The XXIst Century Will Be Decentralized Or Will Not Be!
For the recognition of a Legal Personality to Decentralized and Autonomous Entities
By way of a pastiche of André Malraux[1], we could say that « the XXIst century will be decentralized or will not be! » Indeed, decentralization which is carried out by the digital revolution is starting to shake the economic sphere (cryptocurrencies[2]), and the constraints that it exerts on the traditional arrangements are starting to become obvious[3].
Thus, with the creation of Distributed Ledger Technologies (Blockchain), the principle of social organization as exposed by Montesquieu, raised by Napoléon and De Gaulle[4]: « Deliberation is the work of many men. Action, of one alone » is reversed. This concept — that the military refers to with the saying « one chief, several means, one mission », to which we could add « one responsibility » — which until now has constituted the backbone of occidental organizations and which justifies an efficiency based on discipline and hierarchy seems to become obsolete.
Distributed Ledger Technologies (DLT) allow « governance » schemes in which:
- there are no leaders, but a consensus of players acting on an equal basis between each other;
- the means are shared, releasable according to the results achieved and, securitizable (thus liquid);
- and the mission is a « whitepaper » / a declaration of intent.
Regarding the responsibility, the question remains who should assume it?
This would remove the intermediaries, reduce the reaction delays, and among other matters ensure total transparency in the decision-making process, additional security to the members of the network and better efficiency than the traditional forms.
This revolution, is born, interalia, thanks to the Byzantine consensus (Practical Byzantine Fault Tolerance, Hyperldger Consensus, Ripple Ledger Consensus Process; Stellar Consensus Protocol…) that allowed the digital world to discover in the twentieth century what Greeks[5] have invented in the sixth century BC: Isonomy and the majority principle.
According to this metaphor, the Byzantine generals camp out around an enemy city. They all have to attack at the same time in order to be victorious. They can only communicate through messengers. However, some messengers could reveal to be traitors. It is therefore all about finding the good algorithm that would allow them to determine the best way to neutralize the harmful action of the “traitors”[6]. There are several solutions to this problem[7] however the main ones are based on the idea of unforgeable messages, “committed and equal” generals (isonomy) and a majority rule for decisions.
Mentioned for digital networks in 1982[8] and resolved for the first time in 1999[9], the « problem of the Byzantine generals », allows to guarantee the operation « in conformity of its original chart » of a decentralized network (thus not subject to a unique authority) as long as a series of nodes are not corrupted[10].
The digital network, in which each node in the decision-making chain decides of the whole in the interest of the common good (the majority) can then realize Proudhon’s[11] dream and create a whole that would apply the anarchic motto: «Order without power ». And this organization would exceed in efficiency the traditional organizations with its capacity to manage a multitude of operations and legitimate decisions in minimum time and without « intermediaries ».
The image of a shoal of fish[12], prevails in order to describe the new social forms that this innovative « governance » allows to create. The question at this point would be the provision of a specific legal personality to this whole reunited by an algorithm in the same manner as « instinct » brings together the fish into the same shoal.
The legal concepts of « universality »[13] » or of « corporations[14] », can help in the sense that one or the other describe a « legal fiction ». Indeed, Cozian, Viandier, and Deboissy (French Classics Authors) illustrate this when they write: « The corporate entity is not a person; neither suffering; nor loving; fleshless and boneless, the corporate entity is an artificial being. And Casanova was well aware of this, he perused nuns but never tried to seduce a congregation; we have never picked up a corporate entity[15] ». We have never picked up neither an algorithm nor an artificial intelligence, however, and nevertheless we still envisage to transmute them « from objects » of law to « subjects » of law[16] by granting them with the same legal fiction as “artificial beings”.
The fact that the Decentralized Autonomous Organizations (DAO) or the Artificial Intelligences (AI) are considered to be artificial entities does not seem to create any debate. However, to consider them as « Beings » would imply that we detach ourselves from this humanism/anthropocentrism that creates a parallel between a human being and a corporation. Both of them are organized with a unique decision body (brain / General Assembly) and a decision-making system that can be complexified (me/super-ego; Executive Board/Supervisory Board)… in order to include other structures that would be considered as similar to the ones of the cephalopods for which the brachial nervous system seems to endure cognitive functions[17].
That said, legal science distinguishes itself from Ontology and in order to be considered as a subject of law, it is not necessary to have a self-conscience. However, it should be created either from an « affectio societatis »[18] or, under the influence of Planiol[19], from the assignment of a « heritage[20]».
Can The Decentralized And Autonomous Entities Be Considered As Responsible?
A DAO is, for example, a patchwork organized around an ICO (Initial Coin Offering)[21] composed of promotors and holders of the initial project but also investors « subscribing issued coins (but) who do not sufficiently involve themselves in the consensus that creates a corporation among its shareholders (…)[22]» which triggers the construction of the « affectio societatis[23] ». Their common point is the fact of holding tokens (securitization of rights, products or services, current or future, object of the DAO). This token/digital asset incorporates a political chart which takes the form of an algorithm. The said algorithm, once launched in the cloud, works autonomously while being apt to carry on various tasks either directly or by having them executed by third parties[24].
The question of the legal personality of DAO’s was not brought up immediately. As a comparison to Mr. Jourdain, in Molière’s play “Le bourgeois gentilhomme”, who did prose without knowing it, the initiators and participants of the DAO ecosystem created a «Non-Identified Legal Object » without knowing it. The need for qualification came to light when the risk of breach of American laws and its potential legal criminal consequences appeared. Indeed, the question of « who goes to prison? » triggered each and everyone's curiosity.
This came into light with the “case”: « The Decentralized Autonomous Organization ».
In May 2016, members of the aggregated community around the Ethereum[25] have launched a project « The DAO » (The Decentralized Autonomous Organization) on the basis of a Smart Contract based on the Ethereum blockchain protocol. The objective was to set up a sort of crypto « cooperative » investment fund which would formalize an “eco-system” in which the entity would finance innovative projects as chosen by the community of “token” holders. These “token” holders would then receive a gratification should the object of the positive vote be profitable[26]. During this launching period, the “token” DAO could have been subscribed into in Ether (a crypto-currency associated to the Ethereum), which possibility allowed the project to collect 12,7 million Ether being up to 250 million American dollars.
On June 17th, 2016 a hacker found a vulnerability in the code of the smart contract and was able to embezzle 3.6 million Ether being US$70 million.
This experience had mainly two consequences. First of all, it proved that the DAO did not have the capacity to protect itself and had no resilience. Indeed, the reaction to the hacking came from a minority of actors who despite the decision-making rules of the DAO, found a solution independently. [27] This illustrated the fact that despite the popular image (libertarian fantasy), the Ethereum project was « very centralized and was based in reality on the goodwill of few individuals[28] ». This brought to the split of the blockchain protocol between Ethereum and Ethereum Classic.
After that, this merited a clarification from the SEC which stated as follows[29] “(…) the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology”.
This directly raises the question of the responsibility of DAO’s or of the token holders. Either, these entities do not have a legal personality and as a consequence, the offenders are each of them « token » holders (jointly or severally?). Or, we recognize a legal personality to DAO’s and the responsibility of the breach goes to the entity itself. However, in this case, how do we assign injustice an algorithm?
Some authors consider that: « the «Decentralized Autonomous Organizations (DAO) are only organized estates which conduct is placed in the hands of coin holders associated to them[30] » In this type of scenario if the DAO breaches a legal regulation, each coin holder would be « responsible ». However, should it be a “several” or “joint” responsibility? And how are we to identify the holder of a token anonymously held on a cold wallet[31]?
These are tricky questions (probatio diabolica) that the American authority has cleverly disregarded by mentioning: « The central issue is “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973)[32]”. The SEC, by pointing out that we had « factually » in the case The DAO a team of « co-founders»; of « Curators », in summary of « promoters » that insured the good functioning of the project, implied that they would have been responsible in case of the prosecution. It was considered that the « dormant investors» should be protected considering that their voting rights were limited and that the pseudonymization as well as the diffusion of the token holders, rendered difficult their joint action « to effect change or to exercise meaningful control ».
Since these “co-founders”, curators, promoters, do not necessarily hold « statutory functions » or « tokens » it seems difficult to grant them an executive responsibility similar to the status of corporate managers, mainly due to the fact that we are faced with decentralized entities based on the principles of « trustless »/absence of authority.
That said what solutions to propose?
First of all, we can refer to the possible existence of an « afectio sociétatis », which would have been initiated at the time of the drafting of the whitepaper between the promotors of the project to which the token subscribers adhere at the time of the various issuing phases (private sale, public sale…). This aspect is reinforced by the nature of « auto-executed membership contracts” of the tokens. An embryo of legal personality would, therefore, appear from this « affectio societatis » which would be reinforced by the allocation of an estate to the « project DAO » by the « investors » progressively with the subscription of “tokens” and the release of the fund raised in application of the « smart contract ».
Obviously, this type of recognition of the existence of a legal personality of DAO’s and mutatis mutandis, any Artificial Intelligence under the condition that they would be as autonomous and decentralized should be fixed by law.
However, to effectively ensure the responsibility of these disembodied entities, their legal « minority » should also be dictated in these texts. Indeed, recognizing a legal personality to these entities does not imply the recognition of their full legal capacity.
Therefore, the promoters of the project as well as, and rephrasing the SEC’s arguments, those who are «efforts have an undeniable impact on the success or failure of the project» should be recognized the quality of « Carer/Fiduciary » of the entity. This would bring them to undertake the legal responsibility of the damages caused to third parties and to token holders by the decentralized entity.
Moreover, this solution corresponds to the facts considering that there isn’t a spontaneous generation of DAO’s and considering that there are always creators, promotors, whales[33] able to orient the functioning of the entity either by way of a metapolitical action (oracle actions, curators….) either by way of a direct action (hard fork[34])
Can The Decentralized And Autonomous Entities Be Owners?
The legal personality is intimately linked to the notion of the estate. Originally, for Aubry and Rau, it is considered as universality originated from the personality of its holder. And what is more personal than a work generating a copyright defined by case law as being “the reflection of its authors personality» (C. Cass. ch. commerciale 25 March 1991), « the expression or the mark of the creator’s personality», « the mark of the personal creative talent » (C. Cass. civ. 1re, 13 November 1973 ).
Yet, with the emergence of the « machine learning », some artificial intelligence (neural networks) are henceforth apt to create works from « a process equivalent to the human consideration process[35] » by creating in an autonomous way an original work from data introduced by their programmer. This brought the United Kingdom, in article 9.3 of the Copyright, Designs and Patents Act to declare that « In the case of a literary, dramatic, musical or artistic work which is computer-generated, the author shall be taken to be the person by whom the arrangements necessary for the creation of the work are undertaken.”
This situation is comprehensible when the role of the machine is to assemble, under the supervision of a human the substance given by a programmer following the code conceived by this same programmer. What happens, when a step further is taken and the place of the human in the collaboration between man and machine is more and more tenuous[36]?
Thus, the Berne convention for the protection of literary and artistic works (1886) recognizes to derivative works the same protection benefits than the one granted to original works. Under these conditions, couldn’t we consider that the original and autonomous mixture of various artistic elements which constitute its database by third parties (programmers) and which is organized by an artificial intelligence constitute for the least a composite work (art L/113–2al.2 French Intellectual Property Code)?
And therefore, if the artificial intelligence can be an actor, can it also be the holder of a legal right and a pecuniary right linked to its project in the same way as a legally incapacitated person (a child)?
Also, token subscribers that would exchange digital assets, digital currencies proceed with operations that could be qualified as « assignment » of these goods and rights to the DAO « project ».
However, the « smart contracts » allow the release of these assets and their use by the DAO with the purpose of realizing its objectives. It would, therefore, be suitable to recognize that they may dispose of usus, abusus and fructus rights on goods as well as affiliated rights.
Under these conditions and in the application of the French classical theories (Planiol…) it would be suitable to recognize as well that DAO’s are eligible to hold ownership rights, an estate and ultimately as a consequence a legal personality.
However, some authors[37] consider that recognizing a legal personality to artificial intelligence and by way of extension to the Autonomous Decentralized Organizations would be « a risky solution with a questionable value ». This doctrine is based on several arguments.
First of all, this would ultimately question the legal summa divisio between « persons » and « objects ». However, this argument does not take into consideration the sub-division of « persons » between « physical persons » and « legal persons ». Considering that this last category is a « legal fiction » reuniting « artificial beings », the artificial intelligence and the DAO’s have, as seen above, all their place in this category.
Moreover, granting a legal personality to AI’s and DAO’s may lead to high risks in terms of responsibility law and « may remove owners from any responsibility due to the existence of a legal screen that would prevent their liability[38] ». Doing so would be ignoring the distinction between « legal personality » and « legal capacity ». And the solution of a legal minority as mentioned above would solve this objection.
Finally, one last point, the recognition of a legal personality to the autonomous and decentralized entities would not be useful. We have here the most interesting criticism of the recognition of the legal personality to Artificial Intelligences.
Needless to say that recognizing a legal personality to artificial intelligence, as autonomous as it may be, has little interest as long as it is not independent. Indeed, at best, it would be in the case of an employee that would represent towards third parties the entity to which he is linked by way of a subordinate relationship. And we have not yet started to examine the social relationships between humans and machines in a corporation …
However, when autonomy is associated with decentralization (absence of authority) we are close to independence. And in this case, an economic “independent” actor that interacts with its environment need a legal status in order to secure third parties with whom they interact.
Legal security is, therefore, the core of this approach.
Finally, partial revolutions do not exist. The industrial revolution has shaken the production system, social organization as well as the political and legal structures. The « blockchain revolution » will have the same effect. It already questions the place of intermediaries (economic, political, social), it reformulates the concepts of isonomy (Proof of Work, Proof of Stake[39]), it proposes new forms of project management and wealth production that could make algorithms, artificial intelligence and humans interact in ad-hoc entities (DAO) with unprecedented operation modes.
We are assisting at the moment to the first hesitating steps of a waking giant. When up and awake, nothing will be as before. In order to domesticate him and channel his furious vitality, a legal framework and rules will be needed in order to encourage his development.
Article wrote by Damien Concé, Doctor in Law, and Nadine Gérace, from Rosemont International.
[1] https://www.histoire-en-citations.fr/citations/le-xxie-siecle-sera-spirituel-ou-ne-sera-pas
[2]https://www.lemonde.fr/idees/article/2017/11/10/les-cryptomonnaies-bouleversent-l-ordre-etabli_5213131_3232.html
[3] From Bitcoin to Decentralized Autonomous Corporations Extending the Application Scope of Decentralized Peer-to-Peer Networks and Blockchains Kalliopi N. Kypriotaki, Efpraxia D. Zamani and George M. Giaglis Department of Management Science and Technology, Athens University of Economics and Business, Patission 76, 104 34 Athens, Greece
[4] «Si délibérer est le fait de plusieurs, agir ou décider est le plaisir d’un seul.» Montesquieu ; « Prenez le temps de délibérer, mais lorsque le moment d’agir est arrivé, arrêtez de penser et allez-y » Napoléon Bonaparte ; «Si délibérer est le fait de plusieurs, agir est le fait d’un seul.» «De la guerre», conférence écrite en 1917 et publiée dans le premier tome des «Lettres, notes et carnets» (Plon), Charles de Gaulle, page 473 ;
[5] Réformes de Clisthène, Athènes 508 av JC
[6] https://fr.wikipedia.org/wiki/Probl%C3%A8me_des_g%C3%A9n%C3%A9raux_byzantins
[7] http://www.pmg.lcs.mit.edu/papers/osdi99.pdf
[8] http://www.pmg.lcs.mit.edu/papers/osdi99.pdf
[9] http://www.pmg.lcs.mit.edu/papers/osdi99.pdf
[10] https://www.blockchains-expert.com/algorithme-des-generaux-byzantins/
[11] Pierre-Joseph Proudhon L’Anarchie sans le désordre, Thibault Isabel, Editions Autrement, mai 2017
[12] https://www.larecherche.fr/la-danse-organis%C3%A9e-des-bancs-de-poissons
[13] “Droit Civil Français, Tome 6” Aubry et Rau
[14] “Droit des Sociétés”, Maurice Causian, LexisNexis
[15] M. Cozian, A. Viandier et F. Deboissy, Droit des sociétés, Litec, 19e édition, 2006.
[16] Sur la distinction et ses fondements : Goyard-Fabre, Simone. “Sujet De Droit Et Objet De Droit: Défense De L’humanisme.” ARSP: Archiv Für Rechts- Und Sozialphilosophie / Archives for Philosophy of Law and Social Philosophy, vol. 81, no. 4, 1995, pp. 517–531. JSTOR, www.jstor.org/stable/23680647.
[17] https://www.science-et-vie.com/questions-reponses/puisqu-il-possede-neuf-cerveaux-le-poulpe-est-il-un-genie-10939
[18] https://www.lepetitjuriste.fr/place-laffectio-societatis-aujourdhui/
[19] Marcel PLANIOL. Les personnes morales. Traité élémentaire de droit civil, t. 1, 11e éd., LGDJ 1928 ; http://droit.wester.ouisse.free.fr/pages/brocantes/planiol_pm.htm
[20] https://archive-ouverte.unige.ch/unige:103323
[21] https://fr.icomentor.net/qu-est-ce-qu-une-ico
[22] https://archive-ouverte.unige.ch/unige:103323
[23] « volonté non équivoque de tous les associés de collaborer ensemble et sur un pied d’égalité à la poursuite de l’œuvre commune » (Cass. com. 9 avr. 1996).
[24] From Bitcoin to Decentralized Autonomous Corporations Extending the Application Scope of Decentralized Peer-to-Peer Networks and Blockchains Kalliopi N. Kypriotaki, Efpraxia D. Zamani and George M. Giaglis Department of Management Science and Technology, Athens University of Economics and Business, Patission 76, 104 34 Athens, Greece
[25] https://www.ethereum-france.com/quest-ce-que-lethereum/
[26] https://medium.com/swlh/the-story-of-the-dao-its-history-and-consequences-71e6a8a551ee
[27] https://www.sec.gov/litigation/investreport/34-81207.pdf
[28] https://www.ethereum-france.com/the-dao-post-mortem/
[29] https://www.sec.gov/news/press-release/2017-131
[30] in «Le régime de responsabilité civile en matière d’émissions publiques de jetons digitaux (ICO)», DARBELLAY, Aline, REYMOND, Michel, cf supra
[31] https://cryptoast.fr/hot-wallet-cold-wallet/
[32] https://www.sec.gov/litigation/investreport/34-81207.pdf
[33] https://www.coindesk.com/just-376-individuals-hold-33-of-all-ether-cryptocurrency-chainalysis
[34] https://cointelegraph.com/bitcoin-cash-for-beginners/what-is-hard-fork#terms-you-should-know
[35] https://www.wipo.int/wipo_magazine/fr/2017/05/article_0003.html
[36]https://www.france24.com/fr/20181019-peinture-christies-obvious-algorithme-ia-edmond-belamy-vente-encheres
https://www.contrepoints.org/2019/01/11/334393-lintelligence-artificielle-une-artiste-a-part-entiere
[37] https://corpus.ulaval.ca/jspui/bitstream/20.500.11794/28192/1/34024.pdf
[38] Georgie Courtois, « Robots intelligents et responsabilité : quels régimes, quelles perspectives ? » [2016] Dalloz IP/IT 287 ; Cédric Coulon, « Du robot en droit de la responsabilité civile : à propos des dommages causés par les choses intelligentes » (2016) étude ; in « La protection par le droit d’auteur des créations générées par intelligence artificielle », Mémoire, Maîtrise en droit, Claudia Gestin-Vilion, Université Laval, Québec, Canada, Maître en droit (LL.M.) et Université Paris-Saclay Sceaux, France Master 2 (M2) cf note 38
[39] https://allquantor.at/blockchainbib/pdf/bentov2014proof.pdf
