Faculty of law blogs / UNIVERSITY OF OXFORD

Corporate Governance for Complex Cryptocurrencies


Philipp Hacker
Professor for Law and Ethics of the Digital Society, European New School of Digital Studies


Time to read

3 Minutes

The Bitcoin blockchain has just forked into two rivaling chains; the same split happened to the Ethereum blockchain after its hard fork of July 2016. The development of these, and other, cryptocurrencies thus looks more uncertain than ever, both on a technical and an economic level. Notwithstanding these difficulties, the very same cryptocurrencies are gaining ground not only as alternative modes of payment, but also as platforms for financial innovation that enable smart contracts, initial coin offerings (ICOs), or decentralized organizations functioning as investment vehicles with substantially reduced human involvement. In a recent article, ‘Corporate Governance for Complex Cryptocurrencies?’, I discuss to what extent these novel financial systems could benefit from the adaptation of corporate governance mechanisms.

Cryptocurrencies are based on permissionless blockchain technology whose distinguishing characteristics are its openness for and the formal equality of participants. In essence, a blockchain constitutes a decentralized database that logs pieces of information, such as transactions, in bundles (so-called blocks) and keeps adding novel blocks as new information becomes available. In this way, cryptocoins can be transferred directly between participants of the blockchain; and smart contracts may record information as well as assets, and automatically redistribute them once pre-defined conditions are met, between two or more contractual parties. Theoretically, permissionless blockchains replace the reliance on a central authority by distributed, cryptographically mediated consensus.

Or so the popular story goes. However, recent cryptocurrency crises have shown that these architectures lack robust governance frameworks and therefore are prone to patterns of re-centralization: they are informally dominated by coalitions of powerful players within the cryptocurrency ecosystem who may violate basic rules of the blockchain community without accountability or sanction. This became evident, first, during the Bitcoin hard fork of 2013 that temporarily split the chain in two strands. Core developers colluded with the operators of large mining pools to support the shorter chain – violating the rule that the longer chain is considered the authentic one. Second, consider the Ethereum hard fork of 2016. In this case, the hard fork was pushed by the core developers in order to undo the spectacular failure of ‘The DAO’, an investment vehicle built on top of the Ethereum blockchain that had collected roughly $150 million, but then lost about $70 million to an anonymous hacker. By effectively erasing The DAO and rewriting the history of the Ethereum blockchain, the rule that transactions on a blockchain cannot be reversed was sacrificed. Finally, third, while this piece is being written, the ongoing Bitcoin block size debate, and the hard fork of August 1, 2017, again show how core developers and miners are taking the lead in resolving a conflict that, eventually, will have vast repercussions on the value of bitcoins owned by ordinary users.

Against this background, this research piece makes two novel claims that are elaborated in more detail in the article. First, cryptocurrency ecosystems could be fruitfully analyzed as complex systems that have been studied for decades in complexity theory and that have recently gained prominence in financial regulation, too. Most importantly, complex behavior is induced by imperfect governance structures that lead to unpredictable interactions between diffused agents in the cryptocurrency ecosystem, as seen in the three examples just discussed. Despite its purportedly ‘trustless nature’, questions of trust between different stakeholders, and problems of the governance mechanisms that may inspire such trust, prominently resurface in blockchain environments upon closer scrutiny. Therefore, these platforms show a high degree of volatility and, more generally, uncertainty concerning their future development. This is deeply problematic as cryptocurrencies become more integrated with the traditional financial and legal system, particularly through smart contracts and investment applications like ICOs.

Second, complexity-induced uncertainty can be reduced, and elements of stability and order strengthened, by adapting a corporate governance framework to cryptocurrencies. More precisely, the time is ripe to elaborate a Cryptocurrency Governance Code and to compel cryptocurrencies to comply with it, or to explain why they don’t. This Code would empower users to vote on matters of fundamental importance for a cryptocurrency platform – for instance, on exemptions from foundational blockchain rules. Furthermore, it would address, by a mixture of general principles and more specific rules, matters of transparency; fiduciary duties of core developers; rules on hard forks; and the responsible use of computing power by mining pool operators.

The European Parliament, in its resolution on virtual currencies warned that regulation ‘may not be adapted to a state of affairs which is still in flux’, and therefore called for proportionate, ‘smart regulation’ tailored to cryptocurrencies without stifling innovation; a comply and explain approach is, arguably, very much in line with these requirements. It combines transparency and accountability with the necessary flexibility that allows cryptocurrency developers to continue to experiment for the sake of innovation. Eventually, the coordination of these activities may necessitate the establishment of an ‘ICANN for cryptocurrencies’. Meanwhile, as cryptocurrency systems are again facing an uncertain future, it is high time to implement governance structures that provide users of cryptocoins, parties to smart contracts, and investors in ICOs with a clearer understanding of how blockchain platforms are managed, and for whom.

Dr Philipp Hacker, LL.M (Yale) is a Max Weber Fellow at the European University Institute. He is also a Research Fellow at the Centre for Law, Economics and Society, and at the Centre for Blockchain Technologies, both at University College London.


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