Throughout history, there have been various attempts to operate without, or exclude altogether, intermediaries, and particularly lawyers, from specific business areas in order to simplify the process, drive the cost down, and ultimately benefit users.
In the aftermath of the 2008 financial crisis, Bitcoin was conceived as an instrument to bypass the need for trusted third parties and counterbalance the centralized power of financial institutions (Nakamoto, 2008).
The decentralized, transparent, and cryptographic nature of the Blockchain brought about the possibility of disintermediating and decentralizing all transactions. The Web3 revolution claims to provide the solution to the obsolescence of the intermediary model, alongside entirely new societies built from scratch (see for instance Decentraland).
The pioneers and enthusiasts say that Web2 was about intermediaries while Web3 aims to remove them. Web3, they say, is about ownership. This means that there is no need for banks, for example, to process transactions, or for third parties to process personal data. But most of all, there is no need for any legal system, as “code is law” (which is an often misinterpreted and misused concept drawing from the original piece of Lessig, 2000. See also Drummer, Neumann, 2020 for a different, more recent perspective).
This article contends that on the way to mass adoption, Web3 will necessitate a legal system, be it an entirely new one or an adaptation of the traditional one. We predict that cutting intermediaries out will prove to be an unrealistic, and even undesirable, objective. The focus should rather be on radically changing the legal market to adapt to the new needs of an evolving society. As Richard Susskind would put it, we should seek tomorrow’s lawyers rather than no lawyers at all (Susskind, 2016).
This article considers some examples, starting from societies that have grown progressively more complex, complex societies that have attempted to ease the process cutting intermediaries out, and web3’s relationship with the law.
The discussion that follows has no intention of being a complete, or even comprehensive, account of historical events relevant to this topic. It is rather a partial, openly factious collection of some events that largely draws from a pub conversation with Prof. Andrey Kotelnikov (although the views expressed herein, and any possible mistakes, are attributable only to the authors). This should be an open discussion and we will welcome any comments from readers who provide a different interpretation of the events or reach different conclusions on future developments.
1. The Process of Societies Growing More Complex
Robert Carneiro explains the development of the state through the famous “Circumscription Theory.” Such a theory accounts for population pressure (often caused by environmental or – to a lesser extent – social circumscription) as a key factor in the formation of successively larger political units, with autonomous villages turning into chiefdoms, and then – in certain areas – into states (Carneiro, 1970).
Before modern times, social order was maintained through various mechanisms that prescinded from the law and legal professionals. However, the process of power centralization described by Carneiro often led to the progressive advent of intermediaries as central figures in the management of the developing legal system.
Without having to go back to the Stone Age, we can draw some interesting points from the anthropological studies of Glen Shepard (Shepard, McIlwrath, 2010) on the Matsigenka, a tribe in the Peruvian Amazon that has a peculiar way of resolving disputes.
The basic rule of social interaction for Matsigenka is that it is not acceptable to show emotions in public. Absent a formal legal system, this allows for initial dispute avoidance through the repression of any negative feelings. If anger is shown, the argument is automatically lost. Emotions are allowed only during special gatherings centered on alcohol intoxication, which provide a ritual outlet for emotions. This occurs through singing accusations back and forth. The attendees (up to 60 people in large gatherings) operate as a court of public opinion and indicate the winner as the person who has managed to better control their emotions during the argument.
This system worked well for the original communities that consisted of small autonomous bands of people, but nowadays the population has increased tenfold. Consequently, new types of conflicts have arisen, and the old system seems unable to control the stress generated by these complicated social interactions. As society grew more complex, the need arose for someone to mediate between the various constituencies.
The Shamans took this role, diagnosing the responsible party for giving rise to the anger, the illness affecting the parties. They act all at once as proto-lawyers, judges, psychotherapists, and the police. The responsible person is labelled as a witch and can be banished from the community if it happens multiple times.
The Matsigenka’s way of resolving disputes offers a good example of the natural resort to intermediaries as societies grow more complex. Another more recent example is the Colonies of the 17th century. Lawyers were widely forbidden to receive fees and the general assumption of the population was that the law encompassed fairly simple rules that could be understood easily by most intelligent people. Many judges were laymen, and the public viewed attorneys as unnecessary luxuries (Vargo, 1993).
However, at the beginning of the 18th century, alongside the progressive structuring of a more complex society, it was already common practice to resort to the services of legal professionals with a complex legal system in the making.
2. The Process of Simplifying Complex Societies
There are many examples of modern societies attempting to reverse the process of intermediation. Let us consider a few.
Around the middle of the 18th century, in England, legislation was passed (titled “for the more easy and speedy recovery of small debts”) to introduce the Courts of requests. Such courts were characterized by having no jury, a judge who often lacked any legal qualifications, rare legal representation in the court, and the want of an effective appeal. In the view of Birmingham commissioner William Hutton, “if the commissioners cannot decide against the law, they can decide without it” (Polden, 2004). These courts were, however, strongly opposed not only by lawyers but also by traders and were soon abandoned.
The most recent example is the introduction of the construction adjudication procedure in England and Wales. With the 1996 Construction Act, adjudication was introduced “as an intervening provisional stage in the dispute resolution process. The final rights of the parties can still be determined by arbitration, legal proceedings, or agreement after the dust has settled.” It was intended as a fast, cheap way of sorting out a dispute.
However, within two years of its introduction, legal arguments penetrated this mechanism transforming adjudication in a deep search for evidence, facts, law, and legal process. This is a bad thing you will say. However, it seems to work (or, at least, to have at some point worked) just fine, much to the satisfaction of the parties (Bingham, 2014).
3. Web3 and the Law
As many of the decentralized apps (dApps) built on a blockchain are open source, anyone has access to the source code. On the contention that the “code is law”, this level of transparency is strictly necessary. However, skilled people can exploit loopholes in the code to their advantage.
For instance, it has recently emerged that a hacker stole $114 million from a Solana-trading platform called Mango Markets, by exploiting a price authority known as an oracle (Fortune). The hacker described his conduct as highly profitable trading allowed by the source code. There is no doubt that the hacker’s activity was aimed at obtaining an unfair (in relation to the purpose and activity of the platform and the other users’ behaviors and expectations) personal advantage thanks to a weakness of the system.
However, token holders voted in favor of letting the hacker keep a high percentage of the stolen money and return a part of it (just enough for the platform not to become insolvent), on the basis that “code is law”.
It would be interesting to know how many of Mango Markets’ users were able to read and understand the code. In any case, the more users Web3 attracts, the lower the percentage of those for whom the code will be intelligible, in line with the percentage of coders among the overall population. Therefore, accepting the claim that “code is law” will entail the need to resort to specialized intermediaries.
Furthermore, it will be difficult to claim that Web3 is an “island” that does not fall within the general legal framework. An illegal activity will be such even if it occurs on the blockchain. Knowledge of the law will therefore remain crucial. Ross Ulbricht and James Zhong know it well.
Mr. Ulbricht created a blockchain-based platform, Silk Road, for the exchange of drugs. He believed full-heartedly in his mission and appeared to think that he enjoyed some form of protection from the traditional legal system. However, despite operating as a mere technological intermediary between drug dealers and clients, he was sentenced to life in prison without parole (United States v. Ulbricht).
Mr. Zhong exploited Ulbricht’s creation, triggering a large number of transactions in rapid succession in order to trick Silk Road’s withdrawal system into releasing approximately 50,000 Bitcoin into accounts he controlled. Despite being similar to the hacking of Mango Markets, the outcome is likely to be very different for Mr. Zhong, who is now facing up to 20 years in prison for wire fraud (US Department of Justice).
Arguably, the Web3 community is experiencing the same evolution described in the previous paragraphs of this article. As the community continues to grow, it will be subject to an increased pressure to regulate ever new aspects of social interactions. This will largely happen resorting to the “traditional” legal system. However, such a system will likely face a transformation, which we are in part already witnessing.
Our contention is that not only intermediaries will hardly be eliminated with the advent of Web3, but, on the contrary, they will play a pivotal role in the development of the community and its rules.
This is coherent with the increasing involvement of lawyers in the field, as evidenced – for instance – by the number of Web3 claims flooding into the courts (MoCo Cryptocurrency Litigation Tracker). Some of these court cases provide interesting examples of the evolving interaction between Web3.0 and the legal system, and of the reshaping of the latter to fit the needs of the former.
Let us have a look at some examples.
In January 2022, two non-fungible tokens (“NFTs”) were taken from Lavinia Osbourne’s MetaMask crypto wallet without her knowledge or consent (Osbourne v Persons Unknown & Anor). Lavinia Osbourne sought an injunction from the Court to freeze the NFTs based on the fact that damages were insufficient to make her whole as she had a specific interest in the NFTs. To achieve this result, the Court held that the NFTs were to be treated as property under English law. It was the first time ever and an important step towards the recognition of the rights of Web3 actors beyond the more code.
Another example is the use of NFTs as an effective means of serving a claim both in the USA (LCX AG v. John Doe Nos. 1-25) and the UK (D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited and others). This is a creative way of tackling the unprecedented challenge of countless anonymous transactions and the related difficulty of reaching defendants, whose identities are unknown, through the sole wallet address.
Certainly, there are also controversial cases, where arguably the law is exploited to obtain an unfair advantage. A recent example is the Roche and Ava Labs case where in one video, Kyle Roche, who was, then, a partner at Roche Freedman, claimed that his firm had sued “half the companies in this space” (Ava Labs competitors) thus giving him access to “the insides of every single crypto company” thanks to the process of legal discovery.
Basically, Roche was suing Ava Labs’ competitors on the claim that they misled consumers by offering tokens to the public without complying with the relevant regulation for securities. Not long after the video was leaked, his law firm dropped Roche as a partner and rebranded (Blockworks.io).
Despite its inherent complexity, Web3 is a developing society far from having reached its maturity. There is an anthropological expectation that, alongside its growth, the Web3.0 society will experience an ever-increasing reliance on the legal system.
This will likely hold true even against the founding claims of Web3 to disintermediate transactions. As seen in other historical attempts to exclude intermediaries, Web3.0 seems to be no exception in welcoming them back, even if after a certain degree of transformation, with different skills and responsibilities.
Based on the above, we contend that lawyers will take a prominent role in shaping the future of the Web3 community and its rules. As new evidence of this process keeps emerging, the focus should then be on ensuring that tomorrow’s lawyers have the right skills and knowledge rather than seeking to have a future with no lawyers at all.
About the authors.
Filippo Zuti Giachetti, Co-founder and Administrator of MetaverseLegal and International Disputes Counsel at MDisputes. Filippo is a dual qualified lawyer (England and Wales, Italy) focusing primarily on the resolution of international disputes. Filippo often advises on various matters involving digital assets and blockchain-based transactions. After having completed an LL.M. at the University of Cambridge (UK), Filippo is currently pursuing a Blockchain Regulator Certification Program at the University of Nicosia (Cyprus).
Celestino Dincă, Co-founder and Administrator of MetaverseLegal and Associate Lawyer at Zamfirescu Racoți Vasile & Partners. Celestino is a fully qualified lawyer in Romania, specializing in civil law matters including disputes between professionals. He also has strong crypto and blockchain knowledge and regularly advises clients on such matters.