Does the Blockchain fit well into the American legal system?

by on December 31, 2015 at 12:54 am in Uncategorized | Permalink

Tim Swanson has a new and interesting paper on that and related issues, here is part of the abstract:

…a ledger that does not provide a one-to-one correspondence between what the endogenous network says andwhat the exogenous jurisprudence says about the status of a financial contract is a network that cannot exist without the legacy settlement framework that it seeks to replace, for the latter will continue remain the authoritative record of ownership. In practice, the censorship-resistant aspect of “Blockchain 2.0” is impractical as a solution for financial settlements in cash, securities and other off-chain property titles.

I would put it this way.  Next time you sign a contract with a corporation, try making them the following offer.  You will pay two percent more (or receive two percent less), but if a prespecified set of seventeen yaks, distributed at various points around the globe, all sneeze at exactly the same time, and can be photographed with a time stamp when doing so, the corporation is to send you ten million dollars no further questions asked.  By the way, they could sneeze in tandem three years from now and still you would get the money.

See how far you get.  See if it matters whether they accept your argument that this is a very low probability event.

This isn’t just conformity bias, as corporations strongly prefer not leaving such risks open, even if the risk is extremely small.  They like closing out a deal with finality.  But in the world of the Blockchain, the 51 percent always has the last say, for better or worse.

Here is a Reddit thread on the paper.

1 XVO December 31, 2015 at 12:59 am

51% on the block chain or 1 judge or 12 jurors…which is more likely…

2 Adrian Ratnapala December 31, 2015 at 8:27 am

I guess many would simply prefer the judge-and-juror type risk.

But for people with such a preference, a bank could simply offer a service of “closing out the deal” with an entry in their own ledgers (which is already the status quo), but with the extra twist that they are betting a ceratin bitcoin transaction will succeed some time in the next few hours.

3 TD December 31, 2015 at 9:22 am

The 1 judge and 12 jurors never go away even when you use the blockchain. You’re just adding seventeen yaks *in addition to* the ever present possibility of 1 judge and 12 jurors sneezing at once.

4 Derek December 31, 2015 at 9:31 am

What does it cost to enforce a contract in the US legal system? From start to sheriff seizing assets, in say a parnership breakdown or a contract dispute?

5 The Original D December 31, 2015 at 3:11 pm


6 Mustafa December 31, 2015 at 1:19 am

Actually there are all kinds of ridiculous clauses embedded in large complex contracts. Corporations either carry that risk implicitly or insure it. The hurdle is the deal has to be large enough for the approvals to be given.

7 guest December 31, 2015 at 2:01 am

nice reply Mustafa

8 guest December 31, 2015 at 2:11 am

Apropos to nothing, Marx and Freud were so insane or proto, like really? These guys were talking about such petty shit and turning it into a whirlwind, where are we? Is this what we’re up against because of ancient 3rd-8th Century village politics dominate our discussion. If it’s so? Let’s give em some enlightenment measures. After all this is just one small planet until we get off of here. And if everything is going to shit, aka, who can show the most depravity, aren’t we more equipped to wreck the whole show better than some junk from back when they were drinking camel piss?

9 Tom December 31, 2015 at 7:22 am

Let’s make a nice tasty word salad.

10 John December 31, 2015 at 2:13 am

This addresses blockchain proxy transactions, but even bitcoins don’t work with the US legal system. They are considered chattels rather than currency and so are subject to replevin even from innocent third parties.

11 Jim December 31, 2015 at 4:09 am

Another anti Bitcoin post by Tyler.

Long for the day when a crypto currency like Bitcoin anonymously crowd funds Jim Bells market.

12 Gochujang December 31, 2015 at 9:09 am

Bitcoin can triumph simply by being needed. Cruder things like PayPal and Stripe were needed, and therefore succeeded.

Who will need Bitcoin in 2016? Or is it simply a dream that someone will?

13 Cowboydroid January 3, 2016 at 3:04 am

Bitcoin’s demand will increase once demand for the established monetary system falls. That point may be soon, or it may be some time in the future. But that point will come, because all fiat currencies fail.

14 John December 31, 2015 at 4:32 pm

Bitcoins aren’t anonymous. On the contrary.

15 tjamesjones December 31, 2015 at 5:23 am

is there anything specific here about the US legal system? Doesn’t the same problem exist under UK law or Australian law? Isn’t the point ‘established legal systems’ versions of the truth can’t and won’t be replaced by Blockchains ?

16 Cowboydroid January 3, 2016 at 3:07 am

The bigger point is that established legal systems can and will be replaced by the blockchain.

17 Kronrod December 31, 2015 at 5:39 am

If the US is indeed a poor jurisdiction for issuing blockchain-based assets as Swanson argues, why not simply issue them from a more business-friendly and open economy? Using jurisdictions such as the Cayman Islands or Luxembourg for regulatory reasons is very common in the financial sector. Completely ignoring the offshore option makes that paper appear unfounded. Considering that Swanson works for the R3 consortium, which tries to build a competitor to the Bitcoin blockchain, Swanson’s bias does not surprise.

18 rayward December 31, 2015 at 6:15 am

Currency: the fact or quality of being generally accepted or in use. Historically, money was currency (and, hence, accepted as an intermediary instrument to facilitate the purchase or trade of goods between unrelated parties) if but only if it could be exchanged for something considered inherently valuable such as gold or silver. Today, money isn’t currency in that sense – it isn’t exchangeable for something considered inherently valuable. Rather, money is generally accepted (i.e., currency) because the central bank will manage the supply of it in such a way that it’s value (as a medium of exchange) will be stable (stable because the supply actually reflects the purchase or trade of goods). As I understand it, the blockchain in the context of Bitcoin is to provide the illusion that its supply (and therefore its value) is “managed” in a way that it actually reflects the purchase or trade of goods. The advantage of the blockchain is that it is (supposedly) transparent, unlike the machinations of the central bank. What Bitcoin represents is libertarianism run amok, the view that governments including central banks can’t be trusted to manage the supply of money (and, hence, preserve its value as “currency”), and is the alternative to a gold or silver standard. Governments including central banks have become fair game for attack among certain politicians. What they risk is a loss of confidence, not only in the government but the “currency”. That it is considered acceptable to question the nation’s “currency” reflects the lunacy of the time.

19 JB December 31, 2015 at 10:26 am


Currency is an item of relatively stable value that people will accept for payment. There is nothing inherent in any particular material that makes it such. Gold got to be currency in ancient times because it’s relatively rare, pretty, doesn’t tarnish, and there were no industrial uses for it.

Modern fiat money is currency because (a) you have to have it to pay taxes, and (b) its value is relatively stable so since you already have some for (a) you might as well use it for everything else. To replace fiat money, you’d need something sufficiently superior in (b) to overcome the transaction costs of converting it to tax-acceptable form, which, since governments actively manage the money supply to optimize (b), is unlikely. The only situation where that actually happens is where the government doesn’t control its own currency (Greece), or where it is utterly incompetent (Zimbabwe). Those situations are unstable and tend to neither last long nor spread, so an alternative currency will have limited appeal as long as that remains the case.

20 The Original D December 31, 2015 at 3:17 pm

That it is considered acceptable to question the nation’s “currency” reflects the lunacy of the time.

Hasn’t this always been the case? Weimar Germany, John Law and the Banque Generale? Various panics in the US in the 1800s?

21 Eli Dourado December 31, 2015 at 8:19 am

I think it’s an open question whether the blockchain or the legal system is more like the seventeen yaks. Which provides more certainty or even fairness? Which will as the technology matures? Which is easier to grok: the Satoshi whitepaper or the US code + CFR + all those common law precedents? Corporations make huge investments in their legal departments. If a more modest investment in their blockchain departments became a substitute for all those lawyers, I expect they would shrug and switch to blockchains.

22 Eli Dourado December 31, 2015 at 8:24 am

I might add, go through all these questions once more for the legal system of Kazakhstan.

23 Gochujang December 31, 2015 at 9:17 am

If I am a big guy in Kazakhstan I settle in Swiss banks. If I am a little guy, I settle in gold (or US dollars). Problem solved.

24 The Original D December 31, 2015 at 3:12 pm

Aren’t/weren’t some derivatives like this?

25 Silas Barta December 31, 2015 at 6:20 pm

Is the blockchain 50% + 1 failure insurable?

26 Chris DeRose January 5, 2016 at 11:26 am

Blockchains are for the underserviced. So, if you’re being serviced by the American legal – there’s probably no efficiency to be found in the blockchain. Smart Contracts will likely work very well in heavily regulated industries such gambling web sites, for which access to the American legal system is problematic.

Comments on this entry are closed.

Previous post:

Next post: