Many commentators note that true decentralisation implies that enforcement of obligations must be effected through the system. A permissioned system may include conventional governing law and jurisdiction provisions within a contractual framework established by terms and conditions or an agreement between parties establishing a network. A permissionless system must rely on non-contractual remedies, such as remedies in the system, because it is extremely complex to establish jurisdiction.
Lord Hodge, a UK Supreme Court Justice (in a speech made at East China University of Political Science and Law in October 2018) notes issues with the cross-jurisdictional nature of DLT. He notes, among other things, the role that international arbitral bodies would perform.
The Law Society (in 'Horizon Scanning — Blockchain: The Legal Implications of Distributed systems') notes that “jurisdictional confusion” may be caused by servers and nodes being in multiple jurisdictions.
The Financial Markets Law Committee has considered questions of governing law and the application of conflict of laws rules, proposing several potential solutions ('Distributed Ledger Technology and Governing Law: Issues of Legal Uncertainty' (March 2018)).
Developments in this area are of interest to regulatory lawyers since the technology is used by businesses that operate in regulated environments, such as financial services and technology businesses. Commentators have identified numerous issues:
A Sotiropoulou and D Guegan (in 'Bitcoin and the challenges for financial regulation') note that regulators must put in place frameworks to protect against risks but in a way that does not restrain innovation.
They identify aspects of bitcoin that may be subject to regulation:
the Bitcoin system itself;
the uses of Bitcoin; and
the members of the Bitcoin system.
In the UK, a joint report by HM Treasury, the FCA and the Bank of England Cryptoassets Taskforce notes that cryptoassets are a particular concern and will be monitored closely by them. It states that the most immediate priorities for the authorities are:
to mitigate the risks to consumers;
market integrity; and
to prevent the use of cryptoassets for illicit activity.
The report highlights key risks including:
risks of financial crime;
risks to consumers;
risks to market integrity; and
Following the Cryptoasset Taskforce report, the FCA has consulted on cryptoassets guidance (January 2019) and plans to make a Policy Statement on cryptoassets in summer 2019, as well as publishing a consultation on potentially banning the sale to retail customers of derivatives linked to certain cryptoassets (in 2019).
Trevor I Kiviat (in 'Beyond Bitcoin: Issues in Regulating Blockchain Transactions') notes that current blockchain regulation is focussed towards the application of blockchain for virtual currency and that guidance and regulation outside the financial sector may be required. He states that it is important for regulators to establish risk mitigating provisions, but these must not be so wide as to prevent innovation and the use of blockchain's non-financial utility.
An ISDA White Paper titled Smart Derivative Contracts: From Concept to Construction notes that frameworks will need to be devised in relation to the future direction and regulation of these systems.
In an area where there are questions about the legal structure of what is being analysed, inevitably there are questions about the possible approaches to governance and which is most appropriate.
Nouriel Roubini (in 'The Big Blockchain Lie', October 2018) states that code as law is not viable because it hands too much power to developers. This suggests that a truly decentralised and autonomous system would be problematic precisely because it leaves no room for governance in the traditional sense.
Nir Kabessa, President of Blockchain at Columbia University, (in 'After Ethereum Classic Suffers 51% Hack, Experts Consider — Will Bitcoin Be Next') states that, while difficult, attacks on the larger cryptocurrencies are no longer out of reach. This suggests that any governance system would involve inherent risk as a consequence of the nature of the underlying technology.
Zetzsche, Buckley and Arner (in 'The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain' (2018) University of Illinois Law Review) note that new technology may redefine old words. “Governs”, includes “de facto” governance, that is, the group that controls the ledger by having the “technical ability and opinion leadership to prompt a 'hard fork' of the system”.
As published in Butterworths Journal of International Banking & Financial Law, May 2019.