Blockchain can’t solve either advantage—it’s too decentralized, legally complex, and vulnerabilities can be easily exploited.

Blockchain technology is supposed to prevent counterfeiting.15 In fact, what blockchain does is prevent counterfeiting by individual users through a very specific method. The much-vaunted combination of game theory and cryptography that lies at the center of the blockchain prevents a user from giving cryptocurrency to person B and person C at roughly the same time, and receiving goods or services from each, before reconciliation of the accounts with the network reveals the fraud.16 That is, blockchain has a pretty strong set of technological safeguards against the equivalent of writing bad checks.17

But all the discussion around double spending and how to stop it has stunted consideration of another inevitable set of problems.18 Blockchain software remains software. It is written by someone, it has bugs, and it can be exploited or hacked.19 The author of blockchain software can write it in such a way as to award themselves a large number of tokens. The entities that maintain control over the network can order it to generate tokens to permit them to dump tokens on the market before pulling the rug on the project. A hacker can find, create, or exploit a bug in the code to generate for themselves a large number of tokens. In these circumstances, the promised protection of blockchain networks against crypto-counterfeiting does not help at all.20 And, as the next section demonstrates, the social and legal protections of cryptocurrency projects are often less robust than they should be because of blockchain communities’ organizational precommitments.21

A. Blockchain Organization

The organization of blockchain communities often reflects community precommitments toward decentralization and flattened hierarchy.22 These aspirations are, in practice, rarely met, because blockchain ecosystems often deeply recentralize despite their organizational commitment to decentralization.23 For example, consider the recentralization of the famed Bitcoin blockchain through mining consortia, or recentralization through the control of the software developers themselves.24 That said, however, community political precommitments to decentralization often leave legal actors in the penumbra of a blockchain ecosystem without clear recourse to rectify certain community problems.25

Consider the usual case. When a blockchain is spun up, often some or several entities are incorporated to promote the project.26 That corporation may control things like copyright interests in the blockchain software or it simply may act to coordinate the community and support the project.27 Frequently, these organizations are intentionally constructed to be as distant from the reins of power as possible.28 This is for two reasons. First, these blockchain project curation entities do not want to appear to have the power to make direct changes to the blockchain because they have promised their users a decentralized and nonhierarchical experience.29 One of the major talking points of blockchain community organizations is that there is no centralized authority who can step in and devalue an asset, or force a transfer from one member to another.30 This precommitment speaks to the cypherpunk, cyberanarchist, and libertarian bent of many blockchain projects.31 Even when a project takes a democratic turn, the entity in charge of promoting the product or project does not want to appear to be directly in control of the community.32 Thus, for political and community reasons, these organizations often do not avail themselves of all of the tools that they otherwise might have—like intellectual property licenses, terms of use, or terms of service—in order to restrain participants from wrongfully generating tokens.33

Second, blockchain entities organize themselves with significant legal distance from the projects they promote in order to leverage the international, decentralized nature of blockchain technologies.34 Their purpose in doing so is to avoid legal regulations and sanctions. This approach has only been partially successful.35 Any organization with a significant degree of proximity to a blockchain project has in fact been subject to sanctions and regulations.36 Consider the history of legal regulation of blockchain exchanges.37 These exchanges themselves did not spin up the blockchain projects, but merely facilitated the cryptographic transfer of tokens.38 Regardless, they were almost effortlessly incorporated into the legal regulation of financial systems in the United States through application of the Bank Secrecy Act.39

Regardless of the actual efficacy of blockchain curation entities’ attempts to distance themselves from legal responsibility for their projects, the hands-off and arms-length nature of the relationship between blockchain curation organizations and their projects again means that these legal entities have little ability to immediately sanction bad actors within the community.40 Sometimes an attack is so profound that the community must react, and then these organizations serve as a focal point for the resulting debate. Consider here the role of the Ethereum foundation in the hack of The Decentralized Autonomous Organization (DAO), whereby the community came together and decided not to recognize the hackers’ ill-gotten gains through the functional equivalent of the issuance of an entirely new currency, in effect forking the Ethereum blockchain.41 One of the first insights of this Article, therefore, is that this legal distance is rarely worth the candle. Blockchain curation organizations do not usually escape the enforcement efforts of agencies bent on enforcing the law, and simultaneously these organizations are giving up both substantial power and potential avenues for legal recourse to stop bad actors from wrecking the integrity of the chain.42