CESC2020: The Law and Economics of Blockchain

2020 Ford F150. Alright, thanks for joining us fastidious. See this year, I'm not in person but remotely as is the case around the world at the moment. Unfortunately, I'm an economics professor at the University of New South Wales after spending about a dick head in the US. And I'm going to present to you to die of paper with a nuke. Milani, who's a former colleague of mine at the University of Chicago and it's a bit of an unusual paper for this kind of talk any sense, because it's a survey paper about a relatively nice and or emerging literature on the Lauren economics of blockchain.

But it's going to provide an overview of a number of different areas of law and how they are grappling with. If you like the economics of blood kind and distributed Ledger technology is the starting point for this and I don't need to press this point to, how do I expect we received? The Orient is that block shine or jlt has Really wide range of commercial and practical applications and that's becoming clearer and clearer. The time that also creates opportunities and challenges for a number of legal doctrines, that was set up an established. Without those,

we have this technology being in mind, for obvious reasons. And as I said a few minutes ago, these talks paste on a full coming Piper. We should be coming out next year, in the annual review of Laura and social sciences. And we want to look at a number of different stuff fields of Lola and think about how they adapt will need to adapt adapting to blockchain and how designers of technology that utilizes. Might want to be mindful of various legal Doctrine. Suck our overarching

perspective is that legal rules, create economic incentives to govern behavior in economic activity in which our economy has had on Wales. Free interested in what form and what level of economic activity takes place as a result of that. And, and width of those legal rules and institutions can be designed he in a better and more effective way to totally, two more more economic output of playing catch-up a little bit into some of this stuff is very much Emoji.

Now, I'm not going to provide references too many papers during the talk, but obviously the actual paper itself is going to be as a, as a Survivor is going to be deleted with, you know, a hundred old references, so they'll be contained there. I'm going to cover a few different areas of low as I, as I just mentioned. So the first is blockchain in the Rules of Evidence, which is in itself, a building block for thinking about the implications of blockchain for another number of all the areas of law. The second is to think about Bluff China. As a new

Contracting technology, potentially a superior in some ways, Contracting technology. And what the implications of that in particular fernald, the very, very important literature on the boundary of the phone thing is to think about tokenization, ico's and some of the issues to do with Securities Law around that we could save ourselves. A lot of practical attention that leads to a related topic which is thinking about tax law in the context of De Otay. And then lost to move a little further afield. But overarching an important areas of the Pinole

Nearest voting, an election law and thinking, not only a bad mobile voting voting, you own utilizing blockchain technology. Some of the broader area around security and election law that a very important. And obviously in the United States, with a very consequential election coming up, not too far away. And in the context of covid-19 with voting and present in the universe, which one physical presence involved, it is dangerous and potentially impossible in a lot of circumstances. That's kind of increased interest for these residents. And

the last one is thinking about digital currencies and I'll just touch on that really briefly. You know, there are people who are far more expert in that than I, but there is any sort of interesting issues there that have Regulatory Agencies around. The world are grappling with thinking about the potential for digital currencies to have an impact on the wider than a regular life. Some starting off with both China and the rules of evidence of what should be a fairly on controversial statement is the blockchain tracks fact. Important in threshold question, is whether those

fast are admissible in a court of law, okay? And if they, if they are not, that's going to be very different implications for, for instance, what can be contracted on that is a nice. I are admissible in a court of law in the United States and I apologize that even though I'm recording this in Australia Rand am an Australian. This is a rally US Century Coral. So a few things beside that other jurisdictions. But so, did you ask for a blanket exemption, for the nus Centric up front. Unknown, testimonial evidence,

has to be able to authenticate the documents in the lie. And that implies that one has to show that I blocked and even he's, he's authentic. Another rule under the federal Rules of Evidence, sometimes called the best evidence rule, which says he has to provide the best available evidence, okay? That's going to be interpreted as being original evidence. Okay? So there's a real question about way. What kind of evidence he's original evidence or not? A big fan of Law & Order of the good fight, all these kinds of things, what will

he listens coming off? All the all the time and there's a famous and important test making determinations as to what he has to say. And the implication here is where they electronic records, making a solution by human. Would I make it by a machine and whether or not that's going to be his side or not? Now there's an extension exemption for regular business records. That helps but notwithstanding that many sides. Have passed legislation relatively recently to try and clarify matters and provide some

some certainty, 70, Illinois. For instance there was an act for the Illinois. Blockchain technology act that took effect at the start of the DC area that permits the use of blockchain in transactions and proceedings. But it needs to be accurately reproduced for old party Thursday. Anonymity, that comes with certain kinds of distributed Ledger technology would food, run afoul in general of the Illinois loyalty. And that's important implications for sale discuss later on. Come on, just passed. Legislation Arizona has he's well as well, to

include Bluff chamber, at hotel, has Ohio, and it's very important status. As a state, where many businesses are Incorporated is obviously important. And it allows organizations to mine time business records. Using what he describes this distributed electronic networks Lodi devices, okay, I'm speaking as an economist outside water. The last is, for most types of the world, to be able to be verified. Know a lot of what Contracting use from an economist's perspective. He's thinking about

allocating actions to be taken and payments to be made in a Skype contingent while depending on what's Happening. You know what, an insurance contract. The canonical example of something like that, each day is an accident. Is it in a Lost season could then I'm who ties what to whom and so on. Exodus is going to impact on Contracting opportunities which is the next Topic at least this is next. Few slides are based on a python there in a few years ago about blockchain and Hall. Problems, at that pipe, it does exist and amongst the

follow. It starts with the following observation, which has been distinguished Scholars before, which is at roughly speaking, half of all of economic activity happened in my pockets and Hoff Thai Spice in phones. Never more than a theory of the phone which is known as property rights theory for which all of us who won the Nobel Prize. A couple of years ago. Highlights the value of importance of asset ownership of the property. Rights theory is it gives the owner of those assets residual rights of control, okay? And what that does,

he's encouraged investment. That's relationships, the Tepee and Produces haggling cost for property rights Theory. As I am for the modern understanding of the boundary, the phone determines the boundary of the phone, okay? It's about the relative incentives that are provided for assets, Pacific Investments, or reducing exposed frictions like haggling that come from allocating the asset to different different owners. So that's very important for determining whether phone to vertically into grinder. Tool North or in what direction is vertically,

integrated and things like that raises the prospect that more Contracting. Take the most types of the word, contrite, it on, if you think about that, are there any of that? You said that's going to hold out a full shift? Some activity economic activity from phones to markets. Roughly speaking one Tikes Economic transaction outside of the marketplace and perform sitting inside a phone. So gives up on the magic of the price mechanism that uses the virtues of the authority relationship either side of her. Then if you do a better in the Market at the Mirage and Son

activities, going to become more attractive in markets, rise and phones. He's going to ship that speaks to the issue of the, the kind of opportunity people can do the opportunism. Contracting parties can take advantage of when some States can be contracted on when some contingencies like the quality of the good must be known to the Contracting parties, but a hard to describe to a court of law. Then he's going to have to be renegotiation, after-the-fact. Now, once this renegotiation off, to the fact,

there's the possibility to hack bling and when that heckling goes on, that's going to lie. I'm to the benefits being split in some way and under investment by the owner of the asset. Now, maybe it's the case that smart Contracting Technologies. Can count goes some way to making more states of the world contractible in there for alleviating the holdup program. So changing the boundaries of the phone and potentially increasing the value of total economic output. So we going to that emoji tile in the paper but at this point what I tell you is that they all deserve

a shin is basically it is nearest some time off the property rights theory was developed and instead of using a phone and asset ownership, you could ride a contract that uses really smart what are known as regulation mechanism is the Contracting parties know the size of quality of the good. Then it'll be an either-or day individual interest to reveal that although it was being one of them individually. To tell the truth to a third party, like a court. But if you constructed game for mechanism in the language of mechanism design with just the right sequence

of announcements and penalties, depending on exactly what said, by both parties, then you can end up having truth-telling being a result because people feel line because of the consequences of the punishments, dale dale received a very, very clever mechanism in reality, which raises a number of puzzles and one of those on puzzles mod potentially be resolved by blockchain technology front to have the punishment is not what Economist will cold time consistent. Once Upon a shipment is called for by the mechanism. It would be in the interests of both parties to say, why are

we? Time beats on to something at idealism, renegotiate and, and no, kind of fun to keep that money for a Stihl, and it should be a way to renegotiate. That makes us both better off. But I asked the punishments no longer served a purpose and that's a bit of a conundrum. Now one of the things that smart contracts can do, he's obviously provide but anonymity and a full commitment power, okay? So you might not be able to renegotiate. A cleverly designed smart contract as long as the potty, make side time instead of verifiable by the code of

the contract. So it might lead to the situation where a Colt controverse penalty payments or pay Nolte. Closes houses are often an enforceable by courts of law that sometimes called liquidated damages will stipulate the damages, but if there's an annuity, throw smart contract in those things actually, There's lots of issues about what happens if you get the code to get wrong and you want to suddenly reversed things and and lots of things like that. But it's an interesting because it raises the possibility that

they may be the possibility of these clever mechanisms that Economist introduced actually being able to be used in reality and the importation of that. Is that Motrin more economic activities. Take place in markets in an arms-length Market contractual situations rather than inside phones. Moving on to tokenization in and i t o s a proliferation of I see how many different types in recent years. Utility tokens at that token. Ina Garten. The key issue for Securities Law

is where the tokens the Securities or not, if their Securities under the relevant definition and I've extracted that he from the Securities Act of 1933 East Bayaud and I have to be registered with the SEC. Unless an exemption is is provided through intermediaries the deal, and them need to be registered with the SEC or saving exemption. They even the place where the tokens the soul has to be racist, but it's a large incentive for people involved in a nightie, always and related transactions to do with tokens to get around

is in and not have them. Be viewed as Securities and that's what I'm going. Practical divide, there's a long definition there that I want. But the bold and type their refers to a carve-out to do with an investment contract and that becomes a very important term for figuring out where the tokens of Securities. What is an investment contract with the courts of the United States? To started this a long time ago, a 1946 olds to do with something seemingly very mundane. But now has broader

implication, the style of land and contract to pick oranges sell the juice and share profits. Now, the Securities act says that unless a registration statement is in effect as to a security. It's on local for any person. Either directly or indirectly to make use of any meindl instruments of Transportation or communication. You need to stay. Calm has all the miles. Just tell such a security through the use of medium perspective, Silverado. Okay, so the real question is, what is an investment contract and is many elements to the test. A tire that is what the

contract looks like. Where the money being invested with words, an Enterprise, I need a vertically will hurry. Horizontally with a day is an expectation of profit or when it is affixed to return the weather, it looks more like that or equity in some sense and whether it's done solely through the efforts of others. The casings are not here and it's a recurring thing that I want to come back to the drawing together. Many of these different aspects that I'm told me back. He said the US courts, but not so much cuz you know the jurisdiction. Typically, try to look to the

equity Equity economic real. What has been termed? The economic realities of the transaction? That's very important, in terms of thinking about what he's going to be in this fairly narrow. He's been saying that an investment contract in his hands. Oh no, I'm in the US and also, whether it's very sad, they can stream inside going to be going to be same one way or another relative to existing legal Doctrine substance. The economic reality is very important to us but not quite so much in other jurisdictions. Okay. Now to the point

that I just might there on that Boulder. Bullet point. Is that design choices here, interacting with legal rules table, designing tokens people designing eye-to-eye with tokens naturally involved in making design choices for economic reasons, but they're also changing or affecting. At least how it how they talked into going to be viewed by the courts. So if you make things more decentralized than they might, otherwise I'll definitely be. That might be be good in one sense. In terms of something not being considered the security better, maybe a cannoli, Play

damaging. So there's a trade-off there. Okay. Mart. 112 in the same damage. The functionality of utility tokens in order for them. Not to be sent as a security. Moving on to tax law, a Newton. I wrote up a pace in the New York Times a couple of years ago, just pointing out that with the rise of cryptocurrency should I were to come to replace cash, which you may well be the case in some meaningful, why that would give rise to a whole lot of issues to do it, have things in the past. And so I'm going to Steven

mnuchin, who's treasury secretary of the United States, had some time to go to the Bitcoin could become what he termed the next we spank account. They need to slightly more sophisticated text, Joe Tex. Which it would be very hard to the IRS to approve. So I suppose I can see a hypothetical electronic addresses that you own and you let the IRS know that you are. And I but not that you want to be and say can you buy once a Bitcoin of pick your favorite cryptocurrency it $15,000 in your pocket and vehicle. I or dress. I expecting the price to go up and then just a few

hours later it's supposed to be points going up in value to $15,500. You'll see this can be made to work. Either why you said you said that they going to be and then be sent it to say now down the track when you be calling, you know, size was $25,000. You can send it back to eye and tell the IRS. If you're an unscrupulous Todd to doesn't mind lying to the IRS, I told to be calling to an anonymous counterparty, be back at $15,500 and just now pulled a Bitcoin from another anonymous. Counterparty that's got nothing to do with me

to the IRS, a job at sea for $25,000. As a result, you are taxes on capital gains of just $500 rather than a $10,000. And now the IRS, all the transactions between Ivy and City on the The Conte's proof Advanced AI on slings counterparties, okay? And so the rules in the US, that requires financial institutions to verify the identities that, you know, your customer rules and Saj don't solve the problem. As far as the IRS knows they didn't say you could have been set up our

foreign institutions that doesn't comply with those. Rules that leaves you with a bit of a conundrum, you know, the band crypto-currencies and unappealing for all the raisins, another way of thinking, what the implication. If he sees you could spark a move away from income and capital taxes to mold consumption of value-added, taxes for instance. So that's a live to buy along with the rest of the the tax to buy. Moving on to the penultimate Optical want to touch on voting election, law distributed Ledger Technologies already begun to be used for security purposes in

an online buddy. So I'm online voting. He's committed on to some circumstances in 32 US states. Now and West Virginia was the first state to permit mobile voting in federal election in 2018 to increase voter turnout. But it raises important questions to that security and hacking. And Paper Trails in the very important issue with the overall, Integrity of Elections. Now, on a slightly different topic that had nothing to do with blockchain per se, but everything

to do with voter registration, type out a recently. Published with rashanna, bought in unsw call, Jenny dank. Natural experiment in Massachusetts and litigation under what's known as the Motor Voter act, the national motor voter registration act which basically requires states to allow people to register to vote easily when they get a driver's license. In Massachusetts was found four pair of time to nothing. Don't be adequately complying with that, and I had to do. So, the little pants for that by going on, a Century of voter

registration drives and we're able to utilize that random event alongside Nautica nearby states to use as what Economist call the difference in differences. And in fact that differences in differences in differences strategy to find out what the causal effect of lowering voter registration cost is on voting and we, we found ale too much High registration which is not surprising but the magnitude he's, he's large the conditional on being registered. People coming out of the same rice but these people who

were not previously registered even though this is randomly done. So it's not a democratic voter drive but it does skew towards lower socioeconomic status photos and potential voters that much more likely to vote. Democrat voting doesn't work so much on the registration Majin put on the turnout. Majin speculate that a similar thing is obviously behind some of the sage Bank to see reason that have things you'd buy Republic, the Republican party and up and down and some of their

Affiliates who had been wanting to ban Asian seems like a mile and sell it. And it's going to be a pretty live issues going forward. And you can see why distributed Ledger technology might be an interesting defense against the idea of their being full. Wood waste by Maya, doesn't seem to be any real evidence of being involved. As judge. Posner ruled in the seventh Circuit Court ruling a few years ago but some distributed like to technology including principal even more. Immune to those considerations, it's going to fly very important role going

forward because it has a potential political skewed by intense, but just buying application, that's going to be a very charged issue. And and one can expect more of that going forward. And election law will have to adapt to those circumstances. Don't think I'm going to touch on. You need you to currencies and international. Not a bit of an overstatement day, that aspects of our conflicts of lures and and other things of an international night. Just as many people would know that this ain't a real movement towards the idea of private digital currencies in

racing times, starting with the idea of stablecoins, you know, that we would say it back like Taylor old are getting their issues to put it. Politely there that I want to go into here and I'll be back potentially stibel coins, but I'm thinking he or something like Libra, which would be if it were to reach its full potential, be obviously a dramatically different kind of thing. I like to think of those things is something like a potential. Libra is having two different components of payments component and a

currency components. Kind of component is essentially competition for apple pie in Google Play. You know, maybe they don't charge anything for, but I hold on to a cash which has value even a very low interest rate environment. You're going to get zero interest 0, basis points in interest on that. I get something about the opportunity cost of it today and which is probably posted if such valuable is a business Endeavor, is the currency exchange rate for the US dollar or the Euro the Australian Dollar to the Japanese Yen and you could imagine that that

would lead to The is because I think I'm sorry if that, did you do currency having the ability to dump the country's currency in? That would give it potentially significant power if it would to, to do that in the potential to extract concessions and other related businesses. This relates to it to a comp, I prove mine with Robert Lewis, writers at Northwestern. And I used to be a colleague of mine at Chicago and revising and recent Mission at the general political economy and

markets with network externalities, I think of the platform Achatz. Obviously something like Uber or Amazon, or Facebook, and many, many, many many offers where the more people are on, at the more attractive videos for you, to be honest, opinion about stars of the the market can lead to a situation. We had eaten phones and out phones, but you can have somebody with very, very high makhachev. Have a great deal with Maca power in that market but they may have power and exhilarating pocket. That's very relevant for thinking about these things. I'm the

regulatory implications of that transmission mechanism in there for functionality of monetary policy could be under threat from. These are questions about what reserve requirements, might be required, whether something like labor would be considered a deposit, taking institution and subject to that that some type of Regulation, whether they be taxed, leakage, you know what? Powers the SEC might have with her one of these proposed, digital authorities might have had a regular at so many implications, too many people have discussed. Again, in the paper, will go into that in a lot more

detail and really just giving you a flavor of the topics here. So he expecting the wee tyke is that there's in a meaningful and important interaction between legal rules and distributed Ledger technology. The design choices that affect it does remind me to fix the legal position of these of these contracts and instruments and objects and vice-versa. The legal design affects how how the instrument to design Distributors like to technology. And how is trade a bottle or essential eco-tint tournament? And that's important to keep in mind. Now,

in the US, the general approach is to look at economic substance that's in no small part of consequences Lauren economics, move in with people like I'm going to calabrese's and decompose in a really tiny did the Saints on the back of Broncos is very important contribution for the last. You know, I've lost four of five decades, that's very far from the general approach another jurisdiction. So I can Western Europe or Not Home Country Roads. That presents its own challenges and its own opportunities by think this is in the area where the code determination of the design of these

Technologies in the design of legal rules and instruments is going to be terribly important. Thank you Pete. On