Can Permissionless Blockchains Avoid Governance and the Law?

Abstract

Permission-less (or public) block-chain networks are a new form of decentralized private governance in the digital sphere. Though legal scholars recognize the significance of law in the use of block-chain, existing research using legal and institutional perspectives leaves block-chain governance as something of a black box. We provide a more granular analysis, finding that block-chain governance operates on four distinct levels. Governance at the protocol layer involves discrete institutional design choices intended to constrain network members’ incentives in an ongoing sense. Subsidiary governance arises from the need for communities to draft protocol updates and from the fact that governance protocol design choices create discrete concentrations of political power within the network. Competitive governance forces arise because cryptocurrency networks are constrained by the possibility of exit of participants and users to other alternatives. Finally, in terms of superior governance, permission-less cryptocurrency participants and users are subject to a variety of laws and regulations due to how cryptocurrencies implicate property, contracts, tax, and securities law. Since the interaction of these governance aspects shapes the operation of any given network, legal and regulatory governance of block-chain ought to consider permission-less block-chains as confronting political and governance dilemmas much like any complex organization. Predicting the effect legal and regulatory treatment of permission-less block-chains requires an accurate understanding of the incentives of their members, all of which are greatly shaped by the governance forces we outline in detail here.