Wyoming Blockchain Stampede 2020 | LawCon
September 25, 2020, Wyoming, USA
Wyoming Blockchain Stampede 2020 | LawCon
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Crypto System Governance
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About speaker

Andrew Hinkes
Co-founder & General Counsel at Athena Blockchain

Andrew "Drew" Hinkes, Esq., is a co-founder and General Counsel of Athena Blockchain, a start-up investment bank focused on tokenized securities. Drew was appointed as an adjunct Professor by the NYU Stern Business School and the NYU School of Law, where he co-teaches "Blockchains, Digital Currencies and the Future of the Financial Services Industry."Mr. Hinkes has been quoted and featured in the New York Times, Time Magazine, Barrons, Christian Science Monitor, MIT Technology Review, Bloomberg BNA, Miami Herald, McClatchy’s, and various industry press regarding crypto assets and blockchain technology, and regularly speaks at legal, technology industry, and academic conferences. Previously, Drew was a Partner at Chambers-rated Florida law firm Berger Singerman LLP. Prior to his legal career, Mr. Hinkes worked in technology audit and continuity of business capacities for Citibank and consulted on various technology projects. He holds an A.B. in History from Washington University in St. Louis and a J.D. from the University of Miami.

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About the talk

Wyoming Blockchain Stampede 2020 | LawCon | Andrew Hinkes | 9 25 2020 | 2pm 3pm MT

00:30 Governance and blockchain networks

06:50 Governance of crypto asset networks

10:10 Open source software

14:50 Public network blockchain systems control

20:00 Open source forks

25:35 Corporate governance

30:15 Imposing fiduciary duties on developers of blockchain systems

35:10 Public blockchains

41:13 Cryptosystem governance: ETH

47:15 Current governance approaches

52:56 Legal theory of liability

55:00 Open source license

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Everyone thanks for coming to my talk today for the Wyoming blockchain Stampede. My name is Andrew Hinkes. I'm an attorney with Carlton Fields and it's National boxing practice. I'm an adjunct professor at New York University Stern School of Business and NYU School of Law and excited to talk to you today about governance and blockchain networks. We're going to start on the slides. So I started with your quotes, we collected money and faith in a mathematical framework that street from politics and human error in milliliters. No rules in code. We

trust you quotes from prominent figures and prominent enterprises in the box chain world are Greek quotes for a talk about governance because they suggest a version of reality that perhaps isn't true. We're going to talk a little bit about this meme that blockchains abduction systems are governed by math and that humans don't have any say in their operations through this presentation. We're going to talk a little bit about what the law has to say about governance and what lawyers need to know about the governance of cryptosystems so they can properly and ethically advise their

clients about the systems and so that they can learn to be better prepares for legal services in the cryptocurrency field. The what are we talk about when we talk about governance is the process of interaction and decision-making among the actors in a vault in a collective problem at least the creation of reinforcements or reproduction of social norms institutions. You think a lot about government when we think of governance and government is one offshoot of the idea of governance. It's an organization that has the responsibility and authority to make binding

decisions that apply to a certain geopolitical system typically through the application of laws are rules that have to be followed. And if not, we'll be punished with consequences. I think about politics and government simply as a way by which people dance binding collective decisions and enforceable upon that group. So we're talking about the big picture idea of governance here. Why do we care? Blockchain when from the hobbyist curiosity in 2009 to massive industry and a set of really impactful and important software packages

and structures that are being used or accounted for use in a variety of matters. So we need to understand what box things are how they work and who controls them so we can understand what they're useful for or appropriate to do or what things are appropriate to do with them. There are a several products and services that are being developed on top of blockchains. And therefore if you are building something on top of another technical are you need to understand what is happening on that technical layer would build a house on quicksand you want to understand how to

build a robust system. You need to have a strong foundation and finally, the marketing blockchains in blockchain label systems and products has also relied upon several memes some of which might be true and some of which might be more inspirational or Marketing puffery in order. Be exciting consumer you need to understand the difference and often that difference comes down to governance. Why should lawyers Easterly care about governance will be depending on what kind of lawyer you are the governance of a cryptosystem or a decentralized network system might be very important.

If you are securities are commodities lawyer that's facilitating the issuance of certain products for your customers. You need to understand the underlying Network so that you can assess the risks and advise your clients and how to make appropriate disclosure your intellectual property lawyer to understand the licenses in some of the underlying systems so that you can understand whether a product that's built on top of a blockchain can be licensed in a certain way and whether some art that's been created on top of the blockchain may be patented or whether certain licenses in the

underlying technology. That's Incorporated in that new technology makes it so that the Software may or may not be wholly or partially patent litigator and you want to handle cases involving crypto assets. You need to understand what users can and can't do with systems can and can't do and what sorts of information can be obtained from the system and what sort of remedies can be imposed against a system ultimately if you want to do something to or with a crypto asset system in mitigation you to understand where the power in that system resides.

If your deal where you are engaged in transactional work, you need to understand what representations and warranties can or can't be made about a system and you're going to need to understand the limitations of the system to understand the relationship between the party's 20 deal. If I leave your technology lawyer that likes to work a startup you're advising clients that are innovating on top of existing watching systems. You need to understand how the selection of a certain system may impact development. It's a new business with this new model industry technology.

So we think about governance we didn't think about good or bad governance, but there is no good or bad governance is govern itself is inherently subjective and various times. We thought that monarchies are theocracies or representative Republic swear the best way to govern people and they're still can be disagreement about what is the most effective governing solution we can think about governance by assessing the effectiveness of governance on a spectrum of characteristics and there's a whole bunch of them on the side which essentially are the characteristics of the

the effectiveness of governance and there may or may not be a desire for more transparent or less transparent governance bias may or may not be important in a given system, but there are ways that we can measure the effectiveness of governance and we can look at the characteristics of governance by thinking about a lot of the factors that are listed on the slide. Whether important point is that governance may arise in several different ways governments can be designed and can be coded into a system. It can be arrived at by a contract. It can be pushed down upon

people from a top by law or governance can happen spontaneously can just sort of erupting or develop over time as people think about the way they do things and try to innovate or try to make it better. That way we think about governance of crypto asset networks or public network blockchain. We're thinking about what determines the features and functions of a given system. And so naturally you think about the consensus mechanism, which is what I call the technical control of the system consensus mechanism in pickling for instance

is the set of conditions that needs to occur for the database of transactions that have been completed that we called the blockchain. What do we need to do to update that reflect new transactions? What must be done what form of information needs to be in a message? What do the miners need to do to add messages to blocks? What do the fox me what needs to be done to the Block to verify the block what to do? Need to do to trust a message indicating that a block is verified and so on all these things that I just described to you require some user interaction

But ultimately the rules for those that Things come from the code base enter the codebase can be changed but hypothetically the consensus mechanism can be changed as well. So think about technical control as a function of the consensus mechanism is saying we look to the code. However, the code may not in every situation be able to address every technicality just like in a written contract no contract can address every possible contingency. In certain cases blockchain networks have a drat have encountered crises unintended

consequences or situations that were not anticipated in those circumstances there needs to be political control who can address a crisis and try to solve a problem. We have seen the political control sort of supersede or Trump technical control in situations like the Dow where a smart contract that was built on top of the Syrian encountered a crisis. It was broken and it was being raided by a user and there was a particular concern that the operation of that's our contract would have some negative

repercussions on the interior environment. So certain political actors with India turn community started to agitate for changes to be made zip code in Richwood dresses the problem created by the Dow and so that's an example of where political control can supersede technical control, and of course we can look at the actors that are empowered to do tasks to facilitate transactions. You have the consensus mechanism, but there needs to be a computer's operating for the consensus mechanism to operate it. So you got miners and note operators and they may be able to

exercise circle control because they can decide when they want to update their software or if they want to not accept certain transactions. It's unlikely given the history of the way that these systems operate if it's not impossible if those actors may rise in exercise survive control. All or at least most public network box ratings are based on open-source software and the idea of open source isn't that you can see all the code but that the human-readable code is publicly available to be reviewed and what we talked about open-source think about two different things new

grassroots open-source software, which is self-created self-operated not sponsored voluntary contributions grassroots what you think of when you think of open-source it's a bunch of people. Maybe they don't even know each other working together to develop something. Equally important is to corporate open source, and a great example. That is Red Hat Linux is open-source software, but the development is paid for in guided by a private company. I'm a what's the best open-source software systems was a version of the Unix operating system called Linux

which that project was spearheaded by a gentleman named Linus Torvalds and lionesses law was named after running store balls and what he says insert of advocating for the effectiveness of open source software development. Is that even the Five Alls all bugs are shallow and that means a clever is that you have a variety of people from a variety of backgrounds looking at a problem. They are going to find the problem if enough people are looking at it the bugs will show themselves and that's sort of a rebuke to the idea of a very well-funded very

sophisticated group of people devoted as their main occupation to developing software. I'm so loose for most cryptocurrency systems. Most of them are blockchains are based on open-source software open source software is typically distributed under a licensing agreement. These agreements may or may not restrict certain aspects of what a user or purchaser of that software can do with it. Typically open-source licenses will allow the licensee to redistribute to modify. Sometimes they can sell it.

Sometimes they can improve it but most of these licenses will just claim All rights and responsibilities for the operation of the software and they've essentially say you take this as is where is with no remedies against me the writer for what I've created. Now when we think about cryptosystems and bush are, I mean public network blockchain systems and their system functionality most of these systems prioritize censorship resistance in maintaining immutability. What are these terms mean? What does censorship resistance what is immutability when you hear these

terms when some to censorship resistance, you should spank nobody that keeps me from transacting. When you think indeed ability, you should hear hard to change a transaction in 30 going through because these, unfortunately, our marketing works immutability is a clever and pithy way to say it's hard to overwrite a transaction as long as people can update software then no transaction is ever fully immutable bitcoin has a stellar reputation for its security and fortune

mutability, but I don't think anybody would say that there is no set of circumstances in which a bitcoin transaction could ever be rolled back. Censorship resistance simile is the ability to resist somebody keeping your transaction to go through until when you think about a blockchain that might be counted as censorship resistance in a beautiful thing about anybody stop me from transacting in the circumstance of ethereal and a few other networks. We have seen that the wheel of a group of people can override the censorship resistance quality of the

technical operation of the blockchain again with the crisis with the Dow there was a situation that had not been addressed would have resulted in someone who's considered by many a bad actor siphoning off a tremendous amount of value from other good faith just fence and so a group of people decided that the best thing to do was to roll back a whole bunch of transactions to essentially change the network so that it is afoot. State where the star contract never had existed and allow people to reclaim their assets which functionally rolled

back thousands and thousands of transactions made on the network by that smart contract. So we take a public network blockchains. We should think about who controls them developers can modify update. The code is so in a sense if a network is going to change it's going to be the developers that write the code that change the way that they function, however, not every developer has the ability to propagate where to publish their change in many systems only a subset of developers can adopt a change included in the latest

release of the software and distribute it out. So perhaps it's accord Adela birds that have that control you could think about minors as being in control, since the miners are the actors in many platforms, are in 30 many networks that can add transactions for the miners conspire together to keep a certain type of transaction from being added or to keep certain parties transactions from being approved they met perfectly be able to control the functionality of network operators. They're the ones that keep track of

the database of transactions that we call blockchains. They also might decide that they don't want to accept blocked transactions have been verified by minors if they come from a certain minor or if they come from a certain minor certain location, or if they come from where is Dubois conclude the transaction from certain party. They might be affected by regulation that says you're not allowed to accept a transaction from a certain place or certain user and most importantly the new operators are the ones that decide which version of the codes are going to run Soaker developer by update

software to clean some new features, but it's the new operators who don't want to use that new feature. They may never upload that code and that code improvement or modification that was made by the core developers may not affect at all because it never goes live. Founders of the system sometimes can have that size control. Does nobody know who Satoshi Nakamoto is? So it would be dubious to say that he's exercise any control over Bitcoin at least after he stopped communicating with the world. But as we see with Aetherial founders can sometimes exercise outside control,

sometimes the founders can be subject to a personality where there are comments that can be viewed as Shifting the direction of the project. Strange way exchanges can also have an outsize control on a public network boxing system exchanges are the venues or the intermediaries that facilitate exchanges of one asset for another and unlike in the traditional securities markets. There are not Q-tips or identifiers for a given instrument. So it exchanged can decide what they're going to host or not meeting with are going to allow their users to

trade on the exchange or not and in case of an argument as to whether my version of an asset of your version of an asset is the correct asset or the real asset and exchange might be put in a situation where it makes a decision that drastically influences which network will be considered the real one which may influence the number of resources thrown at the network or supporting the network which way influence security over the network the popularity of the network the financial incentive to support the network and it could ultimately severely

weakened a network and finally social influencers in like exchanges influence which networks are used by whom and went so there are a bunch of different ways in which different actors in sort of the public network watching ecosystem and exert levels of control over those systems and how they function. Okay. We're 20 minutes into this presentation. Why does this matter as long as people are using these systems to convey the value and strains active on each other the governance of systems are critical if you have impeded decision-making that changes the software code you may

find assets becoming unavailable or locked or behaving in a certain way or case of a fork have a potentially be valiant software might not be maintained properly which could expose bugs and not allow. The developers to identify the bugs and handle them quickly can allow 0 days to be discovered and exploited. We had a quick reaction to protect everyone that uses the network in times of crisis. You may get an inefficient response. I can describe that we might also have a no altruistic response meeting a developer or someone who has

power to respond may decide to respond to their benefit and that's the benefit of all users and finally kind of mentioned this before but we'll talk about a head-on here. If there is loggerhead switching users are developers if people can't agree on what to do with the system could for which in many circumstances is not viewed as a positive thing. So, how can we avert is Rex? That's what we should be thinking about. Now. Let's talk a a little bit more about Forex it so keeps mentioning them. If you have a fork is that there's a modification to the code. So that is prospectively or in

the future distinct from the existing could make some network. It operates as a variance from the default assumption that if two different chains emerge the longest chain should govern in a short-chain to review as an orphan to be a bandit. This is something that was built into proof-of-work inherited from Bitcoin Satoshi acknowledge that given that Dozer can be a different place and maybe communicate with heat with each other and with minors at different speeds possible to two different versions of a blockchain record could emerge and the one that has more work put

upon it getting the longest chain should be the one that governs and if you are maintaining a shorter chain that is different than a longer chain, you should discard that and start maintaining a longer chain. In reality, forks don't necessarily the kind of sports that were concerned about don't arise because of technical issues. They sometimes arise because of philosophical issues or intentionally. Sometimes you see that folks want to fork up a system because they want to take advantage of seigniorage is an economics term that describes the

difference in the value of an instrument versus the cost to make it. So if you're a government that issues a dollar and it cost you $0.12 to make a dollar the 88-cent difference is what will cost in Europe and so is the issuer of currency or the issue of an instrument and can be very lucrative to you as the issuer to issue it. If your cost of production is much less than the recognized value. You may also have a situation where there's a project and some of the folks who have been contributing to the project don't like where it's going. They think that's her changes should be made

where they think perhaps the project has been hijacked by a certain charismatic individual that has told everyone that the world should be viewed as a certain way and they disagree so far. It's going to happen to allow for different development pats people might decide that they don't like the way it's going and so they might want to control the direction to project and finally there might be some changes proposed that certain people support network just don't agree with and so those sorts of changes occurred. I would say that you don't agree with change happened in a therein turn classic

control. The direction of the project was likely observed in a Bitcoin cash split NBC also recently soft work in the steam Network, which is come to interesting to think about But what this does is throw into question. What is the network if anybody can change the code so that is not prospectively compatible and Laura a sufficient number of people who are supporting the old codes for the new code. You might have two networks. Both of which can say, I'm the real Network which one's the real Network. Sometimes it's easy. Sometimes it's hard to say you have a big lie and say you Fork

Bitcoin into three different systems each of which has an evening for different functionality in the subway. Yeah, I see you take that one that looks most like the original version and then all the developers change teams from the third one to the first one and start to then modify each of those systems. At a certain point, it becomes difficult to tell which one is the original system where the real system and so it becomes increasingly difficult to figure out what is the authentic version of a system after forks occur in the case of ethereum

classic the forked version or the new version of the modified version was able to keep the original name and the original version was given the classic name for like Coke and Coke Classic but inverted it. So 1 questions are who controls the ticker for Bitcoin unlike other systems, there aren't things like Q-tips that identify the one specific beagle or order industry-recognized name? Who should be responsible for controlling these systems after all should there be any one person who's responsible and if we're deciding some was

responsible? What tool should they use? Should they be able to supersede system functionalities? I can get ability with political choices. Should we be focusing on the community and asking them what they want the system to do. Should we be making technical choices like writing codes that have actors or should we create these systems in a way that really bout to regulation should we could be written so that I can buy with the law? Should we be writing code that specifies what to do in a crisis and if we don't who if anybody is appropriate to respond to these

responders be people that the community of users decides where should they simply be people who are able to exercise power and is the exercise of power itself sufficient authority to exercise power. These questions don't have easy answers either really complicated questions. They are important questions economically, but they're also for the questions philosophically because the best-architected system is still going to run into occasional problems. The good news is that we have literally thousands of years of experience in trying to figure these issues out we call in

the legal of corporate governance. The idea here is that you can organize a legal grand power into fiction the fiction that there's something besides for a bunch of people working together the fiction recognizes that there's a legally distinct entity. But the fiction demands is price fixing requires at the end of the document what it's doing and tell the government about it and it has to pay taxes and he has to disclose what sort of things is going to do and it has to file a report in exchange. The people that created the entity get powers to act through the entity not for

themselves and they get a limitation of liability. So that sounds like a pretty good deal used to be a sort of deal that you had to get by asking The Sovereign now in most countries. It's a relatively Pro-forma thing you file a piece of paper and pay a fee. And while you have to proceed under a legal fiction and so we can look at the various designs that were created in the form of corporate governance in order to try to determine whether some of these governance tools that were created for legal entities to be used to be sort amenities as well in most corporate governance in the

Western World. You have corporations that are similar and Addie's that rely on Directors & officers to function. They are given a specific authority and authority is derived from legislatively created law and interpretations in cases. And so these grants of power allow the enemy to certain legal existence balanced against responsibilities. Like we talked about it over to the entity to its owners and duties over by those that are able to control and guide The Entity to those other As well. It's working very briefly. Look at some fundamental ideas corporate law is that there are managers

typically a board of directors that run the end their agents to the owners were typically called shareholders. They don't do the day by day, but they're responsible for management. The board points officers run the day-to-day operations. Those officers had the same kind of Duty's the board should be informed about the business. They need to do diligence to understand what the company does help with strategizing plan an abortion is involved in major decisions and approves them such as major transactions and board member appointments inside.

There are too few Sherry duties that are really important for us to talk about one of them talked about in this slide is the duty of care. Disc idea is that a board member officer or a director or officer has to make careful informed Decisions by assuming an active role throughout the entire decision-making process. I'm doing this the directors need to assure that they have the required information. They have to actually devote time to reviewing it and get help from experts if necessary. They should rely upon the opinions or reports of experts and they stick a professional confidence

in finding experts or information that they should use when they make decisions for the company. They can't delegate this Duty and they have to keep records of their actions. There's also a press equally important is the duty of loyalty here is that officers have an important role in the operation of the company and they have to be loyal to the company and by extension its stockholders by not putting themselves against the interests of the corporation these sorts of issues come up. When is Raptors on both sides of the transaction or stamps benefit

from the transaction neither interested or if they're not independent meaning that they're beholden to another party with an interest in the transaction and directors can have interest that differs from the stockholders. Sometimes it's the right thing since arises when they have a chance to pay equity in the company or options. They might exercise to get equity in a company. I can see these folks are compensated and obscene benefits. Sometimes when there's a change of control. They can receive payouts. Sometimes you can just come parachutes and they're generally provided with

benefits for their role including identification or insurance issues are the primary weapon is disclosure. Everybody needs to fully disclose when conflicts arise to the board and stockholders. They can you can create procedural safeguards throughout the process to give a transaction in certain cases appoint special committees to handle transactions where certain board member rosters loyalty might be a tad. So people have looked at corporate governance and said boy, the people who support public network watch change. They seem to have a lot of the same

responsibilities and powers. Maybe we should impose duties upon them as well. It's been some suggestion that developers and go to operators may exercise discretion or have power and impacts other users of the system who don't have the same sort of power and that means people who are using the assets that made on operating a note or mine may not be writing code. They have an interest they may not have an easy way to express those interest putting these duties and play protect consumers who rely on them. And otherwise like recourse this again, these the users were talking about it may be an

effective way to mitigate some of the risk involved in using the system to my knees better products and invites for others to mitigate risk by doing things like getting professional certification so that the world knows that is competent to do what they do or perhaps getting insurance. As you might imagine there are also very significant arguments against imposing fiduciary duties on various actors in a typical blockchain ecosystem require there to do these makes the cost to be a developer go up. So it might disincentivize people to volunteer for these projects and does it inhibit

Innovation increase the costs and other people have said look we have contracts. The license is the only thing that I care about it says I take no responsibility. Some people have said that I have the right to write whatever I want. All I'm doing is writing code and I have free speech rights, so you can't make me and so the question becomes if we did it if we undertook a measure like imposing fiduciary duties on coders do we get people who decide that they're going to remain anonymous and not publicize their involvement. So we get more Satoshi's How to get people who decide that

they're going to stay in the shadows and use their power for nefarious purposes. And so I call that more than x that is a reference to Alexander Vinnik who was reportedly the ringleader behind BTC-e Venture that was allegedly used to launder a lot of proceeds of the Enoch’s hack. I don't think we should think about is what are cryptosystems and what are they being used for are they different than other networks? And what kind of networks are these really in a manner of speaking cryptocurrency net worth watching networks are being used in a certain respect as a replacement

for certain trusted third parties in many cases are used as a replacement for a conditional financial markets infrastructure upon which we transact value and next charities trade Tulsa being used for things that are traditionally centralized control by the trust at their parties like the government property records. It's also being used to hold and transact assets for third parties with their parties might have rights think medical records or identity records and all these systems are already subject to considerable regulation. How are the laws on privacy at this point those who hold

assets and information with third-parties a subjective data breach recording and industry standards. If not regulations require things that add more trust insurance and audits. So let's think about what block is like look like if they were treated and governed by weight at financial markets infrastructure is treated government, and I've picked up a couple of the Principal Financial Market infrastructure, and we should look at a couple of these and figure out how the current state of affairs of blockchains kind of really Matt's here. Principal to fix the governance

that basically says that he needs to have a clear transparent governance approach to the safety and efficiency of the FMI and supports the stability of the broader. Financial system and sports other welded public considerations third principle it says that they're she sound risk management frameworks that should manage legal credit liquidity operational know the risks principal 17 vs word operational risk is an FM. I should identify possible sources of operational risk and mitigate their impact systems policies procedures and controls. The system should have a high degree of

security and operational reliability and adequate scalable capacity management should aim for timely recovery of operations in the event of a wide-scale or major destruction. If you know this industry at all, you probably have figured out that there's nothing like this in place for most public watching that if it just doesn't exist. They are focused on the consensus mechanism and minimal extrinsic governance. Although there are some systems that have started to explore with a certain class of governance which are or were thinking about taking a look at the ethos with these public

blockchains. This is different. They look at censorship resistance and maintenance of the consensus mechanism as Paramount. There's little concern in their operation for things like the needle is or regulatory risk, although certain activities that are adjacent to blockchains like selling tokens. Obviously at this point are subject to significant regulatory risk. And I kind of was a little sloppy there with cyber-security because while there isn't necessarily a lot of concern for cybersecurity the networks themselves. Chili Bitcoin is incredibly robust and incredibly secure because of

the efforts that are put in by those who support the network, so it's not as though there in cybersecurity. But where you start to see cybersecurity risk for the invade are as soon as you get to the things that are built around the blockchain interact with the blockchain security software intermediaries, like there is little to no see resolution transparency in these systems. They once again just point to the consensus mechanism and say on this system. This is the Arbiter of what is and is not in use blockchain with bitcoin this example of the bitcoin blockchain is dispositive of

who controls what generally these systems do not have documented procedures policies or practices. Generally, you get a license agreement and it's about it. So the real question that we all need to consider and that is lawyers need to think about a bison or clients on days do the benefits of this system just by the acceptance of what appears to be dramatically higher levels of operational risk. And of course, as I lose you before the block change themselves are just the beginning and generally, they've been pretty robust. But as soon as secondary software starts to be

built on top of it around these systems, it gets infinitely more complicated you have seen wallets for getting hacked through famously. Hey sister parody that operates on the ethereum network was hacked something along the lines of $209 worth of assets were frozen where their users could not obtain them and there was no remedy or the parody folks, unlike the remedy that was glad for her. We're using the Dow our contract changes can be hacked my Cox, for example, Mary famously was the first Great Exchange hack there probably been a hundred since then maybe V

battery a little bit and of course, there's an opportunity that Bitcoin could have said, okay, we're going to rewrite all the transactions that went into and out of the mailbox wallets and give everybody their assets back, but there was what are their assets that flow unblock shaves that rely on assumptions not made on black kids, sometimes they rely on software to do things and sometimes they rely on people to do things. So there are intermediaries that are critical to certain assets which create additional risk and you take all these Assets in all the secondary software

packages in all of this additional infrastructure being built around blockchains. And then you inject them in into the institutionalized Financial world. You start propagating this risk throughout a whole bunch of other parts of our economy and it can seem a little scary. But let's look at to a certain degree how these systems actually operate start with the granddaddy of them all Bitcoin and if you like the picture of the house on fire, this is for the way that I think about Bitcoin. It's anarchy with a little bit of direction. There are open discussions of

proposals to learn how to change or improve Bitcoin. There is a discussion that is conducted until there appears to be some sort of consensus that they want to implement a certain type of change and then if there's enough of a consensus that changed might make its way to one of a group of core developers who are developers that are given commit access and if the developer that has to commit access to the site they like to change then the change to be committed to the code and might be included in the next release of the Bitcoin code as you can probably imagine. This might make it very difficult

to react quickly and to excisions since there is no orderly process in know or have sex Dated Caesar for doing so until it's unclear. What kind of checks and balances really exist given that it's for the Anarchy. It's not really clear what it is that might have caused one person to change their mind and start of the clear who can be pointed to as the person with responsibility. Cortez Robinson given a lot of power. They are the ones that essentially determine whether there has been consensus sufficient. Spider

change has been roughly agreed upon and these core developers change over time. Is there an instances core developers have been kicked out and lost their key control of the software developers and other folks involved in the development process due to political differences. And so the question becomes are those developers that would due process who should be involved in identifying who can develop a buddy had the control should be open to everybody who should be involved in the process of identifying core developers.

Should core developers be compensated. Some people say that Captain City that makes them a partial and make some subjects of the else's agenda While others and appears to be somebody's agenda. Then you have some issues with the complex, but others simply say unicorn developers lot of work. Maybe these folks shouldn't have to have side jobs. So even in something pretty rough around the edges and anarchic there still has to be some sort of order. And we have seen that there are some issues here in the way. Pick one operates. We have moved to

consider is cerium. Probably the second most popular of the public network watching systems. Etherium a rose live it differently than Bitcoin did it was not released into the world by a pseudo-anonymous creator the 14th at work on a theorem is very well-known and they crowd funded the development of their system by selling tokens and created by a foundation that foundation engaged in some advocacy on behalf of the system. Although he rather wants a so we'll see now there's that there's a cult of personality around vital butter

and his statements about Athyrium tend to have some very significant impact on the community of aetherial users He Still Remains influential developer and thought leader with respect to Howard Fearon to develop over time. An interesting week there previously doubted that you could use it to build the Unstoppable application you screenshot here in the slide of an older front page of the aetherial website that has been taken down since the Arium bailout of the Dow at work since the

aetherial fork to rescue the users from the Dow smart contract pack. Until some of the questions around etherium are remained pretty significant. They talked about Unstoppable applications, but we had a very significant application up stopped. Who is it at really decided on the response to the attack? Was it the foundation? Was it tall? Was it some sort of amorphous public opinion or a poll? Was it pressure for the outside? Nobody knows but there was code written for a fork.

There was a brief poll taken that Nancy supported using the code that was written that actually in the fork and it happened the way it led to a group of a small but vocal group of dissenters side in that they disagreed with all of the things that were occurring not uploading the patch and causing split and those checkers are the ones that we call turn classic now. And so this way to so many questions what happens in the next emergency. Should they be handled the same way? Should they be handled differently who

should decide they be handled at all go by the track record suggests that subsequent hacks attacks or crises at basically not been handled on Talk back parody before the parody attack or the pear hack. Remington remediated. I'm driving to the top of another system called EOS and EOS Embraces. The idea that there is a consensus mechanism and then there is additional governance that has to happen independently of the consensus mechanism. He described governance is the process by which the people of the community

reach consensus on subjective matters of collective action that cannot be captured entirely by the algorithm execute their decisions and alter the government's rules themselves by a constitutional amendment. They conceptualize the idea of a constitution. Collaboratively arrived at by those who use the network that governs the way that those people are going to offer it initially. They created a governing body to handle disputes call the EEOC arbitration forum the validations or block producers who work kind of like the miners in the notes in the System

supposed to be according to the rulings of the arbitration forum and their role was to execute with the arbitration forum's found after it handled a dispute and at launch, there was a provisional constitutional adapter. Almost immediately. There was a problem. There were seven individuals whose accounts were stolen on the network the 21 block producers unanimously voted among themselves freeze the accounts of the affected persons without submitting it to the formal procedures of the arbitration Forum after the freeze went into

place the block producers filed and speak against themselves to have their actions reviewed by the arbitration Forum. This is sort of like the declaratory judgment action. Judge. Tell me that what I did is, okay. And the actions were ratified by an emergency arbitration forum arbitrator and the arbitration order is probably unlike any arbitration order you've ever seen but ignoring the form the logic and reasoning here is also probably a little different than anything you're familiar with the emergency measures were ratified and it says that the logic and reasoning for this

order will be posted at a later date. Yes, it has some challenges in its governance day. I believe her on the fourth iteration of their constitution at one point. They allowed members of the community to update their constitution. I'm on a Google Document and used to be able to click this link and go on and see people actively conducting discussions in the comments and offering up their viewpoints on certain governance, and I don't need to pick on etherium Oreos necessarily. I don't know that anything that they're doing is right

or wrong or anything if bitcoin is doing is right or wrong, but we're seeing here is a remarkable variety of approaches inform some in some ways by the situations that have Arisen to crises that they've had to deal with but it's I think it's instructive to see the various ways in which different actors in different systems have attempted to work through some of these problems. We've we also should look at a private Society lesser-known system that take an interesting approach Kodiak red and he credits essentially a version of Bitcoin proof of work with an additional proof of stake element

associated with it and uses proof of work to add transactions and it uses proof of stake to conduct some extrinsic voting for governance tasks. If you only credit or if you minded credit you can stake some of your cheek redness smart contract in exchange for the receipt of Stanley Cup tickets. If your ticket is selected and you have given the power to vote on governance batters, you can vote on proposed changes to the governance to the sorry to the consensus rules and you can also vote to approve the work of proof of work miners and the voting

proposals for consensus rules are developed by an MD called color. Taya Ippolito is an entity that I need a subset of the block rewards to work on improving protocol and development entity, in this case, is an incorporated weekly address go and be out though. I've been given to understand at some point. There was an effort made to take this out to eat and to try to make it more decentralized and what secret is doing is essentially not allowing. It's often governance to impact it's on-chain consensus mechanism allowing participants in the

system to have some say to me this seems like a pretty measured approach and an interesting experiment. You could also look at all these systems and think maybe they're all doing this wrong. All these systems rely on certain assumptions that arise at game theory and are based on the concept that everybody involved can act in their self-interest decentralization and proof of work is necessary to 51%. Anybody has control of the network. They can start to block transactions and potentially put in their transactions. They could even start to they had a

a significant amount of power reverse transaction. All the functionality of these systems are based upon certain assumptions of benevolent action by those involved miners are going to buy to get the asset because they think the assets valuable they can take actions to support the value of the asset and therefore the thing that they get for mining is viable. And minors and have incentives to devote increasing amounts of horsepower or hash power. I should say the network because the stronger than at work the less likely it is that it gets hacked which means that the

asset was a better chance of not being subject to really negative press and we'll have time if they retain its value and stronger than that work in the more secure is more likely it's going to be valuable and so on and so on but it doesn't necessarily always work is Racine networks attacked on various occasions for proof of stake. Are steak essentially is you commit certain resources and you are given the opportunity under one of the few different procedures to be the validator that a certain block and takes the reward, however,

proof of stake equated meaning the more you have the asset the better chance you have of being selected to Adblock. You could eventually force people into things that are you going to sit there any incentive eyes behavior that looks like an oligopoly or a car tell which may or may not be the best thing for the network either and finally it might actually in certain instances a more lucrative to attack a network rather than support it. There's this website here crypto 51. An app that by a certain point would tell you the price that it costs to rent.

Cloud computing resources to 51% attack network. And if you can do that while also shorting the asset on a platform that allows for shorting you might be able to make a bunch of money. Let's just anybody do this, but what I'm suggesting is there may be some problems in the inheritance assumptions in the governance that have been embraced by a lot of different public network cryptosystems that say the consensus mechanism can take care of everything. It may be that people do end up being a problem here as well. Let's just back to one of the

arguments that talks about offered which is maybe the developers the ones who should be liable about 2 years ago commissioner Quintenz of the CFTC released a statement talking about central developer liability for code and he talked about how to code light in Subway's be complicit or do something that might be viewed as violating see if he's if he sees rules and it could be that the FCC might want to enforce again software code commissioner Quinn 10 suggested was that if a code if a developer releases code that they could reasonably foresee when

they create it would be used by US person in a way that violates the FTC regulations those developers might be viewed as aiding and abetting violations of the CFTC. This statement was not very well received by the crypto community and by the development community at large. Tapered around the community was rightfully pretty upset by this they wondered at what point developing software was going to become a crime. And soak the theory of liability that was suggested by commissioner Quintenz is collating and abetting a violation of CFTC law

from his statement. He said it requires a violation of the CEA which is a commodity exchange act that the defendant developer know the wrongdoing and intentionally assisted the wrongdoer. We've got some case law that lays out of sight a different test says that's fine in aiding and abetting a violation of CFTC law the parties have charged or so claimed against needs to know the principles of intent to commit a violation of the act and it's intended for the violation and take some act in furtherance of the principles and checked it. It almost looks a little bit like a

conspiracy sort of tests was dating and Anna's wedding in this case, but it requires a lot of knowledge. But if you go back to a pretend said the developer recently four seats, so we see this idea of reasonably foreseeing modifying what are specific intent sort of allegations to think about how adorable this test is in the context of already released code suppose that you are to argue by analogy a chemical manufacturer has been making Chemical X for 20 years and it has some sort of industrial application and it's used all the time

then one day somebody figures out that chemical X can be used to enrich a drug to make a new designer drug. Is it reasonably foreseeable that the drug could be created from these chemicals probably not. It certainly doesn't rise to the level of intent, but reasonably 4C can be very blurry. Another example of a party is Craig a piece of code that accomplishes something very simple like an escrow contract. It's entirely possible that that party did not expect the Astro contract to be used as part of something that might be considered to be a

crime. So you might end up with instances of unintended aiding and abetting. They're also arguments about the open-source license protecting developers. What is either open source license that says you take my code as a column and I make no warranties or representations? I would have rather I want to do is think about license agreement is a contract and contract lines of parties that contract and in some cases that he intended or sometimes. I'd intended third-party better third party beneficiary's however these agreements don't by the regulator and enforcing agency or law

enforcement. So you might say Visa V your user that we don't make any wrecks in warranties, but that may or may not matter if somebody who wants to investigate that code for wrongdoing. Also, you can't disclose in compliance with the law. If I'm in the contract for instance a parent and a child can't between the two of them decide that the driving age in the State of Florida is 10 years a property owner in Demolition Company can't decide between themselves that 3 a.m. Is an appropriate time to demolish a 20-story building in violation of a zoning ordinance or a

requirement to have learned a private agreement can't necessarily excuse compliance with Securities lock my baseball to the license agreement is not the most compelling argument against there being liability there. You also have heard the argument that dev I can write whatever I want. I have free speech and yes, you do have Free Speech, but you're asking the wrong question here whether code is or is not speech does not contend is not issue attention at this point coding is generally regarded as speech but it's not that you have

freedom of speech is speech that we think about is freedom for the government to tell us from 33 from the government telling us we can't say a thing. It does is not an unconditional SEC vs. Pacifica Foundation. 1978 Supreme Court ruled that indecent speech may be limited. Obviously, we've all heard about also should a Chinese fire in a theater and causing a panic in Warriors vs Rockets racism. You saw that time place and manner restrictions on speech our constitution appropriate as well. As a better example of how speech is not always

protected Elon Musk made this famous tweet about taking Tesla private at 4:20. And yes, he had every right to make that tree but it didn't mean that that tweet didn't violate the law as we saw the SEC believe that they did and they brought an enforcement action against him for making this tweet it every right to is free to make this to meet at the saying the words in the street outside the Twitter audience, but it didn't mean that the SEC didn't do it is a violation for So in summary, where does this leave us? We should all remember that cryptocurrencies in blockchain systems are

in many respects very much still an experiment. Most of them require humans to operate almost all of them still require humans for ongoing maintenance on crises does happen and despite the best consensus mechanism. There are usually humans that need to exercise judgment to handle those prices. Financial market infrastructure is usually mass-production software that is subject to Sayreville quality assurance. The blockchains aren't built that way or chains are not generally created Microbus commercial products in especially lately with the Advent of snowfall so-called EFI

systems were some of the most successful products recently talked about how they test their code in production week. We can't think about these systems as being the same as a private commercially tested for Malik you a product. We also need to think about the relative fluency of the users of these systems in the relevant the necessary knowledge to assess them and evaluate the most consumers cannot read code. Even for the consumers that can read code. It may not be apparent to them. Everything that's going on by

reviewing a given smart contract people rely upon humans to explain the operation of certain systems so that they can understand what software is supposed to do and even when information is provided it is often ignored by people that have been gleefully investing funds into defy systems that are poorly documented or that are emblazoned with representations. Like this is a game. This is an experiment. This is not tested code to not invest the reality is that people use these systems if they think it's beneficial even if

they quote should know Ebony's facts logical that companies basic shelter with established companies that are active in this market. It may be easier to convince a board of directors to invest with a random consulting firm or a variable computer technology company rather than a startup of people who say that they don't even bother to test the smart contracts. What is clear is that if you are a lawyer in advising clients in this space there needs to be clear and accurate communication of the shared responsibility of those who Implement software and

those who use software crypto still remains very much a caveat emptor world. Thank you to everyone who decided to attend this talk. Thank you to the folks at the Wyoming blockchain Stampede in the wire hackathon for having me thanks to all the other wonderful panelist and speakers who came if anybody needs to reach me. I'm available on Twitter at Propel for Thanks everybody and has an amazing rest of the while the hackathon and Wyoming blockchain Stampede. Take care.

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