Crypto Transaction Dispute Resolution

2017 CRYPTO TRANSACTION DISPUTE RESOLUTION
CRYPTO TRANSACTION DISPUTE RESOLUTION
WULF A. KAAL* & CRAIG CALCATERRA **
Forthcoming in: THE BUSINESS LAWYER, SPRING 2018
Abstract
The rapid evolution of anonymous, autonomous, and

distributed blockchain-based smart contracting creates friction and
enforceability issues with existing legal and jurisdictional principles,
calling the future governance of blockchain technology into question.
The effective governance of blockchain technology and smart
contracting is essential to ensuring its continuing evolution. Based on
the mathematical principles underlying the disposition of
blockchains, we propose and evaluate an alternative approach to the
existing legal exercise of jurisdiction that is inherent in blockchain
technology itself. We call this distributed jurisdiction.
This contribution is not merely theoretical. Several Ethereum
smart contracting crypto startups demonstrate that anonymity can be
perpetuated in blockchain technology, despite blockchains’ eternal
storage of information and its growing size working against
anonymity. Startup applications highlight that the technology itself
offers means of internal controls that help ensure effective
governance in the continuing evolution of the technology.
Based on the concept of distributed jurisdiction, we suggest
an open source platform ecosystem for smart contracting dispute
resolution that allows users to opt into a conflict resolution
mechanism that enables more nuanced crypto solutions and produces
greater certainty in the process. Anonymized arbiter expertise via
* Associate Professor, University of St. Thomas School of Law (Minneapolis,

USA). The authors are grateful for outstanding support from research librarian
Megan McNevin and Michael Robak.
** Associate Professor, Department of Mathematics, Metropolitan State
University (St. Paul, USA).
Electronic copy available at: https://ssrn.com/abstract=2992962

rankings in combination with a representation option for crypto

disputes provide a resolution mechanism for legacy businesses that
desire to participate in the growth of crypto business opportunities,
hope to avoid legacy system intermediation and the associated
transaction costs, but require legal legacy system assurances and
crypto dispute resolution equivalence.
Key Words: Blockchain, Distributed Ledger Technology, Artificial

Intelligence, Machine Learning, Data Science, Data Scientists, Meta
Models, Innovation, Entrepreneur, Start-up, Big Data, Smart
Contract, Jurisdiction, Governance, Ties Network, Aragon,
OpenBazaar, Ethereum, Platform, Ecosystem
JEL Categories: K20, K23, K32, L43, L5, O31, O32

TABLE OF CONTENTS
I. INTRODUCTION ................................................................................ 4
II. BLOCKCHAIN TECHNOLOGY ........................................................... 8
1. Mathematical Principles and Foundations ............................... 14
a) Public-Key Cryptography .......................................................................... 16
b) Cryptographic Hash Functions .................................................................. 18
c) Transactions and Block Creation ............................................................... 20
d) Ethereum – Proof-of-Stake ........................................................................ 21
e) Technical Summary ................................................................................... 23
2. Regulatory Recognition ............................................................ 24
III. JURISDICTION OVER BLOCKCHAIN ................................................ 27
1. Traditional Jurisdictional Means .............................................. 28
a) Courts on Cryptocurrencies and DLT Businesses ...................................... 31
b) Uniform Law Commission Regulating Digital Currency Businesses ........ 32
2. Shortcomings of Traditional Jurisdictional Means ................... 34
a) Anonymity of Blockchain Transactions .................................................... 36
b) Enforcement of Smart Contracts ................................................................ 37
c) Limited Regulatory Oversight ................................................................... 40
3. Hybrid Approaches Accelerate Crypto Evolution ..................... 42
a) Jurisdiction Over Creation and Use of Blockchain Technology ................ 43
b) Coding Existing Law Into Smart Contracts ............................................... 44
IV. DISTRIBUTED JURISDICTION .......................................................... 46
1. Securing Anonymity .................................................................. 48
2. Intra-Blockchain Solutions ....................................................... 49
a) Aragon ....................................................................................................... 49
b) Ricardian Contracts – OpenBazaar ............................................................ 50
3.
Limitations of Existing Solutions .............................................. 52
V. OPEN-SOURCE PLATFORM ECOSYSTEM FOR SMART CONTRACT
DISPUTE RESOLUTION ............................................................................ 54
1. Legal Equivalence ..................................................................... 55
2. Anonymous Arbiter Expertise ................................................... 56
3. Optimized Representation ......................................................... 57
VI. CONCLUSION ................................................................................. 58


I. Introduction
The existing legal infrastructure cannot address legal
challenges presented by crypto transaction disputes. For instance, it
is impossible to consistently identify the parties to a dispute in the
context of crypto transactions on the blockchain. We suggest a
regulatory alternative for blockchain-based conflict resolution by
way of governance solutions inherent in the blockchain technology
itself. We call this alternative “distributed jurisdiction”. This article
explains the concept of distributed jurisdiction and analyzes how it
might provide a necessary alternative dispute resolution structure for
crypto transactions.
Blockchain technology and associated technological
innovation1 has demonstrated that the crypto economy has the
potential for disrupting all areas of our current economy. The crypto
economy is a decentralized, digital economy where any actor may be
anonymous. Thanks to advances in cryptography, cryptocurrencies
and smart contracts now enable goods and services to be transferred
through systems which act without centralized intermediators,
guarantors, or regulators with established reputation. A
cryptocurrency is a digital store of value, distributed anonymously
across thousands of computers anywhere on the planet. The
information integrity between competing computers is ensured by a
system of consensus protocols. Bitcoin, the first cryptocurrency, was
created in 2009 using a blockchain architecture for its consensus
protocols. A blockchain is a continually growing chain of blocks of
cryptographically secured records of transactions. Blocks are created
when the distributed computers complete the work of
1
Basic terminology used in this article in the context of blockchain technology and
associated technological innovation includes references to the “blockchain,”
“crypto economy,” “cryptocurrency,” and “smart contracts.” We define such terms
as follows and further put such terms in the context in the above-the-line text that
follows: A “blockchain” is a continually growing chain of blocks of
cryptographically secured records of transactions. The “crypto economy” is a
decentralized, digital economy where any actor may be anonymous. "A
cryptocurrency” is a digital store of value, distributed anonymously across
thousands of computers anywhere on the planet. "Smart contracts” are computer-
coded agreements that encumber digital property, cryptocurrency, digital
reputation, etc., then use mathematical logic to self-execute, self-enforce, and self-
regulate.

cryptographically securing the information. The incentive for

anonymous global actors to do the work of storing and securing the
data is the chance of winning cryptocurrency rewards created when a
new block forms.
Any existing business transaction can be coded into a
blockchain through smart contracts. Smart contracts are computer-
coded agreements that encumber digital property, cryptocurrency,
digital reputation, etc., then use mathematical logic to self-execute,
self-enforce, and self-regulate. Currently the most powerful
blockchain which enables smart contracting is Ethereum. Created in
2013, Ethereum is Turing complete, or computationally universal,
meaning any calculation possible can theoretically be simulated
within its blockchain design. In other words, blockchain can do what
any other computer program can do2--from controlling a Mars lander
to sending a cat video to China. Accordingly, any existing business
logic can be coded into the blockchain, giving it extremely wide
applicability in all industries and subject areas.3
What makes the blockchain architecture so successful is its
ability to solve several seemingly-contradictory requirements: 1. The
blockchain database gives users absolute privacy.4 At the same time,
the complete list of transactions on the public blockchain is open—
anyone with an internet connection can view the entire history of
transactions using the public key addresses. This gives users
2
Note however, most jobs take much more computing energy and time, so that
many tasks performed by other architectures are impractical at the present date.
3
We are not claiming that the broad applicability of blockchain systems
necessarily leads to implementation or even implementation efforts. Legacy
systems in the existing infrastructure undermine a substantial portion of
blockchain-based system implementation in businesses across industries. It is,
however, foreseeable that as the infrastructure in Southeast Asian countries such as
Singapore is being remodeled with blockchain solutions legacy systems in the
infrastructure in the USA and Europe may over time make way for the efficiency
gains possible through blockchain technology. See, Singaporean Dollar Tokenized
Through Ethereum’s Blockchain by the Monetary Authority of Singapore,
TRUSTNODES (June 7, 2017, 3:15 PM),
http://www.trustnodes.com/2017/06/07/singaporean-dollar-tokenized-ethereums-
blockchain-monetary-authority-singapore. Existing shortcomings of the technology
will also be addressed as the technology and its applications evolve.
4
At least within the system this is true. Public key encryption is used, giving users
private keys for information to the bitcoin contents of their personal accounts,
while public keys are generated to give addresses for coins used in any
expenditures.
5

confidentiality and confidence in the accuracy and value of the

transactions. 2. The system is open, meaning that anyone connected
to the internet can participate in editing any part of the blockchain.
At the same time, it is highly secure against malicious attacks on the
integrity of the information within its transactional history. Thus, any
participant has great power over the system, while still giving users
short-term confidence in the system’s validity which can be quickly
verified by any modern computer. 3. The system is autonomous,
meaning no central authority exists to actively maintain the integrity
of the system. At the same time, an open system of coded consensus
protocols regulates the building and maintenance of the ledger.5
Concurrently, this open and dynamic system responds swiftly and
automatically to any necessary changes to secure data, and adapts to
fluctuating computational power. This gives users long-term
confidence through the removal of larger historical forces that can
5
Efforts to move from proof of work to proof of stake are already underway,
improving several of the shortcomings of the blockchain protocol: See Proof of
Stake FAQ, GITHUB, https://github.com/ethereum/wiki/wiki/Proof-of-Stake-FAQ
(last visited June 16, 2017); “What are the benefits of proof of stake as opposed
to proof of work? See Vitalik Buterin, A Proof of Stake Design Philosophy,
MEDIUM (Dec. 30, 2016), https://medium.com/@vitalikbuterin/a-proof-of-stake-
design-philosophy-506585978d51 for a more long-form argument. In short:
• No need to consume large quantities of electricity in order to secure a
blockchain (e.g. it's estimated that both Bitcoin and Ethereum burn over
$1 million worth of electricity and hardware costs per day as part of their
consensus mechanism).
• Because of the lack of high electricity consumption, there is not as much
need to issue as many new coins in order to motivate participants to keep
participating in the network. It may theoretically even be possible to
have negative net issuance, where a portion of transaction fees is "burned"
and so the supply goes down over time.
• Proof of stake opens the door to a wider array of techniques that use
game-theoretic mechanism design in order to better discourage
centralized cartels from forming and if they do form from acting in ways
that are harmful to the network (e.g. like selfish mining in proof of work).
• Reduced centralization risks, as economies of scale are much less of an
issue. $10 million of coins will get you exactly 10 times higher returns
than $1 million of coins, without any additional disproportionate gains
because at the higher level you can afford better mass-production
equipment.
• Ability to use economic penalties to make various forms of 51% attacks
vastly more expensive to carry out than proof of work - to paraphrase
Vlad Zamfir, "it's as though your ASIC farm burned down if you
participated in a 51% attack".
6

determine the value of the currency, such as technological and

political changes.
Because of its very expansive and near universal future
applicability, it is crucial for the broadening evolution of the crypto
economy to find jurisdictional means for governance. A lack of
governance and conflict resolution mechanisms would undermine the
democratized trust created by blockchain technology. Jurisdictional
means are the basis for effective conflict resolution mechanisms
applicable to crypto transactions in the blockchain. Not having the
required jurisdictional means necessary for conflict resolution
mechanisms for Ethereum blockchain-based smart contracting, may
invoke consumer mistrust in the new technology. This can then
undermine the evolution of the blockchain-based crypto economy.
The increasing separation of physical and virtual identities
driven by anonymity in the crypto economy challenges the existing
jurisdictional means over virtual transactions involving blockchain
technology and smart contracting. Encrypted distributed smart
contracts are removed from otherwise applicable jurisdictional
principles that govern virtual transactions.6 Users and supporters of
the crypto economy are anonymized through public-key encryption
and virtual private networks (VPNs). While technically personal
jurisdiction would still apply to parties transacting in encrypted
distributed smart contracts, the practicability of enforcement is
impossible given the separation of physical identifiers and encrypted
distributed smart contracts. Because the system operates largely
autonomously, even if every user and supporter of the blockchain
and their location were known, it would still not be possible to
exercise jurisdiction in the traditional meaning of the word. Such
impracticability calls into question the existing jurisdictional means
governing the evolution of distributed ledger technology.
Regulatory alternatives for blockchain-based conflict
6
The creation and maintenance of a blockchain cannot be controlled directly in
any practical way. As long as the internet exists in two competing jurisdictions, the
creation of blockchains cannot or can only very limitedly be controlled. Because of
the fully networked nature of the technology, the associated variability in possible
legal enforcement of blockchains further complicates the application of
jurisdictional means to govern blockchains. Even if traditional jurisdiction could
be exercised, comprehensive and universal enforcement would be extremely
difficult, if not impossible, as blockchain designs either give users complete
privacy or no privacy at all, or anywhere in the spectrum between.

resolution are necessitated by the impossibility of consistently

identifying the parties in any dispute in the context of crypto
transactions on the blockchain and the associated problems of
applying the existing legal infrastructure. We cannot conceptualize
opportunities in the crypto transactional universe that could possibly
enable and allow a court in the existing legal infrastructure to decide
and enforce any disputes between crypto transactional parties.
Because of the severity of these challenges for the existing legal and
jurisdictional infrastructure, we conclude that the sensible approach
for including good governance in crypto transactions necessitates
instituting governance solutions inherent in the blockchain
technology itself. Accordingly, we introduce the concept of a
distributed jurisdiction, which we hereinafter evaluate.
This article highlights the need for creating blockchain-based
jurisdictional means as a basis for emerging conflict resolution
mechanisms. Solutions for the incompatibility problem between
blockchain technology and the existing legal jurisdictional
infrastructure will evolve with the evolution of the technology itself.
While conceptually we believe in the incompatibility of the crypto
evolution via blockchain technology with the existing regulatory
infrastructure, it is important to appreciate the many gradations of
blockchain technology and its broadening application bases. Given
the gradations, it would be imprudent to claim perfect and universal
solutions to the incompatibility problem we highlight in this article.7
II. Blockchain Technology

Blockchain technology has been defined in many different
7
When discussing the abstract concept of blockchain architecture we have the
luxury of assuming an idealized form. In particular, the abstract blockchain is
perfectly autonomously run, whereas the particular bitcoin and Ethereum
blockchain examples were created in the real world in 2009 and 2015 and have not
yet bootstrapped their way to full autonomy, since there are still human actors who
have outsized power in affecting the code. Further, it is important to recognize that
it is possible to create blockchains that are intentionally not fully decentralized or
autonomous, in which case the traditional legal structure automatically applies.
See, White Paper, GITHUB, https://github.com/ethereum/wiki/wiki/White-Paper
(last visited June 16, 2017). However, we believe we are justified in our
assumption of an ideal blockchain because of the swift and substantial progress
towards perfect autonomy in the most important blockchain applications of bitcoin
and Ethereum. In these cases, and in any future implementations of the ideal
blockchain, we are arguing that the traditional legal infrastructure will be
challenged.
8

ways and no truly uniform definition seems to exist. Some refer to it

as a giant worldwide distributed immutable “google spreadsheet” for
transactions.8 Others define blockchain by focusing on its central
elements of blockchain, e.g. transaction ledger, electronic,
decentralized, immutable, cryptographic verification, among several
others.9 Vitalik Buterin, the founder of Ethereum perhaps most
prominently defined blockchain as follows:
“Public blockchains: a public blockchain is a
blockchain that anyone in the world can read, anyone
in the world can send transactions to and expect to
see them included if they are valid, and anyone in the
world can participate in the consensus process – the
process for determining what blocks get added to the
chain and what the current state is. As a substitute
for centralized or quasi-centralized trust, public
blockchains are secured by crypto economics – the
combination of economic incentives and
cryptographic verification using mechanisms such as
proof of work or proof of stake, following a general
principle that the degree to which someone can have
an influence in the consensus process is proportional
to the quantity of economic resources that they can
bring to bear. These blockchains are generally
considered to be ‘fully decentralized’.”10
8
Jonathan Shieber, Colu Aims To Bring Blockchain Technology Everywhere, TC (Jan. 27,
2015), https://techcrunch.com/2015/01/27/colu-aims-to-bring-blockchain-
technology-everywhere; Craig Leppan, Who Is Blockchain Going to Affect the
Most, OVATIONS, July 29, 2015), http://www.ovationsgroup.com/blockchain/.
9
See, e.g., ALAN MORRISON, BLOCKCHAIN AND SMART CONTRACT AUTOMATION:
BLOCKCHAINS DEFINED, PWC (2016),
http://www.pwc.com/us/en/technologyforecast/2016/blockchain/pwc-smart-
contract-automation-definition.pdf; Alistair Dabbs, What Is Blockchain, and Why
Is It Growing in Popularity? , ARSTECHNICA (Nov. 6.2016, 8:00 AM),
https://arstechnica.com/informationtechnology/2016/11/what-is-blockchain/; Lee
Grant, Blockchain – Definition, Origin, and History, TECHBULLION (Sept. 6,
2016), http://www.techbullion.com/blockchain-definition-origin-history;
DELOITTE, BLOCKCHAIN ENIGMA. PARADOX. OPPORTUNITY 4–7 (2016),
https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/Innovation/deloitte
-uk-blockchain-full-report.pdf.
10
Vitalik Buterin, On Public and Private Blockchains, ETHEREUM BLOG (Aug. 7,
2015), https://blog.ethereum.org/2015/08/07/on-public-and-private-blockchains,
Contrasting public blockchains (the original idea) with:” Consortium blockchains:
9

Rather than attempting to agree on a mutually acceptable

phraseology for a definition, a description of the core elements of
ledger technology can help define the blockchain. As such, a
blockchain is a shared digital ledger or database that maintains a
continuously growing list of transactions among participating parties
regarding digital assets – together described as “blocks.”11 The linear
and chronological order of transactions in a chain will be extended
with another transaction link that is added to the block once such
additional transactions are validated, verified and completed.12 The
chain of transactions is distributed to a limitless number of
participants, so called nodes,13 around the world in a public or
private peer-to-peer network.
Blockchain technology removes fraudulent transactions.
Compared with existing methods of verifying and validating
transactions by third party intermediaries, blockchains security
measures make blockchain validation technologies more transparent
a consortium blockchain is a blockchain where the consensus process is controlled

by a pre-selected set of nodes; for example, one might imagine a consortium of 15
financial institutions, each of which operates a node and of which 10 must sign
every block in order for the block to be valid. The right to read the blockchain may
be public, or restricted to the participants, and there are also hybrid routes such as
the root hashes of the blocks being public together with an API that allows
members of the public to make a limited number of queries and get back
cryptographic proofs of some parts of the blockchain state. These blockchains may
be considered “partially decentralized”. “Fully private blockchains: a fully private
blockchain is a blockchain where write permissions are kept centralized to one
organization. Read permissions may be public or restricted to an arbitrary extent.
Likely applications include database management, auditing, etc internal to a single
company, and so public readability may not be necessary in many cases at all,
though in other cases public auditability is desired.”
11
See, e.g., Michele D’Aliessi, How Does the Blockchain Work?, MEDIUM (June 1,
2016), https://medium.com/@micheledaliessi/how-does-the-blockchain-work-
98c8cd01d2ae#.w76hifcu2; Monica Pearson, Blockchain Is the New Buzzword,
EXPERIAN, (Jan. 31, 2016),
https://www.experian.com/blogs/insights/2016/01/blockchain-is-the-
newbuzzword.
12
D’Aliessi, supra note 11.
13
Participants can be individuals, organizations, and even things. Sloane
Brakeville & Bhargav Perepa, Blockchain basics: Introduction to distributed
ledgers, IBM (May 09, 2016),
https://www.ibm.com/developerworks/cloud/library/cl-blockchain-basics-intro-
bluemix-trs. The only condition for participants is the necessity of an internet
connection. Blockchain Technology, SIA PARTNERS (Oct. 6, 2015),
http://en.finance.sia-partners.com/blockchain-technology.
10

and less prone to error and corruption. While blockchains use of

digital signatures helps establish the identity and authenticity of the
parties involved in the transaction, it is the completely decentralized
network connectivity via the internet that allows the most protection
against fraud.14 Network connectivity allows multiple copies of the
blockchain to be available to all participants across the distributed
network.15 The decentralized fully distributed nature of the
blockchain makes it practically impossible to reverse, alter, or erase
information in the blockchain.16 Blockchains’ distributed consensus
model, e.g. the network “nodes” that verify and validate chain
transactions before transaction execution, make it extremely rare for
a fraudulent transaction to be recorded in the blockchain.17
Blockchain’s distributed consensus model allows node verification
of transactions without comprising the privacy of the parties.
Therefore, blockchain transactions are arguably safer than traditional
transactions that require a third-party intermediary validation of the
transactions.18
Cryptographic hashes further increase blockchain security.
Cryptographic hashes are complex algorithms that use details of the
existing entirety of transactions of the existing blockchain before the
next block is added to generate a unique hash value.19 That hash
value ensures the authenticity of each transaction before it is added
to the block. The smallest change to the blockchain, even a single
digit/value, results in a different hash value. A different hash value
14
D’Aliessi, supra note 11.
15
Id.
16
Id.
17
See, e.g., Francois Janinotto, The Blockchain Explained to Web Developers, Part
1: The Theory, MARMELAB BLOG (Apr. 28, 2016),
https://marmelab.com/blog/2016/04/28/blockchain-for-web-developers-
thetheory.html; Razvan Peteanu, Fraud Detection in the World of Bitcoin, BITCOIN
MAG. (Mar. 26, 2014, 5:50 AM EST),
https://bitcoinmagazine.com/articles/frauddetection-world-bitcoin-1395827419/
(noting, “Fundamentally, detecting fraud is hard precisely because it is rare,
dynamic and not necessarily obviously fraudulent.”).
18
See Michael Crosby et al., BlockChain Technology: Beyond Bitcoin, APPLIED
INNOVATION REV. (June 2016), http://scet.berkeley.edu/wp-content/uploads/AIR-
2016-Blockchain.pdf.
19
ERIC PISCINI, BLOCKCHAIN: DEMOCRATISED TRUST 8, DELOITTE U. PRESS (Feb.
24, 2016), https://dupress.deloitte.com/dup-us-en/focus/tech-
trends/2016/blockchain-applications-and-trust-in-a-global-economy.html.
11

makes any form of manipulation immediately detectable.20

Smart contracts and smart property are blockchain enabled
computer protocols that verify, facilitate, monitor, and enforce the
negotiation and performance of a contract.21 The term “smart
contract” was first introduced by Nick Szabo, a computer scientist
and legal theorist, in 1994.22 An often-cited example for smart
contracts is the purchase of music through Apple’s iTunes
platform.23 A computer code ensures that the “purchaser” can only
listen to the music file on a limited number of Apple devices.24
More complex smart contract arrangements in which several
parties are involved require a verifiable and un-hackable system
provided by blockchain technology.25 Through blockchain
technology, smart contracting often makes contractual legal
20
Antony Lewis, A Gentle Introduction to Immutability of Blockchains (Feb. 29,
2016), https://bitsonblocks.net/2016/02/29/a-gentle-introduction-to-immutability-
of-blockchains.
21
See e.g., Alan Morrison, BLOCKCHAIN AND SMART CONTRACT AUTOMATION:
INTRODUCTION AND FORECAST, PWC (2016),
http://www.pwc.com/us/en/technology-forecast/2016/blockchain/pwc-
smartcontract-automation-introduction.pdf; Nicolette Kost De Sevres & Bradley
Cohen, The Blockchain Revolution, Smart Contracts and Financial Transactions,
DLA PIPER (Apr. 26, 2016),
https://www.dlapiper.com/en/czech/insights/publications/2016/04/the-
blockchainrevolution.
22
Smart Contracts: The Blockchain Technology That Will Replace Lawyers,
BLOCKGEEKS, http://blockgeeks.com/guides/smart-contracts (last visited June 16,
2017); Not-So-Clever Contracts, ECONOMIST, July 30, 2016, at 53,
http://www.economist.com/news/business/21702758-time-being-least-
humanjudgment-still-better-bet-cold-hearted.
23
See, e.g., HORSTEN KOEPPL & JEREMY KRONIK, BLOCKCHAIN TECHNOLOGY—
WHAT’S IN STORE FOR CANADA’S ECONOMY AAND FINANCIAL MARKETS? 15
(2017),
https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Co
mmentary_468_0.pdf; R. Douglas Vaugh & Anna Outzer, Understanding How the
Block Chain Could Impact the Legal Industry, LAW 360 (Jan. 11, 2107),
https://www.law360.com/articles/879810/understanding-how-blockchain-
couldimpact-legal-industry.
24
Vaugh & Outzer, supra note 23.
25
See, e.g., ETHEREUM, https://www.ethereum.org; Gavin Wood, Etherium: A
Secure Decentralised Generalised Transaction Ledger,
http://gavwood.com/paper.pdf; Luke Parker, Industry Research Papers Highlight
Blockchain Technology’s Disruptive Potential, BRAVE NEWCOIN (July 3, 2016),
https://bravenewcoin.com/news/industry-research-papers-highlight-
blockchaintechnologys-disruptive-potential.
12

contracting unnecessary as smart contracts often emulate the logic of

legal contract clauses.26 Merkel trees of these valid smart contracts
are combined and included in blocks on the Ethereum blockchain.
The Ethereum platform is the leading platform for smart contracting
and has a virtual machine that directs the nodes of the blockchain to
compute the smart contracts whenever a user makes a valid request.
Ethereum describes smart contracting in this context as
follows:
”Ethereum is a decentralized platform that
runs smart contracts: applications that run exactly as
programmed without any possibility of downtime,
censorship, fraud or third-party interference. These
apps run on a custom built blockchain, an
enormously powerful shared global infrastructure
that can move value around and represent the
ownership of property. This enables developers to
create markets, store registries of debts or promises,
move funds in accordance with instructions given
long in the past (like a will or a futures contract)
and many other things that have not been invented
yet, all without a middle man or counterparty
risk.”27
It is Ethereum’s goal to provide a platform for writing any
sort of contract, business or otherwise, which is automatically
enacted without recourse to dispute, i.e., self-executing and self-
enforcing. A commonly used example is a smart contract for
purchasing music online: A customer might buy the rights to play a
26
Mark Anderson, SMART CONTRACTS AND BOCKCHAIN TECHNOLOGY, IP
DRAUGHTS (June 18, 2106, 12:14 PM),
https://ipdraughts.wordpress.com/2016/06/18/smartcontracts-and-blockchain-
technology. See generally Josh Stark, Making Sense of Blockchain Smart
Contracts, COINDESK (June 4, 2016, 18:39 GMT),
http://www.coindesk.com/making-sense-smart-contracts; Josh Stark, How Close
Are Smart Contracts to Impacting the Real World of Law?, COINDESK (Apr. 11,
2016, 14:00 GMT), http://www.coindesk.com/blockchain-smarts-crntracts-
realworld-law; Ted Mylnar & Ira Schafer, Why Smart Contracts Will Need ‘Smart
Term Sheets’ to Match, COINDESK (Dec. 9, 2016, 14:36 GMT),
http://www.coindesk.com/smart-contracts-will-need-smart-term-sheets-match. For
an example of what startups hope to accomplish with smart contracting, see
Legalese, https://legalese.com/.
27
ETHEREUM, supra note 25.
13

song on 5 devices. The contract would automatically determine

whether the user is allowed to download the song at any point in the
future, based on whether the user has already downloaded the song
to 5 devices or not. Ethereum provides a platform for writing and
executing such contracts where no legal dispute is possible from any
party.
Such a system has serious inherent flaws in its scalability for
making more complicated contracts. Within one year of the creation
of Ethereum, in May 2016 the DAO28 was created as a smart
contract on the Ethereum platform with $150 million US in
crowdfunding29. The DAO was the first decentralized autonomous
organization, intended to work as a venture funding cooperative. One
month later a hack sequestered one third of its capital. The month
after that Ethereum initiated a hard fork which undid the hack; i.e.,
the Ethereum blockchain computer code was directly altered to
change the DAO smart contract. This was controversial, because it
violated the autonomy and decentralization goals of any blockchain.
Consequently, Ethereum split into two blockchains, the unedited
fork of the chain being called Ethereum Classic. However, new
DAOs are already created that fix the former coding shortcomings.
1. Mathematical Principles and Foundations
In this section, we explain the general technical details
underlying the function of blockchain architecture. To illustrate the
ideas, we will use the specific example of the first blockchain
implemented, Bitcoin. Starting from $0 net worth in 2009, the total
USD value of bitcoin supply in circulation as of March, 2017 was
estimated at greater than $20 billion30. What makes the bitcoin
blockchain successful is that it is a novel database design which
solves several seemingly contradictory requirements:
1. The database gives users absolute privacy.31 At the same time

the complete list of bitcoin transactions is open—anyone with
28
“The DAO” refers to this first decentralized autonomous organization. “A DAO”
refers to other organizations of the same model.
29
Morgan Peck, Ethereum’s $150-Million Blockchain- Powered Fund Opens Just
as Researchers Call for a Halt, IEEE SPECTRUM (May 28, 2016),
http://spectrum.ieee.org/tech-talk/computing/networks/ethereums-150-million-
dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium.
30
https://blockchain.info/charts/market-cap
31
At least within the system this is true via public key cryptography explained in
the following section.
14

an internet connection can view the entire history of changes

in bitcoin ownership following the public key addresses of
every bitcoin. This gives users confidentiality and confidence
in the value of any transaction with the digital currency.
2. The system is open, in the sense that anyone connected to the
internet can participate in editing any part of the blockchain.
At the same time, it is highly secure against malicious attacks
against the integrity of the information in the whole history of
its transactions. This gives users short-term confidence in the
integrity of the system, because any modern laptop computer
can quickly verify the validity of the entire chain.
3. There is no central authority which actively maintains the
integrity of the system. At all times, an open system of
consensus regulates the building and maintenance of the
ledger. At the same time this open and dynamic system
responds swiftly and automatically to any changes needed to
further secure the data, as computational power changes year
to year. This gives users long-term confidence, as larger
historical forces such as technological and political changes
are removed as factors in the value of the currency.
The goal of this section is to explain how the blockchain

architecture achieves these three twin demands. They all rest on two
mathematical constructions: public-key cryptography maintains the
anonymity of its users, while giving a mechanism for permanently
tracking all transactions; and cryptographic hash functions ensure the
security and permanence of the data in an open, distributed
environment where theoretically anyone can edit the blockchain.
The bitcoin program is a distributed ledger. Being a ledger
means it keeps a record of transactions. Each transaction represents
the transfer of ownership of one user’s bitcoins to other users. Being
distributed means the creation and maintenance of the blockchain
ledger is accomplished by a network of nodes. The nodes are
computers which contain a copy of part or all of the blockchain data.
Each block of the blockchain contains a cryptographically secured
tree of data bundled together from the transactions within the system
which occurred in the last 10 minutes of operation on average. The
nodes communicate with each other and maintain consensus on the
definition of the official blockchain data, by continuously verifying
the integrity of the data in the other nodes. The chain of the
15

blockchain is generated by bitcoin miners who sequentially add

blocks which are time-stamped and cryptographically connected to
previous blocks in the chain. In addition to maintaining the ledger,
many nodes are bitcoin miners which further perform the encryption
work necessary to create new blocks. Their work is motivated by
transaction fees and newly created bitcoins that occur each time a
new block is created.
a) Public-Key Cryptography
Public-key cryptography is a crucial element in building
anonymity into blockchain transactions. Public-key cryptography
protects every bitcoin user’s identity, in the same way that a credit
card number is protected when sent over an insecure line to purchase
products over the internet.
Public-key cryptography empowers the entire online
economy. When consumers make a purchase online, they send
valuable personal information through unprotected hubs in the
internet, where unknown, potentially malicious agents (hackers) can
read the information. In any major vending website, the information
is automatically encrypted so that these unknown agents cannot
understand the information sent. The vending website can
communicate with millions of purchasers in various countries on
diverse technological platforms and agree on a secure encryption
scheme, even while malicious agents are watching the entire
interaction.
In public-key cryptography, the vendor has two complicated
numbers, a public key e and a private key d. The numbers e and d are
very large, seemingly random numbers, but they are chosen carefully
so that any message can be encrypted and decrypted with two simple
operations.
First, the vendor sends out his public key e which is seen by
everyone, while his private key d is kept secret. Secondly, the
purchaser encrypts any chosen message m with the public key. In the
original RSA public-key algorithm, the encrypted message was
simply calculated as
! = #$ mod )
by taking the message to the power of the public key under modular
16

arithmetic32. Now the encrypted message c is a garbled version of the

original purchaser’s message m.
In the third step, the purchaser sends the encrypted message c
back to the vendor across unsecured lines. The final, crucial step is
that the vendor, and only the vendor, can now decrypt the message
using the private key d. No other choice of number will work.
Therefore, if the private key is kept secret, hackers will not be able to
decrypt the message without trying all the numbers up until the very
large private key. In the original RSA algorithm, this decryption step
works because d and e are chosen from the beginning with the
property that

!"# = ! mod )
for any number m.

In this RSA scheme the vendor merely takes c to the power of
d in order to decrypt the message, a simple calculation for a
computer which takes a fraction of a second. But if a hacker tried to
decrypt the message they would have to try a great many numbers to
find the correct value d, so many that it would take the fastest
computer longer than the age of the universe to succeed.
In the case of bitcoin, the owners’ identities are protected
because the location of every bitcoin is cryptographically secured
with a public-key encrypted address, i.e. the location of each bitcoin
is a long number, a private key. Since only the owner has the private
key, no one else can use that bitcoin for a transaction.
Further, if the owner wants to prove they have a bitcoin
without revealing the private key, they could send an encrypted
message

! = #$ mod )

and anyone can use the public key e for the bitcoin to check the
decoded message m comes out when taking c to the power of e since
!"# = !#" = ! mod )
thus, proving the owner truly has the correct private key. This is
32
Modular arithmetic sounds difficult, but it is elementary school arithmetic. In
particular a mod n means the remainder of a upon division by n. For example,
23 mod 7 = 2 since 23 =7×3 + 2 or 164 mod 10 = 4 since 164 = 10×16 + 4.
17

called message authentication code, or more specifically, a digital

signature. In summary, the private key owner is not required to
reveal any private information in order to prove ownership.
In point of fact, the Bitcoin protocol33 does not use the simple
RSA algorithm described above, but instead uses a slight variant
called ECDSA (Elliptic Curve Digital Signature Algorithm) to
encrypt the addresses of bitcoins. This scheme uses elliptic curve
algebra in order to garble the message, but otherwise it is very
similar to the RSA method of taking powers of large numbers with
modular arithmetic. ECDSA also naturally incorporates a changing
scale of encryption strength, which is one minor way bitcoin security
responds automatically to improvements in computing power
through the years, giving users long term confidence in the system.
The public-key algorithm makes the location and ownership
of bitcoins as perfectly anonymous within the system as is practically
possible. Experts are confident this protocol will resist any
foreseeable development in computing, such as changes in hardware
like the imaginable switch from electronic to quantum computing.34
As anecdotal evidence of its security, the founder of Bitcoin, who
goes by the pseudonym Satoshi Nakamoto, is still unknown, despite
owning billions of dollars in bitcoins.
b) Cryptographic Hash Functions

The second mathematical tool that makes blockchains
practically realizable is the cryptographic hash function. A hash
function takes an input message and deterministically returns a
number of fixed length, called the hash. Ideally, a hash function
satisfies the following properties:
1. Hashes are easy to calculate.

2. It is difficult to invert a hash.
3. Small changes in the hash value correspond to large changes
in the corresponding message.
4. It is unlikely to find two messages with the same hash.
Consider the following toy example of a hash function. Imagine

we wish to encrypt and store a list of 100 names. Take each name
33
https://en.bitcoin.it/wiki/Protocol_documentation#Addresses
34
ARVIND NARAYANAN, ET AL., BITCOIN AND CRYPTOCURRENCY TECHNOLOGIES
(2016).
18

and convert the letters to numbers:

A→1, …, Z→26
so
John Smith→ 10-15-8-14-19-13-9-20-8.
Remove the dashes and break it into 5 digit chunks:
10158, 14191, 39208
Add the decimal part of 2 ≈ 1.41421 to each chunk:
51579, 55612, 80629
Cycle the nth chunk n digits to the right. The first is cycled 1 digit,
the second 2 digits, the third 3 digits:
95157, 12556, 62980
Sum the chunks and take the remainder upon dividing by 100,000:
(95157+12556+62980) mod 100,000 = 70693
The result 70693 is then the toy hash for John Smith.
If we hash all the other names on the list we will have 100
numbers representing the encrypted names. It is easy to see the 4
properties are satisfied: the operations are extremely easy to perform
(meaning a computer can compute the algorithm very quickly). It is
extremely difficult to guess a name corresponding to any given
number. Changing the final letter to the name John Smitt hashes to
84907, so small changes in the message give big changes in the hash.
Finally, it is always possible for two messages to give the same hash,
but it is extremely unlikely. The likelihood of any two names giving
the same hash using our toy hash function is roughly 1 in 100,000
since we’ve used 5 digits to encrypt the data. So, in a list of 100
names of any size, there is a less than 1% chance any two correspond
to the same hash. If we want to decrease this chance we can use more
than 5 digits.
The hash function used in bitcoin is called SHA-256 which
uses a more complicated scheme of adding, rotating, and threading
chunks of numbers, but still restricts itself to such simple
computations. SHA-256 gives hashes with 256 bits, meaning there
are 2256 ≈1.1579×1077 different possible hashes under the scheme, a
number almost as big as the number of atoms in the observable
universe. So, SHA-256 is quite capable of encoding all the
transactions that can ever be performed by bitcoin with unique
addresses. This ensures the extensibility requirement of
contemporary computer science, as the system can theoretically
adapt automatically to exponentially multiplying scales of use for
19

centuries. This is a crucial requirement for blockchain applications

such as Bitcoin or Ethereum, which hope to become global platforms
for business.
c) Transactions and Block Creation

The use of hash functions helps explain the encryption of
transactions and the block creation stage of bitcoin. Each transaction
in the bitcoin scheme represents the transfer of bitcoins from one
user to others. A transaction can correspond to the purchase of a cup
of coffee, a new automobile, or the transfer of large amount of stocks
from one portfolio to another. Both purchaser and seller need to be
guaranteed the proper number of bitcoins have moved from one
bitcoin account to another. This is achieved by incorporating the
transaction into the blockchain ledger, which happens when it
becomes a part of a newly created block.
Each transaction is represented with a numerical address, in
the same way John Smith was given the numerical address 70693 in
the example above, except each transaction is represented with a
256-digit binary number using the SHA-256 algorithm instead of a 5-
digit decimal number using the toy hash.
Every 10 minutes on average a bundle of transactions are
encrypted in a block which is added to the blockchain. Bitcoin
miners bundle the transactions in a block by hashing the transactions
together in a Merkle tree then solving a so-called “proof-of-work”
puzzle.
As an example of creating a Merkle tree, imagine we had 4
transactions to hash, A1, A2, A3, and A4. Then we would combine
the first two 256 digit addresses A1 and A2 into one address B1 with
a hash, and similarly A3 and A4 produce B2. Then B1 and B2 hash
to C1. Then C1 is the root of the Merkle tree and represents the
bundle of 4 transactions.
Now comes the difficult part for the miner, the proof-of-work
puzzle, described as follows: Take three numbers—the previous
block’s address (P), the current block’s Merkle root hash (M), and an
arbitrarily chosen number called the nonce (N). Combine the three
numbers with SHA-256 to create a resulting hash (R). If the resulting
hash R begins with a specified number of 0s, the miner has solved
the puzzle and a new block is created and added to the chain with a
new address given by hashing its Merkle root and nonce. For any
given nonce it is easy to hash P, M, and N to get R. However, it is
20

very unlikely to result in a number with the required number of 0s, so

the miner will need to try a large number of nonces before
succeeding.
The difficulty of the proof-of-work puzzle is adjusted every
two weeks to give an average block creation rate of six times per
hour. The difficulty level in July 2016 was set to approximately 20
zeros35 and it was estimated a miner would need on average 2×1017
hashes to find a successful nonce.36
Once a miner solves their proof of work puzzle, the results
(the previous block’s address, the collection of transactions in the
block, and the nonce) are published to the network for verification.
The other nodes automatically check whether the results are valid,
which happens nearly instantaneously because hashing one set of
numbers is easy. If the results are valid, the other nodes add the
block to their copies of the block chain. The successful miner
receives the reward of the newly created bitcoins and any
transactional tips. Then a new round of block creation begins. Each
miner creates a new Merkle tree from the unused valid transactions
(which happens nearly instantaneously because hashing one set of
numbers is easy), and they begin their search anew for a successful
nonce.
When a new block is created, all of the unsuccessful miners
receive no reward for their efforts—they have wasted their energies.
Thus, to have any success at bitcoin mining users recognized within
the first year that miners needed to combine their efforts. Mining
pools were created where rewards are shared amongst members.
However, competition quickly grew to the point that today the most
profitable bitcoin mining operations use large banks of computers
with custom designed hardware, programmed in parallel, in locations
where energy for operation and cooling is almost free, such as Tibet
and Iceland.
d) Ethereum – Proof-of-Stake
An open distributed database can be adapted for other
purposes beyond digital currencies. In July 2015, Ethereum created
the most significant new public blockchain since Bitcoin. Ethereum’s
35
https://blockchain.info/block/000000000000000002cce816c0ab2c5c269cb08189
6b7dcb34b8422d6b74ffa1
36
https://blockchain.info/charts/difficulty
21

major innovation is Turing complete scripting functionality.37 As

opposed to Bitcoin transactions which are simple records of transfer
of ownership of digital currency, Ethereum transactions are
executable computer programs, called smart contracts.38 Each node
contains protocol for a virtual machine which can execute these
programs. To guard against spam (anyone can ask the network to run
any program added to the blockchain) users must pay for each step of
each program they call with Ethereum’s digital currency, Ether
(ETH).
Another variation on the Bitcoin blockchain protocols that is
gaining traction is a change from proof-of-work mining to proof-of-
stake mining. One problem with proof-of-work mining is that there
are significant externalities. Before the publication of this article, the
total energy costs for running the global network of computers
devoted to solving the proof-of-work puzzles was estimated at
around $700 million USD per year. Each transaction with bitcoin
currently uses as much energy as a typical American household uses
in 5 days.39 This enormous energy consumption created an urgent
motivation to find a better solution.
To this end, Ethereum announced its intention to institute
CASPER, a proof-of-stake consensus protocol, to be adopted in late
2017. It has not been finalized as of this writing, but the general idea
given by Ethereum founder Vitalik Buterin, is for Ethereum
stakeholders to create blocks with their own security deposits
attached. Whenever the system finds irregularities associated with a
block creation, the stakeholder causing the irregularities is punished
by losing their stake/deposit. If it can be designed in a way that
prevents the many attacks that have been enumerated against past
37
A transaction in bitcoin is represented with a 256 digit binary number. Even
under this protocol, much more information than a history of monetary transfers
can be stored. The number 2256 means each atom in our galaxy can be given a
unique address. Any information or instructions we can imagine can be encrypted
as transactions in a blockchain. The physical actions of every person on earth for
every second for the next billion years, if they can be recorded, can be stored
eternally on the blockchain without running out of space.
38
Smart contracts are self-executing, self-regulating agreements between users of
the blockchain. For example, a smart contract might automatically release funds or
ownership documents once both parties agree stipulations have been fulfilled. The
goal is to reduce (almost entirely) associated intermediary costs of traditional
contracts, such as negotiation, enforcement, and arbitration.
39
CITE http://digiconomist.net/bitcoin-energy-consumption retrieved 6/26/17.
22

proposals, then proof-of stake block creation will eliminate much of

the energetic externalities of the blockchain.
e) Technical Summary
With the use of public-key cryptography and cryptographic
hash functions, blockchain architecture gives its users long term
confidence in anonymity, security, and decentralized autonomy.
Users’ accounts are encoded by private keys, so their
information is securely encrypted. They have complete power over
whether they share information and with whom. When sharing
generic information, such as the fact that they own more than 10
bitcoins, they reveal no private information. Further, each time a
transaction is made, a new private key can be made. So, while we
can track the public key of the addresses of each transaction, and that
information is stored eternally in the blockchain, each transaction
allows for an entirely new private identity which is cryptographically
secured. This gives more anonymity in business transactions than
ever before imagined.
No outside, centralized agency can exert any type of
independent power over the blockchain ledger, because it is
decentralized, autonomous, and secured by the proof-of-work energy
expenditure of the entire planet.
Since a blockchain is decentralized, governmental powers
cannot exert authority over its growth or maintenance. If the U.S.
government attempted to exert power over the system by influencing
any number of individuals within their jurisdiction, they would need
complete control of 51% of the anonymous global users before they
could change any part of the code.
The system is autonomous, so even assuming a government
did find some of the anonymous individuals whose work maintains
the ledger, it would be difficult to argue personal responsibility for
any crime. The miners are simply running a universal algorithm
which was created in 2009.
Finally, and most importantly, the very security of the system
guarantees no outside power will ever have the ability to control the
blockchain. Anyone wishing to change the autonomous growth of the
blockchain for their own purposes needs to outcompete the entire
global network in the proof-of-work cryptographic hash function
puzzles. Even if a major power attempted to take that extreme action,
users would instantly know about the takeover due to the openness of
23

the blockchain. In that event it would lead to a loss of confidence and

ultimate failure of the entire structure. So, the agency would not
control the blockchain, they would merely destroy it. Thus, no
centralized agency, not the General Secretary of the People’s
Committee of China, not the Federal Assembly of the Russian
Federation, nor the entire judicial branch of the United States, will
ever have the ability, much less the authority, to dictate any changes
to a public blockchain.
2. Regulatory Recognition
Regulatory recognition of blockchain technology in the
United States is still largely unsettled. The United States Financial
Industry Regulatory Authority (FINRA) has issued a report,40
establishing a common basis for a dialogue with market participants,
raising a multitude of questions, without providing specific answers.
The U.S. Commodity Futures and Trade Commission (CFTC),
compared the blockchain technology to the internet revolution and
supported a “do no harm” approach in regulating blockchain
technology. The CFTC opined that this approach promoted at the
time of the internet transformation by the American administration
was successful and should be applied to blockchain.41
The states of Arizona, Vermont, and Delaware have launched
specific regulatory initiatives. Delaware launched the Delaware
Blockchain Initiative in 2016, to maintain its leading role in the
context of corporate governance.42 Arizona passed the so-called
“Blockchain Bill”43 into law, which provided specific regulation for
electronic signature, blockchain, and smart contracts. The law now
40
FIN. INDUS. REGULATORY AUTH., DISTRIBUTED LEDGER TECHNOLOGY:
IMPLICATIONS OF BLOCKCHAIN FOR THE SECURITIES INDUSTRY (2017),
http://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf
41
J. Christopher Giancarlo, CFTC Commissioner, Special Address Before the
Depository Trust & Clearing Corporation 2016 Blockchain Symposium (Mar. 29,
2016), http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-13.
42
See Andrea Tinianow, Delaware Blockchain Initiative: Transforming the
Foundational Infrastructure of Corporate Finance, HARV. L. SCH. F. ON CORP.
GOVERNANCE & FIN. REG., (Mar. 16 2017),
https://corpgov.law.harvard.edu/2017/03/16/delaware-blockchain-initiative-
transforming-the-foundational-infrastructure-of-corporate-finance.
43
Act of Mar. 29, 2017, ch. 97, 2017 Ariz. Sess. Laws,
https://apps.azleg.gov/BillStatus/GetDocumentPdf/452616 (to be codified at Ariz.
Rev. Stat. §44-7003) (making a signature on a blockchain a legal signature under
Arizona law).
24

expressly defines blockchain44 and smart contracts.45 It also

recognizes “a signature … secured through blockchain technology”
as equivalent to an electronic signature in an electronic form and “a
record or contract secured through blockchain” as equivalent to an
electronic record in an electronic form, as well as the existence of
smart contracts.46
The state of Vermont adopted a more prudent approach. The
state report “Blockchain Technology: Opportunities and Risk”47
considered that “at present, the costs and challenges associated with
the use of blockchain technology for Vermont’s public
recordkeeping outweigh the identifiable benefits.”48 The report also
emphasized the relevance of recognizing blockchain technology, that
would determine “a ‘first mover’” advantage with the potential to
bring economic activity surrounding the development of blockchain
technology to Vermont”, remarking the uncertainty around such
potential as, “difficult to quantify and challenging to capture due to
the nature of the technology.”49 For the moment, Vermont has
recognized the possibility to use blockchain in the context of a trial
under specific conditions.50
Several pending legislative proposals may increase the
recognition of blockchain technology under existing law. In early
2017, legislators throughout the United States introduced legislation
44
Id. “"blockchain technology" means distributed ledger technology that uses a
distributed, decentralized, shared and replicated ledger, which may be public or
private, permissioned or permissionless, or driven by tokenized crypto economics
or tokenless. The data on the ledger is protected with cryptography, is immutable
and auditable and provides an uncensored truth”.
45
Id. “"Smart Contract" Means An Event-Driven Program, With State, That Runs
On A Distributed, Decentralized, Shared And Replicated Ledger And That Can
Take Custody Over And Instruct Transfer Of Assets On That Ledger”.
46
Id. “a contract relating to a transaction may not be denied legal effect, validity
or enforceability solely because that contract contains a smart contract term”
47
JAMES CONDOS, WILLIAM H. SORRELL, & SUSAN L. DONEGAN, BLOCKCHAIN
TECHNOLOGY: OPPORTUNITIES AND RISK (2016),
http://legislature.vermont.gov/assets/Legislative-Reports/blockchain-technology-
report-final.pdf
48
Id.
49
Id.
50
See VT. STAT. ANN. tit. 12, § 1913. The Statute defines “blockchain technology”
as “a mathematically secured, chronological, and decentralized consensus ledger or
database, whether maintained via internet interaction, peer-to-peer network, or
otherwise”.
25

to explore virtual currency and blockchain technology. While some

states evaluate opportunities for the technology to boost the local
economy, other states are implementing specific use cases.51
51
Illinois
Legislation: House Resolution 120
Sponsor: Representative Michael Zalewski (D)
Introduced on February 8 2017, H.Res. 120 creates a Legislative Blockchain and
Distributed Ledger Task Force to “study how and if [s]tate, county, and municipal
governments can benefit from a transition to a blockchain
New Hampshire
Legislation: House Bill 436
Sponsors: Representatives Barbara Biggie (R) and Keith Ammon (R)
Introduced on January 5, 2017, HB 436 amends New Hampshire’s Licensing of
Money Transmitters statute to specifically address virtual currency issues. The bill
defines virtual currency as “a digital representation of value that can be digitally
traded and functions as a medium of exchange, a unit of account, or a store of
value but does not have legal tender status as recognized by the United States
government.”
Hawaii
Sponsors: Representatives Chris Lee (D) and Mark Nakashima (D)
Introduced on January 25, HB 1481 “establish[es] a working group consisting of
representation from the public and private sectors to examine, educate, and
promote best practices for enabling blockchain technology to benefit local
industries, residents, and the State of Hawaii.”
Vermont
Legislation: Senate Bill 59
Sponsor: Senator Ann Cummings (D), Representative William Frank (D)
Introduced on February 1, 2017, SB 59 focuses on the need “to amend and
establish laws pertaining to consumer litigation funding companies; licensed
lenders; money servicers; debt adjusters; and loan servicers.” To accomplish that,
the bill adds a definition of virtual currency to the state’s money services statute (8
V.S.A. § 2500 et seq.): “stored value that (A) can be a medium of exchange, a unit
of account, or a store of value; (B) has an equivalent value in money or acts as a
substitute for money; (C) may be centralized or decentralized; and (D) can be
exchanged for money or other convertible virtual currency.”
Washington
Legislation: Senate Bill 5264
Sponsors: Senators Steve Conway (D) and Ann Rivers (R)
Introduced on January 18, 2017, SB 5264 seeks to amend Washington’s Uniform
Controlled Substances Act to restrict the use of virtual currency for the purposes of
marijuana sale and distribution. The bill “prohibits a marijuana producer,
processor, or retail outlet from paying with or accepting virtual currency for the
purchase or sale of marijuana or marijuana products.”
Arizona
26

III. Jurisdiction Over Blockchain

The lack of regulatory recognition of Blockchain technology
creates uncertainty for the blockchain community. The lacking
recognition hinders the implementation of the technology across
industries and undermines infrastructure conversion via blockchain
technology. The regulatory uncertainty derives from insufficient or
non-existent regulatory guidance, sparse court decisions, uncertainty
over jurisdiction, and a sense in the user community of interacting in
an environment that is generally free of law. As the technology
applications grow and the value of crypto currencies rises, the
evolution of blockchain-based crypto economy will depend to some
extent on users’ trust in the efficacy of blockchain-based dispute
resolution mechanisms and the immutability of the technology.
Courts have not yet recognized blockchain technology or
addressed legal implications of blockchain-based applications. For
the most part, the technology industry agrees that Blockchain
technology is immutable and secure.52 However, a review of
published court opinions suggests that no court has had to review,
Sponsor: Representative Paul Boyer (R)

Introduced on January 17, 2017, HB 2216 would make it “unlawful to require a
person to use or be subject to electronic firearm tracking technology or to disclose
any identifiable information about the person or the person's firearm for the
purpose of using electronic firearm tracking technology.”
Arizona
Sponsor: Representative Jeff Weninger (R)
Introduced on February 7, 2017, HB 2417 provides that smart contracts written on
a blockchain are essentially equivalent to all other forms of contracts. The bill
defines blockchain technology and smart contracts and then states that transactions
based on these self-executing contracts could not be “denied legal effect, validity,
or enforceability” because of the smart contract term. Further, any signature
recorded on the blockchain would be equated to a legal signature under Arizona
law and would be "considered to be in an electronic format and to be an electronic
record." Lastly, the bill states individuals who own or have the right to use
information they place on the blockchain retain those rights.
While most of the foregoing bills are at an early stage, and do not comprehensively
regulate virtual currency or blockchain technology, it is encouraging that
legislators on both sides of the aisle are increasing their focus on issues relating to
this technology.
52
Ben Dickson, Blockchain’s Brilliant Approach to Cybersecurity, VENTUREBEAT
(Jan. 22, 2017), https://venturebeat.com/2017/01/22/blockchains-brilliant-
approach-to-cybersecurity.
27

assess, or scrutinize the uses and applications of blockchain

technology at the time of publication of this article.53 Thus creating
uncertainty in how courts may perceive and treat blockchain
technology.54 While some judges are technology novices that could
misunderstand and misinterpret the new technology, the technology
is arguably no different from other virtual software that courts have
evaluated.55 Similarly, blockchain ledgers do not exist in a physical
sense, and therefore have no specific location.56 The nodes in the
blockchain network can be located all over the world, and therefore
arguably blockchain transactions can be subject to the legislation of
any given node in the network.57 Moreover, it may be difficult to
identify parties to transactions recorded to the blockchain.58
1. Traditional Jurisdictional Means

In American law, the term jurisdiction has two distinguishable
meanings with a correlating authority: personal jurisdiction and
53
A search of “blockchain” or “block chain” in federal and state cases on Westlaw
reveals that only two cases have mentioned blockchain technology. The courts in
both cases refused to discuss blockchain in depth, and did not take a position on
the legitimacy of the technology. See In re Dole Food Co., Inc. Stockholder
Litigation, C.A. No. 8703–VCL, 2017 WL 624843 at n. 1 (Del. Ch. Feb. 15, 2017);
United States v. Petix, 15-CR-227A, 2016 WL 7017919 (W.D. N.Y. Dec. 1, 2016).
54
“While countless undisputed transactions utilizing smart contracts are likely to
move forward on the basis of such automatic, electronic enforcement, there will
likely always be the need for human intervention to settle legal disputes.” Reggie
O'Shields, Smart Contracts: Legal Agreements for the Blockchain, 21 N.C.
BANKING INST. 177 (2017).
55
Ronald L. Chichester, Wide Open Spaces, 80 TEX. B. J. 228 (2017),
https://www.texasbar.com/AM/Template.cfm?Section=articles&Template=/CM/H
TMLDisplay.cfm&ContentID=36379 (“There is no reason to think that links
within a blockchain could not be admissible in court. While an expert may be
needed to opine on the authenticity of the particular blockchain and the specific
transaction, there is nothing inherently different about blockchains than other
software programs.”).
56
María Tena, 7 Regulatory Challenges Facing Blockchain, BBVA (Jan. 16,
2017), https://www.bbva.com/en/news/economy/financial-and-commercial-
services/fintech/7-regulatory-challenges-facing-blockchain.
57
Gregory Brandman & Samuel Thampapillai, Blockchain – Considering the
Regulatory Horizon, OXFORD BUS. L. BLOG (July 7, 2016),
https://www.law.ox.ac.uk/business-law-blog/blog/2016/07/blockchain-
%E2%80%93-considering-regulatory-horizon.
58
O’Shields, supra note 54; also see Catherine Martin Christopher, The Bridging
Model: Exploring the Roles of Trust and Enforcement in Banking, Bitcoin, and the
Blockchain, 17 NEV. L.J. 139, 180 (2016).
28

subject matter jurisdiction. Generally, jurisdiction may refer to the

geographic distribution of disparate courts of particular levels59 or it
may refer to the official power of a court to exercise judicial
authority over a particular matter.60 To hear a case, courts are
required to have both personal jurisdiction and subject matter
jurisdiction.
Personal jurisdiction refers to whether a court has power over
the person being sued. Personal jurisdiction has four major categories
in case law: 1. Physical Presence,61 2. Domicile/Place of Business,62
3. Consent,63 and 4. Minimum Contacts.64 The doctrine of personal
59
Jurisdiction, BLACK’S LAW DICTIONARY (10th ed. 2014). Only one Supreme
Court exists, the court of appeals is divided into 13 circuits, and there are 94
district courts. Court Role and Structure, UNITED STATES COURTS,
http://www.uscourts.gov/about-federal-courts/court-role-and-structure (last visited
June 16, 2016). In addition, each state court system comprises its own
“jurisdiction.”.
60
Although the term most often is used in connection with the jurisdiction of a
court over particular matters, one may also speak of matters being within or
beyond the jurisdiction of any other governmental entity.
61
CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1064 -
1065 (4th ed. 2015). e.g. Physical presence in a state can grant courts jurisdiction
over a person. A person being served with a copy of the summons and complaint
while physically present in the forum state is sufficient to give a court in that state
jurisdiction over the person who was served. That means that even if a person was
just passing through the state for a few minutes, if the person was properly served,
that person can be sued in that state.
62
CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1069.2
(4th ed. 2015). e.g. The domicile or place of business of a person or business in a
state can grant courts jurisdiction over the person or business. Domicile or
residence in a state is enough to give courts in that state jurisdiction over a person.
This also applies to wherever a person establishes a place of business. In practice,
this means that even if the incident took place in another state or even in another
country, a person can always be sued in the state in which the person has
established residence or maintain a place of business.
63
(4th ed. 2015). e.g. “Persons can simply consent to a court having personal
jurisdiction over the person. Consent comes in two basic forms, express and
implied. Express consent can be given by voluntarily appearing before the court
and submitting oneself to its jurisdiction. This means that even if a court otherwise
had no power over a person, by showing up, a person can grant the court that
power. Consent also can be implied, and one of the most common forms of implied
consent is by driving on the roads of that state. Courts consider a person to have
given implied consent to the laws regulating roads, and thus if a person has a car
accident on the road in that state, a court has personal jurisdiction over that
person.”
29

jurisdiction via minimum contact with a state has become more

complex and circumstantial in the age of the internet. Citing
International Shoe, courts apply a sliding scale to determine personal
jurisdiction in the context of the internet.65 Courts weigh whether the
defendant does business over the internet66 versus whether the
information is merely accessible by residents of the jurisdiction.67 If
a court cannot exercise personal jurisdiction over a person, it may
have in rem jurisdiction, which gives it jurisdiction over things, e.g. a
piece of property owned by a person.68
Subject matter jurisdiction refers to whether a court can hear
a case on a particular subject. Litigants can waive personal
jurisdiction but cannot waive subject-matter jurisdiction. Subject-
64
(4th ed. 2015). See, Burger King v. Rudzewicz, 471 U.S. 462 (1985) (finding
jurisdiction because of a “substantial and continuing relationship” between the
franchisee in the forum and the franchise in the home office and not because of
presence in the forum); Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119
(W.D. Pa. 1997) (maintaining that a passive Web site is not sufficient for personal
jurisdiction).
“A court can also have personal jurisdiction over a person if the person maintains
certain "minimum contacts" with the state where a court resides. Minimum
contacts is somewhat of a catchall where a court decides that a person had enough
interaction with a state to justify having personal jurisdiction over that person. The
United States Supreme Court set forth a basic test to determine whether a
particular person has established minimum contacts with that state/ Jurisdiction is
permissible when the defendant's activity in the forum is continuous and
systematic and the cause of action is related to that activity.” Int'l Shoe Co. v.
Wash., 326 U.S. 310 (1945).
65
Zippo, 952 F. Supp. at 1124.
66
Id. “If the defendant enters into contracts with residents of a foreign jurisdiction
that involve the knowing and repeated transmission of computer files over the
internet, personal jurisdiction is proper.” Id. ref. Compuserve, Inc. v. Patterson, 89
F.3d 1257 (6th Cir. 1996).
67
Zippo, 952 F. Supp. at 1124.
68
CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1070
(4th ed. 2015). e.g. “This means that if a person owns property in another state,
even though such person could not otherwise be sued there, the court does have
jurisdiction over such property which in effect gives it power over to such person.
However, in rem jurisdiction is considerably more limited than personal
jurisdiction, because the lawsuit generally has to concern the property itself and
damages are often limited to the fair market value of the property. This means that
in practice, buying a house in another state would grant a court jurisdiction to hear
a dispute regarding that house, but not necessarily regarding other disputes that
involve the owner of that house.”
30

matter jurisdiction means that a given court can only exercise power
over a claim that the laws of the jurisdiction authorize such court to
hear.69
Under the Constitution of the United States, plaintiffs who
wish to sue in federal court must find a constitutional or
congressional grant of subject-matter jurisdiction to permit a federal
court to hear the claim.70 Diversity jurisdiction generally allows
litigants to bring claims in federal court if such claims exceed the
total of $75,000 and the parties are citizens of different states.71
Federal question jurisdiction, on the other hand, permits a litigant to
bring a claim in federal court if such claim arose under federal law,
including the U.S. Constitution.72 Finally, claims over which a
federal court would not have subject-matter jurisdiction
independently can be adjudicated via supplemental jurisdiction,
which permits a federal court to hear a claim, based on that
claim’s connection to an associated claim over which the federal
court does have jurisdiction.73
a) Courts on Cryptocurrencies and DLT Businesses

Research conducted by the authors and updated before the
publication of this article suggests that existing courts have not or
only marginally addressed legal issues pertaining to crypto
69
CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 3522
(4th ed. 2015). “For instance, the United States Tax Court to cases related to
taxation; thus, that court does not have subject-matter jurisdiction over any other
matter. Most state courts are courts of general jurisdiction. That is, state courts are
presumed to have power to hear virtually any claim arising under federal or state
law, except those falling under the exclusive jurisdiction of the federal courts.
However, for pragmatic reasons some states deny subject matter jurisdiction to
specific claims, such as those arising in other states. In addition to courts of general
jurisdiction, most states also maintain specialized courts of limited subject-matter
jurisdiction. Examples of these types of courts include probate courts, traffic
courts, juvenile courts, and small claims courts.” E.g.
70
U.S. CONST. art. III. § 2. Generally speaking, courts construe congressional
grants of subject matter jurisdiction narrowing, resolving “ambiguities against the
assumption of jurisdiction”. Mars Inc. v. Kabushiki-Kaisha Nippon Conlux, 24
F.3d 1368, 1373 (Fed. Cir. 1994).
71
28 U.S.C. § 1332. “For instance, if a citizen of New York sues a citizen of
California for more than $75,000, a federal court would have subject-matter
jurisdiction to hear that claim.”
72
28 U.S.C. § 1331.
73
28 U.S.C. § 1367 provides for supplemental jurisdiction in federal courts.
31

currencies and blockchain technology.74 Cryptocurrencies and smart

contracting, among other blockchain technology enabled
innovations, appear to be too recent a phenomenon, despite their
formation in 2007 with bitcoin, for much case law precedent to have
developed. We see this lack of existing case law in the context of
crypto smart contracting disputes as evidence that the existing legal
infrastructure may be too far removed from crypto dispute resolution
or incapable of adequately addressing the types of disputes generated
by crypto transactions. Accordinly, we suggest an alternative system
that allows intra-blockchain technology legal solutions as further
explored below.
b) Uniform Law Commission Regulating Digital Currency

Businesses
On July 19, 2017, the National Conference of Commissioners
on Uniform Laws75 released a report on Uniform Regulation of
Virtual Currency Business Act.76 The draft had significant support
from important policy makers and governing bodies, including the
Conference of State Bank Supervisors, Federal Reserve Bank of New
York, the US Treasury Department, and regulatory authorities from
state agencies in Washington, California, and Texas. If adopted
broadly by the U.S. states, the Uniform Law Commission's draft
Uniform Regulation of Virtual Currency Act, could become the
uniform legal framework that governs virtual currency businesses.
Crucial in determining who is subject to its regulations, the
Act sets out important definitions. A three-factor test is performed to
74
Federal and state database searches on legal opinions uncovered only 7 total
decided opinions / cases that mentioned the words “blockchain” and
“cryptocurrency”. However, docket searches suggest that more cases involving
such search terms are pending.
75
CITE The Uniform Law Commission was founded in 1892 "to promote
uniformity in law through voluntary action of each state government." CITE Since
its formation, the Uniform Law Commission issued well over 300 uniform acts,
many of such uniform acts created a uniform set of laws across the 50 U.S. states,
the District of Columbia, Uniform Law Commission, and territories. The Uniform
Commercial Code is a prime example of the success of the Uniform Law
Commission. It was adopted by all 50 states, providing a uniform set of laws
governing investment securities, negotiable instruments, sales contracts, bank
deposits and collections, letters of credit, documents of title, and secured
transactions.
76
http://www.uniformlaws.org/shared/docs/regulation%20of%20virtual%20currenc
ies/2017AM_URVCBA_AsApproved.pdf
32

determine if a person is subject to regulation under the Act: 1. The

product in the respective case is a "virtual currency,"77 2. Service in
the respective case is a “virtual currency business activity,”78 3.
Service in the respective case is subject to any exemptions listed in
the act.79 In summary, persons who provide a service that involve a
"virtual currency" and who perform a "virtual currency business
activity," but do not qualify for any of the exemptions under the Act,
will be regulated under the Act.
Regulatees under the Act who conduct business with other
persons are required to obtain a license with the state of such
persons’ residency. Licensing requires disclosure of principals’
background, including fingerprinting, past bankruptcies, criminal
history, current or past lawsuits, as well as enforcement actions or
arbitrations. If the background check was successfully completed,
an applicant still needs to provide the department administering the
act a letter of credit or surety bond in an amount that reflects the risks
inherent in the applicant’s virtual currency business model. The
applicant is also required to post funds.
Once licensed, businesses are subject to ongoing disclosure
obligations and requirements. Such obligations include disclosures
and compliance policies including cybersecurity, business continuity,
minimum net worth requirements or reserves, creating and
maintaining records, anti-money laundering, disaster recovery, anti-
77
CITE The act defines "virtual currency" as "a digital representation of value that
… is used as a medium of exchange, unit of account, or store of value; and … is
not legal tender, whether or not denominated in legal tender.” CITE The Act’s
definition does not include software protocols, affinity reward programs, and
online game tokens.
78
CITE The term virtual currency under the Act includes:
• Exchanging, transferring or storing virtual currency with or on behalf of
residents of the state
• Holding electronic precious metals or e-certificates of precious metals on
behalf of others
• Exchanging otherwise nonconvertible digital units for one or more forms
of virtual currency that can be exchanged for legal tender or bank credit
outside of online games.
79
CITE The 16 exemptions in the act range from qualification as a bank, securities
or commodities broker, licensed money transmitter, persons who use virtual
currency for personal or household purchases, an attorney providing escrow
services, persons who solely mine virtual currency, secured creditors who hold
liens over virtual currency to persons who merely provide software and
connectivity support services.
33

fraud, and anti-terrorist financing programs.80 To ensure compliance

with such requirements, examinations will be conducted by the
responsible state department. Enforcement measures to ensure
compliance may include enforcement actions, fines, a revocation or
suspension of a business license or the issuance of a cease and desist
order and possibly criminal prosecution.81
Several observations allow us to distinguish the regulations
imposed by the Uniform Law Commission from adjudicative issues
associated with blockchain technology and smart contracting. The
Uniform Law Commission’s regulations do not address the issues of
anonymity of smart contracting parties and the encryption of smart
contracting that enables anonymity. Courts may be able to obtain
more information about registered businesses under the uniform laws
but jurisdiction over the parties to a smart contract will still largely
be elusive given the distributed and global nature of smart
contracting. Surrendering anonymity necessitated by the uniform
application of the Uniform Law Commission’s regulations by way of
requiring compliance with the Bank Secrecy Act and anti-money
laundering requirements across the United States would allow legacy
structures to regulate the non-anonymous application of the
technology. However, that application of the technology creates large
inefficiencies that will be bypassed by the more efficient applications
of the technology in an anonymous setting. It is for this more
advanced application of blockchain technology that a system of
distributed jurisdiction will be needed.
2. Shortcomings of Traditional Jurisdictional Means

To appreciate the distinct nature of blockchain transactions
and the specific legal issues they create for the application of
traditional jurisdictional means, it helps to compare traditional
internet transactions with blockchain-based smart contracting.
Traditional internet transactions are characterized by several
attributes that make them fully accessible to traditional jurisdictional
analyses. First, the parties of a traditional internet transaction are
typically known, either by each other or by the provider or third-
party service providers. If parties should not be known, the IP
address of a given computer involved in an internet transaction will
80
CITE
81
CITE
34

likely be known. Moreover, the location of property details will

likely be available and/or known as well as the payment details used,
e.g. PayPal, Apple Pay, and traditional credit cards. These payment
structures are centralized and accessible. Traditional internet
transactions use the legacy systems in the existing infrastructure with
fiat currencies, not crypto currencies. Moreover, other traditional
contracting mechanisms are also used including traditional legal
tools but in electronic form. Finally, traditional internet transactions
are characterized by the use of centralized server networks, not
decentralized distributed networks.
By contrast, blockchain-based smart contracting is
characterized by diametrically opposed parameters. First, the parties
are not necessarily known thus the IP address of a given computer
involved in an internet transaction will likely not be known either.
For example, the use of virtual private networks (VPN) and
cryptography routinely make it impossible to identify the identities
of smart contracting parties or computer networks / individual
systems. Moreover, payment details like those of a credit card or the
location of property may not be known in smart contracting because
parties may decide to use cryptocurrencies, such as bitcoin. Bitcoin is
also decentralized and autonomously run, so no governing body
exists for which a court might access and demand restitution.
Further, blockchain smart contracts are self-executing and self-
regulating, i.e. all terms and parameters are coded and only executed
and added to the given blockchain if and when all parameters of the
smart contract have been fully executed. Traditional contracting
mechanisms and their legal forms are typically not involved. The
intermediation of traditional legal infrastructure is completely
removed in smart contracting because the system that executes the
contract (the blockchain) is autonomous and decentralized.
Therefore, the blockchain cannot be coerced into any sort of
remediation.
Traditional jurisdictional means have limited applicability in
the context of Blockchain technology. Jurisdiction over the public
blockchain does not exist within the present doctrinal infrastructure
for jurisdiction. In practice, the blockchain itself cannot be regulated
or governed because it is decentralized and autonomous. No
traditional jurisdictional principles can apply because the blockchain
is a mere collection of agreed upon calculations by decentralized
computer systems. The blockchain is merely an idea reached by the
35

consensus of computation; it is pure information, contained only in

the mathematical rules of its inception and the sum of the
computation. The blockchain is entirely maintained and owned by a
distributed group of anonymous users located throughout the planet
who would not likely recognize or comply with any legal authority.
The concept of location or presence in jurisdictional means
does not apply to the blockchain. A location for the blockchain does
not exist - not physically or even electronically. Nodes that contain
the blockchain and all of its information are located all over the
world. Transactions in the blockchain are fully networked and
“present” only in cyberspace. The nodes hold imperfect partial
copies of the blockchain; no particular node holds the entire
blockchain.
a) Anonymity of Blockchain Transactions

The lack of identifiable parties in crypto transactions creates
a distinct separation between real world and crypto transactions that
has lasting implications for the application of existing jurisdictional
principles. The aforementioned anonymity gained by the use of
public-key encrypted identities and VPNs prevents the identification
of the parties to a smart contract. Without identifiable parties,
jurisdictional principles such as subject matter jurisdiction, personal
jurisdiction, diversity jurisdiction, and federal question jurisdiction
become irrelevant. To illustrate this point, proving personal
jurisdiction by means of 1. Physical Presence, 2. Domicile/Place of
Business, 3. Consent, and 4. Minimum Contacts becomes impossible
as none of these elements are known of the parties in a smart
contract. Physical presence is anonymous, as is domicile, consent,
and minimum contacts. Subject-matter jurisdiction, e.g. a given court
can exercise power over a claim that the laws of the jurisdiction
authorize such court to hear, is inapplicable because no given law
would be able to authorize such power. But even if a given State or
even the Federal Government were to pass a law that would grant
such authority to a court, it is hard to see how the court would in fact
exercise such authority, short of limiting access to the internet itself.
Public-key encryption in blockchain transactions secures
consumers. The lack of oversight in blockchain-based crypto
transactions goes well beyond the government. In fact, those who
may attempt to circumvent the existing regulatory framework are
also restricted from interfering with blockchain-based smart
36

contracting transactions. Hackers who watch people online sending

their credit card information to online retailers, etc., may use their
informational advantage to break the law and defraud consumers.
However, hackers are unable to execute such fraudulent transactions
in blockchain transactions among consumers. Like the government
or any other authority, hackers are unable to interfere in blockchain
because of public-key encryption.82
Not all smart contracts are fully anonymous and untouchable
by traditional jurisdictional means. Some smart contracts will not
automatically anonymize the parties because there is a physical
element to such a consumer contract. For example, service contracts
involving a peer-to-peer transportation contract that is executed on
the blockchain will not be anonymous because the passenger will be
physically present for such a transaction. Other smart service
contracts can be completely anonymous. For instance, a service
contract involving services pertaining to cyberspace, such as
programming services to create a given webpage, will be completely
anonymous. It is important to note that as the technology becomes
more widely accepted, such service contracts are going to become a
highly important part of any given economy.
Even outside of cyberspace services, it is clearly possible that
bounties for anonymous work executed via smart contracts will make
traditional service contracts that require personal knowledge and
physical appearance redundant. A bounty contract for anonymous
work allows an anonymous person to put a bounty on a given job and
offer such job on an anonymous smart contracting network to an
anonymous counterparty. The contract acceptance and performance
is dictated to some extent by reputational factors that link the
counterparty and the performance under the contract.
b) Enforcement of Smart Contracts

The enforcement of smart contracts with traditional legal
82
Cryptographically secured (like public-key encryption or the hash functions at
the basis of blockchain) is secure, i.e. secure enough for banks to trust operations
with customers’ encrypted bank account and social security numbers. When
consumers send information over the internet, nearly anyone can get that
information because it travels through many uncontrolled nodes. But, public-key
encryption guarantees that anyone reading the information cannot understand it
unless they were accepted by the respective consumer to have the key. If hackers
could break public-key encryption they would instantaneously be able to influence
and control a significant proportion of the existing wealth of nations.
37

means is limited. First, disputing a smart contract with traditional

means (in court, arbitration, mediation, etc.) is only marginally
possible because of the aforementioned anonymity in blockchain
transactions. Moreover, while smart contracts are coded as self-
executing contracts, they do not necessarily provide effective
mechanisms for enforcement if one party breaches his or her
obligations in the smart contract. Arguably, breach of a smart
contract is not even possible, the contract simply will not execute if a
parameter is not fulfilled.
The literature is split on remedies for breaches of smart
contracts. Some argue that because the smart contract replaces the
existing legal contract in some circumstances, the smart contract will
be governed by the same legal principles as the existing legal
contract.83 Others argue that the breaching party may not live in an
area where the courts have jurisdiction, thus the breaching party
cannot be liable.84 In that case, assuming the operator85 knows
identities of contracting parties, the operator of the blockchain
platform should have a legal obligation to identify who the breaching
party was and serve as the counterparty in a dispute scenario.86
These experts argue the operator of the blockchain should establish
governing rules of the blockchain and specifications for dispute
resolution.87 However, these specifications would have to be
83
Cheng Lim, et al., Smart Contracts: Bridging the Gap between Expectation and
Reality, OXFORD BUS. L. BLOG (July 11, 2016),
https://www.law.ox.ac.uk/business-law-blog/blog/2016/07/smart-contracts-
bridging-gap-between-expectation-and-reality; Martin von Haller Gronbaek,
Blockchain 2.0, Smart Contracts, and Challenges, BIRD & BIRD (June 16, 2016),
https://www.twobirds.com/en/news/articles/2016/uk/blockchain-2-0--smart-
contracts-and-challenges; Josh Stark, Making Sense of Smart Contracts,
COINDESK (June 4, 2016), http://www.coindesk.com/making-sense-smart-
contracts
84
Alexander Savelyev, Contract Law 2.0: ‘Smart’ Contracts as the Beginning of
the End of Classic Contract Law, 26 INFO. & COMM. TECH. L. 116 (2017).
85
However, in general blockchains, and in the most important cases of bitcoin and
Ethereum, there is no “operator of the blockchain” except the entire democratic
community, and there is no way for them to determine the identities of the parties,
nor would they (ideally) be able to intervene in the blockchain.
86
O’Shields, supra note 54 at 191; SAMUEL BOURQUE & SARA FUNG LING TSUI, A
LAWYER'S INTRODUCTION TO SMART CONTRACTS 13 (2014),
https://github.com/joequant/scms/blob/master/doc/pdfs/A%20Lawyer's%20Introdu
ction%20to%20Smart%20Contracts.pdf.
87
O’Shields, supra note 54 at 191. Riika Koula, Blockchains and Online Dispute
Resolution: Smart Contracts as an Alternative to Enforcement, 13 SCRIPTED 40
38

disclosed upfront and agreed upon by the parties to the smart

contract in order to be enforceable.
Courts may be substantially challenged in interpreting smart
contracts. Unlike the interpretation of a contractual dispute in the
existing legal infrastructure where courts will assess what the
contentious language in a given contract may mean to a reasonable
human observer, smart contracts are not coded for a human observer.
Rather they are intended for computer programming in a network of
nodes (and in the future for artificial intelligence). To the extent that
consumers are using smart contracts, the human element may be
increased via the coding of graphical user interfaces. The basic
premise of smart contracting remains emphasized on computer
programming (and in the future artificial intelligence) not human
interaction. Because of the emphasis on code for computer
programming (and artificial intelligence), courts may not be able to
hypothesize a reasonable human’s interpretation of a given smart
contract. Courts may also be limited in their ability to consult
programmers to interpret the coded language at issue in a given case
because the meaning and logical reasoning of coded language is
substantially different from human language.88
From an evidentiary perspective, it is unclear who would own
smart contracting blockchain contributions and whether there would
be any applicable protections, such as work product or
confidentiality. Without ownership rights for a blockchain
transaction, it is also unclear who would be able to claim privileged
information or how discovery would operate via existing laws.
However, when the parties to a smart contract choose to reveal their
(2016), https://script-ed.org/wp-content/uploads/2016/05/koulu.pdf; SEAN

MURPHY, UNNBLOCKING THE BLOCKCHAIN: A GLOBAL AND LEGAL REGULATORY
GUIDE 34, (2016), http://www.nortonrosefulbright.com/files/unlocking-the-
blockchain-chapter-1-141574.pdf.
88
Code is substantially different from human language. Code typically entails no
ambiguity, no variant interpretation is possible. The computer just executes the
code as written. A programmer can make an interpretation of the intention behind
another programmer’s code—whether they were trying to fraudulently take money
from the other party in the smart contract. But in a very real sense, the contract is
perfect, if the victim entered the contract, they did so with all the information at
hand. Fraud is arguably impossible, in the sense that computer programs cannot
lie—they do exactly what their instructions tell them to. Therefore, arguably
deception is impossible. Of course that is merely academic, because coders can
deliberately create very complicated code that confuses people in order to gain
undue advantages.
39

identities, arguably privileged information or discovery laws should

apply as if it was a written contract despite the fact that the contract
was written in code.
Contract law remedies may not apply to smart contracts
which raises possible enforceability issues. If a transaction in a smart
contract fails to be completed or is partially completed but not added
to the blockchain,89 it is unclear how liability will be allocated if
those eventualities have not been accounted for in applicable code.
Because of the blockchains decentralized nature, it is unclear who or
what is accountable and could require regulation. Without solutions
for those issues, liability for failed transactions or conflicts between
parties have little guidance as to being resolved.
c) Limited Regulatory Oversight

The regulatory oversight over blockchain-based transactions
is severely limited. Courts arguably cannot have jurisdiction over
blockchain-based smart contracts because it is unlikely a court could
find out who transacted via the anonymized blockchain.
Furthermore, the court could not change or otherwise affect the
transaction as it was coded because once the coded parameters were
fulfilled the transaction auto executed on the blockchain. Because of
automated execution, contractual breach and damages are less likely
to occur in smart contracts, especially as compared to traditional
contracts. If a given smart contract transaction disadvantages one of
the contracting parties, courts would have to change the blockchain
in order to institute remedies in the traditional sense that could
pertain to the smart contract in question. However, that scenario is
computationally and practically impossible.
Assuming the parties to a given smart contract were known,
courts could require the parties to create a new transaction to reverse
undesirable outcomes of the coded and executed transaction that was
89
Two interpretations are possible for incomplete transactions: First, an Ethereum
transaction is a complete smart contract. Therefore, the whole contract is either
added to the blockchain or not. An Ethereum transaction can’t be partially added to
the blockchain. The second interpretation is the contract transactions between the
parties. It is possible that parties can partially fulfil a smartcontract. But in that
case the smart contract already has all eventualities accounted for—it is completely
self-executing and self-regulating. Therefore, if one provision of the contract is
fulfilled and another is not, the consequences of that situation is already stipulated
in the code with mathematical inevitability. Whatever the program stipulates will
happen, happens; including if nothing happens.
40

disputed. This is a possible solution because courts are unable to

affect the initial outcome of a disputed smart contract transaction.
Courts cannot require a retroactive change in the blockchain because
that is computationally near impossible. Given that the requirements
for a court to exercise jurisdiction over a disputed smart contract are
fundamentally different from courts’ jurisdiction over contracts in
the existing legal infrastructure, contracting parties would likely
second guess courts’ decisions pertaining to smart contract disputes.
In other words, real world court decisions even if attainable may not
have the same legitimacy and authority as other intra-blockchain
dispute resolution mechanism may have. In summary, courts would
only be able to force the parties to execute a secondary transaction or
otherwise pay remedies for a smart contract that created damages for
one of the parties. Courts would not be able to actually change or
interpret the terms of the given smart contract that was executed
according to its parameters and added to the blockchain where it is
immutable.
Because of these inherent limitations, courts will generally
not be able to effectuate resolutions to disputes arising from
blockchain-based smart contracts. Courts do not have the power over
the coder and the code that was used by the parties that may have
been injured. Courts do not have the authority to dictate to a
programmer how, when, and where to change the existing code used
by consumers. Even if courts were given such authority, no
programmer so coerced by the court would be able to override the
will of the majority of anonymous international blockchain users to
make an effective change. Therefore, blockchain-based resolution
mechanisms are the only possible recourse for smart contract
disputes.
Our proposal for courts to leave dispute resolution to
blockchain-based mechanisms is not a mere theoretical postulate.
Rather, this need was already introduced in the second and third
prongs in Aragon’s whitepaper about blockchain-based solutions for
consumers facing code execution problems in smart contracts.90
90
Luis Cuende & Jorge Izquiredo, Aragon Network: A Decentralized
Infrastructure for Value Exchange (Apr. 2017),
https://github.com/aragon/whitepaper/blob/master/Aragon%20Whitepaper.pdf
[hereinafter Aragon White Paper].
41

3. Hybrid Approaches Accelerate Crypto Evolution

Hybrid approaches intended to preserve the existing legal
infrastructure facilitate the broadening evolution of the crypto
economy. The limited applicability of traditional jurisdictional means
in the context of blockchain applications may lead some critics and
traditionalists to institute hybrid approaches that incorporate the
existing legal infrastructure into blockchain-based smart contracting
transactions. Ultimately, hybrid approaches intended to preserve
traditional jurisdictional means may be necessary in the transition
phase. Hybrid approaches can create and increase certainty and trust
for consumers and legacy infrastructure leaders who are otherwise
unfamiliar with the blockchain-based infrastructure and the
opportunities it offers. While hybrid approaches may be necessary in
the transition phase of the new crypto economy, they ultimately
facilitate the broadening evolution of the crypto economy.
Hybrid approaches and meta-structures that attempt to
connect the existing legal and regulatory infrastructure with the
blockchain-based world of smart contracting may ultimately
accelerate the bifurcation of the jurisdictional infrastructure into
traditional and crypto prongs, rather than slow down the bifurcation.
For instance, meta-structures and alliances between the fiat currency
banking system and crypto currencies may only temporarily create a
legacy infrastructure bridge between fiat currencies and crypto
currencies that allows for the tracing of payments demanded by
institutional investors and consumers. If the meta-structure that
connects fiat- and crypto-currencies sacrifice anonymity of
transacting parties, at least temporarily, the meta-structure may
arguably pull smart contracting transactions back into the existing
jurisdictional infrastructure. However, miners that continue to mine
the growing and meta-structure supported crypto world will continue
to create anonymous wealth.
The legacy infrastructure bridge (fiat to crypto currencies)
accelerates the growth of the blockchain-based economy and
infrastructure but cannot curtail its anonymous nature. Once the
currency conversion from fiat to crypto is complete, such crypto
currencies are ultimately untraceable and anonymous in cyberspace.
The legacy infrastructure bridge that is currently evolving allows
increasing and accelerating inflow of financing into crypto
currencies. By investing increasing fiat currency in a blockchain, the
blockchain currency becomes more valuable, which in turn
42

encourages further mining/crypto currency creation that is

automatically anonymously owned. While the crypto currency that
was purchased with fiat currency may not be anonymous before it is
spent, after the first purchase, it is given a new public-key encrypted
address and the new owners are anonymous unless they actively
choose to reveal their identities. Accordingly, the accelerating inflow
of fiat currency financing into crypto currencies enhances and
accelerates the evolution of the crypto economy.
a) Jurisdiction Over Creation and Use of Blockchain Technology

While the public blockchain itself may not be subject to
traditional jurisdictional means itself, the creation and use of
blockchain technology may be subject to traditional jurisdictional
principles. In fact, governing the creation and use of a blockchain
may be the only practical way of exercising any form of traditional
jurisdiction over blockchain. People who are subject to jurisdictional
means may create blockchains. Blockchain creators also live
in geographical locations subject to laws that govern their activities.
Accordingly, blockchains could be governed by the jurisdiction of
the creator of a blockchain.
The exercise of traditional jurisdictional means over the
creator of blockchains may encounter problems over time. First, it is
only a matter of time until blockchains are created by other
blockchains. Moreover, governing the creation of blockchains may
encounter practical problems associated with anonymity (see further
below on anonymity). For instance, Satochi, the billionaire founder
of bitcoin is unknown and most hackers make it their personal hobby
to ascertain his/her identity.
Exercising traditional jurisdiction over the use of blockchain
technology raises several practical issues. For instance, if the focus
of exercising jurisdiction would be on the physical location of the
use, it remains unclear what would count as “use” of blockchain
technology. Use could mean the actual use of blockchain technology
to engage in commerce with other individuals or use could be the
creation of a blockchain platform/forum for commerce. If use means
the actual use of blockchain technology to engage in commerce it
remains unclear if jurisdiction would apply over each user of the
Graphic User Interface (GUI) for a blockchain technology or if use
would mean execution of a transaction on the blockchain. If use
means the execution of a transaction, it would remain unclear if
43

jurisdiction would only apply if the transaction was added to the

blockchain or if use would also be the attempt of adding a transaction
that ultimately failed to the blockchain. If it is the latter, legal issues
may arise because each transaction parameter that was not fulfilled,
and thus the transaction was not added to the blockchain and would
have to be addressed/litigated in the legal system. It is unclear if the
legal system would be adequately equipped to address these
problems as they originate in cyberspace.
Exercising jurisdiction over the creation and use of
blockchain technology is rooted in the traditional understanding of
jurisdiction that may not apply as the technology evolves. In fact, the
evolution of blockchain technology may demand a more proactive,
anticipatory, distributed, or networked approach to jurisdictional
issues.
b) Coding Existing Law Into Smart Contracts

A hybrid approach and a temporary solution for the lack of
traditional jurisdictional means and legal control over smart contracts
could be the programming of existing legal rules, doctrines,
precedent, and their existing legal interpretation into smart contract
code. In essence, such existing rules that would pertain to a
comparable and equivalent real-world transactions and would be
simply added as smart contract parameters. Such additions would
necessitate the adherence to existing laws for contract execution on
the blockchain.
This hybrid approach has several benefits. First, it provides
the contracting parties with a very high degree of regulatory certainty
which increases commerce in smart contracts and supports the
evolution of blockchain-based transactions. Second, because smart
contracts cannot execute unless all regulatory conditions and
parameters are fully complied with, regulators lower their cost of
supervision and enforcement while substantially increasing their
oversight by reviewing the initial setup of smart contracting
parameters in a given market or market segment. Third, regulators
seeking additional oversight and increased transparency may access
the public audit trail of executed smart contracts on the blockchain.
The public blockchain or private blockchains that are opened to
regulators can give the regulators full access and certainty about the
44

state of a given smart contract market.91

The benefits of this hybrid approach are only temporary. As
smart contracting evolves over time, fewer smart contracting
solutions will have a real-world equivalent. In fact, it may over time
become increasingly difficult to find real world legal solutions that
can become effective parameters for smart contracts. This may be
particularly true if the distributed jurisdiction is not effectively
encouraged to adhere to traditional legal standards.
Without strong external pressures from existing regulatory
structures and a distributed jurisdiction for crypto transactions that is
responsive to such pressure, the anonymity of smart contracting will
ultimately undermine the coding of existing legal rules into smart
contracts. Blockchain-based cryptology in Ethereum virtual private
networks do not allow the identification of the transacting parties if
the parties wish to remain anonymous. With the anonymity of
contracting parties in smart contracts, it becomes unclear what
specific laws / rules could be coded into the smart contract and who
the contracting parties are.
Even if separate sets of existing legal rules could be identified
for a given smart contract, it remains unclear how the contracting
parties can turn such legal rules into code. The coding language used
for a given smart contract and its parameters may be unable to spell
out the intent of the legislator, court, or administrative agency in
passing an applicable rule.
The supra-nationality of smart contracting may create
additional burdens and exacerbate legal uncertainty of existing legal
rules that already exists in the extraterritorial application of existing
rules. For instance, the SEC jurisdiction over extraterritorial
application of US Federal Securities Law is the subject of an ongoing
debate and Supreme Court precedent. If ambiguous rules and
precedent, even post Supreme Court decision in Morrison,92 are
91
While public blockchains that are fully distributed and autonomously run
technically cannot be opened to regulators, outside regulators can regulate from
outside. Outside regulators can decide whether a blockchain is running according
to their rules which might trigger labelling the blockchain as compliant or not,
depending on whether the distributed jurisdiction is compliant. A government can
allow its citizens to use only compliant blockchains (except they can’t really stop
the dedicated users who hide their IPs with VPNs, etc.).
92
Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010); See Wulf A. Kaal &
Richard W. Painter, Forum Competition and Choice of Law Competition in
45

applied to smart contracting parties, it is possible that the

supranationality of smart contracting parties and/or lack of
identification of such parties could exacerbate the legally ambiguous
solutions of the existing world.
Finally, as Ethereum and other blockchain-based smart
contracting networks become increasingly autonomous, legislators
simply will not have the ability and authority to dictate to contracting
parties and Ethereum itself whether or not to code existing legal rules
into a given smart contract. Anonymity means the government
cannot identify citizens with access to a free internet who use the
blockchain. Nor can the government prevent citizens from adding
contracts anonymously to the blockchain. Autonomy means the
government cannot stop the blockchain miners from automatically
adding contracts because the protocols do not recognize distinctions
between good and bad contracts that any outside body dictates (as
miners are also anonymous.) Also, the distributed nature of the
blockchain means the government cannot control the nodes which
maintain the blockchain without an effective world-wide governing
body—which is obviously nowhere near feasible at this point in
history—not even if the nodes were known to the government, which
they are not.
Because Ethereum, Aragon, and other blockchains, will be
fully autonomous and decentralized in the near future, they cannot
and will not be changed or superimposed by governments or any
form of authority, unless it is in the interest of the majority of the
blockchain community members. For instance, the vote to hard fork
the first DAO would no longer be possible today as it evolved into a
more autonomous structure. The goal of the distributed nature of all
such structures is to become fully distributed and autonomous.
IV. Distributed Jurisdiction

The nature of smart contracting necessitates crypto dispute
resolution mechanisms. Problems with smart contracts tend to be
two-fold.93 First, while smart contracts can be coded for and
Securities Law After Morrison v. National Australia Bank, 97 MINN. L. REV. 132,
134 (2012).
93
Aragon White Paper, supra note 90. “Problems with existing smart contracts: -
Subjective breaches: Smart contracts can encode most of the possible breaches of
contract, but there is always subjectivity in human relationships. An unbiased
arbitration system is needed for cases where conflicts are not explicitly resolved in
46

encapsulate a substantial portion of possible breaches of contract,

subjectivity in human relationship, bounded rationality of coders and
contracting parties, incomplete foresight, incomplete information,
and opportunistic behavior94 will make breaches or other problems in
smart contracts inevitable. Second, the first DAO has demonstrated
that software and coding bugs will be inevitable in the evolution of
the crypto economy. As the existing jurisdictional infrastructure is
bound to produce suboptimal results for such crypto disputes, intra-
blockchain Distributed Jurisdictional means are needed.
Our proposal in this paper for a distributed jurisdiction over
blockchains has to fulfill two core requirements: 1. The anonymity of
blockchain-based smart contracting has to be maintained as the
technology evolves. Without anonymity of blockchain-based smart
contracting the existing jurisdictional means (in personam
jurisdiction) can apply to smart contracting which would undermine
the evolution of the crypto economy and make Distributed
Jurisdictional means unnecessary. 2. Distributed Jurisdictional means
necessitate governance from within the blockchain technology itself
to effectively address the problems inherent in blockchain-based
smart contracts. Without internal blockchain-based governance, a
fully self-sufficient crypto economy may not be possible as legacy
systems and governance intermediaries in the existing legal
infrastructure will attempt to interfere with crypto transactions,
resulting in suboptimal outcomes that cannot be fully resolved in the
existing legal infrastructure.
Both requirements for the development of Distributed
Jurisdictional means, full anonymity and intra-blockchain
jurisdictional means, can already be accomplished. First, the Ties
Network project demonstrates that anonymity can be perpetuated in
blockchain technology,95 despite blockchains’ eternal storage of
the smart contract code. - Software bugs: The error is always between the chair and
the keyboard. Code can contain bugs so the software needs to be easily
upgradeable, and a sound bug bounty mechanism must exist to incentivize
potential attackers to claim a bounty, rather than attack.”
94
Evolution of Law: Dynamic Regulation in a New Institutional Economics
Framework, in FESTSCHRIFT IN HONOR OF CHRISTIAN KIRCHNER (Wulf Kaal,
Andreas Schwartze & Matthias Schmidt eds.)(2014)
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2267560).
95
DMITRY KOCHIN & ALEXANDER NEYMARK, ÜBERMENSCH WHITE PAPER 8
(2017) https://ties.network/files/%C3%9Cbermensch%20White%20paper.pdf
[hereinafter Ties White Paper].
47

information and its growing size working against anonymity.

Second, the Aragon Network demonstrates that the technology itself
offers means of internal controls that help ensure effective
governance in the continuing evolution of the technology.96
1. Securing Anonymity
The current blockchain characteristics undermine the
continuing anonymity of blockchain-based transactions. Anonymity
removal in blockchain transactions is a serious problem97 that in fact
undermines the evolution of the technology. This is especially true
because the application of traditional jurisdictional means due to a
lack of anonymity provides suboptimal solutions that undermine trust
in the technology-supported transactions. First, because the
blockchain is immutable, blockchain-based transactions will be
eternally stored and cannot be removed or deleted. Eternal storage
itself works against anonymity.98 Second, as blockchain-based
transactions increase in popularity, the size of the blockchain grows
96
The jurisdiction of the Aragon Network is distributed. Specifically, this means
the network does not have a localized geographical existence; it is supranational.
Therefore, no existing governmental entity has current legal jurisdiction over the
regulation of general smart contracts. The Aragon Network’s particular jurisdiction
cannot be controlled by any nation-based court for the practical reason that all
litigants and judges are anonymous, and so have no determinable national location.
Consequently, no political entity will have any practical effect in the governance of
general DAOs. Aragon White Paper, supra note 90. “The Aragon Network has
three primary goals: 1. Provide models for starting well-designed DAOs. 2.
Regulate the behavior of these DAOs according to rules decided upon by a
dynamically evolving Aragon constitution, which rewards the discovery of
potential hacks. 3. Provide a digital jurisdiction for settling contractual disputes in
an anonymous and democratic manner.”.
97
Ties White Paper, supra note 95. “Problem of anonymity removal in blockchain
transactions: The blockchain is immutable. All that is stored in blockchain remains
there forever and cannot be deleted. This is a serious drawback, given that most of
the information in the interaction of users can be temporary and it could be deleted
when the need for its storage disappears. Eternal storage of information also works
against anonymity. Each node is a complete replica of other nodes. As a result,
with the explosive growth of the application's popularity on the blockchain, the
size of the blockchain grows rapidly at all nodes simultaneously. At some point,
the size of blockchain can exceed the capacity of mass-produced hard disks and for
the operation of the nodes, special equipment will be required, which only large
companies can afford, which leads to dangerous centralization.”
98
Id.
48

rapidly99 which will eventually require special equipment that can

only be afforded by large corporations in the existing legal
infrastructure. With such power for large corporations comes the
possibility of dangerous centralization and a threat to undermining
anonymity.100
2. Intra-Blockchain Solutions
Blockchain technology provides its own solutions for
jurisdictional issues, governance, and conflict resolution. Blockchain
technology resolves disputes of contracting parties by calculation. If
a transaction is invalid it is checked automatically and quickly by
any node and ignored. If two competing/contradictory transactions
are valid, then the system automatically resolves the primacy of one
over the other according to computing power. Whichever transaction
is embedded in the longer computation chain will have primacy. No
decisions can be made once a transaction is added to the network. No
governing body currently exists to petition for recourse.
a) Aragon
Despite the dispute resolution mechanisms embedded in
Blockchain technology, smart contracting in a commercial setting
will eventually require additional dispute resolution mechanisms.
Problems with smart contracts are inevitable because of the
subjectivity in human relationship, bounded rationality of coders and
contracting parties, incomplete foresight, incomplete information,
and opportunistic behavior.101 Such human limitations will
eventually make breaches or other problems in smart contracts
inevitable, despite coders’ attempts to optimize code in an effort to
avoid such human traits in smart contracting. Add software and
coding bugs to the human limitations and conflict resolution
mechanisms become a necessity in the evolution of the crypto
economy.
The Aragon Network already provides dispute resolution
solutions that can help the consumer acceptance of smart contracting
and crypto transactions. Aragon uses a form of digital jurisdiction
governed by a representational democracy of anonymous judges and
99
Most transactions, however, do not merit recording and in fact should be
removed to avoid unnecessary increases in storage requirements.
100
Id.
101
Kaal, supra note 94.
49

regulators, whose power is based on their stakeholder share of the

network and supplemented by a reputation system.102 Whenever a
user wishes to dispute the execution of a contract in the Aragon
Network, they post a bond (which will be returned if the dispute is
decided in their favor) and a brief of their argument. 5 judges who
have posted bonds will be randomly selected from all the users of the
network. The judges read the litigants’ briefs and issue their
judgements. Majority decisions determine the outcome of the
dispute. If a judge ruled with the majority, they are rewarded
monetarily; if not, they are punished with the loss of their bond. 2
appeals are possible. If either party disagrees with the judgment they
may appeal by posting a larger bond with their argument. This opens
a prediction market, where any user in the organization may become
a judge by posting a bond. The arguments are read and all judges
return their verdicts. Again, majority determines the result of the
dispute, with rewards or punishments for judges are given based on
whether they sided with the successful party. The final appeal is
made to a panel of 9 “supreme court” judges comprising the most
successful judges in the network. A larger bond is posted by the
appellant at each stage to prevent the wasting of system resources.
b) Ricardian Contracts – OpenBazaar

OpenBazaar is a distributed program that provides an online
trading platform for any type of merchandise using
cryptocurrencies.103 It does not use a blockchain for its core
architecture, but it is a distributed network104 and all parties and
transactions are anonymous. Because of these core elements in the
OpenBazaar network we consider it appropriate to compare its
dispute resolution mechanism.
The essential ideas of OpenBazaar’s system can be profitably
employed on general distributed and anonymous business transaction
platforms: 1. If both parties can agree on the type of transaction they
are performing before signing a contract, a particular pool of arbiters
can be chosen automatically. 2. A pseudonymous web of trust can be
implemented to generate reputation for arbiters without
compromising anonymity.
102
The Aragon Network offered a public token sale in May 2017 which raised $25
million US in the first 15 minutes.
103
http://docs.openbazaar.org/03.-OpenBazaar-Protocol/
104
a Kademlia-style peer-to-peer distributed hash table
50

A core feature of the OpenBazaar dispute resolution

mechanism involves so-called notaries. In the event of a dispute
between parties, assuming alternative dispute resolution (ADR) had
failed, the system includes a third party – the so-called notary. Users
may choose not to involve the notary from the beginning of a
transaction, in which case the smart contract has no transaction fees.
However, the payment option without notaries involves risk because
in that case, no arbitration is possible. The notary’s primary job is to
electronically verify the contract105 has been signed by both parties
and funds are available in escrow. Second, the notary verifies both
parties are satisfied the terms have been fulfilled, then releases the
bitcoin from escrow to the vendor. Finally, in case either party is not
satisfied with the transaction, the notary acts as an arbiter in the
dispute.
The allocation of notaries to contracts is an important
mechanism for comparison of dispute resolution mechanisms.106
Similar to Aragon, notaries in the OpenBazaar system are generally
randomly chosen and allocated to a given contract. However, in
OpenBazaar the creators envision assorted pools of private notaries
with varying expertise. Parties can theoretically agree which pool of
notaries to choose before the contract is signed. This mechanism
encourages the development of expertise within the system while
satisfying the overarching goal of maintaining the anonymity of
vendors and customers, since the details of a dispute are kept secret
assuming the professionalism of the randomly chosen notaries.
The anonymity of the notaries is crucial to keep the system
secure. Without anonymity, notaries could be coerced into revealing
private information revealed in a given party’s case. Therefore, the
notary pool is reviewed using a pseudonymous web of trust to
determine reputation. Pseudonymity is achieved using public keys.
OpenBazaar provides many benefits to disputants that are not
included in the Aragon dispute resolution approach. Similar to
105
Technically OpenBazaar uses “Ricardian” contracts, which have one extra layer
of protocols on the smart contract, an encrypted identification between the human-
readable version and the computer-readable version of the contract for the notary
to interpret. The performance of the Ricardian contract is not always completely
self-executing, and hence needs the third party notary. This is the primary
distinction between OpenBazaar’s system and Ethereum’s smart contracts.
106
At the time of writing, there have been no reported disputes in OpenBazaar, so
the actual implementation of these protocols is entirely theoretical.
51

Aragon’s system of appeals, OpenBazaar imagines an appeal system

that includes randomly selecting new notaries from the agreed upon
pools according to reputation. However, OpenBazaar’s more
complex structure giving disputants the power of selecting between
notary pools is a clear improvement over Aragon’s method of
completely random selection from the entire group of users posting
judge bonds. OpenBazaar’s approach naturally encourages notary
pools to develop expertise in the various fields of law. Even though
there is a chance that disputants’ private information may be revealed
in the course of a dispute, the reputation of a notary depends on their
professionalism in maintaining the privacy of their clients. Aragon’s
whitepaper is not specific about how much private information is
broadcast to the blockchain, but it seems to suggest their judgements
have minimal information. In fact, Aragon appears to not even post a
summary of their arbiters’ reasoning which may cause the losing
party to second guess the legitimacy of the entire dispute resolution
mechanism in Aragon.
3. Limitations of Existing Solutions

Despite its much-needed introduction of dispute resolution
and smart contract optimization improvements of the Ethereum
network, the Aragon network still encounters several limitations.
First, without full and continuing anonymity throughout the crypto
evolution, the application and evolution of Aragon’s distributed
dispute resolution mechanisms may not be viable in the long run as
traditional jurisdictional means would attempt to take over without
the assurance of full anonymity in blockchain transactions. Second,
the random selection of judges from users of the Aragon network
may only limitedly ensure the effective dispute resolution. Over
time, users will inevitably demand the highest possible expertise of
their judges and arbitrators. Without judge’s expertise in a given
smart contract subject matter of a dispute user confidence in effective
and fair conflict resolution is undermined which leads to overall less
confidence in crypto transactions as a whole and can undermine the
evolution of the crypto economy. Third, the democratic decision of a
majority of judges in the Aragon dispute resolution in combination
with its lacking expertise of judges may undermine user confidence
in effective and fair dispute resolution. Fourth, users in the Aragon
system would only informally be able to use lawyers or other
consultants and perhaps would use lawyers from the existing
52

jurisdictional infrastructure to help optimize their arguments in

support of their claims. Support from lawyers trained in the existing
jurisdictional infrastructure and without additional training in
quantitative science and coding can lead to suboptimal results for
transacting parties in smart contracts. Fifth, Aragon does not allow
opting into different dispute resolution mechanisms. Only user of
Aragon can use their dispute resolution mechanisms. As other smart
contracting platforms are being created, a need for more diverse,
nuanced, and effective dispute resolution options emerges.
Several additional factors suggest that the dispute resolution
scheme in Aragon could be improved. The random selection of user
judges in the Aragon network introduces a level of arbitrariness to
dispute resolution mechanisms that many private users but especially
larger entities, including corporations in the existing legal
infrastructure may not appreciate. Especially the submission of
judges to the more popular vote and the economic incentives for
judges to follow a more popular vote (in the Aragon system judges
keep their bond if they voted with the majority), despite the overall
anonymity of the voting, may call required notions of effective, non-
arbitrary, and fair dispute resolution mechanisms into question.
Users who are dissatisfied with such suboptimal conflict resolution
mechanisms may wish to opt into a more nuanced conflict resolution
network that helps them ascertain their rights and guarantees
balanced outcomes.
Similarly, the OpenBazaar supported Ricardian Contract is
subject to multiple shortcomings. Technically OpenBazaar does not
use smart contracts. Instead “Ricardian” contracts are used, which
have one extra layer of identification between the human-readable
version and the code-readable version of the contract. The
performance of the Ricardian contract is not completely self-
executing, and hence needs the third-party notary. The primary
disadvantage of OpenBazaar’s system, compared with Ethereum’s
smart contracts, is this extra layer of verification and the associated
transaction fees. Because of these fees, the OpeanBazaar dispute
resolution mechanism creates substantial transaction costs that can be
avoided by pure Ethereum-based self-executing smart contracts.
Because every single Ricardian Contract has an arbiter/notary
connected with them to automatically, check the contract, and hold
funds in escrow until the contract is validated, such contracts follow
the established legal order for contracting to a significant extent.
53

With it come additional significant transaction costs in various forms

associated with an intermediator, here the notary/arbitrator, in the
traditional financial system. Smart contracts make such transaction
costs unnecessary but need a sound system for dispute resolution
which we herein propose.
V. Open-Source Platform Ecosystem for Smart Contract Dispute

Resolution
In light of the shortcomings of the available dispute
resolution mechanisms for the crypto economy, and based on the
concept of a distributed jurisdiction, we suggest an open source
platform ecosystem of smart contracting dispute resolution that
allows users to opt into the conflict resolution mechanisms that
enable more nuanced crypto solutions and produce greater (legal)
certainty in the process. First, an open source platform based
ecosystem for dispute resolution of crypto transactions could help
ensure full anonymity in blockchain transactions by instituting a
requirement of anonymity for transaction parties to opt into the
platform. Second, the platform would allow users to identify the
highest possible expertise of their judges and arbitrators by way of
reviewing the record of decisions of their judges across different fora
and different types of conflicts.
At this point in time there are many new startups building
contracting platforms using open, anonymous distributed architecture
including Ethereum, Aragon, OpenBazaar, and Tezos, to name a few.
Our proposed platform ecosystem would significantly boost
consumer confidence in the non-arbitrary and fair resolution of their
disputes. This proposal constitutes an open source ecosystem hybrid
that provides effective solutions for the shortcomings identified in
the Aragon and OpenBazaar models.
In contrast with the OpenBazaar solutions, our proposed open
source ecosystem allows dispute resolution only if and when a smart
contract has resulted in a dispute. This solution ensures that smart
contracting transaction costs remain near zero and the cost of paying
an arbiter/notary/judge only occurs in cases of smart contract dispute
resolution issues which will be a fraction of the overall quantity of
smart contracts executed in the evolving crypto economy. As such,
our proposal helps stimulate the evolution of the crypto economy.
We envision a further improvement in comparison with
OpenBazaar’s approach which includes an open review system for
54

evaluating the reputations of arbiters. Arbiters would submit their

judgements to the community for review, removing all personal
information to ensure anonymity. The community could upvote or
downvote such judgments. Arbiters could improve their reputations
by submitting comments and counter-judgements in an open forum.
This proposal has several benefits that can be distinguished
from the Aragon network in several important ways. It involves the
same necessarily democratic solution as in the Aragon system,
except for several core differences: 1. The cases are not bound to
binary decisions (it's unclear how 5 anonymous judges would
collaborate to give a nuanced answer in Aragon). 2. Crowdsourcing
the judgments leads to more efficient appeals. 3. Decisions would be
open to re-evaluation for all eternity, so the judges' reputations are
subject to a greater ideal than mere contemporary popularity.
Further, this approach still promotes the eternal anonymity of parties
and arbiters, as judges who revealed private information would be
severely downvoted. Thus, our proposal provides more nuanced and
better outcomes with better representation for parties in smart
contract dispute resolution.
By way of analogy, just as federal courts in the existing legal
infrastructure often provide better outcomes for litigants than state
courts, because of the better qualifications of judges and the higher
stakes involved, among other factors, our open source ecosystem
would allow litigants more choice among dispute resolution
mechanisms, enable better representation, and facilitate increased
quality of arbiters. For claimants who have an interest in the best
possible outcomes and are willing to wait analog times (≈1 month)
the platform provides ideal fora to settle disputes.
1. Legal Equivalence
Stakeholders in legacy systems will likely hesitate
transferring their legacy infrastructure businesses, and revenue
streams derived therefrom, to an uncertain blockchain infrastructure
and crypto systems without significant and sufficiently incentivizing
assurances that they are not sacrificing any attained existing legal
rights in exchange for smart contract efficiency in a blockchain
system. Accordingly, the adjudication, dispute resolution, and
enforcement of smart contracting disputes in the evolving crypto
economy have to provide equivalent measures that assure legacy
businesses that they can operate in crypto systems without a
55

surrender of existing rights.

Legal equivalence can be assured in the implementation and
transition phase of the crypto economy via dual integration. Dual
integration refers to the use of legacy legal infrastructure in smart
contracting dispute resolution, such as via the Ricardian contracts,
among other measures, in combination with intra-blockchain systems
for the resolution of smart contract disputes.
For participants in the crypto economy who wish to minimize
the transaction costs of dual integration and retain anonymity our
proposed open platform ecosystem is more likely than all other
solutions to provide legal equivalence of dispute resolution
mechanisms. Our proposed system would maintain the importance of
good education and reputation on the principles of law. Yet, it would
still eradicate much of the corrupting collection of power that
specialized knowledge and relationships give to analog lawyers.
2. Anonymous Arbiter Expertise

The platform ecosystem would allow users to identify the
highest possible expertise of their anonymous judges and arbitrators
by way of reviewing the record of decisions of their judges across
different fora and different types of conflicts. We propose using the
open and eternal ledger for purposes of listing the following
information pertaining to a given decision maker in smart contracting
disputes: 1. Contractual Subject Matter, 2. Cases, 3. Decisions, 4.
Justifications for Decision, 5. Dicta. Based on such disclosures, we
propose an open system that allows comments which could be up-
voted or down-voted.
The system allows for the expertise of judges to be
determined by anonymous rating systems or anonymous reputational
reporting, similar to the token holder proposals in DAOs where token
holders whose proposals are voted in but the token holder proponent
who cannot perform in the implementation of such proposal will
rarely get a second chance at making and implementing a given
optimization proposal.
To mitigate the inevitable centralization that comes with
expert involvement107 in a decentralized dispute resolution platform
107
A possible downside in the system pertains to the danger of centralization that
comes with expertise of decision makers in decentralized dispute resolution
mechanisms. Arguably the reputational elements in the proposed ecosystem could
lead to superstars and with it to dangerous centralization. Decision makers in
56

and ecosystem we provide several solutions. Because our proposed

system is based on upvotes from users who have an interest in the
subject, abuse of authority that happens naturally in the non-
anonymous world would be rather limited if not non-existent. And,
crucially important for the success of the system in a legal realm, any
abuse of authority would quickly be dis-incentivized by the deluge of
downvotes such infamy would bring. Our solution allows
anonymous contributors to gain reputation in certain areas of
disputes based on whether their opinions are well-received. Such
systems already exist in non-dispute resolution contexts.108
Reputation may also accrue and promote decision makers in dispute
resolution by means other than erudition, such as network
recognition, connectivity, among others.
3. Optimized Representation
The open source platform ecosystem of dispute resolution in
a distributed jurisdiction also facilitates optimized representation of a
given party who in the Aragon system would only informally be able
to use lawyers and perhaps would use lawyers from the existing
jurisdictional infrastructure. The ecosystem allows for a more diverse
allocation mechanism for smart contracts disputes to the most
appropriate decision-making body/forum. But also, a platform
decentralized dispute resolution mechanisms with genuine educational and/or

philosophical expertise can quickly gain a reputation in such systems, enabling an
inevitable and natural centralization of power.
This could create a potentially serious corruption problem, as arbiters with
the highest reputation will likely become valued counselors for disputants.
Conflicts of interest occur in the possible scenario when a randomly chosen judge
works for one of the parties. If the platform is small, or a domain of interest is
small, the likelihood of this occurring is high. Since judges are anonymous, this is
difficult to police. Because no conceivable way exists to permanently hide an
arbiter’s reputation from the arbiter in an open system, this is an insoluble problem
with the proposal.
However, the problem can be mitigated by two factors in our proposed
platform ecosystem: 1. the system randomly allocates judges based on disputants’
reputation preferences, and 2. judges who advertise, and prove, their high
reputation may be down voted for that very hint of corruption. If any system is
large enough to need a robust dispute resolution mechanism, arguably there should
be enough judges that the potential for corruption is watered down. And the larger
a platform gets, the less susceptible it is to this type of corruption.
108
See https://stackexchange.com/ or reddit. The mathematics version of stack
exchange is called mathoverflow and in that narrow area, the answers are often of
very high quality without any monetary incentive.
57

ecosystem of dispute resolution fora would allow the integration of

user representation in a given dispute.
The Aragon network does not facilitate a representation
system for dispute resolution. In the Aragon network, a user who
wishes to dispute the execution of a contract in the Aragon Network
posts a bond and prepares a brief on their argument. Such briefs are
not necessarily written by a representative of the user. However, as
the stakes get higher in the crypto economy and smart contracting,
users may want to seek smart contract representation on their behalf
to optimize their chances of success in front of decision makers in
their respective disputes. Such representation in the platform
ecosystem of decentralized jurisdictions would be enabled. The
ecosystem would allow for a matching of representation and dispute
resolution fora.
VI. Conclusion
Distributed jurisdictional means for blockchain technology
enabled smart contracting provides much needed governance from
within the blockchain technology itself. Intra-blockchain distributed
jurisdictional means such as via distributed jurisdiction are needed
because the existing jurisdictional infrastructure produces suboptimal
results for smart contract disputes. Distributed jurisdictional means
effectively address the problems inherent in blockchain-based smart
contracts. Our proposal in this paper for a distributed jurisdiction
over blockchains ensures the maintenance of anonymity of
blockchain-based smart contracting as the technology evolves.
Building on the concept of distributed jurisdiction, we
propose an open source platform ecosystem for smart contract
disputes. Our proposal ensures anonymity in blockchain transactions
by promoting arbiters’ reputations according to their discretion. The
platform also ensures users can identify the highest possible
expertise of their judges and arbiters. Our proposed system maintains
the importance of good education and reputation on the principles of
an evolving crypto law. Yet, through its anonymization it also
eliminates the corrupting collection of power that specialized
knowledge and relationships give to analog lawyers.
Implementation of the proposed platform ecosystem for smart
contract disputes would significantly boost consumer confidence in
crypto transaction through the non-arbitrary, low to no-transaction
cost inducing effective, and fair resolution of possible crypto
58

disputes. For participants in the crypto economy who wish to

minimize the transaction costs of dual integration and retain
anonymity, our proposed open source platform ecosystem is more
likely than all other available solutions to provide legal equivalence
of dispute resolution mechanisms. For legacy businesses that desire
to participate in the growth of crypto business opportunities, hope to
avoid legacy system intermediation and the associated transaction
costs, but require legal legacy system assurances and crypto dispute
resolution equivalence, our proposed system offers a preferable
solution. By attracting legacy businesses and instilling confidence in
the legal equivalency of dispute resolution in crypto transactions, our
proposed solution makes an indispensable contribution to the
evolution and significant growth of the crypto economy.
59

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2017 CRYPTO TRANSACTION DISPUTE RESOLUTION

CRYPTO TRANSACTION DISPUTE RESOLUTION

WULF A. KAAL* & CRAIG CALCATERRA **

Forthcoming in: THE BUSINESS LAWYER, SPRING 2018

The rapid evolution of anonymous, autonomous, and

* Associate Professor, University of St. Thomas School of Law (Minneapolis,

Electronic copy available at: https://ssrn.com/abstract=2992962

rankings in combination with a representation option for crypto

Key Words: Blockchain, Distributed Ledger Technology, Artificial

JEL Categories: K20, K23, K32, L43, L5, O31, O32

Electronic copy available at: https://ssrn.com/abstract=2992962

Electronic copy available at: https://ssrn.com/abstract=2992962

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cryptographically securing the information. The incentive for

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confidentiality and confidence in the accuracy and value of the

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determine the value of the currency, such as technological and

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resolution are necessitated by the impossibility of consistently

II. Blockchain Technology

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ways and no truly uniform definition seems to exist. Some refer to it

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Rather than attempting to agree on a mutually acceptable

a consortium blockchain is a blockchain where the consensus process is controlled

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and less prone to error and corruption. While blockchains use of

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makes any form of manipulation immediately detectable.20

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contracting unnecessary as smart contracts often emulate the logic of

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song on 5 devices. The contract would automatically determine

1. The database gives users absolute privacy.31 At the same time

Electronic copy available at: https://ssrn.com/abstract=2992962

an internet connection can view the entire history of changes

The goal of this section is to explain how the blockchain

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blockchain is generated by bitcoin miners who sequentially add

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arithmetic32. Now the encrypted message c is a garbled version of the

for any number m.

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called message authentication code, or more specifically, a digital

b) Cryptographic Hash Functions

1. Hashes are easy to calculate.

Consider the following toy example of a hash function. Imagine

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and convert the letters to numbers:

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centuries. This is a crucial requirement for blockchain applications

c) Transactions and Block Creation

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very unlikely to result in a number with the required number of 0s, so

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major innovation is Turing complete scripting functionality.37 As

Electronic copy available at: https://ssrn.com/abstract=2992962

proposals, then proof-of stake block creation will eliminate much of