Code and law have been entangled in a silent tension ever since the advent of cyberspace. The centralised architecture of cyberspace paved the way for law to prevail. The latest manifestation of this tension, however, appears to be opening up a Pandora’s box. Blockchain and law are on a silent collision course that must be addressed.
This post argues that in bridging the divide between code and law in blockchain, a radical rethink of regulation is imperative.
The primary source of friction between blockchain and law can be traced to the implied proposition that code-driven frameworks running on blockchains can and should operate outside our jurisdictional legal orders. In Blockchain and the Law (2018), De Filippi and Wright refer to the ‘private regulatory frameworks’ that blockchains create as lex cryptographica. While identifying the potential modes of regulating blockchain, they advance the view that blockchains can create ‘order without law’.
The self-executing nature of blockchains, which enables them to operate autonomously of centralised architectures and intermediaries, inevitably entails an element of detachment from current regulatory architectures. This detachment will only widen as blockchains evolve. This is most clearly illustrated when considering the deployment of blockchain-based organisations running entirely on autonomous code, without human consensus.
The claim of code to the creation of a new normative order that can rise above our legal orders is nothing new. In 1999, Lawrence Lessig argued against Frank Easterbrook’s proposition that there should not be a law of cyberspace. In advancing the case for addressing legal issues arising in cyberspace with specific legal principles, Lessig maintained that law alone does not guarantee legal values – the law may need to respond to the displacement of legal values by code (Lessig, The Laws of Cyberspace, 1998).
In introducing lex informatica as the set of rules for information flows imposed by technology and drawing a parallel to lex mercatoria, Joel Reidenberg (1998) argued that ‘principles governing the treatment of digital information must offer stability and predictability so that participants have enough confidence for their communities to thrive, just as settled trading rules gave confidence and vitality to merchant communities’ (Reidenberg, Lex Informatica: The Formulation of Information Policy Rules Through Technology, 1998). Reidenberg echoed Hayek, who famously suggested that ‘within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of government will not be used deliberately to frustrate his efforts’ (Hayek, The Road to Serfdom, 1944).
There is therefore a recurring theme in the struggle of code to displace law, which has a number of intersecting parameters. Applying these parameters to blockchain, the primary question becomes whether blockchain can indeed be self-regulated in a manner entirely divorced from jurisdictional orders, while attaining the requisite stability and predictability for it to thrive. Where that is answered in the negative, which it must be for the reasons explained below, the question becomes one of whether blockchain should be subject to general principles of law or attract specific regulatory intervention.
The discussion of whether blockchain can create a normative order of its own rising above existing legal orders is informed by Lessig’s acknowledgement that the law may need to respond to the legal values displaced by code as well as Reidenberg’s identified need for stability and predictability.
Blockchain presents an ambitious, yet not unattainable prospect, of being the first technological development since the advent of the Internet that could give rise to entirely new ecosystems of economic activity. This is where the code purports to displace law, the latter not being ready to address all aspects of blockchain implementations. Characteristic examples of this include the apparent misalignment between blockchains and the GDPR, the challenges in classifying assetised tokens as securities and the questions of attributing liability for harm suffered by the operation of blockchain-driven organisations.
Despite its potential to render aspects of current legal tools redundant, blockchain needs the stability and predictability that Reidenberg invokes. If the results of transacting on blockchains cannot come to manifest in the real world, and be capable of protection in the real world, their potential is significantly diminished. The act of transacting, even if devoid of requiring any element of trust, must result in an enforceable change over rights attaching to or deriving from the asset concerned, whether this is a token or is represented by a token. For the assets transacted on blockchains to exist in the real world, they should be vested with rights in rem.
In addressing this point there are two fundamental considerations. The first is that certainty is intrinsically linked to enforceability. The second is that sovereigns remain the actors determining the means, rules and effects of the enforceability of rights. Blockchains are therefore not immune to the ability of states to regulate them. As advanced in Blockchain and the Law, states can regulate blockchains through regulating end users, miners, intermediaries or code itself.
The conclusion can thus be drawn that, if distributed ledger technology seeks to attain its full potential, it should not attempt to evade or circumvent law but rather find its place within a well-structured, relevant and versatile regulatory framework that will allow it to be exploited to its profound potential. Code should rather embrace the law and engage in an interaction which advances them both.
Having addressed the main reason for which blockchain can thrive within law, the salient question becomes whether existing frameworks are sufficiently flexible to accommodate its immense capabilities, whilst providing the necessary degree of legal certainty as to its economic effects.
Different blockchains will require different treatment in law. Whether blockchains deployed to create new financial instruments or contractual rights or formulate entirely new constructs can be regulated under existing legal frameworks will be determined by their functional and proprietary characteristics. The diversity of blockchain implementations means that, as the technology becomes more sophisticated, existing frameworks will prove insufficiently scalable to accommodate the novel characteristics that blockchains bring to the table.
The adoption of new rules is crucial in order to provide legal certainty to the markets and avoid impeding emerging ecosystems and stifling technological development. Nevertheless, any new rules should serve to recognise and uphold the effects of transacting on blockchains. As already seen by certain legislative initiatives, states are unlikely to share identical statutory traditions in recognising blockchains. It is inevitable that some jurisdictions will accommodate blockchains and their effects in a more efficient and attractive manner than others. This antagonism between jurisdictions is an enduring feature of our Westphalian world and can facilitate blockchain development. It is for this reason that blockchain developers should inform the law’s response to code by engaging with legislators and regulators.
This article first appeared in Oxford Business Law Blog.