Code is (not) law! Rethinking the regulation approach in the blockchain era

What happens when the implementation of the laws is jeopardized by the use of technologies? National sovereignty has already experienced great challenges from the widespread use of Web2.0, with giant tech corporations able to circumvent basic legal principles; companies providing worldwide online services without having physical branches have successfully avoided taxation or compliance with employees’ rights in most of the countries where they provide services. With Web 3.0 the crisis of national sovereignty may even increase unless we rethink regulation as the way to exercise national sovereignty.

Regulatory concerns arise if certain innovations are intrinsically incompatible with traditional legal principles or legal instruments. What better than the famous aphorism 'Code is law' to show the friction between the legal system and the blockchain, where the software code rules the blockchain while the laws of our legal systems cannot interfere. Some scholars argue that "Lex Cryptographia" and "Lex Informatica" allow anyone to create their own "private" legal system, in which the participants shape their rules, and independently manage interactions in a fully digital way, without the need for a territorial state and its related structures. However, the 'Code is law' aphorism only apparently wants to justify the supremacy of the technical approach over the regulatory one. In reality, the computer code does not write the word end to regulation, as the computer code necessarily coexists within, and jointly with, other regulatory mechanisms. The code and the law should not be seen as two incompatible alternatives, but as phenomena destined to receive inputs from each other and to evolve in a parallel way.

We have seen many regulatory interventions in the blockchain domain as soon as the possibility that a decentralized digital currency, not subject to state control, could be widespread. Several regulators have placed limits and bans on the use, creation, or trading of certain cryptographic tokens, such as cryptocurrencies or security tokens. However, the criminalization of innovations has never proved to be an effective regulatory method, nor feasible in the long term.

The legislative burdens in the technological field only cause an increase in the costs to break the ban or to escape from it, but they do not eliminate the technology that was supposed to be banned. This consideration is confirmed regarding the regulatory bans on cryptocurrencies. The restrictive measures were mainly issued to avoid systemic risks deriving from the mass adoption of cryptocurrencies, as soon as the phenomenon appeared to conflict with certain national interests. The mistake in this regulating approach lies in regulating the technology itself and not its effects. Setting rules on how technology should be structured, or what technology should and should not do, cannot be the adequate approach for regulating the blockchain space. For a regulation on cryptoassets to have an effective relevance or applicability, it is necessary to regulate the effects deriving from the creation or circulation of cryptoassets, together with the role of the actors involved in these processes. The role of the regulator can be very useful to boost the potential offered by the blockchain. In particular, it can compensate for the intrinsic shortcomings that software-based governance offers in terms of right protection. It should be remembered that the underlying mechanisms of DAOs and tokeconomics do not provide any ex-post protection for the users in the event, for example, that they suffer a violation of their rights that is not covered or contemplated by the software. The right to rely on the recourse of a third party able to offer effective legal protection shall remain a prerogative of the State. At the same time, a set of rules can further facilitate interactions between participants in a DAO, for example by conferring a particular status on certain categories of participants; even tokenomics systems can be used to incentivize the achievement of public interest targets. Furthermore, the adoption of these technologies at the institutional level can increase legal compliance in less structured legal systems, where the national authorities often do not enjoy the trust of the citizens. In such situations, the blockchain could offer a reliable infrastructure for interactions between citizens that can take place with greater safety.

The regulator should not be trapped in the dichotomy between "Code is law" and "Code is not law", rather should provide inputs starting from the assumption that "Code is not always right". A new call to action shall move regulators in the blockchain space: rethinking the role of regulators means getting them involved in tech development in a continuous and coordinated way as co-creators of tech innovations; in this view regulators can address compliance concerns by co-creating, for example, solutions compliant-by-design, where the software encodes the rules. Are regulators ready for this new mindset?