Summary
Panel 1: Adaptation Strategies in the Era of Blockchain Technology
at
The George Washington Law Review’s Vol. 92 Symposium:
Legally Disruptive Emerging Technologies
Summary authored by Luis Hernandez.
The first panel of The George Washington Law Review’s Volume 92 Symposium, “Adaption Strategies in the Era of Blockchain Technology,” was moderated by Professor J.W. Verret, Associate Professor of Law, George Mason University Antonin Scalia Law School. The panel featured Professor Yuliya Guseva, Professor of Law, Rutgers Law School; Dr. Thomas D. Grant, Visiting Fellow, George Washington University Law School; Dr. Morshed Mannan, Postdoctoral Research Fellow, BlockchainGov ERC Project, Robert Schuman Centre for Advanced Studies, European University Institute; and Professor Carla L. Reyes, Associate Professor of Law, Southern Methodist University Dedman School of Law. Professor Verret briefly introduced the panelists and provided each with 20 minutes.
Dr. Grant opened his remarks by introducing LITSAT—a collaborative project that explores international trade and security—involving several colleagues, including F. Scott Kieff, a patent lawyer, Joseph Manning, a historian at Yale, and Troy Paredes, who served on the US Securities and Exchange Commission. The project is within the framework of an initiative on leadership in international trade and security from antiquity to the present. Dr. Grant addressed various themes, including the tension between intellectual property and antitrust, the importance of considering security aspects in the blockchain context, and the challenges posed to institutions by changing technology. He subsequently delved into the history of property rights, emphasizing that property regimes have a long history and that property is not a new concept. Highlighting the role of property as a means of communication and exchange, he drew parallels between property regimes in different regions and their impact on geopolitics. For example, Dr. Grant juxtaposed the significance of machine learning in law and how it represents a shift from deductive reasoning to inductive reasoning, with the legal realism movement in the late 19th century. Clarity in property regimes, he argued, thus facilitates communication and interactions. He also discussed the concept of endogeneity, the need for new institutions to have a relationship with the people they serve, and the potential pitfalls of instituting reforms that are out of touch with the population. Dr. Grant addressed the benefits and challenges of norm communities and emphasized the importance of open and interactive communication among individuals with diverse ideas. Lastly, he concluded by encouraging students and the GW community to engage with him and welcomed further discussions.
Professor Verret subsequently posed a question to the panelist as to whether cryptocurrencies can coexist with traditional institutions like the state, law, and legal theory, or if these institutions will attempt to either eliminate or fundamentally change the nature of cryptocurrencies, erasing their unique characteristics. In response, Dr. Grant acknowledged the resilience of states and their ability to adapt over time. He points out that decentralization, a key feature of cryptocurrencies, can be seen as a form of information control. However, he raises concerns about the lack of transparency in decentralized systems and suggests that there may be skepticism about their ability to challenge the enduring presence of states.
Professor Guseva discussed the role of blockchain in creating an institutional infrastructure for financial markets. She emphasized that blockchain technology goes beyond disrupting traditional banking and capital markets; it also serves as a platform for transactions, enabling the transfer of value based on preset conditions. Professor Guseva highlighted the importance of analyzing blockchain as an institution that accommodates both markets and firms, particularly in the context of financial markets. She pointed out that the existing intermediaries and legacy risks faced by traditional markets also apply to blockchain-based markets. She discussed the need for regulatory oversight in the cryptocurrency space and proposed the idea of self-regulatory organizations (SROs) as a regulatory framework for centralized exchanges. However, she acknowledged that the decentralized nature of blockchain, including decentralized exchanges (Dex’s), presents challenges for regulatory enforcement due to their international and borderless nature. Professor Guseva addressed the role of private litigation, including class actions, in providing information and deterrence in the crypto space. However, she noted that decentralized structures and international aspects make it challenging for private litigation to be effective. In short, without the two regulatory helpers, Professor Guseva concluded that regulators are on their own.
Professor Verret asked whether private money, central to cryptocurrencies like Bitcoin, can survive with its identity intact or be affected by her thesis. Specifically, does the role of private litigation in dealing with Dex’s and whether their inherent features could protect them from state efforts to undermine crypto. Prof. Guseva suggested that cryptocurrencies and state-backed digital currencies, like stablecoins and CBDCs, can coexist and even learn from each other, citing historical examples. However, she remains uncertain about their future relationship.
Dr. Mannan provided a comprehensive overview of the implications of blockchain technology for the rule of law. He introduced himself and his co-authors, highlighting their diverse expertise, and emphasized the relevance of their paper considering recent events like the FTX scandal and various blockchain-related lawsuits. Dr. Mannan distinguished between blockchain technology and the Internet, stressing the need to understand the rule of code within a global, pluralist, and polycentric legal framework. He discussed various regulatory approaches, from Lawrence Lessig’s modes of regulation to the concept of regulation via governance. Dr. Mannan underscored the unique features of blockchain technology, such as tamper resistance, transparency, and pseudonymity, while also addressing the challenges of regulating blockchain, including issues related to money laundering, illicit content, and contract law. He argued that the rule of code and the rule of law can coexist within a polycentric legal system, and he advocated for a regulatory approach through governance, exemplified by the voluntary upgrades in the Ethereum network based on changing social norms and environmental concerns. Dr. Mannan concluded by relating to Dr. Grant’s point about norm communities that can respond to changing social norms like climate change.
Professor Verret expressed concerns about the erosion of the rule of law in the United States, citing the Tornado Cash sanction as an example. He asked whether the rule by law might eventually overpower the rule of code, with the ongoing processing of Tornado Cash transactions on the Ethereum network serving as a battleground for this struggle. In response, Dr. Mannan expressed that governance scholars consider competition as a form of governance, particularly in the context of the Tornado Cash sanction. He discussed fluctuations in validator behavior influenced by concerns over legitimacy and the potential for regulatory competition. Ultimately, Dr. Mannan expressed optimism that this competition would continue, potentially moving offshore given the transnational nature of the activities.
Professor Reyes discussed the failures of intermediaries in the cryptocurrency industry in 2022 and the inaccurate claims made in public discourse and by policymakers in response to recent cryptocurrency and blockchain failures. She argued that private law offers a disintermediated approach involving more stakeholders than public law and provided examples of regulatory enforcement actions that target individuals and organizations that are not intermediaries, which undermines the legitimacy of law. Professor Reyes suggested that the legal system needs to respond creatively to adapt to decentralization and disintermediation. She explained that holding a token does not give a person any rights to remuneration or equity stake, and questioned how having a property interest in a smart contract makes one part of an organization for having a supposed property interest in a unilateral offer for service. The lack of intermediaries in decentralized software creates issues with enforcing regulations and mistrust in the judicial process, and Professor Reyes predicted that attempts to force centralization will only push the industry towards deeper decentralization. She suggested a radical rethinking of the lawmaking process that takes a more private law-making approach and works with communities to build social norm-based solutions into technology.
Professor Verret asked whether cryptocurrencies could maintain their decentralized nature, serve as a store of value, and enable the right to code as a form of freedom of speech. He expressed concern about the current state of decentralization in many projects such as DeFi protocols relying on Chainlink’s centralized control. He asked if cryptocurrencies could withstand state-level threats and whether they need to improve their decentralization to do so. First, Professor Reyes questioned the idea that private cryptocurrencies can function without legal oversight, emphasizing the role of the law in recognizing tokens as property and criticizing lawmakers for their reliance on intermediaries. Second, Professor Reyes sees the crypto space moving toward increased decentralization, which she welcomes. However, she notes that this may create challenges in safeguarding certain crypto assets, emphasizing the need for more decentralization to improve privacy, security, and regulatory creativity.
Professor Verret opened the floor to questions from the audience. The first questions concerned the differences between Z Cash and Tornado Cash, reconciling allegations that founders used venture capital funds for web hosting despite the protocol’s decentralization, and whether developers should be exempt from liability for hackers’ actions. Professor Verret responded that the sanction imposed on Tornado Cash was arguably beyond what OFAC’s governing statute allows. The sanction targeted coders who were not closely associated, and the governance tokens within Tornado Cash did not genuinely govern the protocol. Tornado Cash’s decentralized nature made it challenging to impose sanctions effectively. Sanctioning an entire blockchain like Z Cash, which is even more decentralized, would be a significant stretch of authority and beyond the questionable stretching that occurred in the Tornado Cash case. He suggests that OFAC’s decision to sanction Tornado Cash was primarily politically motivated and acknowledges a potential weakness in the decision from a legal standpoint. Professor Reyes added her concern for protecting open-source software. She analogized targeting open-source software developers for the actions of users as akin to arresting Linux developers for the activities conducted on a computer running their software—finding such actions to be unjust.
The second question concerned the challenge of holding individuals accountable in decentralized networks when they increasingly turn to secrecy coins and blockchains with enhanced anonymity, due to concerns about the potential for misuse in decentralized systems, especially regarding illicit activities such as money laundering and terrorist financing. Professor Reyes responded that she desires cryptocurrency technology to be subject to similar rules as cash, rejecting the notion that technology should be regarded differently. Professor Verret agreed. Dr. Mannan pointed out the tendency to regulate cryptocurrency technology similarly to bearer instruments and potentially regulate it out of existence due to its technological nature. Yet many advocates find it prudent to view cryptocurrency as an analog to cash. Professor Guseva agreed. She highlighted the greater transparency in value transfers with Bitcoin, as evidenced by the Department of Justice’s successful prosecutions and Bitcoin seizures, which makes it more practical than transferring large sums of cash. Professor Reyes added that the FBI has been seizing Bitcoin since 2010 and auctioned it back off. Professor Guseva expressed that cryptocurrency price increases benefitted the government. Moreover, Know Your Customer (KYC) rules by the industry, even in centralized settings, where such rules can be encoded, allow for whitelisting of specific addresses and marking others as potentially criminal, underscore the versatility of technology in this regard. Professor Reyes mentioned a little-discussed feature of Tornado Cash—to be addressed in her forthcoming paper—which allows users to demonstrate the cleanliness of the funds they sent through the mixer by producing a report that proves the source of the funds, like the process of proving the source of money when buying a house.
The third question drew parallels between the regulatory and social reforms of the Biden and Trump administrations and those attempted by the Iranian and Russian regimes before their falls, asking whether the U.S. government is at risk of a collapse akin to those governments in the near future. Dr. Grant rejected the notion that the U.S. government is at risk of a collapse similar to the Russian and Iranian regimes. He cautioned against overly simplistic analogies and suggested that current Western challenges, including those in the United States, do not reach the magnitude of past historical crises. While acknowledging the need to consider worst-case scenarios, Dr. Grant maintained that resilience is a defining feature of Western systems.
The fourth question concerned the challenge of defining crypto assets, given differing views within the government—like the SEC, IRS, and judges—that view it as an investment contract, ordinary property, or currency. Professor Reyes explained that “crypto assets” serve as an umbrella term, encompassing categories such as tokens, native cryptocurrencies, and non-native cryptographic tokens, each with distinct legal implications. She suggested reading her article in the William and Mary Law Review for a more detailed exploration. Professor Verret emphasized the challenge of distinguishing legitimate crypto projects from fraudulent ones and preferred projects with substantial development teams, typically with at least 100 active contributors. Professor Guseva recommended reviewing the White House digital asset strategy, highlighting that regulatory agencies often use terms like “digital asset” and “crypto asset” interchangeably. She also suggested watching John Oliver’s Bitconnect segment. Professor Reyes pointed out that “digital assets” can be broadly defined, even including something like a Facebook page, as recognized in state law, while the term “crypto asset” signifies a digital asset with cryptographic elements, which she found unhelpful and technically inaccurate. She stressed the importance of precise terminology for effective communication with clients and developers. Dr. Grant discussed the impact of regulatory definitions on the industry and the potential for “definition creep.” Lastly, Dr. Mannan recommended the Internet Policy Review’s Glossary for Decentralized Techno-Social Systems as a resource.