Distributed Networks and the Law

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By Anna Bergren Miller:

"As blockchain and distributed ledger technologies—the basis of Bitcoin and other "cryptocurrencies"—evolve, so do their potential applications. The same categories of code that allow investors to value, buy, and sell Bitcoin without the intervention of an outside authority can conceivably be used to exchange non-financial entities like intellectual property or voting rights. In addition, the "distributed networks" made possible by blockchain and distributed ledger technology could—and in some cases already do—form the basis of new kinds of collaborative organizations. As exciting as these innovations are, key questions remain. Chief among these is the extent to which transactions on distributed networks will come into conflict with existing laws.

Lawyers, entrepreneurs, subject-matter experts, and government representatives recently sat down to puzzle over the legal status of distributed enterprises at a pair of workshops organized by Harvard and MIT. (Digital asset non-profit DATA and Bitcoin-fueled crowdfunding platform Swarm provided additional support). Over the course of four days, attendees hammered out a 37-page document intended as a potential guide to policy regarding blockchain and distributed ledger technologies. "Distributed Networks and the Law" (soon to be released, this article is based on a nearly final draft) collects background on the history of distributed networks as well as contemporary practices, and offers hope for the future. Crucially, the report concludes that "U.S. law currently accommodates a distributed collaborative structure"—i.e., collaborative organizations built on distributed networks. "We believe this will allow a re-emergence of public goods and collaborative structures that both protect consumers and amplify economic potential, something that sadly up until now has often been an 'either/or,'" write the report's authors.

Per "Distributed Networks and the Law," distributed networks are virtual networks that facilitate the secure issuance and trade of tokens. These tokens can represent financial value, as with Bitcoin, or non-financial bundles of rights. Distributed networks offer participants a variety of benefits. One of these benefits is enhanced trust, a component often missing from the "social web," which tends to prize connectivity over all else. By contrast, the "trust web," as the report's authors refer to it, makes possible the execution of "smart contracts." That is, because the computer code, rather than humans, controls the execution of contracts, token-holders personally unknown to each other can safely enter into relationship without depending on third-party trust proxies.

The report provides a couple of compelling examples of distributed network applications beyond Bitcoin-type financial exchanges. Distributed networks, the report's authors argue, may provide a means to monetize open source software. Traditionally, open source distributers only make money from peripheral functions, like consulting. But with distributed network technology, both early adopters and contributors could be given a (tokenized) stake in the product. As other parties bought in, and the network grew, so would the value of the tokens.

A second example concerns intellectual property and licensing, an area in which lawyers' fees often eat up any financial gains. Under current law, IP rights are treated as rights against specific parties. Thus the holder of a license to, for instance, produce a play, cannot simply pass that right on to an interested buyer. Instead, the parties must renegotiate with the playwright or other copyright holder. With distributed network technology, however, one can imagine a copyright holder assigning certain rights to a particular token, rather than to a particular person. This token could then be redistributed without revisiting the original contract.

The report's most significant contribution involves the definition of distributed organizations and their relationship to the law. Distributed organizations operate primarily or exclusively on distributed networks. As such, they offer opportunities for cooperative ownership and collaborative decision-making without the intervention of a central governing body. The report's authors focus on a subset of distributed organizations they name "distributed collaborative organizations," of which Swarm is one real-life example. In a distributed collaborative organization, participants become members by securing tokens associated with certain rights, including voting rights and, in some but not all cases, access to financial incentives.

"Distributed Networks and the Law" argues that, per the Howey test, distributed collaborative organizations are unlikely to be treated as securities, and thus should escape the associated regulatory scrutiny. "This qualifies as a novel application of newly available technology that falls within both the letter and intent of existing legal frameworks," note the report's authors. They go on to suggest four general legal categories into which, depending on their individual characteristics, distributed organizations may fall: extralegal entity, unincorporated nonprofit association, Limited Liability Company, or Special Purpose Vehicle. No matter the particulars involved, the overall message remains the same: that it should be possible to create and grow distributed collaborative organizations without coming into conflict with existing regulatory structures.

Given the direction of their conclusions, the report ends on an appropriately optimistic note. Its authors point out that, just as its subject is the application of new technologies to collaborative networks, the report itself was the result of a cooperative process—a free exchange among academics and industry leaders often consigned to separate silos. "This suggests a bright future for collaboration," they write." (http://www.shareable.net/blog/beyond-bitcoin-legal-pathways-for-blockchain-enterprises)