(Host) Arnaud: co-founder of LinkZDAO, Operations Leader of Shield.
MasterLi: Sponsor of LegalDAO
Eagle: Founder of the Blockchain Lawyers Group, sponsor of BanklessDAO Legal Guild, European law professor
Master Li: I’m the sponsor of LegalDAO and a Chinese web3 lawyer. LegalDAO was sponsored in April 2022, our goal is to build crypto-native legal order which is of web3, by web3 and for web3. Currently, we have more than 2000 community members around the world, including lawyers, legal scholars, engineers, entrepreneurs, investors, artists, and young talents. We launched our Crypto Consensus Referendum campaign aiming to help crypto citizens make native law in a “bottom-up” manner.
Eagle: I’m a European based law professor and I’m one of the founders of the Blockchain Lawyers Group (BLG). BLG is an association of web 3 lawyers. It’s a global and gated association. So there is a kind of review of the persons that want to join at the beginning. And there is an assessment about the experience of the lawyer. At the moment we are of seventy-two lawyers coming from all around the world. And we discuss legal matters and also practical matters involving crypto. We have a partnership with LegalDAO.
Arnaud: Let’s talk about what is the definition of the native law for the crypto world and why?
Master Li: The general idea is, when it comes to laws, we normally refer to the law of nations. But for crypto issues, since the crypto world from day one is universal, it will easily be regulated by multiple jurisdictions. For example, if your tokens were sold to a Chinese citizen, an English person and a US person, you will probably be subjected to the jurisdiction of Chinese law, English law and U.S. law simultaneously. Another tricky issue is that web3 regulations from different jurisdictions are very different. For example, crypto is essentially banned in China and it’s not banned in other jurisdictions. That could be a problem. In today’s crypto world, even if one jurisdiction makes some crypto-friendly rules, it will not change the game, because you still have boundaries. That is why we cannot count on traditional regulations to help us build order. We believe that today’s crypto world is evolving into some sort of network state or decentralized society. From that point of view, it should have its own native rules, a set of rules made by people within, not the governmental bodies outside.
Arnaud: I’m very curious about the legislation of crypto law. In the real world the parliament has the power to make laws. But what about in the crypto world. Will it still be made by parliaments or be made in a different way?
Master Li: That’s the issue here. And that’s why we launched the crypto consensus referendum (CCR). This referendum is a way for us to explore our possible options for making the law in the crypto world. First of all, the crypto world does not have a governmental body and any sort of authority to “pose” the law to the people. Secondly, we believe that the real power of law should come from the consensus of people. It is very important to build a mechanism allowing us to gather the consensus of crypto citizens and then make the law. For CCR, we gather legal experts first to locate the right issues of the crypto law for people to vote on. That’s how we gather consensus.
Eagle: We don’t need the law because the law is made by intermediaries. Often, we cannot trust intermediaries because I don’t know whether they are corrupted or some facilities that do not work properly. It would be better not to have the intermediary, and this is the idea of the cyber punks, like let’s rely only on the code with the ambition. But if you look into the white paper of Bitcoin, you will have a feeling that there is the willingness of excluding 100% the intermediary and basically starting a new order even if it’s not on that set in an explicit way. Starting a new order which should live without the banks without the intermediary which created a mess in the previous years with the financial crisis. And I like the approach of LegalDAO as an approach to try to go back to the original idea. Also, with the knowledge of how things could also be done better and how basically the dangers of relying only on code could be avoided.
Master Li: Yes, I think Eagle mentioned a very interesting perspective actually. The reason why we launched the CCR is that we believe that while we can all agree on “code is law”, we cannot apparently put everything on code. We will inevitably have to build a certain off-chain standard. Also, from a democracy point of view, the “coders” such as people making the code or the protocol, should not have the authority to decide the law for us. That is why we say consensus might be in a higher hierarchy than the code. Maybe, to regulate this world better, the real “middle-man” should be the crypto industry or the crypto world itself. An interesting point we noticed after the FTX event is that nearly all centralized crypto exchanges begin to show the market how much money is in their reserves. There is not a single law in their jurisdiction asking or requiring them to make such disclosure. The reason why is easy, if they do not do that, no one will use them. That is a typical example of how the “people” push industrial players to fulfill some “native” regulatory rules.
Eagle: I would like to follow up on your points with some observations. First of all, You mentioned some facts, like the FTX collapse, what happened with FTX is that if you don’t have transparency which is granted by technology you arrive at a point in which there can be frauds and people harmed. And this is also to say that this approach, which can be seen a bit as extreme, at least for people that are outside of the industry of considering the code as the law is something which enters into a crisis when our technology meets the off-chain world. Once you transfer the crypto outside of the blockchain, then you have to cope with a different set of rules. I’m not against having strict rules and against rules that prohibit what cannot be done outside with cryptos. But I’m in favor of growing those that are very strict, and I’m not surprised by the fact that these laws will end up resembling a lot to the laws of the financial world or to the laws of the banks. But this is a different story so this must be clear for the listeners. It’s a different story here we are talking about what happens on-chain and I agree with the fact that it could remain on-chain in the sense that there is the capacity of auto regulating and we see that there are also some standards that are created within the industry without any obligation to do so. Think about, for instance, a very prominent Defi project. It follows certain criteria concerning the auditor concerning the bug bounty program without having an obligation to do so according to the law. So I believe that there is a kind of order within the industry, which is based on customs and on social acceptance and this is something which is important to our knowledge.
Master Li: Eagle, what do you think of incidents like Tornado Cash. It did provide a money laundry tool for hackers, which is bad for most crypto citizens, but in the meantime, it provides a very useful privacy protection tool as well. Facing things like Tornado Cash, I believe we should have some outside regulations. But that regulation should be on the standpoint of the crypto world itself, instead of certain governments.
Eagle: That’s a difficult question. As I’ve said before, “code is law” is something which can create danger. Tornado Cash is an extreme example of this. And it’s not the only example, for instance I advise listeners to look at the case of Eisenberg. The hack which was made against Mango. It is something which can be read in different ways. It could be a hack or a market manipulation or it could be something which corresponds to the code as it was created by the mango community and therefore not unlawful according to the rules of the code. We saw that there can be a kind of separation between what is considered ok according to the code and what we evaluate as lawful in an off-chain world. And with respect to Tornado Cash, there is also the willingness of protecting privacy. And the problem is understanding how much we can protect privacy and we know that like every constitutional charter of every part of the world tries to basically create a relationship between different rights and different values that need to be protected, and sometimes there are clashes within these values and therefore like the role of the jurist, but also of the society as a whole. Even more if you try to organize a referendum, it’s basically to create a balance between these different values and different rights and indicate which one is dominant over the other. Tornado cash is a very sad story. I don’t want to talk too much about the fact that a person was in jail right now. We don’t know exactly what the charges are. You could put it as a scandal because I think it’s really not fair to put a person in prison for accounting, which is the core of Europe. So this is something which really should not be accepted. Of course, there is the fact that in a system like Tornado you cannot trace the transfers. And sometimes these transfers have something to do with illicit activities. And the US government was aware about these activities which were connected to North Korea. My feeling is that we have to basically make a decision which will be the paramount for the future of our industry and should we continue to be a niche or should we basically gain acceptance in the entire world, it’s a different position. My feeling is that there are certain standards in western legal systems which are connected to KYC and AML. And I would like to have a situation in which technology could be helpful to implement this parameter and this criteria within the transfers that we have on-chain without basically having to lose the entire privacy. That in a certain sense could be compliant to the law because otherwise I don’t see the future. And another element is of course we are digital lawyers or whatever and so that you are used to the space and we also are here a bit to fight for the space and try to create good narratives. But we have to understand the perspective is completely different, if you go to explain the Tornado Cash protocol to a person who is not aware about crypto. The first reaction of that person would be this is something which is perfect for money laundering. So it could really be that this kind of protocol will not be accepted anymore because of the pressure that you get from the off-chain world which has to be respected.
Arnaud: I do believe that the consensus is a foundation of code. Could you tell us how you intend to attract more people into the CCR.
Master Li: If you want to attract more people to vote on certain legal issues, you have to create a mechanism to help them express their opinions in an easy manner. Since last November, inside LegalDAO we have formed a research group made of 40+ legal experts, to locate the trickiest legal issues within the crypto world. And then we’ll present those issues in a way that more people can understand and we also provide materials for them to understand the background. For example, we are going to tell people that the data protection for the blockchain industry is different from the traditional Internet because the on-chain data cannot be erased and you cannot easily identify who is the data controller, etc. Based on that we can ask people, when you interact with a dApp or certain protocols, do you know what kind of data you transfer and store on-chain? Do you know once those data are on-chain, you cannot delete, or erase them? This kind of questions will be delivered in a very easy way instead of as serious legal questions. Currently we are trying to perfect the formulation of those questions and more experts are coming to join us.
Arnaud: I think it’s important to invite more people to build consensus for the crypto world. Let me ask you a more professional question. If you have a law in the end. How do you intend to make this law effective? And can crypto-native laws influence the traditional judicial system?
Master Li: Well, it’s a good question. I have to say at this moment everything is not that clear, cause nobody ever did that before. I can only guess on possibilities. Once we have a law, we might be able to codize it as a low cost industrial compliance tool. Helping buidlers check if they are in compliance with those industrial standards. What we really want is to influence the traditional judicial system. In the Tornado Cash event, I think we can all agree that it is unconstitutional and it’s not something that should happen in the modern legal system, and I believe what we do here is to gather consensus generated by the crypto world. And if our voice is strong enough we can influence them and let them change and keep in line with the interest and the value of the crypto world.
Arnaud: How can CCR help build the crypto-native order with the crypto privacy law?
Master Li: We have conflicts between the traditional understanding of privacy and blockchain. And what we can do is to find the balance between those two. For the CCR, the privacy law is only season one.We will definitely perfect our methodologies along the way. If we can make this campaign a reality and have something in the end, I believe we can keep doing the same thing for different legal branches, for example, how we should regulate the crypto finance projects, NFT projects or crypto payments, etc. To make the voice of crypto citizens stronger, we need to build a mechanism that enables us to do that , otherwise the voice will not be that concentrated. In the long run, that is what I hope for our CCR would become.
Eagle: I was checking the website and Twitter of LegalDAO and I really appreciate the initiative because apart from the results that you will get, which will be of course interesting from a statistical point of view. I think that it’s a very good initiative because it creates awareness about the problem. And I think that the goal should also be education. Not everyone in this space are lawyers and understand concepts, for instance, privacy, anti-money laundering, KYC. It is very good to have an understanding because I have a feeling that this will be the most important challenge in the upcoming months and years and so really congratulations for the initiative, which is very good and also your website looks splendid and congratulations to LegalDAO and to the proponents.