Blockchain Nerds May One Day Need Legal Skills

Cold sweat. I think this is a fair description of your reaction when you find out that you sent money to a wrong email address. Maybe hot flashes. But it’s bound to be some form of physical stress. And for what? All of the conventional payment platforms are reversible. Your money goes through so many intermediaries and layers of abstraction that it’s not usually a problem to reverse a mistaken payment. At worst, you can sue and claim some form of restitution.

But if you send cryptocurrency to a wrong address, you’re done. No bank to give your money back, no escrow to hold your money until you’re sure what you’re doing, no intermediary to blame. And yes, often no courts with arms long enough to reach into the depth of the cryptocurrency world. The burden of mistakes is on the person making the mistake.

Of course, you can try to sue. First, you need to know the physical identity of the payee—to serve them with the lawsuit and to enforce any judgment against their physical assets. That’s not at all a given in the crypto world. But even if you know the payee, they may have only cryptocurrency assets. If you sue to get your cryptocurrency back in a common-law jurisdiction like Ontario, you can claim an injunction mandating the defendant to return the cryptocurrency to you. If you claim dollar damages, the judgment in dollars is unlikely to be enforceable against cryptocurrency holdings. If you get an injunction, you enforce it through a threat of criminal consequences. It’s a high bar for you as a creditor, especially if the debtor says that he lost his private key or had his cryptocurrency stolen. Good luck.

But crypto communities saw a few massive mistakes leading to loss of cryptocurrency equivalent to hundreds of millions of dollars for both innocent and malicious reasons. Sometimes it looks like these losses should obviously be recovered to their victims. Let’s say you invite donations on your website and make a typo in your ethereum address. Or a thief cracks your private key and steals your cryptocurrency.

In obvious cases like these, should the blockchain technology itself permit recovery of funds?

This is a question that is troubling some cryptocurrency communities today and especially the ethereum community.

The debate is not only about this question but also about the word “obvious.” The original and continuing promise of bitcoin for many of its users, for example, is that it is not reversible. Not because people love losing money to mistakes but because people love guaranties that no one will have power over their money, even under the pretence (or on a real ground) of justice.

But even in “obvious” cases, who and how will decide if the money should be reversed? Will there be an international tribunal of crypto engineers who create open-source blockchain technology? Or will volunteers or the entire user base vote?

One of the first and very controversial steps is a proposal of some ethereum users called EIP 867 or Standardized Ethereum Recovery Proposals. This is a very technological answer to the problem of recovery. It describes a method for ethereum software to implement approved recovery requests and a standard format that all future requests must follow. It does not propose how to adjudicate recovery requests and it tries to look like a dry technical solution. But search the text of this proposal for the word “reasonable” and you will see that it sets the stage for an institutional reversal framework on the ethereum network if approved. Lawyers will know that nothing that claims to protect reasonable outcomes is ever as dry as to be open-and-shut. When reasonableness comes, lawyers follow.