Ether Review Legal Discussion #1

Ether Review Legal Discussion #1 — Challenges in Blockchain Law

In Brief: A walkthrough of the pressing legal issues in blockchain today.

Over the last few months a varying group of legal professionals from Fresh Zealand, Australia, and the USA have been meeting to discuss current events, challenges, and peculiarities in the interaction inbetween blockchain and law. As facilitator I suggested we might record the sessions. This is the very first to be published.

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 thresholds 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 presently lacking.

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 (gratefully 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 thick amount of misinformation, with people conflating blockchain with Bitcoin, which is a problem.

Peter — Dangerous to distinguish inbetween blockchain and Bitcoin, because many superb implements are being based on the Bitcoin blockchain. Doesn’t think there is a big need for involvement of law in here; every fresh technology leads to misinformation, and widespread public adoption is what will switch 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 significant because lawyers are often the front line inbetween the establishment and fresh 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 fresh technology, and also with start-ups. The aim is to bridge the gap inbetween 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 awkward with: censorship resistance. There is no central intermediary who can stop deeds on the network, which central authorities (i.e. governments) are startled 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 permits for reversals as a legal fiction.

Peter — Agreed, but in terms of censorship resistance (ex ante, rather than ex post), central institutions are still jumpy about losing their powers. It is a trade off, and a gooey subject; regulators have become comfy with the assumption that there are only a few large financial institutions to cover, but blockchains switch this. The switch 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 inbetween being censorship-resistant systems and others. Asking what our existing systems are for in the very first place; to ensure financial stability.

Peter — DTCC working on a similar system for settlements and clearing; a blockchain with one knot.

Matt — Some identity solutions and settlement solutions which don’t commence with a public/permissionless chain; just a federation or puny group of knots. This requires trust, but it is just switched 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 leisurely.

Peter — Referring to Matt’s concern about public perception: do we run the risk of presenting a ‘safe’ blockchain with identified knots, but which require trust? Will policymakers then take this and disregard 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 attempting 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 very likely 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.

Matt — People need to realise that there is a way to use our identities to our favour online without providing our information away to centralised ‘identity controllers’ such as Facebook.

Hannah — Aus is looking at switching laws to concentrate not on ownership of private information, but of control. Individuals will have the right to control who has their details and when.

Matt — Switches the script 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 significant 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 chunk of property with a person or entity; at the core of everything in society is the relationship inbetween 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 budge away from government and the law. Experiments with sturdy state control over IP or ideas are pretty poor; copyright is not a good regime for incentivising innovation, and is amazingly hard to enforce as a property right, especially on the internet. The state doesn’t have a good treat on retaining legal property rights to information in a digital age. The idea of this extending to medical records/private info on Facebook is not appealing. Rather, finding fresh ways of restricting others from using one’s own identity is the better response; 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.

Arthur — When we use systems that are presently 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 decent system, there will not be the capability to create ex post switches on an open network. Land registries are sophisticated 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 switching 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 — Indeed effortless 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. Permits 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 liquidate government entirely through the technology’s design.

Matt — This is a very future-focused view, but the collective activity problem will be solved after a transitionary period.

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, providing 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 comfy providing 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 come in a legally tying 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 attempted to update the Electronic Signatures Act to permit the inclusion of blockchains as strapping contracts; Peter thinks this is misguided, as they attempted to define a blockchain, which should not be in the sphere of government, especially at these early stages of the technology.

Matt — Proposed amendments in Delaware regarding corporate law; fairly 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 switch, but to simply adapt.

Matt — Sometimes we don’t need to switch rules fully. 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 — Beginning 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 comfy 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 providing someone down the line the capability to sue the attestor. Banks will most likely 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 reluctant 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 attempting 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 permit. There has not been a large clash yet inbetween private systems and government toleration, albeit this may happen soon. But by continuing discussion and working on the technology, we will begin to solve these problems.

Discussions for the future:

Hannah — ICOs and token sales (cf. Aus and US).

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