Video: “Blockchain is not a firm”

I am delighted to publish a 15-video series dedicated to my book, “Blockchain + Antitrust: The Decentralization formula”. You can access all the chapters over here, and all the video transcripts over here.



In this video, I will be explaining Coase’s theory of the firm and why it does fit well with blockchains. But first, let me talk about trees. One day, in the fall of 1971, a professor of law asked his students if trees could… and should have rights. He thought the question was strange but kept thinking about it. He eventually wrote an article arguing that trees should be recognized rights on their own, or, put differently, to recognize trees as a legal fiction.

The concept of legal fiction has nothing to do with fiction in the sense of a movie or great book. A legal fiction is a fact created by courts or legislation to help legal ruling. Once a legal fiction is created, it can institute legal action, the court can take an injury to it into account, and relief can run to its benefit. Companies are great examples! They have been recognized as a legal fiction since the 15th century.

Now, the question before us is whether a blockchain is a legal fiction or should be recognized as one? If the answer to these questions is negative, it means no blockchain could introduce a legal claim and seek compensation.

To start answering the question, I need to answer a first interrogation: are blockchains firms? If so, they are covered. Antitrust law can apply to blockchain as a whole because it applies to firms. If not, we must explore new territories, or else antitrust law cannot apply; it loses its subject.

To understand what a firm is, we need to explore the work of the economist Ronald Coase. In 1937, when he was 21 years old, he published an article entitled “The Nature of the Firm.” It contains no mathematics and is just 20 pages long, but it remains one of the most-cited publications in economic theory today. In it, Coase asks the following question: if markets are efficient, why do we have firms? His answer is simple and elegant; I quote: firms are “allowing some authority (an ‘entrepreneur’) to direct the resources”, therefore saving costs. And indeed, employees of the same firm do not need to negotiate or write contracts as they trust each other. One gives orders, the other executes. It saves time, and costs. So, if we follow Ronald Coase, where control stops, the firm’s perimeter stops.

Well, guess what? That theory is the very basis on top of which the entirety of antitrust law is constructed. In fact, antitrust law does not give much importance to legal status. Let me give you an example. If a firm owns 100% of another firm’s shares, they are deemed to be only one firm for antitrust law. Similarly, if a firm can decide the pricing strategy of another firm, and, why not, can veto important decisions, well, they are deemed the same firm. Every entity controlled vertically by a firm is within that firm.

Now, why is that important? Two main reasons. One, the firm is the legal fiction to which antitrust law applies, which proves essential when evaluating practices. Let me be concrete here. Antitrust law prohibits cartels between firms. If two legal entities are deemed to be only one firm, there is no cartel possible between them, because they are one. Similarly, if an entity abuses another entity that it controls entirely, there is no infringement of antitrust law because one cannot abuse itself. Second reason: defining the firm’s perimeter helps assign liability, calculate damages and compensations.

So, if the firm is indeed the pillar of antitrust law, can we fit blockchain within it? That is today’s second question. And here is today’s second answer: No. A blockchain is not a firm. At the very least, this is true for public permissionless blockchains. Private and consortium blockchain can get closer to firms. I dedicate a few pages to the issue in the book. Going back to public permissionless blockchain, they reduce costs differently than the firm. There is no vertical hierarchy within a blockchain, and no power to command and control, at the very least, with public permissionless blockchains. The absence of a central authority is the major difference with firms.

But are blockchain markets then? Markets are not legal fiction, they cannot introduce legal actions or claim compensation, and yet they work (most often). But… No, blockchains are not markets. First, blockchains are digital infrastructures that allow participants to transact without trusting each other. Two, blockchain also provides participants with more information than markets. One can watch past transactions, discover prices, etc. Three, they are open access, meta-information such as the number of transactions is in the known. I could go on and on.

So… what are blockchains? I argue in the book that they are emergent and horizontal institutions. And this is why, absent the creation of a legal fiction to capture them, they escape antitrust law. To be clear, I am not saying that antitrust cannot apply to blockchain participants, miners, or core developers, but I am saying that it cannot apply to blockchain themselves. So, should two blockchains factions collude, or should one abuse another, antitrust law would be held in check.

But creating a legal fiction won’t be easy. The absence of command-and-control results in a lack of well-defined borders. Public permissionless blockchains are at the disposal of whoever wants to access them; they are in the public domain – one does not need any authorization to consult them, exploit the information they contain, register information, or conclude transactions. They are… vaporous. We need to find a methodology to create a legal fiction that makes sense with blockchain realities. This is the subject of the following video.

That is all for today. Thank you very much for listening. Take care of yourself, and, if you can, someone else too. Cheers.

Thibault Schrepel

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