'Lex Cryptographica'. Time for Code-based Regulation has Come.
Many Governments worldwide have admittedly claimed that due to the continuing technological advancement, they do not have the appropriate means to enact effectively Laws and Regulations, capable to ensure legal compliance. Up to this point, technology was assumed to sit beside the law as a regulatory lever that influenced human behavior. However, with advent and the subsequent utilisation of the Blockchain as well Quantum Technology, Artificial Intelligence and Machine Learning. there has been observed a wide range of activities in ways that often extend far beyond the law.
Lawrence Lessig in 1999 stated "Cyberspace will primarily be regulated by Cyberspace". Few years later, Charles Clark highlighted that the only answer to the Machine, is the Machine. In other worlds, the most prominent way to regulate Cyberspace as a code-based system is the code itself.
With blockchain technology and associated smart contracts, legal and contractual provisions can be translated into simple and deterministic code-based rules that will be automatically executed by the underlying blockchain network. Technical rules could increasingly assume the same role and functionality as legal rules.
- What if Law be transposed into Code?!
All laws despite their origin or even their type share a similar goal. This Goal directly refer to guide behavior as to encourage folks to act within predefined parameters, introducing a number of incentives or punishments for those who behave in a undesirable manner. As with law, technology has a similar capacity to influence an individual’s behavior or even their entire way of thinking according to some of the latest surveys conducted by the Psychology Department of the University of Colorado.
Advanced Code-based systems have long been used by governmental authorities and State-based departments on a global scale to calculate or even access complex tasks. The United States also uses data mining and big data analytics to make predictive assessments on national security threats, automatically putting people on a no-fly list to protect against terrorist threats.
Developing Code-based systems can literally upscale the meaning of Justice. By translating laws into technical rules, legal provisions are automatically enforced by the underlying technological framework. Instead of hunting down wrongdoers after a legal infraction, code-based systems can ensure greater compliance with the law by preventing violations before they occur.
Delegating the task of applying regulatory rules within pre-encoded parameters by utilizing Big Data analysis and AI to a technical system, would defineley lessen the risk of anyone failing to implement such rules, while at the same time the need of oversight and ongoing enforcement will be decreased or even terminated.
According to Hogan Lovells, transposing laws into code reduces the uncertainty around the interpretation of the these rules, due to the formal and restrictive way computer code is encrypted and subsequently written. Additionally, Unlike laws written in natural language, code-based rules leave less room for interpretation and can therefore be implemented more consistently and predictably.
With the growing reliance on big data analyses and machine learning techniques, it is possible to assemble a profile for an individual by looking at the way in which that individual behaves both online and offline. If such data were used to inform the operation of specific software applications, it could lead to the emergence of a new generation of highly customized rules or regulations that can be automatically adjusted to the specific needs and characteristics of the individuals at hand.
2. Blockchain Technology in the role of Regulator.
Blockchain Protocols alongside with smart contract can be used to model from scratch laws and embed them directly to a distributed network to ensure automation and ex-ante enforcement of these rules. This way governmental authorities can automate the enforcement of specific rules or regulations without the need to affirmatively monitor each and every transaction.
Smart contract code is executed redundantly by the underlying blockchain-based network, and because it cannot be unilaterally manipulated by any single party, transposing legal rules into smart contract code—rather than on a piece of software running on a centralized server—means that no centralized operator can modify these rules or prevent their execution. Laws implemented using blockchain technology provide certain advantages over traditional code in terms of both autonomy and transparency.
This makes it possible to achieve a new form of technical accountability—one that is dictated by technology and that is less dependent on traditional ex-post enforcement.
An exceptional instance refer to the governments around the globe are implementing anti–money laundering (AML) regulations, which require that financial institutions track flows of value (including virtual currencies) and report suspicious activity to stamp out money laundering, tax evasion, and terrorist financing. By relying on a blockchain, laws could require that regulated intermediaries implement or interact with specific smart contracts that control the flow of transactions for these regulated intermediaries, enabling transactions to occur only if they satisfy the strict logic of the underlying code.
A blockchain could be used, for instance, to verify whether an individual is permitted to transfer virtual currency and—according to the information retrieved from the blockchain—a smart contract could limit the amount of virtual currency a person is legitimately entitled to transfer at any given time.
Building on Lessig’s analysis of how computer code can be used on the Internet as both a complement and a supplement to the law, the use of blockchain technology could assume an increasingly important role in regulating the behavior of individuals and machines. To the extent that governments and public institutions adopt this technology, w could shift the focus of regulation from “code is law,” using code to implement specific rules into technology to “code as law,” relying on technology, in and of itself, to both define and implement state-mandated laws.
3. Limitations of Code as Law Scenario.
Having in mind the complexities of the current contractual arrangements especially in cross-border business relationships and given the fact that all Laws cannot be easily translated into code, there are inherent concerns that have to addressed before moving forward.
Laws are interpreted and reinterpreted by judges to determine, on a case-by- case basis, whether (and how) the law should be applied to particular situations. Formalizing open-ended laws, written in natural language, into code could distort the meaning of these rules by making them less flexible and unable to adapt to unforeseen situations.
Another prominent concern refers to the danger for people to 'game the system' due to the high-predictability and formality of code. By looking at the smart contract code, people can figure out what to do (or not to do) to trigger (or not to trigger) any defined conditions in order to fall outside the scope of any given law translated into code.
4. Conclusion
As more and more governmental services rely on a blockchain-based infrastructure, we might eventually bypass the inefficiencies of existing bureaucratic systems and replace them with increasingly algocratic systems. These represent new societal structures governed by lex cryptographica, whose rules are both defined and enforced by autonomous software code, and where people are left with little to no recourse against an improper interpretation or an unfair application of the law.
If Governments do not provide effective protective mechanisms, or choose to disassemble these systems, the current regulatory framework governed by the rule of law may eventually be replaced by a system of algorithmic governance, operated exclusively through the rule of code.
If the vision of blockchain proponents edges toward reality, we may delegate power to technological constructs that could displace current bureaucratic systems, governed by hierarchy and laws, with algocratic systems, governed by deterministic rules dictated by code, computers, and those that program them. These systems could improve society in demonstrable ways, but they also could restrain rather than enhance individual freedom.
What's is your opinion??
Author: Gkikas Panagiotis- Lawyer-Legal Technologist
Date: 22/1/2019
Contact: [email protected]?