“Infrastructural” participants of blockchain networks (e.g. miners, validators, and node operators) constitute the base layer of public blockchains. Our focus is on the question what kind of legal liability (e.g. under sanctions law) is and should be attached to different base layer operators?
By crypto’s “base layer”, we mean:
- the “infrastructural” participants of blockchain networks (miners, validators, node operators), and
- some service providers directly serving the former (e.g. private relay operators like Flashbots, specialized node hosting services like Infura or Alchemy).
It is understandable that regulators and law enforcement, in the U.S., the EU, and elsewhere, may be inclined to treat the crypto’s base layer as the right target for regulation or enforcement of rules, like sanctions or anti-market manipulation rules. However, such rules are rarely - if ever - applied to seemingly analogous actors or protocols in other contexts (e.g. SWIFT, telecommunications operators, operators of internet exchange points).
Response to the U.S. Treasury Department’s consultation on digital assets and illicit finance
Download from Regulations.gov or from ICLE
Submitted on 3 November 2022 by the International Center for Law & Economics. Arguing that, first, policymakers must determine which entities in the crypto ecosystem are the most appropriate targets for law-enforcement and national-security efforts. We suggest that the costs of targeting crypto’s infrastructural or “base” layer may to a disproportionate extent impede the attainment of other policy objectives. Second, it is important to determine the appropriate policy response to privacy-enhancing crypto technologies. As Treasury seeks to forward the goals of consumer and investor protection, promotion of access to finance, and support of technological advances, all those goals point in favor of facilitating responsible use of privacy-enhancing technologies, including “privacy coins.”
SWIFT and crypto’s base layer: an analogy
Developing an analogy between SWIFT (and the position on legal compliance - especially with sanctions law - taken by them) and crypto’s base layer operators. Draft available on request.
Validator control as liability
The lack of “credible neutrality” of validators (e.g. from the perspective of sanctions law) may increase their risk of legal liability. If so, then it may be worthwhile to prioritize protocol-level changes to increase credible neutrality of validators. Draft available on request.