Deconstructing 'Decentralization': Exploring the Core Claim of Cryptoassets

A core claimed feature of cryptoassets is that the systems that create them are ‘decentralized.’ This is said make them more resilient and to eliminate the need to trust in a central party. Indeed, the feature of ‘decentralization’ appears to now be relevant to the legal treatment of cryptoassets, as the SEC recently highlighted the decentralization of Ethereum and Bitcoin as a key factor in whether ether and bitcoin should be treated as securities. In this piece, I explore what ‘decentralization’ means in public blockchain networks, focusing on the fundamental actors in the system: software developers, transaction processors (miners), and nodes. I offer a theory of why ‘decentralization’ might be relevant from a legal perspective and analyze the implications of using such a fluid concept as a basis for legal determinations.

Transcript

1. Deconstructing ‘Decentralization’: Exploring the Core Claim of Cryptoassets Angela Walch @angela_walch Professor of Law St. Mary’s University School of Law Research Fellow UCL Centre for Blockchain Technologies Cryptoassets & The Law London School of Economics 4 Sept. 2018 1 UCL CENTRE FOR BLOCKCHAIN TECHNOLOGIES
2. How We’ll Proceed • Why ‘Decentralization’ is relevant to law now. • How do we know what ‘decentralized’ means? • Looking for power/agency. • Implications for law. • Closing reflections. 4 September 2018 A. Walch, Cryptoassets & The Law 2
3. SEC on ‘Decentralization’ [Speech by Commissioner Hinman, June 14, 2018] • “If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. • [W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.” 4 September 2018 A. Walch, Cryptoassets & The Law 3
4. SEC on ‘Decentralization’ [Speech by Commissioner Hinman, June 14, 2018] • “[W]hen I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value. • [B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions….[A]s with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. • Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise.” 4 September 2018 A. Walch, Cryptoassets & The Law 4
5. How do we know what ‘Decentralized’ means? • Possible Sources of Meaning. – Law? Political Theory? – Computer Science? Distributed Systems? – Network theory? • How is it used in the space? • What does SEC think? • Network • “Seeing” central people who are “key” to success 4 September 2018 A. Walch, Cryptoassets & The Law 5
6. Hints about what SEC thinks it means [Speech by Commissioner Hinman, June 14, 2018] • As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful • “[W]hen I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprisew. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. • [B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions…. • Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise.” 4 September 2018 A. Walch, Cryptoassets & The Law 6
7. Where’s the Power? • Is power dispersed? • Enough that there’s no agents/humans to tie responsibilities/accountability to? • Where do we look? What are we not seeing? – Mining concentration – Pools? – Software Development – Core devs? Others? • Moving Target • On a spectrum rather than binary. (CCAF) 4 September 2018 A. Walch, Cryptoassets & The Law 7
8. Implications for Law • Law is about channeling and constraining power/agency. • If ‘sufficiently decentralized’ equals no power/agency, are we saying law leaves the people in the system alone? • Not just about securities law – implications for commodities law, finance, company law. • Is ‘sufficiently decentralized’ the new, improved, ‘corporate veil’? • How will law treat fluidity of decentralization status? Where is threshold? Periodic measurement? 4 September 2018 A. Walch, Cryptoassets & The Law 8
9. Reflections • If ‘decentralization’ is relevant as a legal category, need to figure out what it means. • Different potential sources of meaning. • SEC appears to be using it as code for lack of agency/power. (But, are they right?) • If this is the case, and law may be opting out if a cryptocurrency can meet this standard, big implications across many fields of law. • Is this making new entities law through the back door? • Broader implications for finance and other systems? 4 September 2018 A. Walch, Cryptoassets & The Law 9
10. Angela Walch angelawalch.com Twitter: @angela_walch awalch@stmarytx.edu UCL CENTRE FOR BLOCKCHAIN TECHNOLOGIES Thank you!