UPDATE 2018-05-31: This blog post has been revised and extended into an article: Legal Personality for Blockchains, DAOs and Smart Contracts (PDF), published by RTDF, 1-2018, p. 39, Corporate Finance and Capital Markets Review, Thomson Reuters Transactive.
On March 2, 2018, the Blockchain Malta Association hosted an event entitled “Reflections on the DLT Regulation.” A number of lawyers and industry experts were invited to debate the consultation document issued by the Government of Malta and wherein the country’s intention to regulate the sector was presented. The consultation document proposed three new bills, which cover a broad range of issues.
The second of the three bills is about “Technology Arrangements and Service Providers” (TAS Bill). It is understood that the term “technology arrangement” was chosen to leave space in the future to cover not only Blockchain and Distributed Ledger Technologies, but also other “arrangements” such as Artificial Intelligence and Internet of Things.
In the consultation document there is a short but very significant section; it is section “5.3 Legal Personality of Technology Arrangements” which reads:
Whilst some Technology Arrangements are owned by a corporate structure, other Technology Arrangements may not have such an ownership structure. This could result in the possibility of transacting on and with the Technology Arrangement without a proper ‘legal person’ as counterparty. The proposed TAS Bill will try to provide a solution to such a scenario and it is being proposed that certain Technology Arrangements will be able to register with the Registrar for Legal Persons in Malta and acquire legal personality upon satisfaction of a number of requirements.
Out of the many ideas proposed in the consultation document, this one alone is the most controversial; the least understood; and also the one that could have the deepest impact on the shaping of the Blockchain industry in Malta, and possibly globally too.
Legal Personality of Technology Arrangements
What characterizes these “Technology Arrangements” is that they might all have a degree of autonomy whereby, when interacting with human counterparts, they might produce damages of various kinds. The troublesome question that the proposed bill is trying to address, is: who is responsible for such damages.
Just like Isaac Asimov imagined the Three Laws of Robotics to limit the kind of actions that autonomous robots could take against human counterparts, the proposed bill suggest a similar approach: namely to recognize legal personality to technology arrangements, thereby conferring rights and duties to such technology arrangements.
The Three Laws of Robotics
- A robot may not injure a human being or, through inaction, allow a human being to come to harm.
- A robot must obey orders given it by human beings except where such orders would conflict with the First Law.
- A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.
For example, under the proposed bill, a DAO (Decentralized Autonomous Organization) could become a “legal entity,” with both rights and duties.
Fear of the Artificial “Person”
When presenting the idea of recognizing legal personality to a Technology Arrangement, it is easy to fall victim of the fear of extending a qualification that is typical of humans to other “things” that do not appear human at all. If it can help, this is not about creating an artificial legal “persona,” but reasoning about the technology that has come about and become aware that it is beneficial to society as a whole to recognize that a Technology Arrangement can indeed have a legal personality.
Of course, technology as such is not a “person.” Yet the kind of technology we are examining (Blockchains, Smart Contracts, and DAOs) are unquestionably of such nature that they autonomously control a set of assets. Now, how is that different from, say a corporation? Every known legal entity is an artificial artifact that is defined by the assets over which it can unilaterally and autonomously exercise command and power.
If assets that are controlled and organized in arbitrarily complex ways by an artificial legal entity, which was created for the benefit and for the convenience of society to deal with it, what prevents recognizing that the controlling entity can actually be a software artifact that acts autonomously and exercises unilateral power over those assets?
If we can accept that the issue is not that about dehumanizing people, but about the convenience and benefit for society to be able to deal with the autonomous nature of these new software artifacts, then recognizing the legal personality of a Technology Arrangement is less intimidating. Extending yet again the artificiality that is created by law, is still a good idea; as it has been for thousands of years. After all, law and order are necessary for a civilized society; even when that society necessarily becomes receptive to new “entities” as these autonomous software artifacts.
The Nearest Person Principle
During the lively discussion at the event, several lawyers expressed the opinion that giving legal personality to a technology arrangement would not be a good idea. The example was given of self-driving, autonomous cars. If such an artifact produced any sort of damage, ultimate resort could be claimed by applying the principle of “The Nearest Person.” In other words, the manufacturer of the autonomous car would be held liable.
The Difference between Autonomous Cars and DAOs
What seems to be missing in putting forth the principle of The Nearest Person, is that in the context of a DAO, such a person might not exist at all. A self-driving, autonomous vehicle is a physical object, which is created by a well known manufacturer. A DAO on the other hand, can exist without there being a known creator.
The most prominent example of The Nearest Person principle not being applicable, is the Bitcoin network itself, which can be considered as a DAO because it effectively replaces a number of intermediaries (like clearing and settlement houses) that were previously human. What has to be observed, is that the original creator of the the Bitcoin network, known as Satoshi Nakamoto is unknown. Even willing to apply the principle of The Nearest Person, in practice it cannot be done.
But the cases for this are even more intricate than this example.
Why the Nearest Person Principle is not always Applicable
If a self-driving, autonomous vehicle goes rogue, in the worse case scenario the vehicle can literally be taken down – physically. In the case of a DAO, “taking down” is not an option. Once a DAO is released onto a Blockchain – in virtue of Blockchains being uncensorable, and providing irrevocable permanence – that very DAO simply cannot be “taken down.” (The only option, as is often stated, would be to “switch off the Internet” – which clearly would produce even greater damage.)
So far, the Bitcoin network seems to have functioned flawlessly. So the need to chase Satoshi Nakamoto has not come into being. Yet it is possible to imagine scenarios where more sophisticated DAOs, constructed on top of Smart Contracts and which provide much more complex functionality, might actually have defects and flaws.
In fact, in the instance of The DAO, a bug in the Smart Contract code created a vulnerability that was exploited by an attacker, who could claim control over $50M. (How that case eventually unfolded is another story altogether; and while it would be worthy of a Hollywood film, we won’t be concerned with its intricacies here.)
Now, in the case of The DAO, the people behind its creation where well known, unlike the case of Satoshi Nakamoto and the Bitcoin network. The creators of The DAO conducted all operations transparently and publicly. In that case, the principle of The Nearest Person could possibly be applicable.
Yet it is possible to envision that similarly complex Smart Contract arrangements could be released in the same manner as the Bitcoin network was originally released. In such a case, there would be no people to “go after.” Who is liable in such an instance? The closest “thing” that resembles a person would be the Smart Contract arrangement itself. So, why not consider it as a Legal Person in its own right?
Why Legal Personality is Necessary
If a technology arrangement, like a DAO exhibits behaviour that until before its existence was in the exclusive capacity of existing legal person with rights and duties, it stands to reason that the counterparties of any interactions (communications, services, transactions) provided by a DAO would expect the same kind of provisions and guarantees offered by an equivalent legal person.
Case of Anonymous Designers
To reiterate the earlier example: the Bitcoin network offers the same guarantees of execution that prior to its existence were in the remit of clearing and settlement houses, and the transactions it executes will have irrevocable finality.
The functionality of the Bitcoin network is very simple, when compared to the kind of functionality that can be offered by second or third generation blockchains, which support extensive Smart Contract applications, and in particular, the realization of sophisticated DAOs. In these instances, the kind of interactions (communications, services, transactions) provided can be much more complex.
Accordingly, the expectations of counterparties will be much higher – to the point that they might expect to be able to have legal recourse if those expectations are not fulfilled. And this is where it is evident that, in the absence of a Nearest Person, because that person has opted to remain anonymous, legal recourse must be made available, but with respect to some other person. A person that the current laws do not identify or recognize.
Case of Consumer Protection
The first reason why such a new legal personality is necessary, is to better provide for consumer protection. It is a general expectation: relevant consumer rights (and other legal issues) presume the existence of the personality of an actor – a person, or a “thing” as it will become evident – who/which is obliged to comply to certain rules.
One way to provide for consumer protection is to require that the Technology Arrangement exhibits certain expected qualities, attributes or even behaviour – like offering securities, guarantees or insurance, that could cover possible damage claims.
Thus the designers of any Technology Arrangement who would find it agreeable for their creation to acquire a legal personality, would have to code and implement the required behaviour. Since this would imply creating or extending Smart Contracts that are part of the Technology Arrangement as such, the required behaviour would become as permanent as the Technology Arrangement itself, once it is deployed on a blockchain. In other words, the required behaviour would become a permanent behaviour of the Technology Arrangement itself, even if the designer remains anonymous or disappears.
Case of Designer Protection
Given the general reliance of Blockchain technologies on open source software, it is to be expected that a number of Technology Arrangements on Blockchains might themselves be realized as open source projects. Open source projects are often inspired by ideals; or start off as experiments, that then take on a life of their own. Open source projects are “forked” and give rise to a multitude of diverse and generative variants and variations.
Often, the initial behaviour of a piece of software can be reused in other later variations, providing the foundation for completely different functionality and behaviour, that were not in the intent or even in the understanding of the original designer. The principle of The Nearest Person would reach such designers, even though they might not have had any active role in the creation of the Technology Arrangement subject to scrutiny, because maybe the later designers have chosen to remain anonymous, or have disappeared. In this instance, providing a legal personality of the Technology Arrangement would effectively shield such remote (and innocent) designers from liability claims on the basis of the principle of The Nearest Person.
Note that this is particularly relevant when the original designers are individuals who might have contributed open source projects as a means of expression; and not corporations that would still provide a limitation of liability to their owners and managers.
In this sense, the provision would protect the vibrant community of innovators that operate in the open source world, and in particular when the software or technology being developed has the features of or can be used to build a Technology Arrangement. In other words, this is a matter of protecting innovation capacity, and not discourage software enthusiasts and professional from continuing developing open source software in the field of Blockchains.
Case of Extinction of Designers
While when a designer is anonymous, it is easy to see that providing legal personality to the Technology Arrangement created by the designer effectively makes some sense, it is harder to realize that it also makes sense when the designer is well known.
Even in this case the principle of The Nearest Person is insufficient.
Because a Technology Arrangement on a Blockchain gains the attributes of anything that is stored on a Blockchain. In particular, it acquires the attribute of permanency.
Individuals and corporations come and go. People die. Companies go bankrupt or close down. If those people or companies were the designers, and were The Nearest Person, who is The Nearest Person once the designers naturally disappear?
The question is relevant, because a Technology Arrangement on the Blockchain will survive the extinction of its designer – and, as we have seen, it cannot be stopped or taken down.
Therefore, even if there is a known designer today, it still makes sense to recognize the legal personality of the Technology Arrangement; and to have the designer (as mentioned earlier) implement those behaviours that the Technology Arrangement would need to have in order to be recognized as a Legal Person.
Case of Technology Arrangement Protection
It is clear that businesses will be built around Blockchain technologies, and that they will seek to generate profits. Therefore, businesses will somehow be considered the owners of the Technology Arrangements that they create and deploy to a Blockchain. Yet, as we saw above, businesses come and go. If for whatever reason a business has to face bankruptcy, their assets do not become immune from seizure just because they take the form of a Technology Arrangement on a Blockchain.
However due to the autonomy of the Technology Arrangement, it might have evolved as to supporting use cases that go beyond the actual scope of accountability/liability of the original designer business. The issue that is raised is: how can one guarantee the continued legal usage of the Technology Arrangement by other third parties in such a case of extend use cases?
It becomes a matter of protecting potentially millions of people who trust the Technology Arrangement (the Bitcoin network, to give a clear example), and to let them continue to exercise that trust, rather than trusting the designer; designer who might go bankrupt.
The Technology Arrangement needs to be able to stand on its own, from a legal point of view. (From a technical point of view it already does. As a matter of fact, to complicate matters, seizure of a Technology Arrangement would be impossible due to the nature of Blockchain technologies and cryptography. Though this aspect is irrelevant with respect to protecting the Technology Arrangement from a legal point of view as well, in addition to what is already afforded by the technology as such.)
The assets managed by the Technology Arrangement must not be caught in any bankruptcy process that hits the original designer business. There might be provisions to pass on the ownership of the entity to someone else; but more easily this can be managed by acknowledging the Technology Arrangement as a separate legal entity, with its own legal personality. The indirect consequence is also that the original designer business can no longer be considered as the owner of the Technology Arrangement and of the assets controlled by the Technology Arrangement; notwithstanding that the business is the creator of the Technology Arrangement. The role of the designer business would have to change, and more aptly qualified as a fiduciary rather than as a owner of the Technology Arrangement.
Case of Evolving Legislation
As everything, legislation evolves and changes. However the dynamics of changing legislation has the potential of clashing with pre-existing Technology Arrangements. We must always keep in mind, that a Technology Arrangement of the kind we are concerned about exists on a Blockchain. Therefore, once it has been deployed, it cannot be changed and it will exist forever.
It might be the case that a new law renders illegal the behaviour of a pre-existing Technology Arrangement, with no possibility of remediation. The (newly) illegal behaviour will always be there, no matter what (and, of course, this is compounded by the earlier considerations that there might not be any known nearest person). The new law would be materially ineffective. The frightening conclusion is that the evolution of law suddenly becomes ineffective.
In order to preserve the possibility of law to evolve, something new must be conceived of. The section of the consultation document cited at the beginning here, “certain Technology Arrangements will be able to […] acquire legal personality upon satisfaction of a number of requirements.”
Such requirements could be, for instance and among others, the effective presence of certain minimum acceptable “good” behaviour in order for the Technology Arrangement to be considered a “good” (virtual) citizen of the jurisdiction. Such behaviours could be defined similarly to Asimov’s Three Laws of Robotics. They would have universal validity and be of such nature that no matter how future laws could evolve, the Technology Arrangement could still be considered a “good” (enough) and (sufficiently) “lawful” (virtual) citizen.
Yet, the legislator will have to take into account the nature of the new medium of Blockchains when promulgating new laws. As an example, consider EU’s “right to be forgotten:” how would it have been shaped, had Blockchain technologies been widely known and used before the drafting of such rules?
Case of Levels of Compliance
While one of the position statements of the original cypherpunk movement (which was the breeding ground wherein the Bitcoin and Blockchain technologies were conceived of) is to deplore regulation on cryptography, one needs to come to terms with the fact that an autonomous Technology Arrangement needs to be a “good” citizen if its services intend to benefit society at large.
Irresponsible proposals, that are often put forth in regulatory circles, ask for the creation of backdoors and other technical mechanisms for weakening the cryptographic techniques. Regulation of cryptography is a very short-sighted proposition, and fails to understand how it undermines all applications of cryptography.
It becomes imperative to create space for a Technology Arrangement’s good citizenship, without weakening cryptography. Since legal personality is conferred to a Technology Arrangement once it exhibits certain desired qualities, attributes, features and behaviours, it is also conceivable to accept different degrees of such. Since these qualities, attributes, features and behaviours are nothing other than further software, they can be programmed as the designer might see best fit in order to give its Technology Arrangement the appropriate degree of compliance.
At the entry level, a Technology Arrangement would simply cater for consumer protection and basic regulatory compliance. At the highest level of compliance (possibly required for applications that are of critical nature in terms of safety or national interests) the behavior would allow for the forces of law to intervene and actually clamp down the Technology Arrangement – yet without compromising any cryptographic integrity – based, for instance, on multi-signature schemes, wherein the competent authorities’ signature needs to be conceded in order for the Technology Arrangement to function; as it could be revoked in case of any sort of crisis or emergency.
With the notion of levels of compliance, space is given both for open development, as well as the realization of governance mechanisms for safety critical Technology Arrangements. In practice, the provision would recognize different types of legal personalities of Technology Arrangements, just like there are different types of legal personalities in current law (individuals, corporations, foundations, trusts, NGOs, institutions, etc.).
Note that this provision would also further support the previous case of evolving legislation, as the Technology Arrangements at the highest level of compliance could be rendered ineffectual should new rules render their instances illegal.
Case of Supporting Forking
In the world of open source software development the possibility of a forking a project is extremely valuable. It is one of the cornerstone of the evolution of new ideas in open source projects.
In a very similar way, even Blockchains can fork, but with much more far reaching – and often very controversial – consequences than ordinary software forks. Whether one agrees or disagrees with Blockchain forks, they do happen; and hence need to be considered with respect to the legal environment that is being enabled through our concepts.
Malta has already a number of legal structures based on the idea of segregated cells to create separation of liability. For example, Malta recognizes protected cell companies (PCC) and securitisation cell companies (SCC).
In the case of a Blockchain fork which might affect a Technology Arrangement, the Technology Arrangement will exist in two distinct instances, each of which might have its own set of qualities, attributes, features and behaviours, which might depend on the core protocol that is subject to the technical forking. In these instances it must be possible to extract a cell from an existing legal entity (on the original branch) and reconstitute a new legal entity (on the spawn branch). The new entity will be self-standing, with its own, distinct legal personality.
With such a provision, the evolution of Blockchain technologies is ensured with respect to the open source practice of forking, while avoiding the risk of putting the two entities at a legal stand still, or worse, in conflict of ownership over existing assets.
Case of Jurisdiction of Choice
Since a Technology Arrangement is or exists on a Blockchain, which is global in nature, it is very tricky to determine its jurisdiction: it is not located in any specific country. By implementing the required qualities, attributes, features and behaviors in order to acquire legal personality in Malta, a Technology Arrangement would effectively choose its home jurisdiction, and offer its services to the international community on the basis of international trade laws.
By having a legal personality of its own, the Technology Arrangement would not need to have a legal representative. Though the proposed bills also provides for designers to voluntarily register with the Malta Digital Innovation Authority, that should not be a limiting factor for a Technology Arrangement to be able to choose Malta as its home jurisdiction. The only condition is that it implements the required qualities, attributes, features and behaviors; and it is ultimately the designer’s own free choice whether to implement those or not.
Blockchain technologies provide a new medium which is global and uncensorable, wherein autonomous software entities can come into existence and never be taken out. The autonomy and permanency of such entities are a novelty never seen before; and since they will exhibit behaviour and provide interactions (communications, services, transactions) with humans, there is a challenge in how those behaviour and interactions can happen in an acceptable and lawful way.
The autonomy and permanence demolishes the principle of The Nearest Person. The only reasonable way to promote the proliferation of “good” (virtual) entity-citizens is to make provision for their legal personality, and use game theoretic incentives for their creators to want to bestow their creations with “good” and lawful behaviours.
The legal personality can be given to qualities, attributes, features and behaviours that Technology Arrangements would be required to exhibit in order to gain the recognition. Such qualities, attributes, features and behaviours would be the basis for regulatory compliance, liability issues, consumer protection, taxation, continuity, etc..
The intent is to create legal certainty and an environment within which both the business creating the Technology Arrangements and the Technology Arrangements themselves can thrive. For good or bad, certainty of law is better than no rule at all, even if it is not the best. A weak, innovative and untested rule, is better than no rule; because it can always be improved.
Thanks to Dr. Max Ganado for providing feedback on an early draft of this piece, and for numerous exchanges during the last couple of years, during which these ideas were developed.