When we were writing our report on virtual currencies two years ago, we had the impression that we had hit on a topic that would revolutionise the economy and the law. Time has shown that it was just the start.
Examining the growing interest in the blockchain technology which Bitcoin is based on, we were witnesses to a unique boom in innovation. The potential of this technology, initially perceived only by a small circle of cryptography enthusiasts, is now recognised by central banks, governments, and major financial institutions. It is already clear that it will extend far beyond the world of finance, and the real revolution is only beginning now, with the first practical implementations of the concept of smart contracts and decentralised anonymous organisations (‘DAOs’). This is a revolution also for the law, as we described back in 2014.
The dawn of smart contracts and DAOs
The funding campaign (initial coin offering, or ‘ICO’) for one of the first DAOs (called The DAO), in May of this year was in many respects a breakthrough moment not only for the development of new economic models, but also for existing legal systems. The ICO succeeded in raising the equivalent of USD 150 million based exclusively on a contract existing in the form of an algorithm. Moreover, the funds went to an autonomous, decentralised organisation existing solely in cyberspace.
The traditional documentation of the ICO, drafted in natural language, was of secondary importance. The rights and obligations of the participants in the ICO were entered in the form of computer code. The events that played out after the ICO (theft of a large amount of the funds by an anonymous hacker) added a dramatic touch to the whole undertaking, underlining how pioneering and innovative these solutions are.
We don’t believe the collapse of The DAO spells the end of smart contracts or DAOs. To the contrary, all indications are that the events surrounding The DAO and its ICO raised the interest in these solutions. They have huge potential for economic growth and for the public sector.
Smart contracts are a challenge facing lawyers and the law
The first experiments with DAOs and smart contracts clearly show that these solutions function in an arena that is almost entirely unregulated. It is already evident that, for many interesting initiatives, this presents an increasingly serious barrier. Our report is an attempt to systematise the most important legal issues arising in connection with DAOs and smart contracts. Unfortunately, the scale of the challenges is vast. The legal systems that are the first to rise to these challenges, even with interim solutions, have a chance to attract initiatives creating new economic models and to ride the growing wave of innovations which some say is only comparable to the Internet itself. Some examples show that such initiatives can be effectively supported with surprisingly little effort.
We hope that the articles in our report provide inspiration for a broader debate on the measures that should be taken to encourage the growth of blockchain-based technologies. These are technologies harnessing huge potential, but they cannot be unleashed without the support of regulations.