Decentralized Self-governance Outlaw: Jurisdictional Challenge by Smart Contract

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With the emergence of block-chain technology, smart contract and decentralized autonomous organization have been put under the spotlight due to their controversial mechanism that is designed to bypass existing laws.

This article provides a brief summary on whether and why smart contract might challenge the judiciary’s power of decision-making. The last part of the article attempts to visualize the conflicts and resistance that the challenge may cause.

What is smart contract?

In short, smart contract is a digital agreement written in computer code and stored in block chain. Different from traditional contracts, a smart contract can be self-enforced and temper-proof. This means that it may minimize or even eradicate third parties’ involvement or interference. Transactions conducted under smart contract are also irreversible.

What is decentralized autonomous organization?

Decentralized autonomous organization (DAO) is an organization created under a smart contract. It is governed by pre-set protocols encoded into a smart contract that can be self-executed and self-enforced. Different from traditional institutions, DAO has structure that is bottom-up as opposed to top-down. It relies on transparent and equal participation of its members rather than imposition of arbitrary influence by centralized party.

Jurisdictional challenges in modern times

Jurisdiction represents the scope of the power of a court or tribunal to examine and determine facts, interpret and apply the law and make orders and enforce judgement.

Jurisdiction is a legacy of sovereignty. The power to administer justice is commonly limited to geographic areas, defined fields or subjects in which a nation is entitled to asserts its sovereignty. Its territorial limits lie with the margin of power. It symbolizes control and dominance.

The boundary of jurisdiction has been blurred due to evolved human society in modern era. To understand how the challenge brought by smart contract and DAO is distinct from other sources, it is necessary to first review some examples of the known variables in the equation of each nation’s jurisdiction.

  • Internet and information technology

Information technology and globalization give rise to transactions with no physical boundaries. It becomes more convoluted to ascertain which nation, by what methods, at what time, in which area, may exercise its jurisdiction to what extent.

  • International conventions

 The development of international law also interferes with the exclusivity of each nation’s jurisdiction. By endorsing consensus achieved by various nations’ governments, some widely recognized customs may apply in certain territories and the power of international courts may supersede some local jurisdictions.

However, the above technical challenges are not fundamental in that they merely define or reshape how different nations’ jurisdictions interact with each other. It is now commonly accepted that jurisdictions do not have to be mutually-exclusive and an amalgamated approach is often taken whenever there is a conflict. If it is uncertain as to which law should prevail, then all related laws may apply without exclusion to the others. This approach may bring some issues to actual enforcement, but it strikes a balance between jurisdictional conflicts and political cooperation.

  • Institutional technology

DAO driven by smart contract, on the other hand, does not seek to balance the judiciary’s powers. It literally creates new jurisdictions and has the potential to exclude any other conflicting jurisdictions.

At the first glance, smart contract appears to be nothing more than a new form of business agreement facilitated by most advanced technology. The essence of the smart contract, however, is not how it is created, but how it is enforced.

Traditionally, only judiciary has power to enforce a contract against a defaulting party and litigation marks the starting point of administration of justice. The unique feature of smart contract is that computer programme replaces the process of judiciary’s decision-making. Any post-contractual dispute resolution process becomes redundant.

For example, in a real estate transaction, disputes may arise when the parties have disagreement on the conditions of the property before settlement. In that case, the vendor has to sue the purchaser if the purchaser refuses to pay. Under a smart contract powered by computer protocols, an exhaustive list will be provided on what defects may constitute defaults and how those defects will be dealt with, leaving no room to dispute any existence or consequence of a default. If any party refuses to rectify the default by making payment, the funds will be automatically transferred by block-chain (typically in cryptocurrency) disregarding the parties’ will.

Once completed, the transaction is irreversible and the funds transferred cannot be recovered.

Under a smart contract, the outcome of any default is pre-determined and any measurements following defaults will be automatically imposed and self-executed without interference by third parties. Therefore, any so-called dispute resolution (including litigation, mediation or negotiation) is of no utility under a smart contract.

Following the above analysis, I consider “smart contract” is a misnomer since it disguises the true nature of this instrument. Contract refers to meeting of minds whilst smart contract delivers meeting of actions. Ordinary contractual performance largely depends on the parties’ willingness to be bound by their agreed covenants and inevitably involves mutual consents during implementation. Performance of a smart contract has nothing to do with the parties’ willingness and does not rely on any person’s consent. Smart contract is not just a contract; it is also a consequence.

Similarly, DAO created under a smart contract is not just a company; it is also a self-defined system and closed circle that effectively dispose of and distribute the existing and future interests.

New jurisdiction or no jurisdiction?

What does smart contract and DAO may mean to our legal system?

In our current system, different states’ legislatures are authorised to make laws and courts are empowered to make judicial decisions based on these laws. Naturally, the laws made by legislatures may stipulate what activities are legal or illegal. For example, selling and using Cannabis for recreational use in California is legal whilst such activities are illegal in UK. Thus, any agreement purporting to sell and distribute Cannabis in UK is deemed as void due to illegality, but that same contract is enforceable in California.

Under a smart contract, there is no fine lines between legal or illegal activities. If a contractual party is involved in a dealing that could be deemed as illegal by local authority, that dealing may still proceed under a smart contract as long as it is permitted by the computer protocols. The local law enforcement is unable to invalidate the dealing since smart contract is temper-proof and irreversible.

Similarly, DAO may not be subject to company laws, trust laws and tax laws. The legislature and judiciary no longer maintains the power to superimpose limitations upon DAO as such institution is only accountable to its members.

We have yet to see such institutional technology so far that may dethrone the supremacy of legislature and judiciary. Smart contract and DAO may become the game changer and may redefine the legitimacy of every nation’s legal systems.

When no law is binding unless smart contract or DAO endorses it, we may see a gradual shift from legal positivism (being the dominant theory developed since 18th century by recognizing the justification for autocracy as well as legitimacy of government) to natural law theory (being the theory that dominated western world until 18th century by affirming common standards and asserting rights inherent by virtue of human nature). Such flashback may be attractive to libertarians who are believed to be the most active promoters of block-chain technology.

There is a substantial stagnancy on part of our legal system in reacting to such challenges. The legality pertaining to usage of smart contract, DAO, crytocurrency, deep web and dark web still seems to be in a gray area. As legal practitioner, I look forward to seeing more judicial debates on these controversial technologies and any institutional reforms that may follow.


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