According to Marc Andreessen, blockchain is “the most important invention since the Internet itself,” but if illegal activities are perpetrated through the blockchain, what liability can arise?
According to the Bank of England, the blockchain is
“a technology that allows people who don’t know each other to trust a shared record of events“.
The main peculiarity of the blockchain is the existence of a shared record, a ledger, distributed to all the participants, allowing multiple parties to transfer and store information in a secure, permanent, and easily accessible space. A report from Santander provides that such technology can
reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $ 15-20 billion per annum by 2022.
But what are the legal issues of such technology? Putting aside the banking law issues, one of the crucial questions is the following:
What liability can arise from the blockchain?
One of the main issues affecting public blockchain is the inability to control and stop its functioning. A blockchain-based decentralized autonomous organization gives the perfect example (DAO). This is a new form of legal structure in which ownership, management, and control
are automated and human involvement is limited or removed, based on a pre-agreed rule set
If everything is automated and out of control, does it mean that no liability can arise from illegal activities performed through a DAO? Or, on the contrary, the mere participation of the DAO creates a distributed liability of all its participants as a partnership made of all its participants?
Are Internet service providers’ liability rules a valuable guide for blockchain liability?
As interpreted by courts, an interesting parallel can be made with the rules applicable to Internet service providers (ISP). I discussed this issue. The rules regarding the liability of ISPs are set out in the European E-Commerce Directive, which provides for
- the liability exclusion for ISPs in relation to contents published by their users unless they become aware of the illegal activity perpetrated and
- the lack of obligation on ISPs to monitor the conduct of their users.
Despite the above principles, courts have been focusing on the distinction between
- “active” Internet service providers that categorize and organize contents published by their users, also providing features to them in relation to the usage and search of contents to which the liability exclusions do not apply and
- “passive” ISPs do not offer the above features and to which the umbrella of liability exclusions prescribed by the European eCommerce Directive (and now the Digital Services Acts) apply.
Are ISPs’ rules applicable to the blockchain?
The difference between the liability regime applicable to the blockchain and the one regulating ISPs’ liability is based on the fact that the EU eCommerce Directive introduced special rules to exclude such liability. Blockchain regulations do not prescribe similar rules (if any).
It might be argued that if a DAO cannot be controlled, there is no negligence or wilful misconduct. And therefore, no liability arises. But it might also be argued that either the creation of the DAO trigger liabilities itself or, as mentioned above, all the participants to a DAO can be jointly liable.
And what about a private blockchain?
In the case of a private blockchain, the lack of control over the platform’s functioning does not apply. But is this sufficient to trigger liability for the company managing the platform? Given the number of transactions that can occur simultaneously and automatically on a blockchain, principles similar to those applicable to ISPs might be useful.
The peculiarity in such a scenario is that platform managers might be obliged to “take down” illegal content when they receive either a court order or a mere notice from a rights holder. Also, on this point, courts shall be tested though.
On a similar issue, the following article “Relevant changes on the liability regime for ISPs with the announced Digital Services Act (DSA)” may be of interest.