SMART CONTRACTS IN DIGITAL FINANCE

BETWEEN INNOVATION AND LEGAL CERTAINTY

Abstract

The development of digital finance and blockchain technology has led to the increasingly widespread use of smart contracts as instruments for the automation of financial and contractual relationships, particularly in the field of online lending and consumer loans. Smart contracts enable the automated conclusion, execution, and enforcement of obligations through computer code deployed on distributed ledger systems, thereby reducing the need for intermediaries. At the same time, however, their application raises complex legal questions concerning legal certainty, consumer protection, and the scope of judicial intervention. These challenges are especially pronounced in forms of digital lending based on standardised and mass-applied contractual arrangements, which may result in a significant imbalance in the equivalence of contractual performances and an increased risk for the weaker contracting party. This article examines the legal aspects of the use of smart contracts in digital finance, with a particular focus on their application in consumer credit and online lending. It builds upon the conceptual and technological framework of blockchain technology and smart contracts, drawing on contemporary Croatian legal doctrine, which does not treat smart contracts as a single legal category but rather distinguishes between so-called “strong” and “weak” smart contracts, as well as between public (decentralised) and private (centralised) blockchain infrastructures. In this context, the article explores whether smart contracts may constitute independently binding legal agreements or whether they primarily function as technical tools for the execution of a previously concluded contractual relationship, emphasising the decisive role of the parties’ intent and the structure of the specific transaction. Furthermore, the article engages with existing analyses of cross-border digital consumer lending and short-term high-cost loans, highlighting additional risks that arise when such financial products are implemented through automated smart contracts. Particular attention is paid to the potential circumvention of national interest rate caps and other consumer protection mechanisms through the cross-border provision of digital financial services, as well as to issues relating to the determination of the applicable law and the supervision of foreign financial service providers. The article also addresses procedural law challenges associated with the use of smart contracts in consumer lending, including issues of proof, judicial control over automated execution, nullity and void ability of contracts, and restitution in cases of unlawful or unfair lending practices. In this regard, the role of collective consumer redress-particularly through representative actions is analysed as a potentially effective mechanism for protecting consumers in situations involving the mass use of standardised smart contracts in digital finance. In conclusion, the article argues that smart contracts in the field of digital lending should not be viewed merely as a technological innovation, but as legal instruments that require a carefully balanced approach between automation and traditional mechanisms of legal protection. It advocates a hybrid regulatory and contractual framework capable of fostering innovation while ensuring legal certainty and effective consumer protection, in line with the fundamental principles of contract and consumer law within the European legal order.