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

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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 2, Part 3, Part 4, Part 5, Part 6, and Part 7.

Lessig (2000) promoted an early concept adopted by cypherpunk computer coders and anarchists: “Code is law.” Such a mentality has been propagated with regard to electronic cash and blockchain systems despite having been discredited by Timothy Wu (2003), who demonstrated the fallacies of such an approach. Most critically, human actors write and maintain all code and algorithms. Yet, the question around decentralized systems has been promoted by Silicon Valley corporations and those seeking to ignore the responsibilities that come with the creation of an engineering product.

More recently, authors have revived such a discredited view of algorithms, and integrated it into the narrative around blockchain technology, moving from ‘code is law’ to a concept of ‘law is code’ (De Filippi & Hassan, 2018). Zwitter and Hazenberg (2020) extend the argument by promoting unregistered corporations as a new structure, ignoring previous online attempts to create digital corporations acting outside of existing corporate rules. The development of web IPOs in the 1990s demonstrates a previous synergistic attempt at creating a system outside of governance rules. The lack of understanding in relation to partnership law leads to the flawed concept of a DAO as a system without formal governance. By assuming that automated structures remove the holder of the key or token from liability for the actions of the algorithm, the authors have failed to understand the workings of corporate law and contracts.

Equally, Wylie (2018) argues that blockchain-based systems come under an absence of law. Yet, the author fails to point out UNCITRAL provisions for electronic contracting, released in 1996 (Habibzadeh, 2014). The promotion of ‘code as law’-based systems represents a reaction to legal systems by technically aware individuals who embrace a distaste for the existing political system and seek socialist or anarchist alternatives. The issue with such an approach is that the existing legal system and framework already encompass the problems that are said to have no solution. Consequently, the argument for decentralization falls flat.

Annotated Bibliography

De Filippi, P., & Hassan, S. (2018). Blockchain Technology as a Regulatory Technology: From Code is Law to Law is Code (arXiv:1801.02507). arXiv. https://doi.org/10.48550/arXiv.1801.02507

The authors argue that integrating blockchain systems with algorithmic control through what is termed a “smart contract” enables the shifting nature of code that has the effect of law associated with the new concept of law being developed as code. While such an argument extends the crypto-anarchist concept of ‘code as law’ presented by Lessig (2000), the subjects of law and contractual control remain misunderstood. The argument presented by the authors creates a false dichotomy of issues by misrepresenting contract law and the nature of contracting. Most critically, systems including electronic data interchange (EDI) have already existed and allowed the direct machine-to-machine exchange of information for decades (Dearing, 1990).

Most critically, the formation of a contracts requires the meeting of the minds between human parties. Machines fail to integrate rational agency, and the actions of the machine are merely the consequence of human actors who have set a predetermined algorithm, along the path of actions taken by human programmers. The argument that automation is put into a decision-making process fails to integrate the programmer’s actions in defining the algorithm. Code development integrates the decision-making process, and arguing that the machine has been programmed does not mitigate liability or responsibility for programmed actions.

Lastly, the notion of integrating legal rules into code demonstrates the complete lack of awareness expressed by the authors regarding the nature and function of courts. The automation of decisions is outside the realm of human agency, and courts have a rational process of choosing outcomes based on equity and justice. Neither aspects of human interaction can be programmed. While it is possible to automate many processes, doing so does not mitigate the requirements of developers to act responsibly or take responsibility for the code they produce.

Wylie, B. (2018). Governance Vacuums and How Code is Becoming Law. Waterloo, ON: Centre for International Governance Innovation. https://www.cigionline.org/sites/
default/files/documents/Data%20Series%20Special%20Report.pdf#page=94

The argument presented in this special report again overlooks existing data contracting rules formulated under the UNCITRAL provisions and global implementation of the guidelines on electronic contracting by the United Nations (Habibzadeh, 2014). Similarly, the paper erroneously assumes that the common law is not resilient or flexible enough to integrate new technologies. Even such an approach would be a stretch as the concept of “smart contracts” merely integrates a new form of EDI and digital value exchange.

The authors assume existing laws and legislation concerning information technology-based systems do not apply. Nevertheless, such an approach is in error. Information technology law has been applied in a variety of cases across the world for over four decades (Lloyd, 2020). So, while many believe it is new or not covered within existing legal frameworks, a plenitude of existing legal systems has already been developed with extensive case law in various areas. In addition, peer-to-peer filesharing cases throughout the 1990s and 2000s demonstrated how the legal system could act even when distributed systems are involved.

Zwitter, A., & Hazenberg, J. (2020). Decentralized Network Governance: Blockchain Technology and the Future of Regulation. Frontiers in Blockchain, 3, 12. https://doi.org/10.3389/fbloc.2020.00012

Zwitter and Hazenberg (2020) argue that the creation of blockchain-based technologies that allow for the automation of certain validation and consensus tasks provides an opportunity to integrate a variety of new governance norms that would enable Lessig’s “code is law” system and structure (Lessig, 2000). Yet, the argument fails for the same reason that Lessig’s original argument failed when Wu (2003) demonstrated the flawed aspects of arguing that algorithms acted independently of human action or that a multitude of distributed actors would lead to a scenario where code could form an independent system outside of law.

The paper presents a series of existing legal structures that are portrayed as new or novel. In arguing that governance models may be structured based on voting rights in tokens, the authors merely present an unregistered corporation that will not have the normal corporate protections associated with shareholders. The authors present a form of partnership without understanding the responsibilities and duties that come with such a structure. As such, the paper merely presents existing legal systems, concluding that they have created something new when, in fact, they have removed the hard-won protection for shareholders that comes with corporate rights.

The promotion of decentralization in the paper takes on the look and feel of a theological argument that ignores real-world conditions and structures that contradict the belief structure of the author. In many ways, the paper presents a delusional concept of decentralization based on a straw man: that legal structures don’t already cover partnership agreements, or that a group of individuals acting outside a formalized corporate structure will not be seen as a partnership under the law.

Additional References

De Filippi, P., & Hassan, S. (2018). Blockchain Technology as a Regulatory Technology: From Code is Law to Law is Code (arXiv:1801.02507). arXiv. https://doi.org/10.48550/arXiv.1801.02507
Dearing, B. (1990). The strategic benefits of EDI. The Journal of Business Strategy, 11(1), 4.Habibzadeh, T. (2014). Developing and Modernizing Iranian Law in the Context of Electronic Contracts by a Comparative Study of UNCITRAL Rules, English Law, American Law, EU Law and Iranian Law. The University of Manchester (United Kingdom).
Lessig, L. (2000). Code is law. Harvard Magazine, 1, 2000.
Lloyd, I. (2020). Information Technology Law. Oxford University Press.
Wu, T. (2003). When Code Isn’t Law. Virginia Law Review, 89(4), 679–752.
Wylie, B. (2018). Governance Vacuums and How Code is Becoming Law. Waterloo, ON: Centre for International Governance Innovation, 86–90.
Zwitter, A., & Hazenberg, J. (2020). Decentralized Network Governance: Blockchain Technology and the Future of Regulation. Frontiers in Blockchain, 3, 12. https://doi.org/10.3389/fbloc.2020.00012

This article was lightly edited for clarity purposes.

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