Blockchain and law: inevitable bedfellows
One of the promised boons of blockchain technology is elimination of lawyers and other middlemen in commerce, but for seminal blockchain creators, law is as important a facet of distributed ledger as the value token. Nick Szabo’s writing focuses as much on a reliable, open legal system as computer science, calling traditional law “wet code” and cryptographic law “dry code”. Gavin Wood’s Ethereum yellowpaper declares that a well designed system will function as law, managing predictable state change and minimizing judicial intervention. Pioneers like Primavera de Filippi work to develop new solutions in the marriage of coding and law in “Lex Cryptographia.” Reliable cryptolegal structures will raise the status of distributed ledger tokens as holders of value. For alternative currencies to succeed, they must attract more users. Human users demand a degree of reliability and predictability in financial matters. Despite the trustless nature of the distributed ledger system, users must decide to trust the system before they will risk their assets in it. Predictable legal structures will make this space inviting and accessible for growth, evolving a new kind of law practitioner.
Common law as blockchain
Common law, the backbone of U.S. and U.K. law, is the wet code version of blockchain technology. Common law is the set of rules developed by judges deciding cases over time and recording them for posterity. Legal patterns and rules are discerned and shaped by studying the results of consensus breakdown, i.e. lawsuits. The kernels of common law are: contracts, the law of voluntary obligation; torts, the law of involuntary obligation; and property, the law of stuff. The three interact in ever more complex ways to create new doctrine but the kernels remain the same. Legal evolution follows a regular pattern: new property → new contracts → new torts → new regulation.
Transactions, i.e. lawsuits, occur at nodes – courthouses. The transactions are bundled into case reporters, which are book series containing the verified cases, codified sequentially. Once a case goes into the reporter system, it does not change. The effect of the case may change by the addition of subsequent cases. Errors in a printed case book may be corrected by subsequent additions to the chain of books, but the original case and book remain in the original state. The common law is decentralized and hierarchical at the same time: the law is everywhere and accessible to everyone. The statements of some nodes are given more authority than others, for example, the U.S. Supreme Court. The law tolerates a level of uncertainty at the transactional level (trial courts). Trial courts are allowed to have different perspectives on an issue until the difference of opinion becomes a problem for the larger system and a uniform rule needs announcing. When there is a fork of authority, the law kicks the issue up to the next level for resolution. When society becomes complicated enough that judicial remedies are inadequate, the common law integrates and scales into regulation.
Analysis in the legal system means thin-slicing a chain of authority for relevance to make predictions about what will happen to a particular client in the future. The pattern-like nature of legal analysis through the web of common/statutory law is “hacking” from another time. Before computers, lawyers were the gateway to collective knowledge in the common law blockchain. The law was accessed primarily by a digest system, a precursor to database indexing. Humans read, transcribed, summarized, coded and indexed each case by multiple parameters. In practice, the human element of the digest system was the weak link because it could not consider all perspectives that might need to access case information in the future. Digesting was easily replaced by computerized legal research. Computerized legal research allowed a lawyer to thin-slice through the web of law in boolean terms to decide how the law was most relevant to her client, but even these processes are increasingly automated.
A shift from dispute resolution to creation of predictable tools.
The two primary functions of law are dispute resolution and provision of predictive tools so that people may plan and create a stable future. These functions work in inverse proportions: the better we are at making predictions and plans, the less we must focus on dispute resolution. Blockchain technology gives us unprecedented ability to shift the balance of law in digital space away from dispute resolution and toward dispute prevention and planning for the future. The traditional legal system builds on a foundation of observing lawsuits in order to discern patterns and create rules to fit existent fact. The law develops by learning the problems created by consensus breakdown and resolving the disputes according to logic, analogy and ever-escalating rules. Lawyers learn to make predictions by of watching how things disintegrate, then creating structures that do not fall into unproductive patterns.
As the crypto law space grows more robust, it will develop better algorithms to sum the law for digesting and dispute resolution purposes. However, to turn existing law into usable, reliable planning tools still requires human translation to capture nuance and meaning. Technologies like machine learning and the blockchain automate many legal competencies, but they cannot replace a human lawyer’s ability to find meaning within statements of the law. Yet.
The elements of a healthy digital legal ecosystem
Today we are faced with a question of how to articulate what the law is so that we may give it healthy life in digital space. Just as the limitation of the old digest system was the perspective of the human digester, faulty digesting of what the law says, and more importantly, what it means, as we translate the old law to new language, is a known pitfall. It is important for traditional legal practitioners to contribute to development of Lex Cryptographia because projects that sound good from a doctrinal or computer science standpoint may not stand up to the reality of legal practice. Not only must smart contracts, etc. work in the crypto space — their methodologies must withstand traditional legal scrutiny when they eventually come before a court of law. Smart contracts professors underscore the need to teach smart contract drafters adversarial thinking skills. When lawyers review a new model, the first step is to determine the model’s vulnerabilities to collateral attack -– not by hacking, but by legal reasoning. This is a skill that practicing lawyers hone over time and one that we should contribute to the development of Lex Cryptographia.
Three areas stand out for development of a healthy legal ecosystem in the digital space: libraries of effective language tools, access to real-time state-change information and dispute resolution. All of these elements already exist in some form – it’s a matter of bringing them together.
1. Effective language and libraries. Lex Cryptographia needs reliable, comprehensive sources of law code. Nick Szabo gave examples in A Formal Language for Contract Analysis of how to translate legal provisions into meaningful, functional code. These language and code models can be imported into libraries like software code, accessed by a function or a structural statement from the digital jurisdiction itself. Commonaccord.org is a project started by lawyer James Hazard to collect legal tools for use in decentralized or centralized systems. These and other projects are a good start, but there are many, many more legal issues that need translating to the digital space. Until we create a better automated method for capturing meaning from cases, human lawyers should methodically scan the tools of law, translating the useful parts into functional code. Even if lawyers do not write in code, the plain language of contracts as well as judicial opinions should be written in an object-oriented grammar that mirrors the requirements of code. Object-oriented grammar makes searching, predicting and building easier.
2. Real-time legal information. The law is not static – it changes state constantly, like the blockchain. Lawyers rely on an ever-growing list of services like Westlaw and Lexis-Nexis to stay up to date. If lawyers cannot keep up with the law’s changes, they cannot make accurate predictions. This is true in the cryptolegal world as well. As crypto law develops, it must be accessible, like blockchain data, so that Lex Cryptographia may learn from its mistakes and successes, evolving and refining itself.
3. Dispute resolution. Many of the conceptual hurdles to machine arbitration are already passed. The US Supreme Court enforces voluntary arbitration clauses and the use of statistical models to prove legal facts. A carefully crafted arbitration machine designed to give meaningful relief in the cryptographic space will add fair, unbiased, indisputable, automatic enforcement of law in the event of dispute, all of which adds to predictability.
Formative seeds: Contract law and corporate governance
The first steps in planning a healthy Lex Cryptographia are reliable contract and corporate governance models.
Contracts are the means by which individuals and created entities manage their future voluntary obligations. Contract law is created by the accumulated wisdom of millions of lawsuits summing to a living pattern of legal doctrine. This doctrine guides dispute resolution and teaches lawyers about the second aspect of law: making predictions about future events. Providing predictability in planning the future is the primary function of contract drafting. Contracts are pieces of code. Contract provisions work together algebraically to govern the prospective consensual relationship between parties, which is what makes contracts easily amenable to coding language. If a contract doesn’t anticipate all foreseeable contingencies, it fails and the parties end up in expensive litigation. A lawyer’s job is to foresee the maximum number of contingencies and plan for it in a document. This practice has evolved longer and longer contracts over time as more fact patterns and contingencies are added to conventional contract wisdom. This managing of complicated, algebraic contracts is something a computer is naturally equipped to do, once we teach it how.
Corporate governance describes the rules under which a corporation or, in crypto space a decentralized autonomous organization (DAO) operates. A DAO, like a corporation, is a legal fiction. Created by consensus, corporate status allows a group to do more than an individual could do alone. Traditional legal systems provide corporate governance models that give options and predictability to business relationships. As DAOs get more numerous and diverse of purpose, it’s a good idea to make deliberate choices about the rules of the organization as it relates to traditional law. To be autonomous an organization must be self-governing. Lawyers have managed self-governed existence through bars for centuries. As long as a self-governing organization does not merit government expending energy interfering, it can remain self-governing. Once a self-governing group fails to to govern itself, it becomes a subject of regulation.
Big decisions: choice of law and forum
Choice of law provisions are critical for contracts, corporate governance and dispute resolution to keep issues originating in digital space within jurisdictions equipped to handle them. In the traditional legal world, parties often choose a particular law and venue for its expertise, and these choices are usually enforced. For example, the state of Delaware law is favorable to corporations and its judiciary is sophisticated in corporate matters, so it is a common choice for applicable law and venue in business contracts. Consensus on preferred terrestrial jurisdictions will help develop laws that the crypto space can live with. Some jurisdictions are already thinking about how to position themselves to serve new entities.
At this moment, you are free to choose
Lex Cryptographia is at a point in time where it has the opportunity to define itself before the traditional legal system does. Many in the cryptographic space want to shake free of established legal and financial structures and may assume that old laws will not apply. This is unlikely. Even if one’s goal is to change the world, the new world contains the components of the old and the traditional legal system will change to encompass it because the digital world is a human undertaking. When humans get together, they tend to do so in patterns that produce predictable results and side effects. The law calls them “fact patterns.” We do not have to wait and see what will go wrong in digital space in order to create prospective remedies and planning tools – we need only a small amount of imagination. Predictable mechanisms for self-organization and managing change in the crypto law world are within our grasp. In a healthy cryptographic legal system, we can take what works from traditional law and adapt it into code libraries, thoughtfully rejecting the things the system does not need or want. This process can be accelerated and streamlined by practitioner contribution.
Careful prospective legal decisions serve two purposes for any DAO that is going to participate in activity that may affect human beings living in the physical world: choice and leadership. By making express decisions regarding corporate governance, choice of law, forum and dispute resolution, digital organizations go a long way toward creating stable, lasting entities that by nature do not become entangled in the legal system. Lex Cryptographia should take steps to anticipate legal problems and address them internally because the traditional legal world is rapidly expanding its jurisdiction to reach digital space. Without express choices, DAOs will be subject to default provisions of law. For example, entities cooperating in business without going through corporate formalities are deemed partnerships by default.
By creating examples of voluntary, functional structures, Lex Cryptographia leads traditional law by example rather than waiting for committees to cobble together a new uniform law recommendation based on the old regime. In the U.S., states are regulating digital currencies piecemeal and uniform laws are under development. When a regulation drafting committee convenes, the best ideas regarding the crypto law space should come from those who inhabit it. If Lex Cryptographia has created good models, they will give the drafters of legislation patterns to follow.
Legal practice in a cryptographic space – the decline of the advocate
In a cryptographic legal system, there will be a reduced need for lawyers as paper-pushers, gatekeepers and advocates but the profession is unlikely to disappear altogether. As the line between the practice of law and software-as-a-service blurs, new kinds of legal professionals will evolve. In the U.S. that might mean a shift toward a crypto solicitor/barrister system, where crypto solicitors are paid like software-as-a-service providers for their legal perspective and ability to make things work in the digital world.
Crypto barristers might handle the inevitable interplay between the traditional legal world and the digital. As long as the blockchain continues to touch regulated transactions and humans in general it has a potential of being the subject of litigation. A lawyer entering this space in a transactional role faces a real possibility of ending up in court because the law will have to learn about the blockchain on its own terms, case by case, until it comes to an understanding. There are few lawsuits involving blockchain technology on the books, so when lawyers draft “smart” contracts or wills, they have to think about more than creating functioning code. A lawyer must look at every digital model through the eyes of a judge applying a doctrinal and evidentiary smell test because she may may have to explain how the model works to a court of law. Someone, possibly a digital barrister, is going to have to do it.
Lex Cryptographia contains less room for the advocate as adversary and persuasive spinner of facts. The facts in the blockchain are already known and not disputable. A machine judge cannot be swayed by rhetoric, emotion or politics. Lawyers will have to learn new, collaborative ways to solve problems in a world where formal, pitched battle is impractical. Projects like computationallegalstudies.com are valuable tools for lawyers to merge their experience with digital space. Models for teaching object-oriented English have existed for decades — I learned it in college in 1990. The art of thinking like a lawyer combined with computer science will create new, collaborative ways to advocate in what Primavera envisions as a more cooperative world.
The blockchain will not replace law: it will prompt law’s evolution. Of course there will be things that we cannot anticipate from a legal perspective, but now is the time take care of those things we can foresee in dry code to minimize the chances of the wet code system bugging it up. A stitch in time saves nine. A good contract saves future plans.