Blockchain as the cure for cancer — or how a hammer was mistaken for a painting
I call it the law of the instrument, and it may be formulated as follows: Give a small boy a hammer, and he will find that everything he encounters needs pounding. (Abraham Kaplan, The Conduct of Inquiry: Methodology for Behavioral Science, San Francisco 1964).
The simple hammer may be the oldest tool developed by humanity. Although it comes in myriad shapes and sizes, its idea can nonetheless entirely be captured through its function: the application of overwhelming force in a small area through concussive bursts of power. In its simplest form, the hammer is simply a dense and heavy object with which one hits something with a view to changing that or another something’s shape or position.
I frequently seek to apply my trusty hammer to solve problems encountered during my day-to-day work as a lawyer. Disclaimer: this is rarely a productive endeavour; attempt at own risk, may come with heavy indirect costs. Despite my promotion of pro-active hammer-based problem-solving strategies, start-ups and venture capitalists protest that “hammering out a deal” should not be approached literally, leaving the precise application of concussive force only as a tempting fall-back position (although they may be wrong: there was a time when hammers were rather fashionable for the resolving of all sorts of issues).
Sadly, the only application left for my 14 oz FATMAX® High Velocity Hammer would appear to be the hanging of pictures, coat-hooks, and whatever else my wife may wish to have hanged around the house — such as paintings. This is counterproductively restrictive, as the quality of artwork currently accessible to me is sold in museum giftshops in puzzle form (boss, if you’re reading this, give me a raise).
In short, much as I would like to use my hammer to develop more original problem-solving approaches, the only option available remains decidedly mundane.
Blockchain currently appears to be enjoying a hammer moment. In the right hands, the precise application of blockchain can, it appears, solve all problems. In no particular order, according to examples provided by various block-pundits and chain-enthusiasts this includes any or all of the following:
- administering justice (“Economic and rating motivation forces judges to investigate and resolve disputes fairly and correctly, rather than to randomly pass their verdicts.”)
- creating the bank of the future (“Cryptobank for Cryptopeople”; “Banking for the Blockchain Era”; “The Future of the Money Transferring System”, etc., etc., etc., ad nauseam)
- replacing land registries (“[…] legacy title registry systems will be seen as slow and redundant”)
- political stuff like voting (“Our online voting system uses elliptic curve cryptography […]”)
- boring things like increasing liquidity for shares in privately owned companies (Do you really want quotes and links for this? Thought not.)
- creating P2P SaaS platforms for artificial intelligence (“[…] a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets”)
- managing supply-chains (“Smart shippers are finding ways to leverage these innovations to increase profits and strengthen relationships across the supply chain.” — how? nevermind)
- raising funds (too many to choose from)
- establishing prior art for intellectual property claims (“Blockchain certificates are valid worldwide because they are not guaranteed by any central authority, but by mathematics”)
- serving no purpose at all (“The world’s first 100% honest Ethereum ICO”)
- tokenising rhino horns (“Synthorn proposes a synthetic rhino horn aphrodisiac, tokenized on the Ethereum Blockchain via an ERC20 token”)
- financing banana plantations (“Banana plantation is a real proof asset with blockchain inside. It is new technology of the agricultural sector”)
- empowering the masses to sell their DNA sequences (“Our open protocol will leverage the genomic data growth by enabling data buyers to efficiently aggregate standardized data from many individual people and genomic databanks”)
- help find a cure for cancer (“WE MINE HEALTH!”)
One or several of the above may be spoofs. Dare we say it? Some may even be scams, though we’d be hard pressed to tell which is which. You may be surprised to discover which ones are jokes and which are not.
So, what does all of this tell us? First of all, it tells us that we should read more history books, or remember their contents. In 1720, buoyed by what, after it finally went *pop*, was called the South Sea Bubble, some overenthusiastic punters famously invested £2,000 in a project for “carrying-on an undertaking of great advantage but no-one to know what it is”. History does not tell whether this investment was the success it was undoubtedly hoped to be (though we can safely assume that it was, as ignorance of the undertaking was the stated objective).
Before laughing at the matter and moving on, consider that £2,000 in 1720 corresponds to $419,284.91 today (according to the calculations made here which I have not verified but which appear to be scientific-ish on the face of this).
There appears to be a pattern of people throwing good money at ludicrous projects, such as launching blockchain into space or similar.
The question is: how do we get to this point from the invention of a technology like blockchain?
The basic pattern appears to be the same in several instances, and goes as follows:
1: Develop a new means of financing a commercial operation, with the potential to either reduce risk of failure or increase returns dramatically. This usually starts as something entirely legitimate.
Examples include the development of joint-stock companies as a potent debt-restructuring and fund-raising tool in the early 1700s (the South Sea Bubble), the sudden widespread use of futures as a means of hedging against evolution of tulip prices (which turned into the speculative tool that led to the Tulip Mania and corresponding collapse of 1637), and the invention of the recently popular credit default swap options (the consequences of which I probably don’t need to date for you, unless you’re a pre-schooler). Currently, this is the development of initial coin offerings or “ICOs” as a potent crowd-financing tool.
2: Allow unregulated access to the corresponding market to the masses. Note that in a liberal mindset there is appears to be pretty much nothing that can be done to stop this. Absent regulation, our legal systems will tell you to do what you like — and there’s nothing wrong with that per se. If there are negative consequences to any sort of action, usually some form of legislation or regulation is required to keep it in check.
Regulation would however imply that the regulator knows what to regulate and has the drive to do so. Unfortunately, regulators themselves are often (i) at the heart of the problem (South Sea Bubble), (ii) in position to indirectly benefit from the process (housing boom during the subprime mortgage crisis), or (iii) as ignorant as the next guy (blockchain technologies/ICOs).
This brings us to the core issue. Most of the projects listed above have little or nothing to do with blockchain itself, other than the fact that they leverage blockchain technology as a financing tool (viz. carry out an ICO). The basic message of nearly all such projects can be broken down into the following steps:
I have a project to cure cancer → I need money to fund my project to cure cancer → I can use a blockchain-related technology to raise money to fund my project to cure cancer → I tell people my project to cure cancer can be realised through an ICO.
If we abstract fear of missing out and greed as the exclusive drivers of investment, at this point in the process the next most important factor becomes ignorance. This comes into play with a vengeance as most people (including investors which once were called “sophisticated”) only have a very cursory notion of what blockchain is and how ICOs work.
Because the technology is opaque, we do not associate the various ideas as follows:
I think financing a cure for cancer is a good idea. These look like serious people who have a novel and promising approach to this. Ok, we can finance this via an ICO if it makes sense.
but rather as follows:
I think financing a cure for cancer is a good idea. These look like serious people who have a blockchain-related approach to this. I read somewhere that we can do fantastic things with blockchain. (Bonus: my uncle John made $200K by buying Ripple at $0.006 back in January 2017).
leading to:
This is a typical case of mistaking a tool with a precise function (or the hammer, see where I’m going with this?) with an activity involving implementation of such a function (or hanging up the painting).
And that’s what happened with the blockchain through the ICO process: the blockchain becomes the cure for cancer. Blockchain is currently everywhere around us not because of actual blockchain-related projects, but because of blockchain appearing as an appropriate framework for any project in need of funding.
This situation appears at the same time to have created an illusion of non-regulation. Here too, there is a mess of ignorance and incomprehension.
Assume a conversation between Philip the project leader and Lawrence the lawyer. Philip has some basic notions that you can’t do certain things, and is scared of a mysterious thing called a “security”. He heard that the SEC doesn’t like those and has read lots of blog posts concerning the Howey test. Lawrence knows that people are doing fantastic things with blockchain, and that this will revolutionise how we do… stuff. He heard that blockchain is a ledger, and knows that the latest fad is to raise funds by selling tokens.
This is how the conversation goes:
- P: So, we’re going to be having an ICO and selling all these tokens. I heard that tokens shouldn’t be securities. I don’t think my tokens are securities, they’re utility coins. It says so in my whitepaper. Also, my tokens are ERC20 compliant.
- L: Yup, that’s right, you don’t want those tokens to be securities. I looked through your whitepaper, and it says clearly that they’re utility coins. ERC20 compliance is good.
And this is where it breaks down. Philip has read that he needs the coin to be a utility, failing which the bogeyman will hit him with a big stick. So, he invents a special utility for what is essentially a fund-raising exercise. Lawrence does not have the technological understanding necessary to determine on the face of the explanation being provided to him whether the coin is a utility, or whether it is a security.
In fact, most of the time Lawrence is not capable of linking the various functions that may be associated with coins with any specific legally relevant categories. He does not realise that the categories “utility” and “security” may not even make sense in his legal framework. He also, most likely, would not be able to describe what ERC20 compliance means and, more critically, what it does not.
Your average Lawrence (at least the one who claims to know how to deal with blockchain-related projects) has read every major law firm’s newsletter or blog post on the topic in his home jurisdiction, but has no idea how to code a basic token in solidity.
Where does this long-winded explanation bring us? To several things we need to realise to ensure that the current bubble deflates softly before engaging in sustainable growth (or at least goes out with a pop rather than a boom when the regulators swing that stick):
(i) Technology neutrality cuts both ways. Having a new technology with which to do old things does not mean all of a sudden that old laws become inapplicable.
(ii) Most of the “novel” projects backed by ICOs and launched on a blockchain-fueled rocket are, in fact, old hat. As a consequence of (i), the same laws apply as previously have. There is no “vacuum”.
(iii) Whether such laws are appropriate is another matter entirely, which needs to be dealt with on the basis of an understanding both of the law and of the technology.
This brings us to my actual point:
It is more than ever necessary for lawyers and for regulators to truly understand the technologies. You don’t need to be able to build a smart-contract from the ground up (…yet, but that will come too). As a first step, all you need to do is read more about the technology, and less about what other lawyers and regulators think may or may not be an asset-backed-utility-cum-tokenised-security-hash-crypto-currency-generation-event.
Reading newsletters purporting to correctly classify tokens between arbitrary legal categories will get you nowhere very fast if you have no idea concerning the technology itself, what it’s useful for, and what it’s not. Read and learn about the technology first: you already have the legal tools.
Until you do, you’re pretty much condemned to not knowing the difference between buying a hammer and hanging up a painting. Is that a problem?
Not unless you’re giving legal advice concerning blockchains and ICOs.
