Law’s Detrimental Reliance on Intermediaries

Abstract

Emerging technology is law’s magic mirror. Even as law seeks to cabin the effects of emerging technology in society, when we hold emerging technology up to law, emerging technology often reflects flaws or gaps in legal constructs. Of course, rather than recognizing those flaws or gaps, law retorts back “mirror, mirror, on the wall, who is the fairest of them all?,” demanding that all other disciplines and constructs bow before law’s mighty, near-perfect reach. Often, no matter how strongly emerging technology demands that law bend, legal evolution only occurs after regulatory failures harm individuals on a massive scale. One emerging technology—blockchain technology—serves as a magic mirror for financial and capital market regulation. Since 2009, blockchain technology has promised to disrupt centralized financial intermediaries—institutions acting as middlemen between parties to facilitate financial transactions. As the blockchain technology industry grows, such disruptions become more and more apparent.

Although some point to recent turmoil in the cryptocurrency industry as evidence of the technology’s failure, this Article argues instead that the cycles of expansion and explosion prevalent in the blockchain ecosystem represent the magic mirror effect of emerging technology. When viewed through a magic mirror lens, cycles of boom and bust in the cryptocurrency and blockchain industries reveal deep flaws in regulatory structures that depend on the compliance of centralized intermediaries. Indeed, this Article argues that if considered at this angle with a wide enough lens, blockchain technology reflects deep cracks in the law-making process itself.

Blockchain technology reduces the need for intermediaries in certain circumstances and can enable flatter governance structures. When considering law’s responses to cryptocurrency and blockchain technology, recent regulatory proposals and enforcement actions seem to emphasize the need for centralized intermediaries more than ever, proposing an expanding definition of intermediary in an effort to combat specific harms in financial markets. However, recent rapid and significant failures in the cryptocurrency markets shine a light on law’s potentially detrimental reliance on intermediaries and offers an opportune moment to consider—both as a matter of substantive financial regulation and as a matter of law-making itself—when deeper decentralization might improve legal and policy outcomes. To that end, this Article ignites a discussion about whether and how blockchain technology can unlock an avenue for mitigating law’s practical need for centralized intermediaries and sets up further research exploring the potential for disintermediating the law-making process itself. Ultimately, perhaps, the magic mirror reflects the power of disintermediation in the law-making process as a means to improve the legitimacy, effectiveness, and function of law.

Keywords: Emerging technology, Blockchain, Cryptocurrency, Financials regulation, Intermediaries, Decentralization, Disintermediation

JEL Classification: K2,K22,K23,K24