A. DOES CODE NEED LAW?
1. A GLOBAL TRANSFER MECHANISM WITHOUT A LEGAL BASIS
DLT is often presented as an alternative to legal solutions. It was originally designed to surmount the shortcomings of the trust-based banking system that gives banks and states a prominent role.16 Satoshi Nakamoto, the pseudonym used in the original bitcoin proposal, saw these institutions as being inherently corrupt.17 His goal was to eliminate the need for them by creating a peer-to-peer system in which transactions are recorded by a decentralized network of computers rather than intermediaries.18
15. See infra Section B.3.
16. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN.ORG https://bitcoin.org/bitcoin.pdf (last visited Dec. 5, 2019) (calling for “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need of a trusted third party.”).
17. See Primavera De Filippi & Benjamin Loveluck, The Invisible Politics of Bitcoin: Governance Crisis of a Decentralised Infrastructure, 5 INTERNET POL’Y REV. 1, 4 (2016) (“Bitcoin aimed at eradicating corruption from the realm of currency issuance and exchange.”).
18. See id. (“Bitcoin is often presented as an alternative monetary system, capable of bypassing most of the state-backed financial institutions. . . .”).
The philosophical underpinnings of the blockchain stand in sharp tension to the rule of law. Anarchists, like “cypherpunks” and “crypto rebels,”19 are attracted to DLT because they see autonomous cryptocurrencies as a safeguard of civil liberties against a Big Brother state.20 The idea also appeals to neoliberals because it might toll the bell for the state’s monopoly to create money.21 For both ends of the political spectrum, the right-wing and the left-wing, DLT is essential to reduce the role of the government and its rules.22 The anti-legalistic tendency is epitomized in the formula “code is law,” which was coined by Lawrence Lessig, albeit with precisely the opposite intention: to demonstrate that the state should intervene in the internet’s architecture.23 Some authors maintain that the blockchain
19. See generally Eric Hughes, A Cypherpunk’s Manifesto, ACTIVISM.NET (Mar. 9, 1993), https://www.activism.net/cypherpunk/manifesto.html [https://perma.cc/KR2Y-CZG4] (“[P]rivacy in an open society requires anonymous transaction systems . . . an anonymous system empowers individuals to reveal their identity when desired and only when desired. . . .”). The Cyperpunk’s Manifesto builds on the earlier Crypto Anarchist Manifesto by Timothy C. May. See Timothy C. May, The Crypto Anarchist Manifesto, ACTIVISM.NET (Nov. 22, 1992), http://groups.csail.mit.edu/mac/classes/6.805/articles/crypto/cypherpunks/may-crypto-manifesto.html [https://perma.cc/6GEG-58Y8] (predicting new technologies that will “alter completely the nature of government regulation, the ability to tax and control economic interactions, [and] the ability to keep information secret. . . .”).
20. For the story of “crypto rebels” beating the government and “Big Brother,”* see generally* STEVEN LEVY, CRYPTO: HOW THE CODE REBELS BEAT THE GOVERNMENT SAVING PRIVACY IN THE DIGITAL AGE (2001) (describing various instances of individuals who succeeded in protecting personal data from the government using cryptography).
21. See, e.g., Nikolei Kaplanov, Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against its Regulation, 25 LOY. CONSUM. L. REV. 111, 171 (2012) (“Allowing bitcoin to operate unfettered by substantial regulation allows it to contribute toward job creation, economic growth, and opportunity.”). Neoliberals have long argued for the need of a currency that is independent from the state, see FRIEDRICH AUGUST HAYEK, DENATIONALISATION OF MONEY: THE ARGUMENT REFINED 133–34 (3rd ed. 1990) (arguing for a “Free Money Movement” to overcome central-bank-induced inflation).
22. See, e.g., Scott H. Kimpel, House of Representatives Approves Bipartisan Blockchain Bill, THE HUNTON ANDREWS KURTH BLOCKCHAIN BLOG, https://www.blockchainlegalresource.com/2019/10/house-of-representatives -approves-bipartisan-blockchain-bill/ (describing a blockchain bill with bipartisan support in the U.S. House of Representatives).
23. Lawrence Lessig, Code Is Law, HARV. MAG. (Jan. 1, 2000), https:// harvardmagazine.com/2000/01/code-is-law-html (last visited Dec. 5, 2019); see also LAWRENCE LESSIG, CODE: VERSION 2.0 1–8 (2006) (arguing that absent some state regulation cyberspace will become a tool of control).
would be governed by a non-state and a-national law for the digital age, which they call lex cryptographica.24
A quick look at the technology seems to confirm the idea that code is indeed replacing the law: DLT permits to transfer assets on the internet without any intervention by banks or other intermediaries that can be controlled by the state.25 A DLT transfer is initiated when the transferor enters a unique digital key that is only known to him (a “private key”) as well as the publicly known key of the transferee (a “public key”) to a chain of digital signatures on the internet.26 The transfer is then broadcast via a unique “hash” (a string of numbers) to computer servers (so-called “nodes”), which verify the validity of the keys and the conformity to the previous transfers in the chain.27 Each of the nodes maintains its own copy of all transfers (the “ledger”) against which it checks the new transfer.28 The nodes work on a decentralized basis and are dispersed around the world (therefore “distributed ledger”).29 The nodes are assigned a “fee” to incentivize them to perform the verification work.30 Their verification effort results in the addition of a new block to the chain (therefore “blockchain”). Once it is proven that enough work has been invested into the verification process, the longest blockchain—representing the decision of the majority of nodes— will be accepted by all others.31 From this moment, the chain can no longer be altered without redoing all the verification work
24. See Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology and the Rise of Lex Cryptographia 48 (Mar. 10, 2015), https:// papers.ssrn.com/abstract=2580664 (last visited Mar. 28, 2018) (describing lex cryptographica as “a set of rules administered through self-executing smart contracts and decentralized (and potentially anonymous) organizations.”). See also DE FILIPPI & WRIGHT, supra note 2, at 52 (claiming that with lex cryptographica “national laws get pushed to the edges”).
25. See De Filippi & Loveluck, supra note 17 and accompanying text.
26. Nakamoto, supra note 16, at 2; (“We need a way for the payee to know that the previous owners did not sign any earlier transactions.”).
27. See id.
28. See id. at 3 (“New transactions are broadcast to all nodes.”).
29. See id. at 3–4 (explaining how such a decentralized system operates).
30. See id. at 4 (explaining how this fee structure incentivizes network support).
31. Id. at 2 (“[W]e need a system for participants to agree on a single history of the order in which they were received. The payee needs proof that at the time of each transaction, the majority of nodes agreed it was the first received.”).
that has been done, which becomes even more difficult as new blocks are added.32
This whole process is independent of any legal rules. The transfer comes about by the transferor combining its private key with the public key of the transferee and the following confirmation of the transfer through the verification process.33 None of this requires the intervention of notaries, lawyers, or intermediaries that could be supervised, e.g. banks, clearing agents, or depositories.34 Nor does it need a contract, or any other legal agreement or act. In this sense, the characterization of code as law seems to be entirely fitting.
2. PRIVATE LAW PROBLEMS THAT MAY ARISE FROM DLT TRANSFERS
Although many consider DLT as independent from the law or an underpinning legal system, they nevertheless seem to assume that the technology yields legally binding results. For instance, it is very often said that the recipient of a transfer becomes the “owner” of the bitcoin,35 or that concepts such as “ownership” and “property” would also apply to cryptocurrencies.36 Statements like these presuppose that DLT transfers have some effect on the level of property law. But it is wholly unclear whether bitcoin and other virtual currencies can indeed be conceptualized as property from the point of view of
32. See id. at 3 ( “To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes.”).
33. See id. at 2 (explaining how transactions incorporate private and public keys).
34. See De Filippi & Loveluck, supra note 17 and accompanying text.
35. See Kaplanov, supra note 21, at 123 (“[O]wner transfers her bitcoins to the purchaser. . .”); Sarah Meiklejohn et al., A Fistful of Bitcoins: Characterizing Payments Among Men with No Names, IMC’13 - PROCEEDINGS OF THE 13TH ACM CONFERENCE ON INTERNET MEASUREMENT 127 (2013) (“[B]itcoin can be thought of as a chain of transactions from one owner to the next. . . .”) (emphasis in original). Kevin V. Tu, Perfecting Bitcoin, 52 GA. L. REV. 505, 548 (2017) (“Owners access, manage, and use their virtual currency with digital keys.”).
36. See Michael Abramaowicz, Cryptocurrency-Based Law, 58 ARIZ. L. REV. 359, 414 (2016) (claiming that a legal system’s refusal to allow cryptocurrency ownership “would be self-defeating”); Shawn Bayern, Dynamic Common Law and Technological Change: The Classification of Bitcoin, 71 WASH. & LEE L. REV. ONLINE 22, 29 (2014) (calling direct ownership of bitcoin “a new class of private property”); Fairfield, supra note 3 at 842–54 (suggesting to reconceptualize property law as the “law of information” in order to cover virtual assets like cryptocurrencies).
the common law.37 An even more problematic but often neglected point is that one cannot assume the blockchain is exclusively or predominantly subject to the common law.38 Given the division of the world into different states with diverging legal systems, each and every form of property exists by virtue of its recognition under some applicable national law.39 It is first necessary to identify this law through the mechanics of conflicts of law before it can be applied to any phenomenon of the real or virtual world.
To blockchain enthusiasts, the search for an applicable property law is anathema.40 They consider DLT as guaranteeing the position of the acquirer with absolute certainty, something that a real-world transaction with tons of documentation, lawyers, and courts cannot provide.41 From their point of view, the technology does not need law.42
Yet this belief is wrong. Blockchain is designed to avoid “double spending,” i.e. that the same owner transfers the bitcoin twice. It provides no safeguards at all against other problems
37. See Tatiana Cutts, Bitcoin Ownership and its Impact on Fungibility, COINDESK (June 14, 2015, 3:00 PM), https://www.coindesk.com/bitcoin -ownership-impact-fungibility (claiming that there is “a good policy reason for the conclusion that one cannot, in a private law sense, ‘own’ bitcoin”); Kelvin F. K. Low & Ernie G. S. Teo, Legal Risks of Owning Cryptocurrencies, 1 HANDBOOK OF BLOCKCHAIN, DIGITAL FINANCE, AND INCLUSION 225–47 (2018) (stating that “it is not entirely clear what, if any legal rights, attach to bitcoins and other private cryptocurrencies like bitcoin”); Bayern, supra note 36, at 25–29 (arguing that “owning” Bitcoin may be a contract right rather than a property right).
38. See Low & Teo, supra note 37, at 9 (“It may come as a shock . . . but there is no such thing as digital money as a matter of law.”); Bayern, supra note 36, at 33–34 (explaining that Bitcoin “does not fit neatly into classical categories” of common law).
39. See generally Carol M. Rose, Possession as the Origin of Property, 52 U. CHI. L. REV. 73, 84–85 (1985) (“It is not enough, then, for the property claimant to say simply, ‘It’s mine’ through some act or gesture; in order for the ‘statement’ to have any force, some relevant world must understand the claim it makes and take that claim seriously.”).
40. Bayern, *supra *note 36, at 25 (questioning the meaning of “hold[ing] a bitcoin”).
41. Cf. Fairfield, supra note 3, at 29–31 (explaining that courts often rely on imprecise and unhelpful distinctions, such as physicality, causing them to wrongly apply intellectual property law to digital objects, thereby denying the appropriate protections of law).
42. See May, supra note 19 (predicting that developments in information technology such as cryptographic protocols “will alter completely the nature of government”); Hughes, supra note 19 (“Even laws against cryptography reach only so far as a nation’s border and the arm of its violence.”).
that may occur.43 The following provides some illustrations of such problems. In order to get a better overview, they will be divided into those that are endogenous, i.e. inherent to the transaction, and those that are exogenous, i.e. rooted in events outside the blockchain.44
a) Endogenous Transfer Problems
Many problems inherent to the transaction may plague a DLT transfer. One of them is that the transferor may have made a mistake.45 He might, for instance, have entered the wrong number of bitcoin, e.g. “10” instead of “1.” It is also conceivable that the transferor’s assent to the bitcoin transfer was induced by fraud or material misrepresentation because the transferee has made false allegations to induce the transferor to use its private key. Furthermore, it is possible that the transferor acted under the influence of an improper threat by the transferee, thereby forcing her to make the transfer. This is by no means a farfetched possibility, given that many online blackmailers today demand payment in bitcoin, e.g. in exchange for abstaining from the publication of private information on the internet.46
From a legal point of view, in all of these situations the contract that entails the property transfer is voidable.47 Yet
43. See, e.g., Low & Teo, supra note 37, at 22 (explaining the blockchain protocols “only promise to prevent double-spending”); see also Nakamoto, supra note 16, at 1 (proposing “a solution to the double-spending problem using a peerto-peer distributed time stamp server . . . .”).
44. See PRIMAVERA DE FILIPPI & GREG MCMULLEN, GOVERNANCE OF BLOCKCHAIN SYSTEMS: GOVERNANCE OF AND BY DISTRIBUTED INFRASTRUCTURE 16 (2018), https://hal.archives-ouvertes.fr /hal-02046787/document (explaining the difference between endogenous and exogenous rules).
45. See generally DE FILIPPI & WRIGHT, supra note 2, at 44 (explaining “it can be difficult to unwind the transaction retroactively” if bitcoin is sent to the wrong address).
46. See Cristina Miranda, How to Avoid a Bitcoin Blackmail Scam, FEDERAL TRADE COMMISSION BLOG (Aug. 21, 2018), https:// www.consumer.ftc.gov/blog/2018/08/how-avoid-bitcoin-blackmail-scam [https://perma.cc/Z7F6-J8MT] (describing a scheme in which payments in bitcoin were extorted from men in exchange for silence about an alleged affair).
47. See RESTATEMENT (SECOND) OF CONTRACTS §§ 153, 164, 175 (AM. LAW INST. 1981) (providing that a contract made under the influence of a mistake, fraud, or an improper threat is voidable).
under the blockchain, the transfer is effective.48 For an effective transfer, it suffices that the correct codes have been used.49 Transfers of bitcoins are recorded as long as the correct private key of the transferor is combined with an existing public key of a transferee.50 The technology does not take into account mistakes, fraud, or improper threats.51 These are not part of the algorithm.
Even worse, the cryptocurrency transfer is also effective where it is not supported by any agreement at all. This may occur where the transferor or the transferee has been subject to some strong form of incapacity, for instance, because they suffer from a mental illness or defect.52 One must also not discard the possibility that the parties to the transfer have never been in contact.53 For example, the transferor could have confused the public key of the transferee with that of another person. Or the transferee could hack the computer of the transferor, copy his private key, and used it to transfer to bitcoin to himself. In these cases, no contract has been concluded between both sides.54 Yet from a technological point of view, the transfers would be effective.55
b) Exogenous Transfer Problems
Exogenous events are those that have no relation to the blockchain but nevertheless have the potential to impact the
48. See, e.g., DE FILIPPI & WRIGHT, supra note 2, at 21 (explaining the validity of Bitcoin transactions with the aid of a private key); accord Meiklejohn, supra note 35, at 2 (describing the basic Bitcoin protocol).
49. See DE FILIPPI & WRIGHT, supra note 2 and the accompanying text.
50. *Id. *
51. Id. at 4 (noting that the technology requires regulations to prevent it from being used for criminal and illicit activities).
52. See RESTATEMENT (SECOND) OF CONTRACTS § 13 (AM. LAW INST. 1981) (providing that a person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect).
53. See DE FILIPPI & WRIGHT, supra note 2, at 38–39 (explaining that blockchain technology allows transactions to occur without the parties to the transaction revealing their true identity or trusting each other as long as both parties “trust the underlying technical infrastructure”).
54. See RESTATEMENT (SECOND) OF CONTRACTS §§ 17, 18, 22 (AM. LAW INST. 1981) (providing that a contract requires mutual assent on behalf of both parties to the contract, and that the manifestation of mutual assent be in relation to the manifestation of the other).
55. See DE FILIPPI & WRIGHT, supra 2 and the accompanying text.
ownership of crypto assets.56 One salient example is succession or inheritance law. In most legal systems, in case of death the assets of the decedent are vested in their entirety in the heirs or the executor of a will.57 This transfer is automatic and not conditioned on any transmission of possession or other act. Arguably, it also includes any cryptocurrency that the decedent had acquired.58 Since the decedent is no longer able to dispose of these coins, his successors must have become the “owners” outside of the DLT.59 The question is how and under which national law does this transfer happen legally.
Exogenous problems may also occur in case of bankruptcy. Typically, the bankruptcy trustee steps into the shoes of the debtor and acquires the right to dispose of all of the latter’s assets in order to satisfy the creditors.60 This power arguably extends to virtual assets, such as bitcoin, which can make up a
56. See DE FILIPPI & MCMULLEN, supra note 44, at 16 (explaining exogenous rules).
57. See e.g., M.J. de Waal, Law of Succession, in INTRODUCTION TO THE LAW OF SOUTH AFRICA 169 (C.G. Van der Merwe & J.E. Du Plessis eds., 2004) (describing the transformation of South African law from the Roman-Dutch concept of universal succession to the English system of executorship); HENRY DYSON, FRENCH PROPERTY AND INHERITANCE LAW: PRINCIPLES AND PRACTICE 313 (1st ed. 2003) (explaining the vesting of the decedent’s assets in her lawful heirs under French law); WILLIAM M. MCGOVERN JR., SHELDON F. KURTZ & DAVID M. ENGLISH, WILLS, TRUSTS AND ESTATES, INCLUDING TAXATION AND FUTURE INTERESTS, 4TH 49–133 (4th ed. 2010) (outlining intestate succession and effects of wills); Catherine Rendell, Payment of Expenses, Debts, and Pecuniary Legacies, in LAW OF SUCCESSION 193 (Catherine Rendell ed., 1997) (describing the devolution of the decedent’s assets on his personal representative under English law).
58. See, e.g., Ana-Caterina Anitei, Digital Inheritance: Problems, Cases and Solutions, INT’L. CONF. EDUC. & CREATIVITY. FOR A KNOWLEDGE-BASED SOC’Y. 32 (2017) (characterizing bitcoin as part of the “digital inheritance”); Naomi Cahn, Probate Law Meets the Digital Age, 67 VAND. L. REV. 1697, 1702–05 (2014) (considering bitcoins as “digital assets” subject to probate law); L. A. G. M. van der Geld, De Executeur in een Nalatenschap met Bitcoins en Andere ‘Digitale Bezittingen’, 8 TIJDSCHR. ERFRECHT 122 (2014) (discussing the executor’s obligation to search for digital assets of the deceased, such as bitcoin, under Dutch law. This article was among the first to discuss the problem of inheritance of digital assets).
59. For an example of such inheritance under Dutch law, see Anna Berlee, Digital Inheritance in the Netherlands, 6 J. EUR. CONSUMER & MARKET L. 256 (2017).
60. See HENRY CAMPBELL BLACK, A TREATISE ON THE LAW AND PRACTICE OF BANKRUPTCY: UNDER THE ACT OF CONGRESS OF 1898 AND ITS AMENDMENTS 42 (3rd ed. 1922) (“Property, wherever situated, which is not exempt, passes to and vests in the trustee…”).
sizeable proportion of the debtor’s wealth. Furthermore, many legal systems endow the bankruptcy trustee with the power to avoid transactions made before the opening of the bankruptcy proceedings that favor particular creditors over others.61 To achieve its goal of protecting the bankruptcy estate against fraudulent, biased, or suspect transfers by the debtor, this power must also extend to bitcoin and other virtual currency payments.62 The treatment of cryptocurrencies in bankruptcy proceedings is the subject of intense legal discussion.63 Independently of the correct characterization, it should be clear that crypto assets are part of the debtor’s estate and, as such, must be used for the benefit of his creditors.
3. INTERMEDIATE CONCLUSION
The problems discussed, whether they are endogenous or exogenous to the blockchain, affect the private relationships between individuals. They concern the parties to a bitcoin transfer, but also third parties such as the heirs or creditors of a holder of crypto assets. None of these issues are taken into account by the functioning of DLT. The blockchain largely ignores them. Real-life problems like mistake, duress, death, or bankruptcy are not solved by decentralizing a ledger in which transactions are recorded. In all of these cases, a rational outcome cannot be ensured without the intervention of the law.
61. See 11 U.S.C. § 544 (2012) (giving the trustee the right to avoid certain transfers made by the debtor).
62. See, e.g., Order on Motion for Partial Summary Judgment, HashFast Technologies LLC v. Lowe (In re HashFast Technologies LLC), No. 14-30725- DM, (Bnkr N.D. Cal. Feb. 23, 2016) (granting, in a partial summary judgment, recovery of the value of the bitcoin at the time of the transfer to the defendant, in which case the bankruptcy trustee of the plaintiff sought to recover 3000 bitcoin that had been paid to the defendant before the plaintiff had gone into administration).
63. See, e.g., David E. Kronenberg & Daniel Gwen, Bitcoins in Bankruptcy: Trouble Ahead for Investors and Bankruptcy Professionals?, 10 PRATT’S J. BANKR. L. 112, 116 (2014) (categorizing bitcoin as “property” for the purposes of the Bankruptcy Code); Chelsea Deppert, Bitcoin and Bankruptcy: Putting the Bits Together, 32 EMORY BANKR. DEV. J. 123 (2015) (defending a characterization as “currency”). The courts differ on whether bitcoin can be considered as property or currency, see United States v. Petix, 2016 WL 7017919 (W.D.N.Y. Dec. 1, 2016) (holding that bitcoin is not money in the ordinary sense of the term); United States v. Mansy, 2017 WL 9672554 (D. Maine May 11, 2017) (stating that the court is not persuaded by the reasoning in United States v. Petix).