The Coming Age of Machine Law

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Given the ongoing global buzz about distributed ledger (DLT), I thought that I would offer up a bit of a diversion from the current public discourse about , including the non-stop blizzard of conversation about public versus private blockchains, scaling, use cases, interoperability, consortia, smart contracts and more. I thought that for today I would write about . More specifically, the practice of law in the distributed ledger age.

Let me preface this post by stating that I am not an attorney, although over the course of my career I’ve had many, many conversations with extremely capable lawyers across all disciplines. In addition, this article is the result of some thought exercises that occurred in the wake of several conversations with industry specialists, as well as the insightful commentary by CFTC Commissioner Giancarlo as part of his keynote at the May 10th, 2016  Markit Customer Conference in New York City[1]. Of particular interest to me was his commentary that “…DLT could be the biggest technological innovation in the financial services industry and financial market regulation in a generation or more…”. That statement and the follow on commentary raised an interesting question in my mind. What have we done or, more importantly what should we do, about the aspects of blockchain technology that impact how we live, exist and interact in a legal framework?

Let’s think about that for a moment. The entirety of legal canon that all of Western or Eastern civilization operate under, is generally predicated on the idea that human beings are the actual legal participants with which we engage in legal transactions. However, thanks to DLT (potentially coupled with enhanced processing power in the future ala artificial intelligence, quantum computing, et al … and the subject of a future post), we are rapidly approaching a reality wherein computers will be the legal participants. Smart contracts that auto-execute the covenants within any particular financial transaction for example. An Internet of Things (IoT) or Internet of Value (IoV) world, wherein money is exchanged at the speed in which information moves today, and done so with no human interaction whatsoever.

Perhaps it’s worth looking at some existing law to start. For example, let’s take the Uniform Commercial Code. Courtesy of Wikipedia, the UCC “…first published in 1952, is one of a number of uniform acts that have been promulgated with the goal of harmonizing the law of sales and other commercial transactions across the United States of America (U.S.) through UCC adoption by all 50 states, the District of Columbia, and the U.S. territories…[2]. As we dive into the depths of UCC, it’s worth looking at Article 2, which deals with sales. Under UCC Article 2, “… Firm offers (offers by a merchant to buy or sell goods and promising to keep the offer open for a period of time) are valid without consideration if signed by the offeror, and are irrevocable for the time stated (but no longer than 3 months), or, if no time is stated, for a reasonable time”.

What does signing mean for example, in a DLT world replete with private keys, for example? What about “…keeping the offer open…”, when transactions are in theory instantaneous with the exchange of goods or service?

The act goes on: “…Offer to buy goods for ‘prompt shipment’ invites acceptance by either prompt shipment or a prompt promise to ship. Therefore, this offer is not strictly unilateral. However, this ‘acceptance by performance’ does not even have to be by conforming goods”.

Let’s pause here for a moment. In a DLT world, how do we define “prompt shipment”, when exchange of value is for all intents and purposes …instantaneous? In a technological environment, whereby the “trade” and the “exchange of value” are literally the same thing, how do we monitor the  performance and structure “acceptance”, if those no longer functionally are relevant? Article 2 also speaks to “Contract repudiation and breach…”. Are we to operate under the assumption that in a future DLT world, there will never be a “non-conforming good”? Will there ever be a situation where contract repudiation is relevant?

How about Smart Contracts? Most people are operating under the understandable but slightly misleading perception that smart contracts are ultimately a simple “If-Then” logic statement in some computer code, that just so happens to sit within…you guessed it…a blockchain. But one could argue that smart contracts are much more. Wikipedia defines smart contracts as “…computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary…”. We’ve already seen the prototypes of smart contract capabilities in light of blockchain technology with the current industry Proofs-of-Concept.

Let’s look at another law that might have particular relevance in the soon to be world of “digital assets” and  “smart contracts”: The Investment Company Act of 1940, known in industry as “The 40 Act”.[3] The 40 Act, along with the Securities Acts of 1933[4] and 1934[5], form much of the foundation for financial markets regulation in the United States. The 40 Act in particular was recently updated as part of the Dodd-Frank Act of 2010.[6] As one examines these laws, one of the items that are particularly striking is that all interaction references, even where the Acts define things like validity of contracts and liability, all refer to “… any person…”. It will be interesting to see how the world develops with smart contracts, decentralized autonomous organizations (“…a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that…”[7]) and the like, and how these will be reflected in current rules and regulations, almost all written at a time when the only interactions were with people.

But what does all of this mean for the legal industry? How do we define, manage and monitor contractual relationships that are carried out by computers? How do we even write laws and regulations in the distributed ledger age?

These questions are more than just interesting theoreticals. In my opinion, we are in the very early stages of a reinvention or evolution of what it means to be an attorney, a legislator and a judge, and what it means to write, enact and enforce laws. We are rapidly approaching what I call the “Age of Machine Law”. A future world in which national and international laws and regulations need to be “coded for”; where the actors, interpreters and possibly even the drafters of these laws…are not human, but machines. More accurately software that runs on machines.

How will this evolve? Should universities and law schools begin to meld together the computer science and technological training that I suspect future attorney’s will need to operate in the world? Will legislators and staffers need to do likewise? Science fiction fans may fondly remember Asimov’s “Three Laws of Robotics”, reprinted here for your enjoyment: 

  1. “A robot may not injure a human being or, through inaction, allow a human being to come to harm.
  2. A robot must obey orders given it by human beings except where such orders would conflict with the First Law.
  3. A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.”[8]

Taken in context, Asimov’s fictionalized rules governing robotic behavior may in some way need to be adapted to a DLT future. What will be the rules governing DLT interactions and behavior, one may ask?

I believe that there will come a point when efforts across legal, business, technology and governmental organizations will need to intersect to properly define how people and businesses will be impacted by these significant changes. So for my friends in the legal profession and beyond, I would ask that this be considered a call to action, or at least the beginning of a reimagining of law and the legal profession.

The question is: Who will craft, and more importantly, how will we legislate and enforce, The Laws of the Machines?

I look forward to feedback from friends and colleagues in the legal profession and beyond. Please let me know if anything is missing from my analysis. 

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Ron Quaranta possesses more than 25 years of experience in the financial services and technology sectors, and is an recognized expert in the area of blockchain innovation, particularly related to its impact on the world of financial markets. He currently serves as Chairman of the Wall Street Blockchain Alliance, a non-profit trade advocacy group whose mission is to guide and promote comprehensive adoption of blockchain technology across global financial markets.

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[1] http://www.mondovisione.com/media-and-resources/news/keynote-address-of-cftc-commissioner-j-christopher-giancarlo-before-the-markit/

[2] https://en.wikipedia.org/wiki/Uniform_Commercial_Code

[3] http://www.sec.gov/about/laws/ica40.pdf

[4] https://en.wikipedia.org/wiki/Securities_Act_of_1933

[5] https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934

[6] https://en.wikipedia.org/wiki/Dodd–Frank_Wall_Street_Reform_and_Consumer_Protection_Act

[7] http://www.fastcompany.com/3047462/the-humans-who-dream-of-companies-that-wont-need-them

[8] https://en.wikipedia.org/wiki/Three_Laws_of_Robotics


, the author of this post is Chairman of Wall Street Blockchain Alliance