Crypto’s Biggest Legal Problems

For good legal frameworks, crypto must acknowledge very big problems.

(This is the first part of a larger analytical project titled CryptoLaw, available on Crypto Law Review).

CryptoLaw is undergoing explosive growth at the moment. This includes everything from the introduction of new legislative and regulatory schemes, to the re-conceptualization of some of the most basic legal forms, like “contract,” “property,” and so on.

It’s difficult to define the field of CryptoLaw, but it’s fair to characterize it as extremely fragmented and discombobulated. This, itself, is a sign of a big potential problem in CryptoLaw.

As Mike Orcutt suggested in the MIT Technology Review a few months ago, continuing the current choppy approach to defining crypto legal forms brings: (1) chaos (2) incoherence, (3) unnecessary complexity, (4) regulatory blowback, (5) added costs, (6) confusion, (7) reduced innovation.

However, CryptoLaw’s conceptual and operational problems are even worse than the parade of horribles listed above.

Today’s CryptoLaw problems are exacerbated by many people’s belief in lexscapism — the idea that they can extricate their crypto projects from the messy and inefficient world of existing law by creating their own “self-sustaining legal systems.”

The common crypto belief that it’s possible to take crypto legal relations entirely into one’s own hands may prevent crypto teams from even seeing major structural problems in the broader Crypto Legal Matrix in which they operate.

CryptoLaw Problems

While some of the items on the list below will leave you scratching your head, here’s a partial list of the biggest structural problems plaguing CryptoLaw today.

• Conceptual incoherence: belief in “self-enforcing,” “smart contracts as special-purpose ‘legal system’ with very low enforcement costs” (Buterin/Ethereum); the very premise of legal ‘immutability’ (ETC); apparent lack of interest in legal theory (with some exceptions); etc.
• Immutability: certain things are fixed, we want them fixed, and CryptoLaw can keep them fixed.
• Wrong contract law: founding manifestos for “smart contract” movement are doctrinally wrong (e.g., Nick Szabo’s reliance on “meeting of minds” subjective standards of contract formation; inaccurate grasp of remedial mechanisms for contract enforcement & the circular ‘logic’ of so-called “self enforcement.”).
• Inadequate remedies: on-chain fetishism (the idea that contract formation, performance, breach, and dispute resolution can all be fully done on-chain or within a given crypto instrument) leads to willful disconnects from existing legal and non-legal remedies. Existing remedies, of course, were never displaced by CryptoLaw, and now serve to operate alongside various purported on-chain remedial and/or dispute resolution mechanisms. Interoperability between on-chain and off-chain remedial mechanisms is one of the biggest legal problems facing crypto today.
• Unease with ambiguity: Law often strives for clarity & certainty, but absolute certainty is impossible because there will always be ambiguity (factual and legal ambiguity is impossible to solve); CryptoLaw (especially of the intra-crypto variety, such as so-called “smart contract” architectures) often claim certainty; more worrisome, many CryptoLaw projects claim that they can “solve” ambiguity and arrive at 100% objectively clear forms, processes and outcomes.
• Lexscapism: belief that it’s possible to extricate crypto from existing Law (legal forms, processes, institutions, etc.) & that we should pursue these aims (Buterin: “[Blockchains are] digital institutions with no central coordinator and not bound to any single jurisdiction.”) (see also EOS).
• Open legal exposure/liability: frequent representations, assertions, claims (IOTA = “quantum proof”) that lead to wide-open legal exposure; maintaining open exposure despite notification of liability and ease of risk mitigation.
• Bot enforcement: casual references to pre-programmed autonomous “bot enforcement” actions without express acknowledgement that “bot enforcement” is a logical and legal precursor to “robot enforcement” (CryptoPolice, RoboCop, etc.) (see also: dehumanization; lack of self-awareness).
• Jurisdiction: Blockchain structures are ideal for creating the world’s most robust and up-to-date streaming, dynamic, fluid jurisdictional maps (and streaming, dynamic, fluid legal doctrinal maps!), but today’s CryptoLaw conceptions of jurisdiction seem constrained by crypto’s irrational pursuit of 100% immutability, certainty, and fixed, predictable jurisdictional bounds. In practice, CryptoLaw operates along familiar 20th century overlapping and concurrent jurisdictional lines, like a Venn diagram. CryptoLaw’s unwillingness to apply Blockchain/DLT tech to rethink jurisdiction in more functional terms is crypto’s single largest missed opportunity.
• Dehumanization: (human law is costly, inefficient, unjust, clunky, disorganized, protracted, prone to human error) = DumbLaw; (CryptoLaw is cheap, speedy, efficient, unbiased, organized, transparent) = SmartLaw.
• Unacknowledged ideological baggage: crypto-anarchy, crypto-libertarianism, Bitcoin maximalism, ‘Capitalistic Socialism,’ ‘Liberal Radicalism,’ self-sovereignty, #CodeIsLaw, #CodeAsLaw, ‘algorithmic justice,’ immutability, individualism (individual rational self-interest), etc.
• Formalism/Hyperformalism: (appropriation of existing legal forms like ‘contract,’ ‘property,’ ‘individual legal personality,’ ‘Constitution,’ etc.) + (‘freedom of contract,’ ‘choice of law’ & ‘choice of forum’ doctrines) + (formal maths) = CryptoLaw. Exhibit A for crypto hyperformalism = EOS.
• Private Law > Public Law: Contract & property rights between self-sovereign individuals dominate CryptoLaw imaginaries; public law has a place, but that place should be as clearly defined and as small as possible (see also: regulatory anxiety; ideological baggage).
• Anti-formalism: #CodeIsLaw, except when it isn’t (in unusual situations like the DAO, when we can make exceptions); “we can trace every transaction, which is why strict accountability, traceability, verifiability, transparency is coded into CryptoLaw, but the environmental footprint of crypto mining (and other externalities from other processes), well, those are too speculative & too difficult to attribute.”
• Law & Global Governance: Crypto can drive development, and must have open regulatory runways. Crypto/DLT actors want public sector adoption; but when China/Russia/Venezuela/North Korea/etc. are seen as subsidizing crypto & crypto-mining operations, CryptoLaw falls silent.
• Crypto-phrenia: “Down with banks! Why are banks suspicious of crypto?” “Down with law! Why is law enforcement gunning for crypto?” “Down with trust! But please trust the ‘terms,’ ‘conditions,’ ‘rules,’ and ‘guidelines’ of our self-hosted mobile wallet for Ethereum-based blockchains, called Trust.” Transparency is the DNA of crypto; except, of course, when it comes to inter-crypto cartel formation; etc.
• Crypto IP: everyone is rushing to get Blockchain patents, but nobody is ready for big crypto IP cartels and even bigger crypto IP wars.
• Regulatory anxiety: Liberty good; regulation bad; ‘pro-crypto’ regulation is great, except when it’s “bad” ‘pro-crypto’ regulation (see also crypto-phrenia); lack of broad sectoral lobbying and/or negotiated rulemaking coordination on the one hand, but clear signs of cartel formation among some leading crypto development teams to the exclusion of others;
• Victimization: crypto innovates, innovates, innovates; the State just regulates, regulates, regulates.

• Binary Logic: us v. them; honest nodes v. attacker nodes; “legit” miners v. Bitmain; crypto v. SEC, Wall Street, Central Banks, etc.; crypto v. world.

• CryptoLawyers: lots of ($$$) opportunity invites legal opportunists, posers, and scammers; depth of legal problems above makes it easy for many lawyers to conceal lack of expertise, while appearing knowledgeable and helpful. Most worrisome, Crypto’s trustlessness fetish (w/r to underlying algorithms or implementation mechanisms) manifests as CryptoLawyer v. CryptoLawyer suspicion.
• Core v. Periphery: CryptoLaw is law, so each day, it gets more and more institutionalized though vehicles like [Chamber of Digital Commerce](file:///Users/anon15/Downloads/Understanding-Digital-Tokens-08_09_2018-Web%20(1).pdf) & Stanford & E+5 which have resources to exercise unilateral fiat power to issue guidance. Such guidance claims global reach, but reflects mostly Anglo-American common law (doctrinally) & Anglophone law (in terms of legal institutional and lawyering sensibilities). For example:

• Lack of Self-Awareness: “Wow, we were too busy doing [insert crypto development roadmap goal here] to realize there were so many legal problems.” But we crypto folks are really on the receiving end of these problems (see: victimization). We’re not responsible for them.
• Lack of Accountability: see above.
• […]

Each of these problems can be seen as a hurdle on crypto’s march to global scale and global domination. Yet everyone should also see that removing any of these discrete hurdles creates immense new opportunities, and not only for crypto.

Hey, Where’s Problem Z?

At this point, if you don’t see a particular item on the list above as a discrete legal problem (e.g., “us v. them binary logic”), that’s ok. We began by pointing out that many analysts and insiders also aren’t aware of the extent of legal problems surrounding crypto.

So just acknowledging the enormity of the task before us is a good start.

Similarly, if you’re surprised to see a legal problem missing from the list (e.g., U.S. tax law, the “disruptive effect of projects like OpenLaw,” or applications of BlockTech to court dockets, etc.), the same disclaimer applies.

CleanApp might not be aware of a particular problem area, or we lump it into another umbrella category like regulatory anxiety (which itself is very broad and includes tax, securities law, antitrust, anti-money laundering, capital controls, etc. — hailing from thousands of global jurisdictions).

If you think we should add your problem to the list above, please drop us a response below. We just ask that you remember:

No list like this could ever be exhaustive. That’s not the point.

Instead, what everyone should see is a clear need for more conceptual clarity, categorization, prioritization — things that we continue to work on in our broader CryptoLaw project.

Ok, Problems. And Solutions?

If you’re building complex rockets that are failing to launch as planned, it’s worthwhile to do multiple comprehensive bottom-up vulnerability audits before trying to fix this or that easy-to-spot symptom.

The same is true with crypto projects and with CryptoLaw.

The point of this article isn’t to provide a check list of legal problems facing crypto development teams. Instead, our goal is to show that, in light of the magnitude of the unresolved legal issues above, the best approach to CryptoLaw is:

Assume nothing; question everything.

We know that many plans are in motion to address this or that need area. But we also know that for the next 5 to 10 years, we’ll likely see far more fragmentation and incoherence (notwithstanding, and alongside, the continuing drive towards legal harmonization and convergence).

Therefore, whatever legal strategies or advice we’ll get from CryptoLawyers (or from Google), we should continue to sharpen our default legal analytical posture of “trust but verify.”

We’re not suggesting that everyone (lawyer & non-lawyer alike) should start developing expertise in CryptoLaw. Specialization has its place.

Instead, we merely suggest that every crypto developer and investor who cares about the success of the broader Crypto/Blockchain/DLT enterprise should place legal risk awareness and legal risk mitigation much higher on their respective to-do lists than whatever place “legal” occupies at present.

My CryptoLawyer’s Got This!

If you run any of these problems (individually or collectively) past your CryptoLawyer and their response is, “Don’t worry, we got this!” — then it might be time for a new CryptoLawyer.

Seriously.

Whether you’re a seasoned CryptoLawyer or CryptoCat reading this, a better response should be something along the following lines:

(1) CryptoLaw Actor Mapping: Who benefits from maintaining these levels of legal incoherence and disorganization? Who would benefit from greater clarity? Who is affected by CryptoLaw and various current, and emerging, crypto legal institutions? How?

(2) CryptoLaw Concept Mapping: Are there any assumptions or ideological commitments that CryptoDevs bring to CryptoLaw that are simply unnecessary for smooth crypto legal relations, and in fact, may serve as an impediment to efficient CryptoLaw? How can we design mechanisms and processes to give us the best CryptoLaw ideas in as inclusive, efficient, and emancipatory manner as possible?

(3) CryptoLaw Institution Mapping: What’s the fastest and best way to build transparent and inclusive legal institutions to perform comprehensive and ongoing industry-wide legal analysis and legal risk mitigation work?

(4) etc.

Keep Reading CryptoLaw

Here’s another reason to keep reading CryptoLaw. Improved knowledge of CryptoLaw allows non-lawyers to exert a check on the growing power of CryptoLawyers.

Our sense is that we got into many of the messes above because of early CryptoLawyers. Hence, they must lead the effort to CleanApp this mess. Better command of CryptoLaw allows you to keep track of the people whose job it is to add value and decrease risk, instead of the other way around.

Here are the next steps in our self-directed version of Crypto Law School: (1) learning to see the Crypto Legal Matrix, followed by (2) careful analysis of the relationship between the Crypto Legal Matrix and the even broader legal matrix that structures it, and surrounds us all.

If you’re ready to take this leap, let’s plug in to the Crypto Legal Matrix.