Blockchain and the reconstruction of law: Code is law

Editor's note: This article is excerpted from Chapter 7 of "Blockchain: From Digital Currency to Credit Society" (CITIC Press). The author believes that code has always been an important force in regulating behavior in cyberspace. Similarly, the regulation of blockchain is inseparable from the four aspects of law, code, market, and norms. Norms are similar to laws, but they can play a key role when the law is not yet sound. Therefore, it is particularly necessary to establish a set of guidelines for the use of blockchain technology. For example, Australian standards agency Standards Australia has asked the International Organization for Standardization to set global standards for blockchain technology. Once the standards are established, they will play an important guiding role in the use of blockchain technology, and even establish basic usage specifications.

Code is Law

Code has long been an important force in regulating behavior in cyberspace. Professor Lawrence Lessig has a classic discussion on this: Code, together with law, market, and norms, regulates various behaviors in cyberspace. Code-based software or protocols determine how people use the Internet.

The current laws and regulations related to the Internet need to be based on network protocols such as TCP/IP protocol, firewall technology, domain name resolution technology, hyperlink technology, digital signature technology, etc. More advanced technologies such as WeChat platform, Weibo platform, and Taobao platform are also the basis of various network specifications. Like the TCP/IP protocol, WeChat platform or other codes on the Internet, blockchain technology will also have a profound impact on various network behaviors, and directly affect the relevant legal relationships, the legal subjects involved, and the new legal objects, which will inevitably lead to adjustments to the current Internet legal system. Even though there are very few blockchain applications in the industry, many people still believe that blockchain technology has great development prospects. At present, more and more countries are forming a consensus that before the government introduces relevant regulations, the benefits and costs of blockchain should be accurately analyzed.

It is generally believed that blockchain technology has the following technical features: decentralization, trustless, collectively maintained, reliable database, time stamp, asymmetric cryptography, etc. Due to the existence of these technical features, the application characteristics of blockchain technology are very significant: decentralized distributed structure can save a lot of intermediary costs in reality; unalterable timestamp can solve data tracking and information anti-counterfeiting problems; secure trust mechanism can solve the core defects of Internet of Things technology. It is precisely because of the advantages of blockchain that network assets based on blockchain system are different from any previous network property (such as domain names, accounts, online game props, etc.), and the differences are mainly manifested in:

(1) Blockchain assets do not have a central node;
(2) Each node will store the system information of the entire network;
(3) Changes in assets can be tracked in the blockchain system;
(4) The assets in the blockchain system have higher security.

McKinsey & Company recently published a research report on "blockchain technology" predicting that blockchain technology will greatly reshape the capital market, affect business models and save costs. Based on the characteristics of blockchain technology, The Economist describes blockchain technology as: "a machine that creates trust." Blockchain technology has changed the economic model of everything related to trust on the Internet, making trusted third parties no longer necessary. In the traditional network transaction model, a trusted third party is required to provide guarantees. A trusted third party can have at least three functions:

(1) Prove that the items being traded actually exist;
(2) Avoid multiple transactions;
(3) Prevent transaction disputes and record transaction history.

The establishment of trust on the traditional Internet depends on the existence of a trusted third party. For example, when buying goods on Taobao, you need to use Alipay as a trusted third party to guarantee and transfer funds. After the buyer receives the goods, the funds are transferred from Alipay to the seller. Although it is called a "trusted" third party, as an outsider to the transaction, there is always the question of who will supervise the trusted third party. The significance of blockchain technology is that the online transaction of blockchain assets does not require a third party such as Alipay to provide credit guarantees, and can provide a trusted transaction model without involving the question of who will supervise the trusted third party. Lin Xiaoxuan, a member of the China Information Technology Hundred People's Association and vice president of the Agricultural Bank of China, believes that "blockchain technology has fundamentally changed the centralized way of creating credit. It uses a set of consensus-based mathematical algorithms to establish a trust network between machines, thereby establishing credit through technical endorsement rather than centralized credit institutions. Through this mechanism, the participants do not need to know who the counterparty of the transaction is, nor do they need to rely on third-party institutions to endorse or verify the transaction. Instead, they only need to trust the common algorithm to establish mutual trust, create credit, generate trust and reach consensus for the participants through the algorithm." Through blockchain technology, the transaction contract can be directly embedded in the transaction process, and the contract terms are triggered and automatically fulfilled under certain conditions. Furthermore, if blockchain technology is combined with Internet of Things technology, these changes can even be extended to offline real life.

Legal regulation of blockchain

Blockchain is an emerging technology. The regulation of blockchain is inseparable from the four aspects of law, code, market and norms. The application and development of blockchain technology is also bound to be affected by these four aspects.

The law regulates various behaviors that use blockchain technology. Copyright law, tort liability law, and contract law directly punish various infringements using blockchain and set legal red lines. For example, administrative restrictions on the use of Bitcoin have directly affected the development of Bitcoin.

Code also regulates the behavior of cyberspace. The characteristics of the blockchain code itself determine the use of various applications based on blockchain technology. Movements such as open source code can improve the security and stability of blockchain technology, allowing users to use it with more confidence.

The market is also an important force in regulating blockchain technology. The market's likes and dislikes directly determine the development prospects of blockchain technology. In addition, if the cost of using blockchain technology is too high, then the application of blockchain will inevitably be limited. In other words, even if blockchain is technologically advanced, if it lacks commercial success, the parties involved will not have too much time to regulate blockchain.

Guidelines are similar to laws, but they can play a key role when laws are not yet sound. Therefore, it is particularly necessary to establish a set of guidelines for the use of blockchain technology. For example, Standards Australia, an Australian standards organization, has asked the International Organization for Standardization to set global standards for blockchain technology. Once the standards are established, they will play an important guiding role in the use of blockchain technology and even establish basic usage specifications.

Therefore, when considering regulating blockchain, we need to take a longer-term view and think more comprehensively, taking into account the four aspects of law, code, market, and standards in order to regulate the potential problems faced by blockchain technology.

The legal future of blockchain

In the process of social and economic development, technological factors have always played an important role. Social relations are constantly changing due to the development of technology, and the changes in social relations have also made the adjustment of laws inevitable. On the other hand, the law also directly affects the development of technology. Laws and regulations such as the "Law on Promoting the Transformation of Scientific and Technological Achievements" will directly affect the progress of science and technology. The impact of technology on the law is always a complex topic, and the shadow of technology is always behind the changes in the legal system. Blockchain technology has the ability to completely change the trust relationship on the Internet, and the impact on the current Internet legal system is difficult to estimate. Blockchain technology makes the network more like reality and makes network rules more like physical rules. Blockchain turns the physical theorems in reality into encrypted algorithms to ensure the uniqueness of data.

In recent years, there are many people who have discussed "Internet + Law" in both the legal and technology circles. Legal professionals are worried that the Internet will change the current way of doing business in the legal industry, while Internet industry practitioners are trying to infiltrate the ancient legal industry through the Internet. Therefore, it is necessary for legal professionals to have a better understanding of Internet technology, and it is also necessary for Internet industry practitioners to understand the current legal system. Blockchain technology provides a completely different possibility for the combination and development of the legal system and the Internet. Perhaps it will really take this path in the future, or it may take another path for various reasons. In either case, no one can ignore the possible impact of blockchain technology on the law, let alone ignore the legal regulation of blockchain technology.