and technologies should be based on principles like consumer protection and sustainability to guarantee inclusiveness and green economy.

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Smart contracts are deterministic computer programs that can automatically execute on the blockchain according to prespecified functions. Smart contracts take advantage of blockchain properties, i.e. immutability and decentralization. Thus, blockchain-based smart contracts are considered an opportunity to automate any kind of process in a safe, transparent, efficient, and traceable way.

Smart contracts, despite the term, are not contracts. Of course, they can get legal relevance and be applied in the contractual domain, to conclude contracts or perform contractual obligations. In principle, however, they are suitable to automate every action or operation and can be applied in innumerable fields. For example, they could facilitate interactions in supply chains, or have the potential to transform the public sector. They are having a significant impact on those fields where huge amounts of data are processed daily between various intermediaries, such as in the finance and the insurance sector. More recently, discussions around smart contracts concern non-fungible tokens (or NFTs), units of data that can be recorded and traded on the blockchain and that are unique. They can be both the digital representation of existing assets or native digital assets that populate the Metaverse. Smart contracts make these tokens ‘programmable’, which means that they allow more complex operations than just exchanging NFTs (e.g., the automatic payment of royalties to the author of a digital work of art represented by an NFT).

Besides contract law, smart contracts can represent or perform other legal acts, which are subject to different legal domains (apart from private law) and can support both private and public activities. For this reason, it is usually distinguished between ‘smart contract code’ and ‘smart legal contracts’, the second indicating the use of smart contracts for legally binding contracts.

Like every new impacting phenomenon, smart legal contracts need a regulatory response to protect consumers and provide legal certainty for businesses. Indeed, while legal scholars affirm that smart legal contracts could foster the development of electronic commerce, on other hand, they have outlined several legal shortcomings and profiles regarding the entire life cycle of contracts, from formation to performance. The Resolution of 3 October 2018 of the European Parliament ‘Distributed ledger technologies and blockchains: building trust with disintermediation’ stresses that the European Commission needs to undertake an in-depth assessment of the legal implications of smart contracts, in particular by use-case monitoring and conducting an in-depth analysis of the existing legal framework in the individual Member States. Following this path, in 2021 the EU Commission released a study on smart contracts and the digital single market through the lens of a ‘law+technology’ approach. Outside the European borders, on 25 November 2021, the UK Law Commission published its advice to Government on smart legal contracts. Also, UNCITRAL and UNIDROIT have organised joint workshops to discuss legal issues arising from the use of DLT and smart contracts. Some countries, including Italy, have even issued dedicated rules. More recently, a definition of smart contract appears in Regulation 2023/2854 on harmonised rules on fair access to and use of data (the so-called “Data Act”) which disciplines the use of smart contracts for executing data-sharing agreements.

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Etymologically speaking, the term Metaverse is derived from the combination of the Greek word, “Meta”, which stands for “beyond”, and “verse” which is a contraction of the word “universe”. Technologically, the current belief is that the Metaverse is to become the next generation of the internet, Web 3.0, where the users would change from passive to active creators. In any case, the metaverse is best described as an immersive virtual world that exists entirely within a computer-generated space, made accessible by Extended Reality (XR) technology, where its users interact between themselves by using avatars. The virtual world would encompass a combination of social, commercial, and entertainment activities, where the users could also own, buy and sell virtual goods. And while this concept of a virtual world has been around since the end of the last century, a significant change in the scenario was made possible by the development of blockchain.

This is because there is not only one metaverse, but several, and they lack interconnectedness. In this sense, distributed ledger technology provides the perfect structure for interactions between users. And some interactions can have real-life legal consequences, which has risen the question of whether real-life law could or should be applied to the metaverse.

Currently, the main legal consequences of the metaverse are related to property rights including intellectual property disputes, privacy, and harmful behavior. In the field of property law, digital assets, such as land, buildings, and art have value not only in the metaverse but also in real life. Therefore, disputes over the ownership of these assets can arise. In addition, there are more than a few uses of copyrighted material in the virtual world. The lack of regulation on this matter can raise issues of copyright infringement. Data protection is also one of the main concerns that arose within the metaverse. The use of XR technology involves the collection of immense amounts of data, including very sensitive personal data, such as biometric, emotional, and physical data, which requires specific protection measures under the General Data Protection Regulation (GDPR). Finally, there is a considerable range of harmful behavior that can happen (or has already) within the metaverse environment, same as in social media, including verbal harassment, hate speech, and defamatory content.

The economy of the metaverse relies on blockchain and cryptocurrency technologies. Non-fungible tokens (NFTs), for example, are used to track and validate the sale and ownership of digital assets. In real life, ownership rights of NFTs are still very much debatable, and property rights in the metaverse seem to be taking the same direction. The lack of clarity and confusion over ownership of virtual goods can lead to legal disputes.

Intellectual property, therefore, would appear to be a much more reasonable approach. However, copyright protection has also been a victim of uncertainty when it comes to its applications. It is clear that copyright applies to software, but to what extent it should also be applied to virtual objects and goods in these worlds? In addition, the same problem faced with digital art, the easiness of reproduction and distribution raises questions about the feasibility of enforcement of IP rights in the metaverse.

Data protection is another key issue. Besides all the personal sensitive data collected to create one’s avatar, the multitude of entities and data processing by Artificial Intelligence (AIs) will create difficulties in determining the responsibilities and liabilities. The new EU AI Act, for example, aims to impose strict restrictions against certain AI behaviors that are common in the metaverse.

Finally, the use of virtual worlds as a means of social interaction and communication raises the issues of online harassment, bullying, hate speech, and other forms of online misconduct. With the use of XR technology, content moderation will face new challenges in dealing with avatars that simulate sexual harassment or assault.

In this sense, the rapid growth of the metaverse raises in the same proportion the number of legal challenges society will have to face in order to ensure that the virtual worlds would be safe and secure spaces for users.

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