Blockchain can’t solve cyber – is vulnerable to bad actors and inevitable bugs

The law must adapt to address the harms of cryptocounterfeiting. This is both ironic and inevitable. It is ironic because the prevention of crypto-counterfeiting is the entire point of a blockchain. Blockchain has been used for many ends for which it is not suited; the prevention of duplication of currency is the one thing that the system seemed to do well. Yet as bad acts by blockchain project organizers, hacks on blockchain projects like The DAO, or the use of exploits in infinite mint attacks proliferate, these supposedly invulnerable blockchain systems fall prey to inevitable bugs, intentional exploits, or unintended back doors in the code that permit the wrongful creation of extra tokens or the double spending of tokens. The reliance on purely technological solutions has also caused actors in the blockchain space to forgo developing legal instruments and theories that would provide governance should the worst happen. Crypto developers and communities must rediscover and develop legal constraints against bad behavior—standard in other virtual economy contexts like virtual worlds—such as EULAs and Terms of Use. They must then add the development of legal arguments around personal property and unjust enrichment to explain clearly to courts how crypto exploits steal value from individual token holders and from the entire community for whose benefit tokens are issued.

This will become increasingly important as crypto projects pass through the so-called recent crypto winter, an ongoing industry-wide downturn in value precisely caused by the lack of governance described in this Article.248 Wild-West-style arguments, such as the argument that all transactions executed by the software, even those obviously resulting from a hack, bug, or exploit, are valid, must be soundly rejected in the courts. If such arguments hold sway, crypto projects as a whole will simply fail. Given human greed and ingenuity, the failure of technological safeguards against crypto-counterfeiting is inevitable, and the law must adapt to enable project participants and other affected entities to move quickly to prevent and fix the damage exploits cause.

At least the damage is straightforward to describe: by wrongfully causing a system to inflate the number of tokens on the market, by duping it, double spending it, counterfeiting it, or flooding the market with tokens that were supposed to be held back to reward community members for securing the integrity of the blockchain, bad actors undermine the foundations of a blockchain project. First, causing a blockchain system to inflate the number of tokens wrongfully dilutes the holdings of legitimate token holders. Second, and arguably more importantly, exploiting a system to cause it to inflate the number of tokens wrongfully undermines the entire principles of artificial scarcity and digital integrity on which the blockchain’s value proposition rests. The entire point of blockchain was to create virtual money and property analogs that worked because of artificial scarcity. Money simply ceases to function if it is subject to runaway inflation, whether that inflation is due to government hyperinflation or a bad actor inflating the supply of crypto-tokens. Blockchain projects can no more brook crypto-counterfeiting than a nation-state government can permit rampant counterfeiting of its fiat currency.

This basic description of the problem will necessarily generate legal solutions. The obvious disconnect between the fundamental nature of blockchain projects and attempts to justify hacking, exploiting, or back-dooring of such systems presents too clear and compelling a framework to avoid legal sanctions longterm. And indeed, the common law has already begun to work itself out clearly. It has begun to recognize legal rights of conversion in intangible digital objects, and replevin of digital assets will soon follow behind. It is simply not conceivable that valuable intangible rivalrous assets could be taken without any recourse to compel their return. Similarly, the strength of the narrative against crypto-counterfeiting is strong enough to drive legal recognition of what is obviously true: from the first days of virtual economies, digital asset counterfeiting damaged and disrupted online digital value ecosystems. The solution is straightforward. Those who wrongfully take or exploit a system to cause the generation of tokens that should never have existed must either destroy the tokens or turn them over to be destroyed. That is the remedy that fits the problem and restores both the integrity of the blockchain’s scarcity of value and protects the holdings of legitimate owners of crypto-tokens.