Contesting the Fiduciary Fit for Public Blockchain Developers
As with many emerging technologies, public blockchains pose new legal questions for courts and regulators. After Bitcoin's value dropped by over 70% in 2018, litigators and regulators became increasingly aware of the need for greater oversight. To some, the solution is to impose fiduciary duties onto the developers of the code underlying the blockchain network's protocols and functions. In our recent article, "Blockchain Development and Fiduciary Duty," we disagree.
To determine whether to impose fiduciary duties, courts generally attempt to discern whether the relationship between two parties is sufficiently analogous to existing fiduciary relationships. Fiduciary duties matter when one party—the beneficiary—delegates some of their authority to another party—the fiduciary—and the fiduciary's exercise of that authority is not readily transparent to the beneficiary. If fiduciaries' interests differ from the beneficiaries', fiduciary duties incentivize fiduciaries to prioritize their beneficiaries' interests over their own. If both parties have the same interests however, then fiduciaries prioritizing their own interests inherently also prioritizes their beneficiaries' interests. Put another way, fiduciary duties serve no useful purpose if the fiduciary's and beneficiary's interests are aligned.
Beginning with the premise that cryptoassets resemble shares in a corporation, some scholars suggest that the relationship between blockchain software protocol developers and other network participants is sufficiently analogous to the relationship between corporate directors or officers and the corporation's shareholders. However, that analogy begins to fall apart when you look a little deeper into what blockchain networks actually entail. The calls for fiduciary fit to be imposed on public blockchain developers ignore the gamification schemes of the network and the processes by with the open source software is developed.
Because of certain traits inherent in blockchain networks, corporate fiduciary duties map poorly onto protocol developers. First, blockchain software developers do not have the same ability to bind other network participants as corporate fiduciaries have on shareholders. Even if a developer updates the code of the blockchain client, users may elect simply not to download the new update. In that sense, that network participants do not truly delegate their authority to the developers, therefore making fiduciary duties inappropriate. Second, because developers' primary source of payment from their blockchain activities comes either from reputational boosts from coding important facets of the network, or from appreciation of their cryptoassets, developers are incentivized to publicize their contributions, providing transparency which is absent in traditional fiduciary relationships. Developers' interests thus align with other network participants', because both want increased transparency into decision-making and improvements to the network with increase the value of the network's cryptoassets. Third, blockchain developers are subject to greater scrutiny than corporate fiduciaries, because of increased transparency and the threat of reputational damage, which incentivizes developers against acting carelessly. Finally, there are other ways to protect network users, including commodities and securities laws, money transmission and payments law, consumer protections laws, anti-fraud laws, and data security breach laws.
While there are many reasons why fiduciary duties fit poorly with blockchain developers, the potential damages they pose to developers are equally plentiful. These problems include forcing courts to develop arbitrary tests to determine which developers merit fiduciary duties, an increased number of strike suits against developers in our already overloaded court system, developers subverting the purpose of decentralization by increasing their own authorities to better control against liability, and chilling open-source software innovation generally.
Raina Haque - Wake Forest School of Law
William MacFarlane - Wake Forest School of Law