Papers associated with Bitcoin and related topics in law: Part II

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This article was first published on Dr. Craig Wright’s blog, and we republished with permission from the author. Read Part 1, Part 3, and Part 4.

Annotated Bibliography: Part II

Hoffman et al. (2020) aid in evidencing how the terminology and descriptions associated with decentralization can be seen to have multiple meanings. The use of the terminology has been misrepresented to imply political notions of control rather than the concept of resilient networking. Jiang and Wu (2019) also focus on the political aspect of decentralization. In doing so, the authors ignore the concept of network resilience in favor of political control. Such an approach doesn’t address the reasoning behind who is in control or the leadership of the system, but rather creates an assumption that businesses shouldn’t control networks.

Pech (2021) conversely notes how the existing legal structures provide ownership and rights in the blockchain. Yet, the author then uses the scenario to argue that the law should change to allow for a system that doesn’t have property rights. In this argument, the author effectively notes that legal frameworks apply, but ‘code-is-law’ methodologies should be introduced.

Annotated Bibliography

Hoffman, M. R., Ibáñez, L.-D., & Simperl, E. (2020). Toward a Formal Scholarly Understanding of Blockchain-Mediated Decentralization: A Systematic Review and a Framework. Frontiers in Blockchain, 3. https://www.frontiersin.org/article/10.3389/fbloc.2020.00035

Hoffman et al. (2020, p. 1) “argue against the binary positioning of “decentralization” and “centralization,” proposing a dialectical approach and arguing that the authority allocated in a system is a quality positioned on a spectrum between purely decentralized and completely centralized, noting how a blockchain set-up could simultaneously both have facets that are significantly centralized and others that are not.” Such research analyses the concept of decentralization, and examines the power structures within blockchains. In addition, the authors study the historical meaning of decentralization but focus on the concept deployed within political science—rather than computer science.

The authors demonstrate how cyberpunk mentality has led to adopting terminology associated with political power and that it has been hijacked for the purpose of describing blockchain networks. Through such an analysis, the disjuncture between the use of the word decentralized and describing network architecture has been integrated into a political process, and the primary purpose of Bitcoin has been subjected to and hijacked into a political statement, rather than a system to deliver micropayments. Understanding the reasoning behind the change in purpose is essential in understanding the reasoning being used in promoting Bitcoin as a political system rather than a micropayment solution.

Additionally, the crypto-anarchist and cyberpunk positions concerning authority can be shown to have replaced the concept of decentralization as it applies to distributed systems such as cloud architecture. The distinction here is important; political decentralization assumes a distributed power structure and the inability of individuals to control a system. Yet, it can be demonstrated that the control of a blockchain remains within the hands of the developers who maintain the system. Consequently, using the term decentralization as a political statement is inaccurate. The term is only accurate when describing the computer network and not as a means of noting how power has been removed.

This is critically important to note as it means the developers remain fiduciaries with the ability to implement controls. The term decentralization has misleadingly been deployed along with the term ‘cryptocurrency’ to imply that systems such as Bitcoin are encrypted. The paper contains some factual errors, but the general concept and methodology remain sound. Consequently, using the same process with a validation exercise against the terminology used within the industry will provide a more accurate framework.

Jiang, S., & Wu, J. (2019). Bitcoin Mining with Transaction Fees: A Game on the Block Size. 2019 IEEE International Conference on Blockchain (Blockchain), 107–115. https://doi.org/10.1109/Blockchain.2019.00023

Jiang and Wu (2019) argue that the lack of a centralized control structure within each blockchain network necessitates the creation of dynamic environments with cooperative behaviors based on game theory. In this analysis, the authors assume the promoted definitions of nodes used by many industry actors and commercial industries, discounting the original definition as defined in the Bitcoin white paper. The scenario extends into a proposal for a block-size increase to 4 MB, defining an allegedly ideal distribution size based on an unsupported argument that decentralization is critical and a defining factor within Bitcoin.

The authors note how the security of Bitcoin depends on nodes that mine bitcoin and through pools are massive systems but exclude the majority of other nodes. This analysis assumes the advertised commercial position that thousands of nodes exist and that even though they do not participate in the consensus methodology, they are critical for the distribution of transactions and blocks within the Bitcoin network. The assumption of full, broadcast, and mining nodes is presented uncritically.

Next, despite the lack of rigorously reviewed academic literature, the common assumptions concerning attacks and weaknesses of Bitcoin are deployed against costs and incentives without critical analysis. Finally, the paper creates a theoretical simulation and model of the Bitcoin protocol with the assumption that nodes make decisions as to the operation of the network. This assumption strictly opposes the definition within the Bitcoin white paper, yet is used in any event. In the model, a complex system based on unsupported foundations of numbers of attacks and requirements, the number of nodes is used in presenting an argument for an increased block size of up to 4 MB. Yet, changing the model parameters alters the ideal block size from anywhere around 2 MB to up to 1 PB. In addition, the reasoning behind each foundational parameter in the calculations is not adequately explained, or the reasoning is not justified.

Pech, S. (2021). Who Owns the Blockchain? How Copyright Law Allows Rights Holders to Control Blockchains. Journal of Business and Technology Law, 16(1), 59–82.

Pech (2021, p. 59) investigates the claimed benefits and implementations that derive from the “lack of control by a single authority [which] is an oft-described characteristic of blockchain technology,” and demonstrates that existing “US and EU copyright law protects information stored on a blockchain” while showing the extent to “which rights holders can control blockchains.” In this article, the author demonstrates how the “EU sui generis rights for non-original databases” provide “both the operator of a blockchain and participants in the blockchain network” with a range of rights and protections that may be enforced in a court of law.

Yet, while the author demonstrates that such existing laws apply to “the normal use of blockchain,” the author then extends the argument to claim that exemptions should be introduced restricting such existing legal frameworks. In analysing the laws and regulations and how they apply to Bitcoin today, the author demonstrates that legal frameworks already exist globally to protect intellectual property rights and allow for controlling “both private and public blockchains” (Pech, 2021, p. 60). Yet, the author misrepresents the idea behind Bitcoin. While the aim “was to create a payment system that would function without any need for a trusted third party to supervise transactions” (Pech, 2021, p. 60), the extended concepts that “nobody owns or controls Bitcoin” and that there is no authority and the community decides on the rules within Bitcoin are incorrect. Importantly, the author notes my authorship of the white paper and the filing of the copyright (Pech, 2021, p. 60) against the same, but fails to note the implementation of a protocol that was ‘set in stone’ and designed not to be altered—by the community or otherwise at whim.

The paper is important as it analyses the legal property rights associated with Bitcoin and conclusively demonstrates that existing copyright and database rules allow for the control of the system. Yet, the author extends this into an argument as to why Bitcoin should be re-regulated outside the existing legal frameworks. This point further emphasizes the nature of the study being conducted and the promoted desire of a limited group of individuals seeking to bypass legal systems and the law to promote their own ‘will’ outside of democratic processes. By the author’s analysis, the contractual basis of creating a system that is “set in stone” removes the ability to alter and negatively control the protocol. As such, the introduction of laws to bypass controls over blockchain-based systems would be both unnecessary and a negative imposition.

This article was lightly edited for clarity purposes.

Watch: Law & Order: Regulatory Compliance for Blockchain & Digital Assets