Review Summary †Cloud Crypto Land. [SSRN] Edmund Schuster (London School of Economics († Hot Topics accept, abstract & review summary to journal)
Paper summaries from the reviewers: “This paper discusses blockchain technology from a legal perspective, and presents an argument that smart contracts are intrinsically incompatible with the legal system. Going further, it is posited that any attempt to address this legal incompatibility will negate the advantages of smart contracts. The argument largely hinges on the idea that it is not possible in computer code to capture all possible outcomes, and for this reason law has developed to allow for uncertainty and malleability.”
“This paper argues that ultimately every blockchain will face a choice between being legal, i.e., in synchronization with the legal system of some jurisdiction, or else contenting itself with the lack of such synchronization, i.e., enforcing rules that may be viewed as arbitrary or even illegal in one or more existing jurisdictions. The former case amounts to a "government backdoor" which defeats the purpose of blockchain and decentralization; and the latter case gives rise to a system of contracts that are neither smart, nor true contracts in the legal sense, and thus useless. Therefore, even if blockchain technology is more widely used in future, it will not disrupt the existing legal order, rendering many use cases related to "crypto-assets" and property ownership ineffectual.”
Comments on the strength of the paper: “The author does an excellent job of tying together diverse strands of literature, in particular historical jurisprudence (largely European) and modern crypto-legal inquiry, while neatly avoiding the hype, hyperbole, and hubris that surround “blockchain”. Its argument is rational and grounded in serious legal theory and scholarship.”
“This paper offers a nice counterpoint to a very common standpoint, namely that the success and proliferation of blockchain technology is inevitable and unstoppable. On the other hand, progress can be thought of as akin to the Spanish Inquisition. In the limit, nobody escapes it, even lawyers.”
Critiques: “The paper's argument is entirely theoretical and ignores actual, on-the-ground use cases of blockchain technology today on the part of thousands (if not millions) of people across many jurisdictions. These everyday users of crypto-assets have no grounding in, and likely don't put much faith in, legal theory, and choose to store and transact some portion of their wealth in these assets; some effort must be made to reconcile theory with this observable reality.”
“There are some shortcomings in the author´s claims around the efficiency of centralized and distributed systems, and in particular the idea that centralized systems are more efficient than distributed ones. We would like to see much more substantive details and examples to instantiate this. It would also help to clarify what exactly is meant by efficiency here.”
“With respect to double spending, and message ordering - the fundamental issue here is the Fischer consensus problem (Impossibility of Distributed Consensus with One Faulty Process, Fischer, Lynch, Paterson). The problem for the argument in this paper, is that Fischer consensus applies to all communicating systems - including human ones. Banks do consequently have to deal with the double spending problem, and traditionally dealt with it by delaying credits to accounts - in the UK this is for at least five days. Modern computer systems have significantly improved performance in this area, to the point that it is far less visible. But similar issues lurk elsewhere, interbank lending suffers from a race condition, that can and has been exploited - Keynes provides an example in Theory of Money and Prices from the early 20th century, where London banks published their holdings on different days to allow cash to be moved around the system to satisfy reserve requirements.”
“The claim in 3.2.1 that a distributed system is inevitably less efficient than a centralized one, is not technically correct (Gupta and Kamar, Capacity of Wireless Networks, 2000), with respect to a key aspect of any distributed systems, which is scaling. Summarizing a complex set of issues, the reality of all database systems at scale, regardless of who is running them, is that they have to navigate a delicate balance of distributing the information they hold over multiple individual systems, each of which compartmentalizes a subset of the data. The same is true for the human organizations that run them. If we take the land registry as an example, historically and today, it is distributed over offices in the major cities - there is not a single centralized office in London, with a very large queue in front of it. The technical advance of blockchain is to provide synchronized, consistent distributed access and update mechanisms to a centralized database - but as the author correctly observes, at far too high an energy cost, and with a de facto very limited scaling ability.”
“Viewed through the lens of modern legal scholarship, it is indeed easy to "write off" smart contracts and other blockchain-related ideas and technology as alegal, illegal, or otherwise not up to the task of adequately reflecting the complexities and ambiguities that our present legal system is designed to handle. Nevertheless, the continued existence - and large market capitalization - of Bitcoin, other blockchain networks and "crypto-assets" is proof that, in spite of this theoretical limitation, many humans today see great value in blockchain technology and the alternative "legal order" that it manifests. Indeed, many or even most of the users of networks like Bitcoin have little to no knowledge of legal theory, but this does not prevent them from transacting on the network or choosing to store some portion of their wealth on it; on the contrary, the fact that the explicit "property law regime" of Bitcoin is expressible, and understandable, to types such as programmers in computer code is one of its selling points.”
“As observed in the paper, law is a human construct, and it adapts over time, and to assume that it will not be able adapt to technology, seems self contradictory. The paper would benefit from a much more rigorous discussion of the practicalities of the law, with a couple of actual examples. From a scientific perspective, a proof that this is actually impossible could be grounded by showing that a very simple actual legal contract simply cannot be implemented in computer code, and showing how this can be extended to a larger set of more complex examples.”
“Some discussion of blockchain’s legal advantages would be appropriate, since all technological change tends to hinge on a balance of factors. From a legal perspective, and this has already been taken advantage of - see Silk Road et. al. - blockchain does offer a completely transparent, immutable and auditable transaction trail - that this may well not be something that everybody needs is understood - there will inevitably be parties that do regard it as compelling. Immutability is more than can be said for many of the technologies that are currently accepted without challenge in court, for example, digital photography and video. While it is correct to say that blockchain does not provide new capabilities, it does provide a new, and arguable technically superior (if we overlook the scaling issues, and implicit requirement for extraterrestrial power sources) solution. Existing methods are cumbersome, expensive, and not actually - which is overlooked - generally available. Recourse to the legal system is typically extremely expensive, especially for individuals and small companies, legal resolutions can take years, if they are achieved at all. Members of the ruling and inheriting class seem prone to overlooking this. Law is currently also suffering from serious scaling problems, as it is being challenged by the complexity of the modern economic and financial system, to the point where equally questionable (in comparison to cryptocurrency) financial activities are simply not being prosecuted. (Compare and contrast the number of prosecutions for the S&L crisis to those accompanying the 2000 crash and of course, 2008.) The ultimate attraction of blockchain and similar technologies is that they offer the potential, indeed it remains to be seen whether it can actually be realized. It is far from certain that will be the case in their current form, of extending such facilities to be more generally available - just as the digital camera has for portraits.”
“The paper would be made stronger by a more nuanced exploration of this question: even if blockchain fails to ever fully "synchronize" with the "wet code" of an existing legal jurisdiction, and even if "dry code" smart contracts never exhibit the flexibility of their wet code cousins, aren't there still many interesting use cases and many scenarios where such tools have merit?”
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