The decentralisation defence

Abstract

This article explores the phenomenon of the decentralisation defence, which refers to instances where ‘decentralisation’ is invoked either as a shield against liability or as insulation from the reach of the law. This defence is rooted in the technological features of distributed ledger technology and smart contracts built on the blockchain settlement layer, including pseudonymity, programmability, immutability and decentralisation. Together, these features enable transactions while reducing reliance on centralised intermediaries. Although major decentralised finance (DeFi) applications, such as decentralised crypto exchanges, are not harmful per se, their misuse by bad actors creates risks for market participants. The recent cases of Uniswap Labs and Tornado Cash illustrate that the decentralisation defence can result in unaddressed harms and produce other negative externalities. These outcomes have prompted efforts to identify regulatory hooks along the centralisation vectors. The search for a responsible party in blockchain-enabled decentralised arrangements resembles processes observed with two other key technological advancements in the digital space – the internet and artificial intelligence. Drawing inspiration from the modern EU regulation of these transformative technologies, this article focuses on the role of user interfaces as DeFi gatekeepers, and software developers engaged in the creation of smart contract code and blockchain protocols.