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 this situation, a new technology is gaining ground and deserves to be studied: decentralized identity (DID), also known as “self-sovereign identity” 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.”
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.
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.
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After the global financial crisis of 2008, public confidence in conventional banking systems suffered a severe blow. While the negative effects of the economic crisis were still lingering, Satoshi Nakamoto published Bitcoin’s white paper, explaining that while the current system works well for most transactions, it “still suffers from the inherent weaknesses of the trust-based model”. Nakamoto explained that cryptocurrencies could solve several problems of current financial systems through distributed ledger technology (DLT) and cryptography, such as lack of trust, inefficient transactions and instability. DLT was initially conceived with the aim of removing the need to have a central governing authority. Its proponents claim that blockchain technology offers a new model of decentralized trust without intermediaries and in a more democratic way.
DLT is a powerful tool for governance due to its unique characteristics. One of the most significant features is decentralization, where the database is managed by a network of participants rather than a single entity. This can help to reach a more democratic form of governance where power is distributed among the networks. The second important aspect of DLT is transparency. The tamper-proof and transparent nature of DLT can help prevent corruption and ensure accountability in governance processes. This can help rebuild public trust in the system and make it more efficient. DLT also improves accessibility by making information more readily available to all relevant parties. This can lead to a more informed public and greater participation in governance. Additionally, the cost-effectiveness of DLT can lower costs related to governance by eliminating intermediaries and streamlining procedures. Smart contracts, a building block of DLT, allow for automation of governance procedures and eliminate the need for manual intervention. The anonymity provided by DLT enables people to freely express their thoughts without fear of consequences, promoting active participation in government. With these features this technology has the potential to improve inefficient and corrupt public governance mechanisms. Considering the potential benefits, a restrictive approach to blockchain technology could therefore prevent it from developing and realizing its full potential, from which we could benefit significantly.
However, this technology is still in its infancy, and the optimal governance structure for it is far from clear. DLT also pose significant risks and create legal and regulatory challenges. To efficiently unlock the potential of these distributed ledger-based systems, the limitations and risks of this technology should be understood and mitigated. In addition to architectural and governance challenges that blockchain must address for wider adoption, there are also significant legal issues that require the right regulatory interventions. While countries around the world are looking for ways to regulate this technology for its possible use in governance, so far three U.S. states – Vermont, Wyoming, and Tennessee – have been the pioneers by recognizing Decentralized Autonomous Organizations, a DLT-based governance tool, as legal entities. As the regulatory landscape is evolving, it’s clear that more regulations from other countries and states are on the way.
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Financial technology, as well knowns 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 transaction and financial risk management. A greater efficiency of market services was mainly due to the global economic and financial crisis in 2009, which prompted the 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 Techonology (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 to generate profit.
Specifically, a distributed ledger is an information database that records transactions and shares information through a set of network nodes which operate with a consensus mechanism. Transactions are carried out without any intermediaries, under conditions of transparency and safely.
Financial instruments traded in these markets are cryptocurrencies: a particular kind of virtual value which 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 to 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 most remarkable application of DeFi is represented by the Decentralised Autonomous Organizations (DAOs) – financing and value exchange systems in which developers hold a share of tokens to assure you control of the market – and the Stablecoins: currencies that are easily convertible because they are anchored to the values of legal tender currencies.
Regarding the legislative framework, many have been the draft bill about regulations to outline and describe the phenomenon, but also to protect consumers from frauds and to prevent tax evasion.
One of the most considerable initiatives in the EU context is the proposal for the harmonization and regulation of crypto assets (MiCA) which is expected to be approved in the next months by the European Parliament. The main goal of the legislation is to enhance consumers and investors’ protection and promote the innovation of these assets as well as financial stability. Finally, it is worth mentioning a specific regulation on pilot regime for market infrastructures based on distributed ledger technology adopted on 2 June 2022 (Regulation EU 2022/858), which establishes specific rules for trading and transactions in crypto assets.
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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.
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It is no easy task to define the Metaverse. Etymologically speaking, the term is derived from the combination of the Greek word, “Meta”, which stands for “beyond”, and “verse” which is a contraction of the word “universe”. Practically, 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, and while this concept 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 interest.
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, is indisputable that digital assets have value not only in the metaverse but also in real life. Therefore, disputes over the ownership rights of these assets can arise. In addition, the lack of regulation related to the use of copyrighted material in the metaverse becomes a beacon for copyright infringement discussions. In relation to Data protection, the sole 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. Finally, there is a considerable range of harmful behavior that can happen 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 in debate, and the lack of clarity and confusion over the existence of ownership of virtual goods can lead to legal disputes.
Intellectual property, therefore, would appear to be a much more reasonable approach. However, 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?
Privacy 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.
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.
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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