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Categories: The Ether Review

Ether Review Legal Discussion #1 — Challenges in Blockchain Law

Published on May 14th, 2017 by Arthur S. Falls


In Brief: A walkthrough of the pressing legal issues in blockchain today. Over the last few months a varying group of legal professionals from New Zealand, Australia, and the USA have been meeting to discuss current events, challenges, and peculiarities in the interaction between blockchain and law. As facilitator I suggested we might record the sessions. This is the first to be published. Attendees: Arthur Falls: Host of The Ether Review, State Change, Director of Media, ConsenSys Alex Sims: Associate Professor, Head of Commercial Law, The University of Auckland — Research project on regulating crypto in NZ and Aus. Liesl Eichholz: Studying Master of Laws, University of Otago — LLM in blockchain technologies and their implications for the law in NZ, as well as regulatory options. Hannah Glass: Solicitor, King & Wood Mallesons — Ensuring blockchains work within the law, nationally and internationally. Matt Corva: Law and Business, ConsenSys — Pushing the limits of what is legally possible with blockchain technology, especially with real use cases and actual enforceable contracts. Peter Van Valkenburgh — Director of Research at CoinCenter — Interested in open/permissionless blockchains and what they can be used for, as well as securities regulation. Arthur Falls — Director of Media at ConsenSys and Host of Ether Review — Interested in creating media covering blockchains and the law, which is currently lacking. Reputation: Matt — Pervasive view that anything related to blockchain/crypto is also related to drug money/dark net. Culture that hasn’t been shaken yet. There are things that we can be doing to extinguish the (thankfully already dying) narrative that crypto = shady. Can be championed by legal sector. Hannah — In Aus, it has moved on from this. Less people using BTC, more focusing on Ethereum. Still a huge amount of misinformation, with people conflating blockchain with Bitcoin, which is a problem. Peter — Dangerous to distinguish between blockchain and Bitcoin, because many great tools are being based on the Bitcoin blockchain. Doesn’t think there is a big need for involvement of law in here; every new technology leads to misinformation, and widespread public adoption is what will change the view. Example of souped up vehicles being created as a result of bootleggers needing to escape the police — technological movement which ultimately led to real advances in automotive science. Same with the internet, and will be the same with blockchain networks. Matt — Legal aspect is important because lawyers are often the front line between the establishment and new technologies — the establishment needs specialists to tell them what is ‘ok to use’. Maybe 10% of F500 companies are still questioning the value of blockchains. Hannah — Role is to work with traditional clients (banks, government), who are pretty excited with the new technology, and also with start-ups. The goal is to bridge the gap between government and business. Regulators are realising that blockchain is not necessarily Bitcoin, which is why Aus now has a regulatory sandbox for companies to experiment. Peter — Open blockchains still have something in common with BTC, which regulators may be uncomfortable with: censorship resistance. There is no central intermediary who can stop actions on the network, which central authorities (i.e. governments) are scared of. Hannah — When working with large organisations, the “what happens if things go wrong” question comes up often. Immutable ledgers already exist (e.g. land titles), but fraudulent activities can be rendered void. On a blockchain, an ‘equal and opposite’ transaction can be created to ‘reverse’ transactions; the ledger is still immutable, but there can be a legal framework which allows for reversals as a legal fiction. Peter — Agreed, but in terms of censorship resistance (ex ante, rather than ex post), central institutions are still nervous about losing their powers. It is a trade off, and a sticky subject; regulators have become comfortable with the assumption that there are only a few large financial institutions to cover, but blockchains change this. The change from ex ante to ex post intervention in banned transactions will be unpalatable for regulators. Hannah — Agreed; there needs to be a way to stop something illegal happening before it happens. Something like a clearing house exists to stop transactions from going through before they need to be reversed. Trade-off between being censorship-resistant systems and others. Asking what our existing systems are for in the first place; to ensure financial stability. Peter — DTCC working on a similar system for settlements and clearing; a blockchain with 1 node. Matt — Some identity solutions and settlement solutions which don’t start with a public/permissionless chain; just a federation or small group of nodes. This requires trust, but it is just changed from one party to another. No one expects, especially as consensus algorithms evolve, everything to be moved to a public blockchain instantly. Integration will need to happen slowly. Peter — Referring to Matt’s concern about public perception: do we run the risk of presenting a ‘safe’ blockchain with identified nodes, but which require trust? Will policymakers then take this and ignore or even crush the open networks, because they are perceived as unsafe? Matt — Thinks that the public perception of ‘drug money’ is a dying narrative, so is not too worried about policymakers crushing open networks — but it is a risk. Businesses are trying to capitalise on the bad reputation of BTC to espouse private networks. However, contrary to this perspective, open networks can be safer: crypto-economics make it unfavourable to cheat the network, and they are publicly auditable, as well as having more developers working on them. Questions will be answered by technology, not fear. Peter — It would be like having internal wikis instead of Wikipedia because of the risk of public access and decentralisation. Hannah — Facebook probably has more information on people than the government; making people realise this, and making them feel secure about having their identity online (on a blockchain) is the way forward. Identity: Matt — People need to realise that there is a way to use our identities to our favour online without giving our information away to centralised ‘identity controllers’ such as Facebook. Hannah — Aus is looking at changing laws to focus not on ownership of personal information, but of control. Individuals will have the right to control who has their details and when. Matt — Changes the scenario for the better in terms of enterprise; it is difficult for them to hold information without some legal issues. If identity is no longer held on a central database, the people no longer need to trust institutions to know or control what is happening with their data. Arthur — Proponents of federated identity or self-sovereign identity; can the former be subsumed by the latter? Identity is at the core of law in many ways. Peter — Legal personages are an important concept in the law, in terms of agreements and jurisdiction. However, there is fairly little regulation of this. Matt — The systemic system of rules and laws is all based around identity. It associates e.g. a piece of property with a person or entity; at the core of everything in society is the relationship between persons and things (or persons and persons). Identity is foundational for how the world works, and will become more foundational with the coming advent of AI and other ‘inanimate’ intelligences, which will need identities of some sort. Peter — Transition should be to move away from government and the law. Experiments with robust state control over IP or ideas are pretty poor; copyright is not a great regime for incentivising innovation, and is incredibly hard to enforce as a property right, especially on the internet. The state doesn’t have a good handle on retaining legal property rights to information in a digital age. The idea of this extending to medical records/personal info on Facebook is not appealing. Rather, finding new ways of restricting others from using one’s own identity is the better answer; the law does not need to make rules around information use, as the architecture of the technology will do this instead. Decentralised networks give a right to information not enforced by government, but by cryptography. Property: Arthur — When we use systems that are currently enshrined in law, e.g. property conveyance… Peter — Property records use case has never made much sense to Peter; better registries will not help if the government is corrupt. Matt — With the proper system, there will not be the ability to create ex post changes on an open network. Land registries are complex and involve many parties. It’s about getting all the information in one place. Peter — Blockchain/property connection often touted, but government will not abdicate power to an open network. Liesl — But 2-of-2 multi-sig systems could make this more secure by preventing the government from changing the ledger without the owner’s consent. Matt — The government will be able to come in as an actor on a public chain to make registries more efficient without reducing individual rights. Using the same traditional actors, but doing it in a less traditional way. Hannah — Really easy to use existing public records to create land registers on a blockchain; plus we could incorporate instruments such as mortgages to make the administration more secure and reduce errors. Allows trust even where the system is more open. Peter — If it’s only going to happen with the closed systems, as the government does not want to give up power over land titles, this could have been done years ago on a non-blockchain system. We need to remove government entirely through the technology’s design. Matt — This is a very future-focused view, but the collective action problem will be solved after a transitionary period. Digital identity: Arthur — Having a public key infrastructure that is legally recognised came up at the Standards meeting in Sydney. Hannah — Estonia already has a system in place where the government has issued digital identity cards, giving them the right to control information and see who has access to it. However, this means that the government has all this information, which people don’t like. However, we are comfortable giving this information to e.g. Facebook. A lot of the identity discussion is about public perception. We all want the rights to our own information, but it is about setting up a system where the information is stored in such a way that those without permission cannot get access, by virtue of the design, rather than trust. Peter — You can enter a legally binding contract with nothing more than a digital signature; there is no need for government to legally recognise a particular standard of identification (digital or otherwise). We need laws which are agnostic on technological standards, as these will not cover all eventualities for now or in the future. Arizona has tried to update the Electronic Signatures Act to allow the inclusion of blockchains as binding contracts; Peter thinks this is misguided, as they tried to define a blockchain, which should not be in the realm of government, especially at these early stages of the technology. Matt — Proposed amendments in Delaware regarding corporate law; quite successful in being technology agnostic. Hannah — We have laws in place to make sure that signatures match the parties’ agreement, and that the lack of pen-to-paper consent does not mean a contract is unenforceable. We need digital contracts to be in human-readable form, but not paper form. There are existing principles which we do not need to change, but to simply adapt. Matt — Sometimes we don’t need to change rules completely. But enterprise wants certainty in outcome, not a vague indication that they can rely on the common law, for example. They want to know that their contracts are actually enforceable; they can’t just rely on an assumption, which is where the concern arises. The need for mainstream consensus arises here (e.g. an agreement that certain types of contracts are enforceable). Hannah — Starting to arrive at that consensus in Aus in terms of electronic signatures. Peter — This area is not too bad in the US either. Matt — The reasons to doubt the enforceability of digital signatures go beyond whether the signature was valid; jurisdictional issues etc. It’s about generally getting people to be comfortable with the technology. Peter — Would be cool to have an open network for public key infrastructure, where people can attest that they are behind a specific address, and other people/institutions can make attestations about that person, which that person can then share with whomever they want in whatever degree they want. Arthur — The catch here is the potential liability that comes with attesting to a particular identity. E.g. a bank makes an attestation, and then the person uses the attestation in a fraudulent way, potentially giving someone down the line the ability to sue the attestor. Banks will probably never play ball with federated identity because of the risks. Peter — Systems could be put in place to hedge these risks. KYC information has to do with de-risking, which comes from regulators (who are worried about crime and terrorism). This is why banks are so averse to BTC. KYC regulations are miscalibrated. Hannah — Aus is reviewing AML/CFT Financing Act, to re-calibrate the regulations. Looking to bring BTC/blockchain exchanges into a legitimate environment by examining the issues and trying to overcome them. Peter — Aus should lead way way with this, as the US is having trouble in this area. E.g. US-based non-profits who have involvement overseas are having trouble with financial regulation; 42% have resorted to physically moving bags of cash on a plane. But the de-risking is so strong in the US that it is stifling. Matt — This is all about figuring out a better way than existing systems allow. There has not been a large clash yet between private systems and government toleration, although this may happen soon. But by continuing discussion and working on the technology, we will start to solve these problems. Discussions for the future: Hannah — ICOs and token sales (cf. Aus and US). Meeting closed: 12:59pm (NZT) https://itunes.apple.com/podcast/the-ether-review/id899090462?mt=2

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