Fork Fallout? A Bitcoin Split Could Become a Legal Mess

Should the bitcoin network suddenly split into rival networks, those negatively impacted in a shake-up may be unable to turn to courts for recourse.

In conversation with CoinDesk, legal experts discussed the more notable claims that have emerged amidst escalating discussions about a potential bitcoin hard fork, a process by which a portion of the network could migrate to new software, possibly creating two separate blockchains – and two bitcoin tokens – in the process.

In recent days, bitcoin's miners and developers have shown an increasing determination to back separate visions for the technology's path forward, in the process claiming that certain actions taken by the other party could result in legal consequences.

On one side, miners have put forth the idea they could sue developers for changes to bitcoin's consensus algorithm, should it result in their inability to operate profitably. On the other hand, developers have implied miners could face repercussions should they act aggressively, or maliciously, to disrupt one of the two resulting blockchains.

First and foremost, lawyers queried by CoinDesk reported that jurisdiction was likely to prove the biggest hurdle in any lawsuit, given the disparate locations of bitcoin's key participants.

Stephen Palley, counsel at Washington, DC, law firm Anderson Kill, told CoinDesk:

"Legal theories aren’t the hard part here, jurisdiction is. In the absence of an express contract between someone with bitcoin and someone who can change the rules, you enter into the world of implied contracts and equitable remedies."

Andrew Hinkes, a lawyer at Florida law firm Berger Singerman offered a similar concern.

On either side, he noted that courts are bounded by geographies, something that internet-based economic networks united by blockchains are not.

"There are only certain people that I can sue in a Miami court. The court has to have subject matter jurisdiction, and then you have to have the right person to sue there," he said.

Hinkes went on to use the example of an anonymous developer named Voldemort, famed for his authorship of bitcoin's MimbleWimble proposal, as an example, noting that jurisdiction would be hard to prove if identity can't first be established.

"I don't know who Voldemort is. That would be a problem. A lot of devs are outside the US. If I want to sue a guy in China, where most of the miners are, I have to sue there," he continued.

Still, lawyers surveyed reported a much wider host of issues that would suggest such legal claims would likely be byzantine, if not impossible, in practice should a fork result in any claims.

Developer risk low

In discussions, one trend that emerged was the idea that miners would likely be unable to sue protocol developers given the absence of a defined contract between the parties.

According to Marco Santori, fintech lead at Cooley LLP, such claims would be barred, at least in the US.

"Purely economic damages, which are the only damages that I could imagine a miner would suffer, require that there be a contract between the plaintiff and the defendant," he told CoinDesk. "I’m not aware of any such contract between miners and protocol developers."

Hinkes agreed that the lack of a direct contract between the parties would prove problematic, should a mining group (as an example) try to sue.

"This has all been done with the tacit understanding that these things can change. There's never been guarantees the consensus algorithm won't change. In short, they're going to have hard time trying to find a person who promised that," he said.

Here again, Hinkes brought up the fact that, while developers can release new code to the bitcoin network, they aren't able to force anyone else to run it, meaning that proving such a connection would be problematic.

Possible options

Yet, there could be options.

Hinkes perhaps offered the most in-depth assessment of this scenario, suggesting three potential ways that developers might be sued.

These included claims of tortious interference (a process by which someone not involved in an existing contract takes a wilful action that disrupts it), equitable estoppel (a form of law where parties rely on statements from other parties) and an injunction (whereby a court would explicitly bar a party from certain actions).

Of the three, Hinkes speculated that a tortious interference claim could have the most merit, though he repeated that jurisdiction and identity issues were likely complexities.

"By propagating new code, you can say you directly damaged me. But, you have to say that you had an agreement. If you're a miner, who is that agreement with? What about the investors? Who do they have an agreement with? There's some issues there," he said.

Equitable estoppel, he reasoned, would break down should the party seeking recourse be unable to prove a defendant had a pre-existing position on an issue, and that the direct change in this position resulted in economic harm.

Likewise, injunctions, he said, were likely to be similarly ineffective, as they would require developers to be found and served in a location that may be hard to determine.

Miner threat

Of the two groups, lawyers surveyed seemed to suggest that miners were perhaps more likely to be held liable for actions, though they acknowledged this depended on how nefarious any steps taken could be deemed.

"It would depend upon what those malicious actions were. Merely moving hashing power from one fork to another wouldn't be sufficient," Santori said.

Should the action be sufficiently malicious, however, Hinkes noted there are still roadblocks. Namely, someone from a law enforcement agency would need to take up the case and be willing to venture into its complexities on the basis it could be fruitful for future case law.

He also suggested that precedent here is uncertain, given that it's a commonly held notion that a so-called minority blockchain (one that was small enough to be attacked and taken offline) is expected to fall away in the event of a fork.

"Any time you attack the property of another person you still have to prove and qualify damages. Does the minority chain have any value at all?" he asked.

Still, Hinkes and Palley suggested that even if the actions could be construed as criminal, jurisdiction would likely prove another difficult impediment.

"Let’s say you could convince a US court that you’re entitled to relief, aren’t most miners offshore, in China and elsewhere? It's not impossible, but it's highly unlikely," Palley said.

Where there's a will

Yet, some suggested that the right amount of creativity (and the right situation) could combine for an effective legal case.

For example, BakerHostetler fintech lead Carol Van Cleef speculated that a criminal prosecution could be possible, depending on the financial stakes involved and the extent to which the parties were aggrieved by any outcome.

Van Cleef said simply:

"There are legal theories that can be constructed from existing laws. And these could be pursued by creative lawyers and clients with resources."

Wire tangle image via Shutterstock