Regulation by blockchain: the emerging battle for supremacy between the Code of Law and Code as Law

Many advocates of distributed ledger technologies (including blockchain) claim that these technologies provide the foundations for an organisational form that will enable individuals to transact with each other free from the travails of conventional law, thus offering the promise of grassroots democratic governance without the need for third party intermediaries. But does the assumption that blockchain systems will operate beyond the reach of conventional law withstand critical scrutiny? This is the question which this paper investigates, by examining the intersection and interactions between conventional law promulgated and enforced by national legal systems (ie the ‘code of law’) and the internal rules of blockchain systems which take the form of executable software code and cryptographic algorithms via a distributed computing network (‘code as law’). It identifies three ways in which the code of law may interact with code as law, based primarily on the intended motives and purposes of those engaged in activities in developing, maintaining or undertaking transactions upon the network, referring to the use of blockchain: (a) with the express intention of evading the substantive limits of the law (‘hostile evasion’); (b) to complement and/or supplement conventional law with the aim of streamlining or enhancing compliance with agreed standards (‘efficient alignment’); and (c) to co-ordinate the actions of multiple participants via blockchain to avoid the procedural inefficiencies and complexities associated with the legal process, including the transaction, monitoring and agency costs associated with conventional law (‘alleviating transactional friction’). These different classes of case are likely to generate different dynamic interactions between the blockchain code and conventional legal systems, which I describe respectively as ‘cat and mouse’, the ‘joys of (patriarchial) marriage’ and ‘uneasy coexistence and mutual suspicion’ respectively.

I argue that the emerging response of conventional law in the first two kinds of case can be readily anticipated and understood. While the first class of case threatens to undermine the rule of law and which national legal systems can be expected to take positive action to safeguard, the second class of case does precisely the opposite: reinforcing the primacy and sovereignty of national law, and hence blockchain applications falling within this class are likely to be regarded as a welcome development by conventional legal systems. But it is the law’s response to the third category of applications (‘alleviating transactional friction’) that is the most difficult to predict, due to the normative ambiguity of these applications. Whether the conventional law ought to intervene to oversee these systems raises fundamental tensions between the sovereignty of law in modern legal systems, including the universal coverage of the rule of law and its guarantee of security (which includes, but extends beyond, providing transactional security), on the one hand, and respect for individual autonomy and freedom of association on the other. I argue that, to the extent that the exercise of agency and freedom of association by a group of individuals results in adverse consequences for third parties and the broader public, state intervention via the code of law is normatively justified. Accordingly, the critical challenge is to identify the conditions and circumstances in which this threshold is reached in concrete contexts in order to justify the assertion of supremacy by conventional law over activities taking place on and arising out of blockchain systems.

Full report available here

Karen Yeung, Interdisciplinary Professorial Fellow in Law, Ethics & Informatics, University of Birmingham

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