Ethereum Q&A: Impact of smart contracts on law and accounting

[Q] My youngest brother, he is a professor in law.
He teaches his students to read the word of the law,
write the word of the law, but judge according
to the spirit of the law. When we look at these…
.. new technologies, like distributed ledgers
and Ethereum smart contracts, suddenly we’re [faced]
with the dilemma where you have to decide
who is judging the spirit of a piece of code.
So if you look at it from that perspective…
maybe national, maybe regional, maybe global…
Is a legal framework necessary, preemptively?
If so, how urgent is that?
[A] As a system that overrides the consensus
algorithm? No. Not only is it not necessary,
it is odious, it is contrary to the very concept
we’re trying to build. We already have plenty…
.. of institutions that allow you the flexibility
to try and see if your problem will be adjudicated…
.. based on the spirit of law, in front of an
impartial judge or jury of your peers.
We already have all of that. Everything we have
is all of that. Your [brother’s] students will…
.. leave law school believing in the spirit of law and
be gradually ground down through the system of…
.. prosecution and courts until eventually they
don’t believe in anything — other than winning the case.
That’s usually what happens. The reason
we have a consensus algorithm is because…
.. we’re trying to build an alternative system
where the outcome is known based on the…
.. formulation of a contract, and it is completely
neutral and impartial. Will that always work?
Hell no, it won’t! Sometimes it will backfire badly,
and we will have a DAO-saster. [LAUGHTER]
But then the question is: how can law create
a safety net? The worst case you can have,
if you have a system where the smart contract
has failed, is that every participant in the smart…
.. contract finds anyone they can specifically
identify (jurisdictionally, geographically, individually)
sue them in whichever court they choose,
or find themselves at the time. Then you have…
.. to deal with this morass. I’m not suggesting
that’s a good outcome, I’m suggesting that…
.. it’s an inevitable outcome. If you have disputes
that arise in this system and you don’t have the…
.. means of resolving them other than a consensus
mechanism, people will start firing lawsuits…
.. at each other. There’s this really interesting framework
called the New York Convention On Arbitration,
which is an international treaty that allows you
— in 156 countries — to claim independence,
legal arbitration, through a private system of
law that you can pre-define: the duration, discovery,
who the judges are going to be, how it’s going
to be adjudicated, etc. Perhaps we should be…
.. building systems that say, ‘If there is a failure
in this consensus system, we agree to waive our…
.. rights under the New York Convention to
local courts, and instead subject ourselves…
.. arbitration under a crowd-jury, selected by smart
contract 0XABCDEF, to provide the final solution.’
Maybe you do that. I don’t know if it’s a good
solution; I know it’s better than trying to defend…
.. yourself in a hundred local courts.
[Q] What if it’s not the consensus algorithm,
but in the use, or rather abuse, of the system?
For example, TheDAO… but I can imagine much worse.
[A] The trick is distinguishing between what is
‘use’ and what is ‘abuse’ of the system.
In a system that has no spirit of law, but
only has rule of consensus, there is no such…
.. thing as a distinction between ‘use’ and
‘abuse’ of the system. If you can use the system,
it is ‘use’ of the system. If the consensus algorithm
allowed it, it is ‘use.’ The distinction you’re putting,
which is a normative judgement of the spirit,
doesn’t apply. It simply doesn’t. Quite honestly,
I think TheDAO was a great lesson in that.
The lesson wasn’t “should we fork or…
.. should we not fork?” The leson is: don’t put
$150 million in an untested contract, you idiots!
[LAUGHTER] But that is a lesson that is
self-correcting. People got hurt by that.
They’re going to learn, and we’re going to
get better. We have to realise that what…
.. we’re building here, these systems…
Their defining characteristic is caveat emptor:
they are free market systems. They are free,
collaborative, voluntary participation systems.
Caveat emptor – buyer beware.
That is not a warning, that is a fact.
You take it as it is. If you don’t like it, you
can use the other systems. We have plenty…
.. of them. But we’re not going to change
this one and make it into one of the others.
In fact, we’re going to fiercely resist that change.

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