Abstract
One of the most talked-about technological developments in the digital arena is distributed ledger technology, better known by as Blockchain technology. Initially conceived of as a means of developing digital currencies, or cryptocurrencies, the most famous of which being Bitcoin, Blockchain has rapidly become a candidate technology for dealing with a wide range of aspects of commercial life, regulation, property law and so on. The literature on Blockchain is growing rapidly, although it remains to be seen how many of the potential applications of Blockchain will eventually make it into everyday use, and how many will be forgotten about as quickly as they emerged. Nevertheless, Blockchain has been getting serious attention from business, regulators, policymakers and lawyers alike, and this book by Primavera de Filippi and Aaron Wright is a key reference point for anyone who would like to understand the nature and potential of Blockchain, as well as its associated legal and regulatory challenges.
The book is divided into five parts. The first explains the nature of Blockchain and its underlying technology, locating its emergence on the timeline of peer-to-peer networks. Blockchain is in many ways the ultimate peer-to-peer network as it relies on every member of the network to monitor and verify all the data recorded on the Blockchain, with no central authority having any kind of overall control over the Blockchain. Chapter 1 provides a useful and concise account of how Blockchain technology evolved. In Chapter 2, the authors turn to the characteristics of Blockchains, particularly their distributed nature. They highlight the disintermediated and transnational nature of Blockchain networks, while noting the inevitable problems this will pose for any regulatory endeavour, both in terms of not having any particular party controlling a Blockchain and the jurisdictional quandaries arising from its transnational reach. A further key feature of Blockchains is the reliance on consensus in deciding which data to verify and add to the Blockchain. In theory, a Blockchain is distributed widely across a large number of participants, or nodes, with incentivisation provided by ‘mining’, that is, being the first to validate a block of transactions. Interestingly, on page 40, the authors note the emergence of ‘mining pools’, resulting in a concentration of power which might enable a small number of pools to collude and take over a Blockchain. This point is something which could have been discussed in more depth, as it highlights a potential risk to the basic idea on which Blockchain is based. The most significant aspect of this chapter, however, is the introduction of the lex cryptographica notion. At the heart of the lex cryptographica are the Blockchain protocols and services which can create a separate system of rules which are effectively enforced by these protocols, that is, Blockchain technology uses code-based rules to enable and limit Blockchain-based activities. In the long-term, this could take power away from regulators and lawmakers and shift this to the code and its programmers, but, as the authors acknowledge on page 56, Blockchain technology is some distance from that, and at least for the foreseeable future, Blockchain is not beyond the reach of governmental regulation. In the authors’ conception, the lex cryptographica has the potential to become an autonomous transnational system of code-based rules. This echoes a debate among scholars of Transnational Commercial Law as to whether there is an autonomous, supranational lex mercatoria which can govern all transnational commercial transactions, rather than domestic laws, 1 although its foundations are becoming increasingly thin. 2 A similar fate may await the lex cryptographica as governments begin to assert control over Blockchain technology and its applications. However, the value in using this concept lies in the fact that it shows how technology may take on a life of its own and supplant the role of government-made regulation in controlling the way users interact with Blockchain and its applications.
Having thus laid the foundations for their analysis of Blockchain technology and the way in which lex cryptographica could govern potential applications of this technology, the authors turn to a number of ‘emerging uses’ of Blockchain. In Part 2, their focus is on what have by now become ‘classic’ Blockchain topics: digital currencies and decentralised payment systems (Chapter 3), smart contracts (Chapter 4) and smart securities and derivatives (Chapter 5). Each chapter explains what these uses are, as well as the various legal and regulatory issues these create, and considers the role of the lex cryptographica in this. A recurring theme is that some Blockchain-based applications may have beneficial effects, but also pose potentially serious risks. For instance, the authors highlight the potential of Blockchain in facilitating cross-border payments, but also point out the risks of cryptocurrencies becoming attractive for criminal activities because of the decentralised and anonymous nature of Blockchains.
‘Smart contracts’ and Blockchain technology are often mentioned in the same breath these days. Generally speaking, a smart contract is a self-executing code, usually utilising Blockchain technology (such as the Ethereum platform) which can turn traditional contracts into transactions executed automatically and with an assurance of performance. Thus, once the parties to a contract have reached agreements, elements of it can be converted into code and the resulting smart contract executed via the Blockchain (p. 74). Of course, this is only feasible insofar as elements of the ‘natural contract’ can be translated into code; however, many open-textured or vague notions will continue to require human input. On the Blockchain, this role might be performed by ‘oracles’ – but this seems to be reintroducing a trusted intermediary through the back door. There may nevertheless be advantages in using Blockchain to automate elements of a contract, particularly if they can be codified easily (such as triggering a payment obligation on the occurrence of a particular event). On the other hand, for many commercial uses, smart contracts may not be appropriate, as the authors themselves concede (p. 84). Nevertheless, as Chapter 10 on the ‘Blockchain of Things’ illustrates, there may be potential in using smart contracts on Blockchains for dealing with transactions between devices in the Internet of Things, although the prospect of connected devices ‘selling’ the data they collect to other devices and becoming increasingly emancipated will raise new legal and ethical questions about the allocation of liability for the actions taken by these devices (p. 168).
An altogether different application of Blockchain technology is discussed in Chapter 6, which focuses on the role of Blockchains as repositories of information. The underlying idea of Blockchain is that information, once added to a block, becomes immutable and resilient, bringing with it an assurance that information recorded on a Blockchain database has not been altered and is therefore accurate. Instead of relying on one central agency to manage a database and verify the accuracy of the information it contains, a Blockchain database would be distributed and decentralised. However, as the authors highlight, the public nature of the Blockchain allowing anyone to access the data stored on it could have serious implications for privacy (pp. 115–116).
Part 4 then turns to how Blockchains can be used to manage, and ultimately create, organisational structures. For example, voting conducted via a Blockchain mechanism could be made both more efficient and reliable (p. 134). The creation of entirely new organisational forms, based on smart contracts operating on the Blockchain, could become an alternative to existing corporate structures, although some of the benefits of existing structures, such as the limited liability conferred on companies by law, would not be available to Blockchain-based organisations (pp. 141–142). A concern with such organisations would be that their decentralised nature would make it difficult, if not impossible, to control their activities – one of the drawbacks of the lex cryptographica (p. 145).
The preceding paragraphs have only given a snapshot of the potential uses of Blockchain technology, the role of the lex cryptographica in providing an autonomous, a-national and transnational code-based system, and the risks for regulation and legal control over Blockchain-based activities. The tone of these chapters is generally enthusiastic, and perhaps at times even over-optimistic, about the potential of Blockchains, although there are notes of caution throughout. These notes of caution become stronger in the final part of the book, which focuses on the challenges of regulating Blockchain-based activities.
In Chapter 11, the authors consider the possible regulatory approaches for Blockchain-related issues. Their starting point is Lessig’s ‘pathetic dot theory’ which assumes four ways of controlling an individual’s conduct: legislation, social norms, market forces and the architecture of the physical and digital world. 3 This assumes that there is an individual (whether natural or legal) whose conduct can be regulated, but one of the characteristics of Blockchain is the absence of a central authority and thus someone whose actions could be made subject to regulation. However, Blockchain does not provide full disintermediation: as Chapter 11 explains, there are several contenders at which regulation may be targeted, ranging from the end-user of Blockchain applications to intermediaries operating at various levels on the technological infrastructure, as well as those developing and writing the code for Blockchain protocols and smart contracts (pp. 175–184). This offers some reassurance that Blockchains are not beyond the reach of regulatory intervention should such action become necessary, although there is always a risk that there might be attempts to evade any regulatory efforts. However, that risk should not mean that governments should not try to act where there is a need for some kind of regulatory intervention, whether through legislation or other means.
The final substantive chapter then reverses the perspective: instead of treating Blockchain merely as something to be regulated, it could also be utilised as a regulatory tool in itself by translating legal obligations into code which would then be enforced automatically. Rather than using laws and relying on ex post enforcement, Blockchain-based regulation would use technology to channel individual conduct and preclude certain actions altogether. However, as the authors acknowledge, such an approach would remove the option of an individual to act in disregard of the law. 4 Moreover, not every rule can be translated into code, particularly where it relies on open-ended notions. Furthermore, the possibility to apply legislation to circumstances not envisaged at the time of enactment, which could be realised through appropriate statutory interpretation, would not be available in the case of code-based regulation (p. 200).
In their concluding chapter, de Filippi and Wright are clear about the potential dangers of letting the lex cryptographica displace governmental regulation, and re-emphasise the various regulatory controls which will continue to be at the disposal of governments and regulators. Moreover, there may be need for some regulation so as to encourage potential users of Blockchain and its applications rather than dissuade them (p. 209). Their final paragraph leaves the reader with the most important message: If blockchain technology matures, we may need to ask ourselves whether we would rather live in a world where most of our economic transactions and social interactions are constrained by the rules of law…or whether we would rather surrender ourselves to the rules of code. Decentralised blockchain applications may well liberate us from the tyranny of centralised intermediaries and trusted authorities, but this liberation could come at the price of a much larger threat – that of falling under the yoke of the tyranny of code. (p. 209)
