The Legal Basis of Cryptocurrency Forks

Prologue: The recent confusion in comments I’ve seen about legal property rights and cryptocurrency forks, led me to write this post. This post has some passing relationship to my previous post on Blockchain Consensus, but I’ve focused this post on the legal implications rather than the social ones, and I’m also writing this more for the general reader rather than for cryptocurrency people (but it still assumes some small knowledge of cryptocurrency).

How does a cryptocurrency get started?

Before I talk about the primary legal basis for cryptocurrency forks, I need to cover a little basic background about how and why cryptocurrency networks exist.

A new cryptocurrency is born when someone writes some software that defines the rules for that cryptocurrency, and then one or more people decide to run that software on their computers. For most cryptocurrencies, the people running this software do this on an entirely voluntary basis: they sign no contracts to run the software.

The cryptocurrency software is generally open-source licensed by the developers so that anyone is allowed to run it and that anyone can modify the software as they like and run their own modified form of the software.

Why does a cryptocurrency coin have value?

In most cases, a cryptocurrency coin only has value because people decide to agree it has value (by being willing to exchange it for other goods). In such cases, the price of the coin rises and falls relative to other goods purely based on people’s sentiment about the coin.

There are exceptional cases, however, such as when a corporate entity will legally back a coin’s value by promising to allow the coin to be exchanged for some fixed good at any time, but these types of cryptocurrency are much less common.

At first, all the above may seem really strange. Based on what I’ve said above, you would be right in concluding that anyone can potentially create their own cryptocurrency, create as much of it as they like, convince people it has value, then use that newly minted cryptocurrency to buy food, land, etc. This is exactly what happens whenever a new cryptocurrency is created.

But the trick is to convince people that the newly created currency has some value. You either have to have a lot of charisma, or your cryptocurrency has to offer some utility (some capability) that wasn’t available from the existing currencies (having both charisma and a coin with utility helps even more).

What is a cryptocurrency fork?

A cryptocurrency fork results when someone decides to take an existing cryptocurrency software, modify the rules of the cryptocurrency, then convince other people to run that modified software. In fact, technically speaking you don’t even need to convince someone else to run the software you’ve modified in order to create a fork: you can just run it on your own computer. But as mentioned in the previous section, the value of a coin depends on what value people decide it has, so if you’re the only one running the software, fewer people are likely to decide it has value.

As a side note, forks happen all the time in the cryptocurrency ecosystem. They can happen because people are unhappy with the distribution of the coins, because of some perceived technical weakness of the existing coin (for example, it takes too long to send it), or just because someone decides they have enough charisma to get people to value a new coin which will make the new coin creator rich (there’s actually a technical term for this in cryptocurrency: shitcoin). In fact, there’s a reasonable size group of people that believe that only bitcoin has value, and all other coins are just “shitcoins” created to enrich greedy coin creators.

The legal basis of a cryptocurrency fork

Ok, with the background information out of the way, lets move on to analyze the legal basis for someone to operate a fork (a modified version) of an existing cryptocurrency network. In practice, forks happen all the time, but are they legal?

Given the legal climate in the US, it is worth making a few short disclaimers at this point: I am a not a lawyer, and this is not legal advice: it is purely my opinion developed over time, and based on my understanding of US law combined with an expert understanding of cryptocurrency software.

For the sake of this post, I’m only going to address US law, primarily because I know it better than the laws of other countries. Even if I don’t directly say it every time hereafter, all the legal analysis that follows should be assumed to be with regard to US law.

As a first point, it is legal to run cryptocurrency software on your computer that operates as a node in a cryptocurrency network in the US. I’m not going to go into any more depth on this issue, since it’s well established elsewhere.

The key issue around cryptocurrency forks is software licensing

But the next question that emerges is, can someone run a modified form of a cryptocurrency software (i.e. a cryptocurrency fork) on their computer? To legally do so, the computer operator must clear several legal hurdles: 1) did the original creator of the software license the software in such a way that the computer operator can run a modified copy and 2) did the computer operator enter into any contract that prevents him from running a modified copy.

For most cryptocurrency software, both these hurdles are easily cleared and forks pose no legal problems. Most cryptocurrency software is licensed by the creators in such a way that anyone can run the software, either in it’s original form or in a modified form. And most computer operators will not have signed a contract that enforces they run a particular form of the software. In fact, most computer operators that run cryptocurrency software do so on an entirely voluntary manner, without contractual obligations of any kind.

Also note that even if some computer operators do sign a contract to not run a modified form of the software, this isn’t likely to stop a fork of the software if the software license itself doesn’t explicitly forbid forking: there’s always other computer operators who haven’t signed any contract that can run a modified form, in that case.

But what about property rights and harm to property holders from a fork?

One claim I’ve seen recently is that someone who creates a fork that doesn’t include another user’s stake has infringed on that other user’s property rights and is therefore liable for harming that other user. But, in my opinion, this is a flawed analysis due to a basic misunderstanding of cryptocurrency operation and/or the value of cryptocurrency itself.

If someone creates a fork that doesn’t contain a user’s stake from a previous fork of the software, the user who “lost” his stake can simply start another version of the software on his own computer that still has his stake (he creates a fork where his stake still counts) and optionally convince others to run his version that has his stake, instead of the fork that doesn’t have his stake.

Even if the person running the fork was previously running a different version of the software that recognized the user’s stake, he has no liability for running the new software, assuming he is under no contractual obligations that prevent it: any benefits that users derived from his voluntary operation of a previous version that don’t exist with the new version were simply “freebies”.

As a non-cryptocurrency example of this, consider the case where you used a voluntarily-operated social media site where you got reputation points for answering questions. If the social media operator decides to close down or just eliminate the point system, you lose all your points. But if the operator had no contractual obligations to you, then it was a just a free benefit, that you’ve now lost.

But compared to the social media example above, cryptocurrency has a nice advantage due to it’s distributed nature: unlike in the social media site case, the software and data will generally still be available for a while on someone’s computer, so that you (and others) still have the option of running the software on your own computers, regardless of what the old operator does with his computer.

In the above scenario, there are now two cryptocurrency forks running on separate computer networks. In this case, both coins may or may not have value: it solely depends on whether other people are willing to accept the coins from either network in exchange for other goods. This is one of the really interesting things about cryptocurrency: valuations are set purely by the users, and this means that people are able to voluntarily decide what currency has value and what people they want to associate with via the mechanism of cryptocurrency exchange.

Beyond the legal realm

At this point, I’ve addressed all the legal issues surrounding a fork that I can think of right now. But the above scenario of two forks operating simultaneously with differing stakes may leave you wondering about why people might choose to accept one or the other fork as the one they want to operate on. I thought about addressing some reasons at the end of this post, but after some thought, I’ve decided to leave it to a separate post tomorrow, to keep separate the comments on two fundamentally separate issues.

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Nice analysis. As a tech lawyer and crypto expert I agree.

Strong article again 💪
it is a long way to voluntarism. The felt/experienced vulnerability of people probably comes from the problem, that users are passive and have no skills to scape and form the opensource-cryptolandscape except for using/not using a certain system. We need more UIs where people can create fork-proposals with the push of a few buttons.

It's actually interesting you bring this up, as it is one issue I've been thinking about for a while: the imbalance of power in cryptocurrency that exists depending because of different levels of programming skills (and/or the money to hire a programmer). My initial thought was something similar to what you're mentioning, a single software system that could embrace something like forking.

But that in turn led me to thoughts on a much more radical system with dramatically different economic underpinnings than current cryptocurrency systems. But it's a huge topic, and I plan to approach posting about it slowly, partly to bridge the gap between current economic thinking, and partly because some of my ideas about it are still unformed. I am planning to create a prototype of such a system that can be tweaked with time, as new ideas emerge.

As an aside, I find it mildly humorous that the spellchecker for this site's editor doesn't recognize the word "cryptocurrency".

Interesting Read.

I read somewhere else Craig White wants to take some sort of suit against those that forked bitcoin because the MIT license didn't include use of the DB or something.

That's possible in theory, but unless he can show he owns the rights to that particular component of the software, he wouldn't have standing to bring a lawsuit to court.

Craig Wright ?

No, dude. That's the guy who's suing for the Beetcorn rights. Totally different case.

I understand the confusion though. :)

Okay. Thanks for clearing that up. :)

lol yep, well at least you understood who I was referring too

Hey, @blocktrades.

I appreciate the analysis on the legalities of forking. I didn't know that some folks thought it was an issue, since it's happened elsewhere with varying degrees of success.

I guess what I would be most interested in is knowing the legality of using a soft fork to effectively freeze, or however it should be phrased, the use of an account or accounts on an existing blockchain. Are there legal ramifications for that? What recourses does an account have in the event it happens to them?

For me, that's far more front and center, and frankly, I don't know the answer when it comes to cryptocurrency. I wonder if there's even precedent for it, and if so, how that turned out. If it hasn't happened prior to what happened here on STEEM, what are things that could realistically be done to legally reclaim use, providing that whatever terms there might be for having the soft fork removed were not met?

Hi Glen, I'm trying to answer that particular legal issue in this section of the post: "But what about property rights and harm to property holders from a fork?"

As a specific issue, it has happened on Steem before. Steemit Inc create a fork (I think someone said recently it was HF9) that changed balances on accounts (actually on further reflection, I think they changed the keys on those accounts to keys owned by Steemit itself), after someone obtained the keys of many users due to a bug on the steemit.com web site and began moving the funds of those accounts to their own accounts.

I read through that and did so again now. What I get from the section is, if an account is forked out, they can go ahead and try to run a version of the blockchain where they're not.

re: HF9

I hadn't heard about that. There seemed to be a reluctance to do anything like that, even to obviously bad actors, in the time I've been here, other than starting to pull whatever initial delegation from the Steem account.

What I get from the section is, if an account is forked out, they can go ahead and try to run a version of the blockchain where they're not.

That is one of the key points of the section.

But the other point is even more significant: even if they didn't have the recourse to run a copy of the software where their stake is still there, they still would have no legal recourse, because the node operator ran the software on a completely voluntary basis and has no contractual obligations to run any particular form of the software (or even to continue running any form of the software). This isn't destruction of property in the traditional sense, because the "property" in this case was just a free benefit/service offered by the software operator (plus the other people who run computer nodes of the software).

Thanks for the post and commentary back and forth with Glen. It has help me understand a little bit more.

Okay.

I'm not sure if this makes me feel any better. :) On the one hand, I guess knowing that Justin Sun can't necessarily win a lawsuit against STEEM et al for minimizing the Steemit stake is good to know, since it in essence eliminates one tack he could take that would no doubt be devastating to the blockchain if he could win.

On the other hand, from the account owner standpoint, it's kind of terrifying to know that such a thing is possible without any recourse. Whether the likelihood of it happening is high, low, or in between. I wish I had known this over two years ago. I would have made a more informed decision when I joined STEEM. :)

Thank you for all the answers. I appreciate you writing this post and taking the time to respond.

Hi Glen, I put a Q/A section at the end of my new post, the last one trying to address your concern about the potential for destruction of your coins in a fork. There's no complete comfort in the answer, but maybe you'll find some.

Hey, @blocktrades.

Thanks for doing that. I have read through it. From a purely technical standpoint, I get the dynamics and mechanics of it. The problem is, as you mention in the post, there's human beings involved, with all of their myriad of emotions, principles, experiences and vested interests.

So, knowing it can occur (however unlikely it may be for most of us), is better than not knowing, as I guess I did up until now. Or rather, I knew it was allowed by code. I guess it was the social contract idea, which seems to be tossed around quite a bit right now for other things, that I felt would keep such a thing in check.

Obviously, it has its limits, and for many here, that limit has been met, temporarily or otherwise.

Love this point...

What's both great and terrifying is the very nature of a decentralized digital idea of value.. You are safe if enough people agree you are safe. And you are not if enough people think you are not..

One interesting thing that may not be obvious, is that this is actually true of regular "fiat currencies" like dollars and euros. If people lose faith in those, the same loss of value can occur. You can see this today in countries that have hyperinflation, where the residents begin to use currencies from other countries as a medium of exchange in preference to their country's currency. Essentially fleeing their native currency for a fork that is perceived to be safer.

I was going to say something similar, tbh.. the only difference being whatever government exists might back the currency.. rather than code.. but then they can't really control inflation..

but then, a Government is often only as valid as the faith the people put into it..

Yes, and I'll cover that reluctance based on socio-economic reasons in a separate post, probably published tomorrow. Of course, some people are reluctant/scared simply from a legal perspective, so that's all I wanted to address in this post.

Took one for the team. I clicked the link, so you don't have to. Inside I found:

For example if me now am and am alone in my room or anywhere but I don’t know how to press a phone and I call somebody for help it means am going to lose life due to lack of knowledge.

#truth

Forget @blocktrades' post, get this man on trending stat!

This triggered a wicked joke within my mind but I think I'll just bite my tongue this time.

The whole idea of laws in cryptospace as a whole is baffling when you consider how global it is. In Nigeria for example, we have zero laws in relation to blockchain and whatnot. We do have propriety laws and the likes but due to the ambiguous nature of cryptospace, I doubt there'll be any parallels.

So if you patent and protect your International software with US laws and indeed even aganist forking , what's stopping me from Forking anyways based on the laws of my society?

There's very little to stop such forking from taking place. There are international treaties in place between many countries to recognize IP rights granted by other treaty participants, but I'm sure there are countries that are not signatories to such treaties (generally they are poorer countries that see being a signatory as being a disadvantage, something I think they are probably right about).

In such a case, where the fork is being operated in one or more countries that don't recognize the IP rights, the countries that abide by those IP treaties could enact laws preventing their residents from connecting to and using such networks, but they wouldn't legally be able to stop the entire network from operating.

Also, it's worth noting that if they (e.g. the US) did pass legislation of this sort, it would be very difficult to enforce, and probably drive such currencies to a black market.

It seems like one of those situations where something gets more complicated whenever we try to "simplify" it.

I mean, crypto space as a whole thrives off a high level of anonymity from both users and developers.
People generally come here because they want to get away from governments, laws, policies and whatnot. This leads to a question, do people have to go through KYC registration before making a fork? I ask because I wonder what the basis is for "legally" protecting your product against people that you technically can't even track.

No, under current US law (or laws in any country I'm aware of ), there's no requirement to register either yourself or other users of a cryptocurrency fork. Cryptocurrency network node operators are not currently considered money transmitters, so no KYC collection requirement exists for them.

Therefore attempting to "protect" one's software from forking becomes an exercise in futility, at least for the case of forking.

Above all, legal frameworks regarding cryptocurrency are either nonexistent or in their infancy. Attempts to apply existing legal conceptual frameworks to crypto are not going to be entirely successful. New ways of conceiving and languaging what currency is and what legal rights exist around creating, possessing, and transferring it are necessary.

I like how simply you addressed the topic and want to point out this part for those still confused as to the legality of forking a chain:

If someone creates a fork that doesn’t contain a user’s stake from a previous fork of the software, the user who “lost” his stake can simply start another version of the software on his own computer that still has his stake (he creates a fork where his stake still counts) and optionally convince others to run his version that has his stake, instead of the fork that doesn’t have his stake.

This is similar to "if you don't like how you are being governed, declare independence." Create your own sovereign nation-state. The difference is it is digital and there is effectively no limit to the amount of chains that can exist simultaneously. So applying old scarcity-based concepts of ownership of real-estate are not going to cut it when it comes to crypto real-estate.

That being said, there is no way to stop people and governments from trying. They will continue to attempt to conceptualize what blockchain is in terms of what is known until the differences from traditional monetary forms come into clearer relief over the years heading into mass adoption.

Looking forward to the second part you mentioned!

Above all, legal frameworks regarding cryptocurrency are either nonexistent or in their infancy. Attempts to apply existing legal conceptual frameworks to crypto are not going to be entirely successful. New ways of conceiving and languaging what currency is and what legal rights exist around creating, possessing, and transferring it are necessary.

That is no longer in question here in the US, the federal chairman has already come out and defined that crypto currencies do in fact have value. They had to make that determination so people could move forward with lawsuits.

https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-commission

You do not have to be listed with the securities exchange to have your crypto treated the same as any other fiat.

Nice analysis. Maybe an even better example instead of the social media reputation are MMPORGs.
In those game very regularly there are items which can be exchanged for exorbitant amounts of real world money. However, it is not uncommon for the game operator to reduce the power of such an item in a patch rendering the item "useless". This doesn't give you any right to process the company either.

In an open source game on a distribute ledger, at least, you could choose to continue running "the game" as it was. However, most players most likely will go to the new game instance where the rules favor the vast majority and not the minority that was using those overpowered items such that that "fork" of the game will not be worth much.

Yes, that is a better example. I chose a social media site because it's something most everyone is familiar with if they use a computer nowadays, but for anyone who's played an MMPORG, your example brings home the point clearer.

BIggest issue with forking cryptocurrencies is that who can legally change the license that the original creator inserted to the code, and if it is changed to conflicting one, is it still legally binding.

As I see it, you can replace full directories from source code and use compatible license in directory that replaces the removed directory.

If license in new code is incompatible with license of the original code in the root directory of the source code, it is not legally binding.

Using two licenses in same source directory is only allowed if two binary files don't touch each other as in neither is linked against the other.