Regulating Smart Contracts and Digital Platforms A Chinese Perspective

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10 Regulating Smart Contracts and Online Platforms
A Chinese Perspective
Jia Wang and Lei Chen
10.1 Introduction
The advent of technologies like the blockchain brings changes and challenges to daily life
as well as the commercial world. Blockchain technology facilitates groups of individuals
to reach consensus without relying on a relationship of personal trust.
1
The technology
has been applied to numerous ways, such as cryptocurrency, logistics, financial services,
and smart contracts.
2
However, proponents of blockchain technology overestimate
the power of private ordering and minimize the need for trusted intermediaries. The
onslaught of technologies inevitably brings challenges that are fundamental to
the commercial organizations and the legal system entrusted to regulate the market.
The challenges presented by new technologies relate to individuals who trade through
various means and the platforms that facilitate the trades. Therefore, a general question is
whether innovative technology will result in innovative legal frameworks? This is a
pressing question in China where blockchain technology and smarts contracts are
increasingly being applied as e-commerce continues to expand.
This chapter explores whether the legal landscape will need to be fundamentally
changed in view of the emergence of smart contracts in China. It further examines the
role of online intermediaries and assesses the regulatory framework relating to online
platforms. The chapter acknowledges gaps in the existing regulatory framework, but
argues that the current legal framework can accommodate or mitigate the legal risks
presented by smart contracts. Innovative technology generally does not lead to a need for
innovative jurisprudence. On the one hand, it is premature to change existing legal
frameworks in response to a still-evolving technology (blockchain-based smart contracts).
On the other hand, the regulatory framework for platform operators needs to be adjusted
carefully to incentivize them to diligently check and verify the information of vendors
who conduct business on their platforms.
1
Stephen Knack, Trust, Associational Life and Economic Performance, OECD conference paper, www.oecd
.org/education/innovation-education/1825662.pdf. The lack of trust has particular implications for eco-
nomic development underpinned by a robust regime of contracts; as indicated by Douglas North: “The
inability of societies to develop effective, low-cost enforcement of contracts is the most important source of
both historical stagnation and contemporary underdevelopment in the Third World.”See Institutions,
Institutional Change and Economic Performance, Cambridge University Press (1990), p. 54.
2
More examples can be found here: Smart Contracts Alliance in collaboration with Deloitte (2018), “Smart
Contracts: 12 Use Cases for Business & Beyond –A Technology, Legal & Regulatory Introduction,”https://
digitalchamber.org/wp-content/uploads/2018/02/Smart-Contracts-12-Use-Cases-for-Business-and-
Beyond_Chamber-of-Digital-Commerce.pdf.
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This chapter is divided into five sections. Section 10.2 discusses blockchain technol-
ogy-based smart contracts. This section explains the core functions of smart contracts and
discusses the development of smart contracts in China. Section 10.3 discusses the
advantages and limits of smart contracts, identifies the industries that tend to rely on
smart contracts in China, and focuses on the uncertainties of smart contracts. In parti-
cular, China’s contract law is examined to determine if there are legal ambiguities with
regard to formation, performance, and modification of smart contracts and the problems
relating to enforcement, remedies, and dispute resolution. Section 10.4 evaluates the
effects of past regulation of new technologies and discusses the regulatory models
proposed for platform operators. It argues that the government needs to restrain itself
from habitually relying on imposing heavier penalties on platforms as a form of regula-
tion, rather it should pursue a more balanced approach taking the interests of different
stakeholders into consideration. Section 10.5 analyzes the importance and benefits of
online platforms as intermediaries. Section 10.6 recommends possible solutions to make
the current legal system more accommodating to smart contracts, online platforms, and
evolving technologies.
10.2 Development of Smart Contracts
This section provides context to the deeper analysis of the challenges smart contracts and
online platforms present to existing law. The first part reviews the emergence of smart
contracts in general and then focuses on the evolution of smart contracts in China.
10.2.1 Emerging Smart Contracts
Smart contracts are computer protocols that can embed the terms and conditions of a
contract.
3
The human readable terms (source code) of a contract are translated into
executable computer code that can run on a network. Contractual clauses can thus be
made partially or fully self-executing and self-enforcing. Smartcontractenthusiastssee
blockchain technology as facilitating contracting and diminishing role of
intermediaries.
The idea of smart contracts is not a new concept. The classic prototype of a smart
contract is the vending machine. Once money is inserted into the machine, then a
contract for sale is executed automatically. The term “smart contracts”was coined by
computer scientist Nick Szabo in 1993 to emphasize the goal of bringing what he calls
the “highly evolved”practices of contract law and related business practices to the design
of electronic commerce protocols between strangers on the Internet.
4
A more modern
definition of a blockchain-based smart contract is “a piece of code deployed [on a] shared,
replicated ledger, which can maintain its own state, control its own assets and which
responds to the arrival of external information or the receipt of assets.”
5
3
Riccardo de Caria “A Digital Revolution in International Trade? The International Legal Framework for
Blockchain Technologies, Virtual Currencies and Smart Contracts: Challenges and Opportunities,”p. 4, at
https://aperto.unito.it/handle/2318/1632525.
4
Nick Szabo, “Formalizing and Securing Relationships on Public Networks.”Vol. 2, no. 9. 1 September
1997. First Monday, http://firstmonday.org/ojs/index.php/fm/article/view/548.
5
Rani Subassandran, Blockchain and Smart Contracts: Today and Tomorrow (2018) www.courtsofthefuture.
org/wp-content/uploads/Blockchain-Smart-Contracts-Today-and-Tomorrow.pdf.
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The use of smart contracts has become increasingly popular as they have become
“smarter.”For example, bitcoin protocol only permits monetary transactions and does not
offer the possibility of storing smart contracts or transferring assets. More advanced smart
contracts, consist of computer code that executes the terms and conditions of a contract
between parties.
6
The more sophisticated the code, the more automated, self-executing,
and ‘smarter’the contract is. The early adoption of smart contracts was facilitated by
digital rights management (DRM) schemes.
7
Smart contracts have been used to create
copyright licenses, as well as the use of cryptography schemes for financial contracts.
Ultimately, smart contracts may be created by computerized agents, through the Internet
of Things (IoT) and placed online.
8
In 2017, more than half of the world’s approximately 400 blockchain-related patent
applications originated from China,
9
which quadrupled the number of filings in 2016.
10
The United States ranked second in 2017, with 91 filings compared to 21 in 2016.
Through March 2018, there were 456 registered companies in China whose business
model was based on blockchain technology.
11
Smart contracts are advantageous in many respects. Smart contracts, among third
parties unknown to each, provide a secure trustless means of transacting since the
blockchain cannot be tampered with, as data is secured in a decentralized registry.
12
The cost involved in entering into and enforcing smart contracts is lower than traditional
contracts. Also, blockchain transactions can be cost-efficient as repetitive types of con-
tracting can be streamlined and carried out by prescribed programme codes. Moreover,
smart contracts are almost entirely fraud-proof because records of the transactions are
permanently kept on the blockchain. For example, in the field of logistics, blockchain-
based smart contracts can shorten the chain of third-party agents, speed up delivery,
reduce the price to consumers, and reduce the possibility of theft.
13
Smart contracts can
be –at least in theory –fully automated and self-enforcing. Once the terms and condi-
tions are set in computer code, the contract will run its course and the terms will be
executed by computer systems on the basis of the code and certain exogenous events
embedded in the code. In many commercial relationships, in particular in financial
services, these properties make smart contracts very attractive. Automation, combined
with the blockchain’s distributed nature, significantly decreases transaction costs.
6
Sergey Grybniak, “Advantages and Disadvantages of Smart Contracts in Financial Blockchain Systems,”
https://hackernoon.com/advantages-and-disadvantages-of-smart-contracts-in-financial-blockchain-systems-
3a443145ae1c.
7
For example, see the introduction of DRM at American Library Association at www.ala.org/advocacy/
copyright/digitalrights.
8
See note 8, 313.
9
Global Times, “China led global blockchain patent applications in 2017: WIPO,”published on March 26,
2018/, www.globaltimes.cn/content/1095289.shtml
10
Echo Huang, “China’s Blockchain Ambitions Are Revealed in the Sheer Number of Patent Applications,”
https://qz.com/1240364/chinas-blockchain-ambitions-revealed-in-sheer-number-of-patent-applications.
11
Ministry of Industry and Information Technology, White Paper on the Blockchain Industry of 2018,
published in May 2018, www.miit.gov.cn/n1146290/n1146402/n1146445/c6180238/part/6180297.pdf, p
1.
12
Pierluigi Cuccuru, “Beyond Bitcoin: An Early Overview on Smart Contracts”(2017) International Journal
of Law and Information (25), 179,186. See note 8, Max Raskin “The Law and Legality of Smart Contracts”
316.
13
DHK Trend Research, “Blockchain in Logistics –Perspectives on the Upcoming Impact of Blockchain
Technology and Use Cases for the Logistics Industry”(2018) pp. 12–18, www.logistics.dhl/content/dam/
dhl/global/core/documents/pdf/glo-core-blockchain-trend-report.pdf.
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Technological innovation, such as the evolution of smart contracts, has its own
disadvantages. For example, consumers may question the rental terms for an apartment
after execution. If the data is already registered in a smart contract, it will be technically
difficult to adjust or make corrections.
14
So a mistake in the language contract or in the
coding of the language contract cannot be corrected due to the self-performing nature of
smart contracts. Clerical errors are common in language contracts, but can be immedi-
ately corrected; but once coded, they become immutable. Ironically, the need for lawyers
experienced in IT will increase in the future because programmers of smart contracts will
need to know about the requirements of law and the legality of certain contract terms.
Because smart contracts are autonomous in nature, promises memorialized in a smart
contract are –by default –harder to memorialize in a natural-language legal agreement.
Once a smart contract is put into motion, the terms embodied in the code will be
automatically executed, unless the parties have incorporated code that allows smart
contracts to self-terminate based on data provided by a third-party oracle.
15
To summarize, smart contracts face major obstacles before they can become common-
place. First, laypersons may find it difficult to acquire a comprehensive understanding of
the terms of smart contract codes. Second, smart contracts can only be applied with very
specific terms and cannot accommodate the flexibility provided by standard-like contract
terms. Third, once distributed, a smart contract can be triggered and executed only when
the decentralized nodes reach consensus with the same data input.
10.2.2 Development of Smart Contracts in China
The Chinese State Council, in 2017, embraced blockchain technology in its 13th Five-
Year Plan, resulting in a 30-fold increase in cryptocurrency market capitalization. This
governmental policy has made blockchain and cryptocurrencies a major topic of debate
in China.
16
Chinese policymakers are eager to set frameworks and standards to accelerate
industrial adoption of blockchain technology, while protecting and educating investors in
the nascent and unregulated cryptocurrency ecosystem.
17
Chinese policy, however, remains unsettled, as the government weighs the benefits
and dangers of the blockchain. In 2017, Chinese officials lauded the World Economic
Forum White Paper, “Realizing the Potential of Blockchain.”But, less than three months
later, the People’s Bank of China (PBC) announced an immediate ban on initial coin
offerings (ICOs) and shut down all domestic cryptocurrency exchanges. At the same
time, Sun Guofeng, the director of the Institute of Finance at PBC, clarified that the ban
“should not prevent relevant financial technology companies, industry bodies, and other
technology firms from continuing their research into blockchain technology.”
18
At the
14
See note 12, Pierluigi Cuccuru, “Beyond Bitcoin”188–190.
15
Kevin D. Werbach and Nicolas Cornell “Contracts Ex Machina,”(2017) Duke Law Journal 67, 313.
16
World Economic Forum Report, What’s the Future of Blockchain in China?, www.weforum.org/agenda/
2018/01/what-s-the-future-of-blockchain-in-china.
17
For example, China has moved to more closely regulate Bitcoin. See Mark Schaub and Molly Su (2017)
“Prospective Opportunities & Risks for Bitcoin in China,”www.chinalawinsight.com/2017/08/articles/
corporate/prospective-opportunities-risks-for-bitcoin-in-china/. In 2017, People’s Bank of China ordered a
ban on domestic initial coin offering (Notice on Preventing Financial Risk of Issued Tokens). Back in 2013,
it ordered the Notice on Preventing Financial Risk of Bitcoin.
18
“China bans issuance of long-term certificates of deposit,”www.xinhuanet.com/english/2017-08/31/
c_136571679.htm.
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same time, China’s Ministry of Industry and Information Technology launched the
Trusted Blockchain Open Lab.
19
The lab promotes the exploration of blockchain
technology independent of cryptocurrencies, or the exchanges that trade them.
Public-private partnerships have increased and the judiciary has been supportive of the
developing blockchain industry. Guizhou Far East Integrity Management Company
initiated, in collaboration with local government authorities, a project known as
“Identity Chain.”Identity Chain provides privacy protection through real-name identity
and facilitated cross-chain technology to achieve different applications of blockchain
value transfer and business collaborations. With one ID, a person may engage in
numerous activities, such as registering for a telephone number, setting up a corporation,
buying a car, and engaging e-commerce platforms. Identity Chain can connect and
match all the activities in different scenarios with digital records corresponding to a single
ID.
20
The judiciary has recognized the data stored on blockchain as evidence in legal
disputes. In July 2018, a court in Hangzhou confirmed the legal validity of electronic
data stored via the blockchain as evidence in an online copyright dispute, involving
the infringement of online broadcasting rights. The plaintiff used a third-party evi-
dence storage platform to prove that the defendant published the plaintiff’scopy-
righted content on a website without approval. The third-party platform captured the
infringing web page and conducted source recognition, before compressing the web
content along with the call date by means of a hash function and uploading it to
Factom and bitcoin blockchains. Previously, the Guangzhou Arbitration
Commission issued the industry’sfirst ruling based on the “arbitration chain,”
21
which uses distributed data storage, encryption algorithms, and other technologies
to input transaction data on to the chain. Once a dispute arises, the data stored in the
chain can be uploaded to the arbitrator’s electronic system as an authenticated
document to expedite arbitration. The uploaded material of real-time preserved
data provides a chain of evidence to meet the requirements for authenticity, legality,
and relevance of the evidence.
22
In the private sector, smart contracts are widely used in financial services, food
industry, logistics, legal services, intellectual property industry, and many other sectors.
23
For example, ZhongAn Online, an insurance-technology firm, uses blockchain to track
the life cycles of poultry, so consumers can be assured that they are eating organically
farmed chickens.
The supply chain and retailing sectors are more inclined to rely on blockchain
technology to enhance the transparency of supply and prevent counterfeit goods from
entering circulation. Online retailer JD.com has applied the technology to track domes-
tic and international beef products for shoppers. Green Hand is part of the Alibaba Group
19
See www.theasset.com/china-today.
20
“Blockchain Technology Based Innovative Identity Chain –Create a New Model for Personal Credibility,”
www.qxgcx.gov.cn/article/xinyongzixun/chengxinxinwen/1725.html.
21
The ruling was developed by Weizhong Bank, Guangzhou Arbitration Commission, Hangzhou Yibi
Science and Technology’s“arbitration chain”based on blockchain technology.
22
“Weizhong Bank and Guangzhou Arbitration Commission, the first ruling of ‘blockchain + certificate’was
born,”at www.sangbe.com/article/372362.html.
23
See note 11, Ministry of Industry and Information Technology, “White Paper on the Blockchain Industry of
China”(2018), p. 41.
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and specializes in generating e-passports for physical goods. By scanning a QR code,
identity verification is enabled and this triggers the recording of the logistics, origin, and
destination of the goods. The tracking data is sent to a “block”that provides a unique
identifier enabling customers to see the status of the shipment. VeChain is another
blockchain platform offering a transparent, immutable, and secure platform to store
information with a private key. In addition, logistics service providers can now manage
goods at the granularity of single units for the very first time.
24
The financial sector has also adopted blockchain technology. Ant Financial
utilizes a blockchain network to raise funds for charitable purposes. In 2016, it
successfully launched its first project using blockchain to raise funds for children
with hearing disabilities. In 2017, it collaborated with the China Social Assistance
Foundation.
25
Each donation has a tracking record, and, thus, enhances donors’
confidence in the fund-raising. Everbright Securities operates a credits and voting
blockchain and is developing applications for the capital markets and financial
institutions in China.
26
The intellectual property industry, as mentioned earlier in this article, embraced
technological measures early on to protect the rights and interests of IP owners. The
copyright sector employs DRM to secure copyright royalties by securing the copyright
work and only allowing access to users that pay a fee in order to view the works. The next
step was the development of a blockchain to register copyrights that establishes a public
record of ownership and copyright transactions. In this way, copyright protection is
conferred automatically when a work is complete regardless of whether it has been
registered.
27
Currently, copyright registration can be performed instantaneously at the
cost of RMB 40 cents (USD 5 cents) per registration.
28
A similar system allows the
tracking of the distribution of trademarked goods prior to the registration of the trade-
mark. As a result, the mark can continue to be used within the same scope of products or
services without infringing on similar or identical trademarks that are registered at a later
time.
29
Smart contracts are an improvement over DRM in combating online copyright
infringements and facilitate the collection of royalty fees.
30
10.3 Challenges to Smart Contracts
This section reviews the challenges smart contracts present to business and law, including
its current use in certain industries, application to relational types of contracts that require
flexibility, and the application of contract law in general to smart contracts.
24
www.vechain.com/#/solution/logistics.
25
www.sohu.com/a/167829002_402387.
26
Irene Aldridge and Steven Krawciw, Real-Time Risk: What Investors Should Know About FinTech, High-
Frequency Trading, and Flash Crashes (Wiley, 2017), pp. 33–34.
27
Art. 2, Berne Convention for the Protection of Literary and Artistic Works.
28
Jie Hua, “The Role of Blockchain Technology and Smart Contracts in the Establishment of Entitlements
and Transaction and its Regulatory Framework”(2018) Intellectual Property (2) 13, 17; citing Wu Jian, Gao
Li & Zhu Jingning, 2016(7), Copyright Protection based on Blockchain Technology, Broadcasting and TV
Information, 61.
29
PRC Trademark Law, enacted in 1993, amended in 2001 and 2013; see art. 59(3).
30
Micro Film (Micro Video) Copyright Centre is one such platform that allows content creators to upload
their works and receive payments through a blockchain network that distribute monies specified by the
terms encoded into a smart contract. See www.wsp360.org.
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10.3.1 Understandability and Rigidity
Contracts define rights and obligations for the contracting parties. Some rights and
obligations are easily translatable into code –particularly those related to the exchange
of value or the transfer of title to a digitally represented asset, which can be written as if-
then propositions. These promises are often binary in nature and thus naturally transla-
table into software. Other contractual provisions, however, are not as easy to code.
31
Legal agreements often include open-ended terms that outline performance obliga-
tions. For example, a contracting party may promise to act in “good faith”because it
might be difficult to precisely define what constitutes appropriate performance, while
another party may promise to use “best efforts”to fulfill his or her obligations, because the
most cost-effective or efficient manner of performance might not yet be foreseeable.
There is value in keeping contracts open-ended or ambiguous, because it provides
flexibility to the parties and lowers the transaction costs of negotiations. In many cases,
vagueness may in fact result in more efficient contracts.
32
As mentioned earlier in this chapter, smart contracts face three major obstacles in
their application. First, smart contracts trigger the issue of understandability of such
technology; as laypersons do not entirely understand coded contract terms relative to
natural language.
33
Second, contractual terms translated into code must be specific,
definite, and not be subject to change. The theory of incomplete contracts indicates
that it is impossibly complex and costly for parties to create a complete contract
34
;the
law provides default rules to fill in the gaps found in contracts. Uncertainty or flexibility
in contracts is useful in facilitating performance under conditions of uncertainty, such
as changing circumstances. The rigidity of codes renders smart contracts inflexible
when conditions deviate from the initial expectations of the parties. Third, smart
contracts are restricted by the decentralization of the blockchain nodes. The entire
contract becomes nonfunctional if the inputted data contain discrepancies. The fol-
lowing subsection examines how these three obstacles affect the current contract law
system. The observation is conducted within the framework of China’s contract law,
and related laws and regulations.
10.3.2 Revisiting the Law of Contracts
This section reviews the three core areas of contract law –formation, performance,
enforcement, and remedies –to determine their continuing role or fit to smart
contracting.
10.3.2.1 Formation of Contract
A contract is an agreement between two or more parties creating obligations that are
enforceable or otherwise recognizable at law. For an agreement to be enforceable,
31
Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note, SDN/16/03, January
2016, p. 23.
32
Oliver Hart, “Incomplete Contracts and Control,”(2017) American Economic Review, 107(7), 1731.
33
See note 12, Pierluigi Cuccuru, Beyond Bitcoin, p. 188.
34
Oliver Hart and John Moore, “Incomplete Contracts and Renegotiation”(1988) Econometrica, 56(4), pp.
755–785.
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three elements must be present: an offer (expression of a willingness to enter into a
binding agreement), acceptance of the proposed terms, and a mutual exchange of value
(consideration). Article 14 of the PRC Contract Law (CCL)
35
definesanofferasa
party’s manifestation of intention to enter into a binding contract with another party.
Thetermsoftheoffermustbespecificanddefinite. Within the context of smart
contracts, codes posted to a ledger can be considered an offer.
36
However, a problem
emerges when it comes to acceptance. Article 30 of the CCL provides that: “[T]he
content of an acceptance shall be consistent with the content of the offer.”For smart
contracts, it is uncertain whether an offeree is entirely in agreement with the contents of
the offer.
37
A further question relates to the inability of the offeror to withdraw its offer
due to the speedy transmission of data and the irrevocability of encoded data on the
blockchain.
38
This seriously undermines freedom of contract, which is the cornerstone
of contract laws.
39
If a smart contract meets the legal requirements of contract formation, the validity
of the contract or its terms is subject to further judicial scrutiny. Article 52 of the
CCL provides that if a contract is used as a façade to commit unlawful financing
activities, the contract is invalid. Articles 39 and 40 of the CCL provide that standard
terms are generally valid if the party providing the standard terms sufficiently brings
them to the attention of the other party. The CCL further renders unenforceable
standard terms that exempt from the liability of the party supplying the terms,
increases the liabilities of the other party, or deprives the other party of any of its
material rights. Parties to a smart contract are exposed to greater risks related to such
terms because of their self-executing nature. Also, they may be disadvantaged if they
cannot discern the contractual terms embedded in code, which could expose them-
selves to unreasonably greater liabilities by the supplier or creator of the smart
contract.
Chinese scholars have suggested that contract terms in natural language should be
provided to all parties before the language is coded into a smart contract.
40
The dilemma
here is if every smart contract has to be accompanied by a translation in human-readable
language, the low cost of smart contracts will be diluted. The existence of a complete
natural language version of the smart contract will also cause problems relating to
interpretation. In case of a dispute, the court has to interpret the disputable contractual
terms. If the coded contract is the true contract, the courts may not be able to rely on the
human-readable language translation in the interpretation process.
41
35
PRC Contract Law was enacted in 1999.
36
See note 8, 322.
37
Zhen Mei and Yali Kang, “The Application of Blockchain Technologies in Finance and Reflection on
Legal Issues”(2017) Journal of Shanghai Li Xin School of Accounting and Finance (4). Jing Jin, The Power
of Classical Contract Law in Digital Age –With the Perspective of European Single Digital Market Policy
(2017) European Studies (6).
38
Zhou Run & Lu Ying “Impact of Smart Contracts on Chinese Contract System and Solutions”(2018)
South China Finance (05) 93–94.
39
See note 37.
40
See note 38, p. 95.
41
Stefan Grundmann and Philipp Hacker, “Digital Technology as a Challenge to European Contract Law –
From the Existing to the Future Architecture”(2017) European Review of Contract Law 13(3), 255, 279.
Xiaojing Zhou, “Development of Smart Contracts Based on Blockchain and Their Restrictions through the
Lens of Law”(2018) Legality Vision (5) (Fazhi Bolan) 4.
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10.3.2.2 Performance and Modification
Likewise, inconsistencies between the practice of smart contracts and statutory provisions
are found in the areas of performance and modification. Under the CCL, legally binding
agreements have to identify the parties and subject matter with particularity, and include
mutual promises, which may be absolute or subject to conditions. A legally binding
agreement may be written on paper or in electronic form, or may be oral in limited
circumstances.
Smart contracts are not well suited to accommodate legal arrangements that are
complex or relational in nature.
42
In order to implement a smart contract, parties need
to precisely define performance obligations. In many commercial transactions, however,
obligations will likely prove unpredictable,
43
and smart contracts will not be able to
provide parties with the flexibility to structure their ongoing contractual relationship.
Knowledge necessary for completing contracts often hinges on specific circumstances
that cannot be easily standardized or coded. Moreover, automatic execution is costly to
the extent that it would preclude efficient breach.
44
To determine whether a smart contract has been successfully performed, the parties
have to take a take-it-or-leave-it approach. Technically, only full performance can be
recognized and executed by code. However, according to Article 94 of the CCL, delayed
or incomplete performance cannot be recognized. However, in practice, it is possible to
have partial performance or even substantial performance even though the performance
does not fully conform to the initial contractual terms.
A contract may not be fully performed due to a change of circumstances, which
renders the performance impossible or too costly to be performed. CCL Articles 68
and 69 provide a link between the impact of “change of circumstances”and the
modification of performance obligations. Article 68 provides that:
[T]he party which ought to discharge its debts first may suspend the discharge if it obtains
evidence that the following conditions relating to the other party exist: (1) business
operations seriously deteriorating; (2) diverting properties and withdrawing capital to
evade debts; (3) falling into business discredit; or (4) other situations showing inability or
possible inability to meet liabilities. A party that suspends [performance] without truthful
evidence shall bear the liability for breach of contract.
Article 69 further provides that:
[W]here a party suspends the discharge of its debts in accordance with the provisions of
Article 68, it shall promptly notify the other party of the suspension. The party shall
resume the discharge when the other party provides a guarantee of performance. The
party that has suspended the discharge may dissolve the contract if the other party has
failed to regain the capability of meeting its liabilities and to provide a guarantee within a
reasonable period of time.
All these provisions indicate that modification of a contract is possible
when circumstances change. The CCL
45
and the General Provisions of Civil
42
Karen E. C. Levy, “Book-Smart, Not Street-Smart: Blockchain-Based Smart Contracts and the Social
Workings of Law,”(2017) Engaging Science, Technology, and Society (3), 1–15
43
Ter Kah Leng, “Non-Absolute Obligations: Their Interpretation and Effect in Business Contracts,”(2015)
International Journal of Humanities and Social Science, 5 (6) (1), 1.
44
Robert Cooter and Thomas Ulen, Law and Economics, (5th edn. Pearson, 2008), p. 266.
45
Art. 54.
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Law
46
provide that gross misunderstanding can render a contract voidable. If both
parties are at fault, they shall bear liability in proportion to their fault. However, due to
the problem of understandability and the rigidity of coded contracts, as previously
stated, a bug (code error) in a smart contract becomes immutable when recorded on
the blockchain. Some commentators suggest that courts should treat an error in a
smartcontractasa“change of circumstances.”However, according to Article 26 of
Judicial Interpretation of Contract Law II states that only an event which occurs after
the formation of contract and which was unforeseeable when the parties formed the
contract can be a legitimate reason to render a contract voidable or subject to
modification. Therefore, the ground of “change of circumstances”cannot be applied
to a smart contract containing coding errors.
47
The expansion of smart contracting into other types of contracts, other then simple if-
then contracts, is unlikely because of the inability to code standard-like or open-ended
terms. For instance, legal agreements often include representations and warranties,
which cannot be fulfilled solely by referencing data stored or managed within a block-
chain. These representations and warranties run the gamut of legal agreements where
contracting parties often affirm ownership interests, agree to keep information confiden-
tial, or warrant that they will comply with applicable laws. Smart contracts—at least for
the immediate future—will not be able to account for these more open-ended rights and
obligations, which are neither binary nor standardized.
10.3.2.3 Enforcement, Remedies, and Dispute Resolution
The legal system offers remedies for breach of contract, such as the payment of damages
or, in certain circumstances, an order of specific performance or injunction. Smart
contracts limit the application of traditional remedies because the contract has been
programmed and distributed on the network, and cannot be altered due to a change of
circumstances. However, with a conventional contract, parties have greater flexibility to
adjust or modify the contractual terms in order optimize performance, mitigate losses, or
maintain the contractual relationship..
48
Without the ability to exercise the seller’s right
to cure and the buyer’s duty of adaptation or mitigation of loss, contract remedies are a
poor fit for smart contracts.
Apart from the limited scope of remedies, dispute resolution raises another concern for
smart contracts. Due to the anonymity of smart contracts, it may be impossible to identify
the parties to a dispute.
49
Due to the constraints of territorial jurisdiction and state
sovereignty, there is no comprehensive legal institution for regulating cross-border
disputes, except through Online Dispute Resolution (ODR).
50
This means that the
46
Art. 157 of General Provisions. Adopted at the 5th Session of the Twelfth National People’s Congress on
March 15, 2017; became effective on October 1, 2017.
47
See Zhou Xiaojing, see note 41 above, at 3.
48
See note 47, p. 4.
49
Wulf Kaal and Craig Calcaterra, “Crypto Transaction Dispute Resolution,”(2018) Business Lawyer, 73 (1)
8, 109–152.
50
Online Dispute Resolution (ODR) uses alternative dispute resolution processes, including mediation,
arbitration, and negotiation to resolve a dispute. The parties may use the Internet and web-based technology
in a variety of ways. See NCSC/Pew Charitable Trusts ODR Project Announcement at http://odr.info/; also
see “Online Dispute Resolution”Hong Kong Lawyer November (Nov. 2017), at www.hk-lawyer.org/con
tent/online-dispute-resolution.
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choice of law or jurisdiction, or the recognition and enforcement of ODR decisions, are
all determined based on national law. In response to these challenges, the EU has created
a union-wide ODR platform with translation services through the ODR Regulation (524/
2013) and ADR Directive (2013/11/EU).
51
The uncertainty in the enforcement of judicial judgments in transborder disputes
52
increases the importance of an effective redress mechanism to force compliance
with decisions reached in the ODR process.
53
Several solutions for enforcing
ODR decisions have been suggested. One solution would be to enforce ODR
decisions through the courts as arbitral awards. Other options range from user
reviews to chargebacks and escrow services. A more intrusive solution is direct
enforcement by an e-commerce site, which requires a close interface between the
marketplace, the payment method, and the ODR service. In China, courts at the
provincial level, such as the Hangzhou Intermediate Court, have launched an ODR
platform for judiciary services including mediation, arbitration, and litigation. This is
a positive development in bringing greater certainty to dispute resolution to smart
contracts.
10.4 Responses to the Challenges
This section examines the notion of a paradigm shift to code as law, the need for new laws
to regulate blockchain and platform transactions, and the continued role of the judiciary
in the on-chain world.
51
The Regulation establishes an EU-wide portal for consumers and traders, who can submit com-
plaints through the platform. The platform then directs the complaint to the suitable national ADR
entity, which helps the parties in reaching an out-of-court settlement in accordance with the
entity’s own procedural rules. Full text of the Regulation available at http://eurlex.europa.eu/
LexUriServ/LexUriServ.do?uri=OJ:L:2013:165:0001:0012:EN:PDF. The platform, which was
launched in January 2016, is available at https://webgate.ec.europa.eu/odr. Unfortunately, the
United Nations Commission on International Trade Law (UNCITRAL) has attempted to draft
uniform procedural rules for ODR but the work has come to a relative standstill. The objective of
UNCITRAL’s Working Group III has changed since it started working on ODR in 2010. The
stumbling block has been the fundamental difference between different jurisdictions regarding
the acceptance of binding pre-dispute arbitral clauses in consumer cases. In July 2015, the
Commission further specified the Working Group’s mandate to focus on the “elements of an
ODR process, on which elements the Working Group had previously found consensus”.The
Working Group will continue for one year, until the summer of 2016, after which it will be
terminated regardless of the outcome. See United Nations Commission On International Trade
Law, Working Group III (Online Dispute Resolution), Thirty-second session, “Annotated
Provisional Agenda”(30 July 2018), p. 4, https://documents-ddsny.un.org/doc/UNDOC/LTD/V15/
066/23/PDF/V1506623.pdf? OpenElement.
52
Enforcement is considered to be necessary for efficient access to justice. The case law of the European
Court of Human Rights (ECtHR) highlights the importance of enforcement as a part of fair trial provided
for in Article 6 of the European Convention on Human Rights. See ECtHR, “Guide on Article 6: Right to
Fair Trial (civil limb)”(2013) at 23–24, available at www.echr.coe.int/Documents/Guide_Art_6_ENG.
pdf. There is also a UNCITRAL debate, as to the question of whether the acceptance of binding arbitration
clauses in consumer relationships is linked with the possibility of enforcing these arbitral awards in
accordance with the provisions of the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (New York, 1958). See further, R. Koulu, “One Click Too Much? –Thoughts on
UNCITRAL’s Work on ODR Draft Rules, Part II”(2015), available at www.cyberjustice.ca/actualites/
2015/03/13/one-click-too-much-thoughts-on-uncitrals-work-on-odrdraft-rules-part-ii/
53
The term of enforcement refers to different mechanisms of providing compliance with decisions reached in
different dispute resolution procedures.
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10.4.1 Paradigm Shift: From “Code is Law”to “Law is Code”
The ecosystem based on blockchain and other technologies of encryption differs from the
existing systems of code-based rules implemented by today’s online applications.
54
With
the advancement of artificial intelligence (AI) and machine learning, a paradigmatic
shift, sometime in the future, is likely. In this future world, code will be seen as having the
effect of law (“code is law”) and law will be defined as code (“law is code”).
55
Lawrence
Lessig famously stated: “Code is law.”
56
He argues that coders and software programmers,
by making a choice about the working and structure of IT networks and the applications
that run on them, create the rules under which the systems are governed. The coders
therefore act as “quasi-legislators.”In other words, “code is law”is a form of private sector
regulation whereby technology is used to enforce the governing rules.
Currently, most online services either act as an intermediary or rely on other inter-
mediaries, such as cloud-computing providers, search engines, payment processors,
domain name registrars, and social networks in providing their services. The intermedi-
aries craft their own rules and impose and enforce those rules, and to the extent that they
are easily identifiable and located in a particular jurisdiction, they also serve as central
points of control for regulatory authorities.
57
Therefore, there are inevitably tensions
between intermediaries and the legal system related to online economic activities.
58
With the advent of blockchain and machine learning, technology is progressively
preempting the use of existing legal rules.
59
In order to improve the efficiency of smart
contracts, technologies are being developed to address the problem of the rigidity of
decentralization and computer codes. Commentators point out that smart contracts may
not be so “smart”.
60
In particular, commercial or private exchanges are often very
complicated. Contract lawyers will readily attest to the impossibility of drafting a com-
plete contract that takes into account all possible contingencies. Incomplete contracts are
the norm and ambiguities in contractual terms are common and are often desirable. They
are desirable because they address the hold-up problem and enhance efficiency.
61
Therefore, enabling smart contracts to accommodate changes, while maintaining the
advantages of low cost, trustless transactions, will allow them to be applied in more types
of contracts.
Sophisticated commercial contracts not reducible to if-then propositions, dependent
on objectively verifiable facts, requiring manual administration are susceptible to mis-
application or inadvertent non-application problems when translated to code. Smart
contracts can be said to be smart to the extent they offer the efficiency of automated
contractual performance and reduce the prospects of a dispute. This is not to say that
54
M. Swan and P. Filippi (2017). Toward a Philosophy of Blockchain. Wiley, Vol. 48, Issue 5, https://doi.org/
10.1111/meta.12270.
55
P. De Filippi, X. Lavayssière, Blockchain technology: Toward a decentralized governance of digital
platforms? in D. Bollier & A. Grear, eds., The Great Awakening (The Works of Jonathan Edwards Series,
Volume 4, 2015).
56
L. Lessig, Code and Other Laws of Cyberspace (Basic Books, 1999).
57
De Filippi, P. and A. Wright, Blockchain and the Law: The Rule of Code. (Harvard Academic Press, 2018),
p. 6.
58
See note 59.
59
Harry Surden, “Machine Learning and Law,”(2018) Washington Law Review 89 (1), 29.
60
Adam J Kolber, “Not-So-Smart Blockchain Contracts and Artificial Responsibility”(2018) Stanford
Technology Law Review, 25.
61
Oliver Hart, “Incomplete Contracts and Control,”(2017) American Economic Review, 107(7): 1731–1752.
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smart contracts are simple; indeed, a smart contract could encompass a range of complex
outcomes based on multiple inputs. However, a computer cannot be programmed to
accurately ascertain, for example, whether a party has exercised reasonable efforts in the
performance of their obligations. Viewed through this prism, smart contracts are not very
smart.
Compared with contracts in natural language that accommodate more flexibility to
allow parties to make adjustments to the initial terms smart contracts are inflexible,
unable to adapt to changing circumstances and the parties’revised preferences.
Therefore, smart contract designers need to develop channels to accommodate real-
time changes, making smart contracts a bit less immutable. Software developers have
developed application programming interface (API) to address the problem of the rigidity
of decentralization. API connects to the Internet and sends data to a server. The server
retrieves the data, interprets it, performs necessary actions, and sends it back to the
sender’s system.
At this stage, to address smart contracts’problems relating to the rigidity of decentra-
lization, an extrinsic data source (oracles) has been connected to smart contracts that
allow for the future verification of a “particular factual condition”that is “objectively
ascertainable through programmatic reference”to oracles.
62
In a blockchain system, an
oracle is an agent that finds and verifies real-world occurrences (weather-related informa-
tion, price indexes, real-time stock prices, and so forth) and submits this information to a
blockchain to be used by smart contracts.
63
With oracles, smart contracts can respond to changing conditions in real time.
64
Smart
contracts can be coded to reference an oracle to modify payment flows or alter encoded
rights and obligations according to the newly received information. Oracles also make it
possible to determine or update specific performance obligations based on the subjective
and arbitrary judgment of individuals. In this way, parties can rely on the deterministic
and guaranteed execution of smart contracts for objective promises that are readily
translatable into code. At the same time, they can assign to a human-based oracle the
task of assessing promises that cannot easily be encoded into a smart contract, either
because they are too ambiguous or because they require a subjective assessment of real-
world events.
65
Optimistically, with sufficient data provided by trusted external sources, it
is possible for smarts contract to be made more flexible. Moreover, with data commu-
nication facilitated by API and the increasingly sophisticated analytical capabilities
empowered by machine learning, AI may be trained to draft, manage, and enforce
smart contracts in the future.
It is important to note that reliance on trusted intermediaries is contradictory to the
ideology of smart contracts as self-contained, self-performing governance structures.
66
An
alternative to the use of a single trusted oracle is the use of a blockchain-like system of
untrusted or partially trusted parties in which performance changes are made based on
62
David M Adlerstein, “Are Smart Contracts Smart? A Critical Look at Basic Blockchain Questions”at www.
coindesk.com/when-is-a-smart-contract-actually-a-contract.
63
https://blockchainhub.net/blockchain-oracles.
64
M. Ethan Katsh, Law in a Digital World (Oxford: Oxford University Press, 1995), p. 120.
65
Pietro Ortolani, “Self-Enforcing Online Dispute Resolution: Lessons from Bitcoin”(2016) Oxford Journal
of Legal Studies 36 (3), 595–629.
66
See note 12, pp. 185–186.
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the consensus of multiple sources.
67
This type of system would act as a decentralized
oracle system. Nevertheless, this approach is problematic since it requires a predefined
standard on data format and is inherently inefficient.
68
The solution developed by Oraclize is to demonstrate that the data retrieved from the
original data-source is genuine and has not been corrupted.
69
This is accomplished by
accompanying the returned data together with a document called authenticity proof. The
authenticity proofs build upon different technologies such as auditable virtual machines
and Trusted Execution Environments (TEE).
70
The developers of blockchain applica-
tions and the users of such applications do not have to trust Oraclize. Data providers do
not have to modify their services in order to be compatible with blockchain protocols.
Smart contracts can directly access data from websites or APIs. Nevertheless, it is
suggested by scholars that it is best to leave the determination of the availability of a
remedy in case of nonperformance to human judges because such a task is too compli-
cated for a smart contract to evaluate.
71
Evolving technologies can, to some extent, address the limitations of smart contracts.
However, technologies are double-edged swords since the adoption of a new technology
may solve problems of other technological applications and, at the same time, create new
problems. However, disruptive technologies like AI and machine learning could cause a
paradigm shift by making legal rules more specific and tailor-made through data feeds.
72
Nonetheless, new pose questions as trust-free smart contracts are undermined when
third-party sources of information are introduced.
73
Technology optimists may take
solace in Charles Clark’s eloquent statement that “the answer to the machine is in the
machine.”
74
Today’s disruptive technologies have resulted in significant advancements.
However, their long-term impact is yet to be tested and may require future technological
solutions to address issues such as privacy, data protection, and government regulation.
10.4.2 Regulatory Efforts
The legal system offers remedies for breach of contract, such as the requirement to pay
damages. Smart contracts have limited remedies compared with the remedies available
67
See the explanation provided by the website of Oraclize at https://docs.oraclize.it. For more information,
see https://medium.com/coinmonks/a-guide-to-perform-web-queries-in-dapp-35683a386044.
68
Eliza Mik, Smart Contracts: Terminology, Technical Limitations and Real World Complexity, Law,
Innovation & Technology (2017) 9.2, available at https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?arti
cle=4298&context=sol_research, p 23.
69
http://www.oraclize.it.
70
TEE is a secured area of a main processor. It guarantees code and data loaded inside to be protected with
respect to confidentiality and integrity because it is an isolated execution environment. See Poulpita,
“Trusted Execution Environment, Millions of Users Have One, Do You have Yours?”at https://poulpita.
com/2014/02/18/trusted-execution-environment-do-you-have-yours/
71
Eric Tjong Tjin Tai, “Force Majeure and Excuses in Smart Contracts”(2018) European Review of Private
Law (6) 787.
72
Omri Ben Shaharand Ariel Porat, “Personalizing Mandatory Rules in Contract Law,”(2019) University of
Chicago Law Review 86, 255.
73
Weldon, “Building an ‘Oracle’for an Ethereum Contract,”Medium (October 11, 2016), https://medium.
com/@mustwin/building-an-oracle-for-an-ethereum-contract-6096d3e39551#.f335uyw5a; B. Arruñada,
“Blockchain’s Struggle to Deliver Impersonal Exchange,”Pompeu Fabra University Economics and
Business Working Paper Series 1549 (2017), https://ssrn.com/abstract=2903857, at 31.
74
Charles Clark “The Answer to the Machine is in the Machine”in The Future of Copyright in a Digital
Environment (Kluwer, 1996).
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for conventional contracts. Also, in traditional contracting, prompt adjustment or mod-
ification by the parties may prevent or mitigate losses. However, with a smart contract,
parties are less likely to make changes to avoid loss.
75
Commentators have very different views on the appropriate regulatory model for smart
contracts, and disagree as to whether a proactive approach should be taken. Some argue
that there does not appear to be many differences between the functioning of a smart
contract and that of a mechanical vending machine.
76
Therefore, a wait-and-see
approach is preferable at this early stage of blockchain development.
77
Other scholars have proposed different regulatory models for smart contracts. For
instance, a “Superuser,”such as a government authority, could be empowered to modify
or terminate smart contracts.
78
Admittedly, the problem with this solution is that it
eliminates the primary advantage of smart contracts of being free from external manip-
ulation. The idea of a Superuser may result in the blockchain being hardly more
attractive than traditional databases and registers maintained by state authorities.
Another solution is to enforce the law by state authorities with an “offline”mode by
pursuing specific users and forcing them to include changes to the blockchain as well as
using conventional claims like unjust enrichment and damages.
79
This solution raises the
concern that the application of conventional remedies will stifle innovation in develop-
ing alternative dispute resolution methods. In sum, the current proposed solutions are
hardly satisfactory; an optimal solution has yet to be devised.
In the United States, some states have been working on legislative initiatives relating to
blockchain technology. For instance, blockchain-related legislation has been proposed in
Nevada.
80
In March 2017, Arizona enacted legislation legalizing smart contracts, defined in
the law as “an event-driven program, which runs on a distributed, decentralized, shared and
replicated ledger and that can take custody over and instruct transfer of assets on that ledger.”
81
In China, under the Law of Electronic Signatures,
82
a contract, signature, or record is
not considered unenforceable merely on the basis of being in an electronic format as long
as the record is capable of being reproduced for later reference. It would seem that smart
contracts would be treated in the same way. Innovative technology promises to have a far-
reaching impact on how legal agreements are recorded, evidenced, and performed.
Meanwhile, existing concepts of what constitutes a legally binding agreement will
endure. While thoughtful legislative initiatives are welcome, existing legal frameworks
are currently able to provide the basis for the enforcement of smart contracts.
10.4.3 Judiciary as Last Resort
As previously noted, fully automated and self-enforcing smart contracts may deal with
straightforward matters but are less capable of dealing with commercial scenarios that are
75
See note 47, p. 4.
76
See note 3, p. 13.
77
See note 8, p. 316.
78
Alexander Savelyev, “Contract Law 2.0: ‘Smart’Contracts as the Beginning of the End of Classic Contract
Law,”(2017) Information and Communications Technology Law, 26 (2), 116, 133.
79
See note 81.
80
David M. Adlerstein “Are Smart Contracts Smart? A Critique Look at Basic Blockchain Questions”(2017)
www.coindesk.com/when-is-a-smart-contract-actually-a-contract/.
81
See note 83.
82
Art 3, Law of Electronic Signature, enacted 28 August 2004 and amended on 24 April 2015.
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more complex and were performance is unpredictable. Smart contracts applied to
complex private and commercial relationships will have to remain open-ended and
rely on courts and arbitration to provide remedies. A portion of contract law is made of
mandatory rules or immutable principles. They are so fundamental to the regulation of
economic activity that courts will not enforce otherwise-valid contracts if they are not in
compliance with these principles.
A key function of courts is to adjudicate in matters where circumstances have changed
in a way not foreseen by the parties at the time of entering into the contract. Smart
contract allocates the risk in typical binary fashion without room for deviation unless it
incorporates some reference to an external arbiter to decide whether such deviation has
occurred. The contracting parties can agree that the contract’s enforcement should be
made contingent upon its fairness. This would require coding that provides a measure of
fairness that can be objectively determined. In the area of complex contracts, in cases
where performance is ongoing it will be necessary to maintain safety valves for a court or
an arbitrator to be able to override contract provisions coded in the blockchain.
Courts would likely intervene post-performance to provide remedies if the contract is
deemed invalid in cases of fraud, duress, forgery, lack of legal capacity, and unconscion-
ability. This should be expected, and it does not prevent smart contract from becoming
widely adopted. In particular, sophisticated parties are assumed to be more capable of
protecting themselves when entering smart contracts. This may be beneficial for start-ups
to avert legal risks and enhances the certainty of their contracts.
10.5 Online Platforms as Intermediaries
This section reexamines gatekeeping theory as it relates to online platforms, reviews the
legislative history of existing e-commerce laws, looks at current practice in China, and
analyzes the current trend toward increased liability for e-platforms.
10.5.1 Gatekeeping Theory Revisited
Enthusiasts of blockchain and similar technologies argue that individuals can directly
trade with each other without the use of intermediaries, drastically reducing transaction
costs.
83
However, the reality differs from this imagined world. Despite being presented as
a decentralized, non-governed blockchain system, more advanced applications, such as
Ethereum Classic, continue to rely on third parties for enforcement in the “more
conventional form of state intervention.”
84
Thenextwaveofdisruptiveinnovationwill arise from technology-enabled, plat-
form-driven ecosystems now taking shape across industries.
85
Technology companies
like Amazon, Google, and Alibaba have long understood the power of digital tech-
nologies. It is noteworthy that many of these companies’innovations do not involve
83
Ally Financial Buy stocks online without the need for a traditional broker (2017), www.ally.com/do-it-right/
investing/trading-without-a-broker/.
84
Avtar Sehra, Building a Decentralised Ecosystem, slide 9, www.slideshare.net/arcatomia/ethereum-classic-
18-august-2016?qid=f687c929-6875-4c92-9f42-422ceaba64cc&v=&b=&from _search=7.
85
Accenture Technology Vision 2016 People First: The Primacy of People in a Digital Age, p. 11. Available at
www.accenture.com/t20160804T100550Z__w__/us-en/_acnmedia/Accenture/Omobono/TechnologyVision/
pdf/Technology-Trends-Technology-Vision-2016.pdfla=en#zoom=50
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the production of new products or services as much as the development of new
platforms and platform applications on which products and services are traded.
Such platform-based business models fundamentally change the way that companies
do business. The top 15 public “platform”companies represent $2.6 trillion in market
capitalization worldwide and continue to attract capital investment through their
platform ecosystems and digital assets, which are believed to be value-creating.
Moreover, there are more than 140 “unicorns,”driven by platform strategies, with a
total valuation of more than $500 billion.
86
It is anticipated in the near future, a core
component of corporate and capital market valuations will be their platform ecosys-
tems and digital assets.
87
In the digital age, platforms typically act as online matchmakers that connect
suppliers and consumers. By far, the most common types of transaction platforms
are essentially digital matchmakers. In China, transactional platforms include
Alibaba in e-commerce, Tujia in flat renting, and Didi in car-hailing services.
88
Profit margins for platforms that provide matching services is much higher than the
vertical model of e-commerce where product or service providers build their own
platforms to directly sell to customers.
89
More than conventional platforms, Internet
users are involved in e-commerce as both suppliers and consumers with the assistance
of social media. For instance, one can register a personal account on WeChat with a
function called “Moment,”which creates a friends circle where all the viewers who
are “friends”of the account holder can access the displayed content. Alternatively,
WeChat users can opt to have their accounts accessible to the general public. The
publicly accessible accounts are under much stricter regulations than are enforced by
WeChat.
90
The positive externality produced by matchmaking platforms is that they increase
the variety and quality of product and service offerings available to users.
91
These
network externalities are enhanced as customer bases increase in size, and providers
join and provide additional innovative products.
92
The current literature suggests
how to maximize capabilities, pricing, strategic alliances, and ecosystem value
co-creation. Little research has focused on appealing to the provider side of the
market.
93
The rest of this section, and the next, will consider the operation of
platforms from a legal point of view, as well as the elements of a liability regime
for platform operators.
86
“The Unicorn List,”CB Insights (2015), www.cbinsights.com/research-unicorn-companies.
87
Marshall Van Alstyne, Boston University, and MIT Sloan’s Initiative on the Digital Economy www
.accenture.com/us-en/insight-digital-platform-economy; Accenture, People First: The Primacy of People
in a Digital Age (2016); Xia Han, Veronica Martinez & Andy Neely, Service in the Platform Context: A
Review of the State of the Art and Future Research, in Anssi Smedlund, Arto Lindblom, Lasse Mitronen
eds, Collaborative Value Co-creation in the Platform Economy, (Springer, 2018), p. 2.
88
Didi Chuxing (DiDi), www.didiglobal.com/about-didi/about-us.
89
The Fatal Problem of Platform Businesses, http://finance.sina.com.cn/zl/management/2018-08-31/zl-
ihinpmnq4586705.shtml
90
WeChat Official Platform Operation Rules, https://mp.weixin.qq.com/cgi-bin/readtemplate?t=business/
faq_operation_tmpl&type=info&lang=en_US&token=
91
John W. Boudreau, Strategic Industrial–Organizational Psychology Lies Beyond HR (2012), https://doi
.org/10.1111/j.1754-9434.2011.01409.x
92
T. Eisenmann and A. Hagiu, “Staging Two-Sided Platforms,”(2007) Harvard Business School Working
Paper, 808–904.
93
See note 91, p. 12.
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To regulate online platforms as gatekeepers has theoretical roots.
94
The origins of the
concept of gatekeeper can be traced back to Kurt Lewin, who described gatekeeping as
the process of food reaching the family table. To put food on the family table requires a
series of decisions to purchase, transport, and process the food.
95
Lewin employed the
term “channels”to refer to the sources of information and the ensuing decision processes.
Each channel consists of several sections, one for each decision. It is the gatekeeper who
determines whether a type of food enters a given channel or whether it should be moved
from one section to another.
96
The entrances to the channel and its sections represent
decisions or action points that are called gates. In a word, gatekeeping is a process of items
entering into a channel where guarded by gatekeepers.
In the digital age, platforms act like gatekeepers. Some platforms provide content,
products, or services by themselves, while others simply provide a virtual space for users to
upload user-generated content or where users can offer their own products or services for
sale. A persistent question arising from the platform economy is whether platforms should
be liable in providing hosting and matchmaking services, when users break the law, such
as by committing copyright infringement. Needless to say, the primary infringer is subject
to tort liability. However, the platform may also be subject to liability even though there is
no evidence showing that the platform was directly involved in the infringement.
Curiously, despite its importance, the topic of third-party liability has received only
scant attention by legal academics.
97
The justification to expand liability to third parties,
such as platforms, is that primary liability is not sufficient to deter potential infringers.
98
While the fundamental reason for expanding liability to third parties is well established,
little has been settled about the appropriate scope of third-party liability. Specifically,
legal scholarship has little to say about the standard of liability that should apply to third
parties.
99
In the last decade, gatekeeping theory has been continuously challenged and
modified.
100
Gatekeeping theory has been traditionally adopted by the financial sector.
Gatekeepers are intermediaries whose cooperation is essential for many financial
transactions: bankers, accountants, lawyers, credit rating agencies, and other
94
Jonathan Zittrain, “A History of Online Gatekeeping,”(2006) Harvard Journal of Law and Technology (19)
253; OECD, (2011), The Role of Internet Intermediaries in Advancing Public Policy Objectives, (2011),
www.oecd.org/sti/ieconomy/theroleofinternetintermediariesinadvancingpublicpolicyobjectives.htm.
95
Kurt Lewin, “Frontiers in Group Dynamics”(1947) Human Relations, 1 (2), 145.
96
Abraham Z. Bass, “Refining the ‘Gatekeeper’Concept: A UN Radio Case Study”(1969) Journalism and
Mass Communication Quarterly, (1), 69–72.
97
A notable exception is the seminal article by Reinier Kraakman offering important insights concerning
gatekeeper liability. See Reinier Kraakman, “Gatekeepers: The Anatomy of a Third-Party Enforcement
Strategy”(1986) Journal of Law, Economics, & Organization, 2 (1), 53; Assaf Hamdani, “Who’s Liable for
Cyberwrongs?”(2002), Cornell Law Review, 87 (901).
98
See Reinier H. Kraakman, “Corporate Liability Strategies and the Costs of Legal Controls”(1984) Yale
Law Journal (93) 857, 865–867.
99
But see Neal Kumar Katyal, Criminal Law in Cyberspace (2001), University of Pennsylvania Law
Review, 1003, 1095–1101 (exploring the optimal regime of ISP liability for user crimes); William
Landes & Douglas Lichtman, Indirect Liability for Copyright Infringement: Napster and Beyond
(2003) Journal of Economic Perspectives (17), p. 113 (providing a framework for evaluating indirect
liability for copyright infringement).
100
J. Wallace, Modelling Contemporary Gatekeeping. The Rise of Individuals, Algorithms and Platforms in
Digital News Dissemination (2017) Digital Journalism, http://dx.doi.org/10.1080/21670811.2017.1343648,
available at www.mediachange.ch/media/pdf/publications/Wallace2017_Digital_Gatekeeping.pdf
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professionals.
101
Financial laws impose an obligation on financial institutions to moni-
tor and detect their clients’illegal behaviors or be subject to liability if they continue to
provide services to such clients either knowingly or negligently.
102
In many instances,
laws holding intermediaries liable for aiding criminal activity incentivizes gatekeepers
to report bad conduct in order preserve their reputational capital. However, in reality,
reputational incentives may not be strong enough and the high threshold to be held
liable produces a perverse effect.
103
Intermediaries are very careful to ensure that they
never reach the level of culpable knowledge or negligence, which prevents them from
screening for signals of potential fraud .
Legal commentators have long recognized that gatekeeper liability may affect the
market for gatekeeping services. Yet, little consensus has been reached about the precise
nature of this effect. Some have argued that gatekeepers may choose not to contract with
clients who are inclined to commit misconduct in order to minimize their exposure to
liability.
104
Others have maintained that gatekeeper liability produces a chilling effect on
the market as the intermediary becomes overly cautious.
105
As a response, immunity rules
have been introduced to exempt intermediaries from liability under certain circum-
stances. Safe harbor provisions were adopted in the United States with the enactment
of the 1998 Digital Millennium Copyright Act. It establishes a set of notice and “take-
down”rules that allow platforms to avoid liability if they promptly delete or block access
to a copyright infringing link after it receives notice from a copyright owner. The policy
consideration for the safe harbor rule for copyright infringement is that it is too costly for
platforms to monitor the content that passes through their platforms and platforms do not
profit from the infringing activities. The safe harbor rule has been followed in later
legislation, particularly laws relating to e-commerce, where the notice and take-down
rule has been introduced into regulations.
106
101
See note 100, p. 54 (defining gatekeepers as “private parties who are able to disrupt misconduct by
withholding their cooperation from wrongdoers”).
102
Stavros Gadinis and Colby Mangels, Collaborative Gatekeepers, https://corpgov.law.harvard.edu/2016/
05/12/collaborative-gatekeepers.
Posted by Stavros Gadinis and Colby Mangels, University of California, Berkeley Law School, on
Thursday, May 12, 2016. Financial intermediaries became the target of regulation because it has
informational advantage and operates on the model of reputational capital. John C. Coffee, Jr.,
Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms (2004), Boston
University Law Review (84) 301, 308.
103
See note 105 above, p. 3. While Enron and Worldcom are the most famous examples of large-scale
accounting irregularities, they were not the only ones. See Daniel J.H. Greenwood, (2004), Enronitis:
Why Good Corporations Go Bad, Columbia Business Law Review, 773, 786; Andrew Ross Sorkin, 2 Top
Tyco Executives Charged With $600 Million Fraud Scheme, New York Times, September 13, 2002, at
C1, available at www.nytimes.com/2002/09/13/business/2-top-tyco-executives-charged-with-600-million-
fraud-scheme.html (discussing the Tyco International Ltd. Racketeering scheme).
104
Bruce A. Lehman, US Department of Commerce, Intellectual Property and the National Information
Infrastructure (1995), pp. 114–124 (advocating the adoption of strict liability to ISPs for copyright
infringement by their subscriber).
105
See note 8 above, p. 116 (noting the concern that imposing strict liability on ISPs would drive service
providers out of business and result in the failure of the Internet); Joel Seligman, The Transformation of
Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (2nd
edn., Kluwer, 1995), p. 77 (reporting concerns that the imposition of liabilities on gatekeepers under the
Securities Act of 1933 would dry up American capital markets); Michael P. Dooley, “The Effects of Civil
Liability on Investment Banking and the New Issues Market”(1972) Virginia Law Review (58), 776, 776–
777 (indicate that the expansion of liability to underwriters would “discourage practically all financing”).
106
Xianlong Zhao and Mo Zhang, “Analysis on the Intellectual Protection and the ‘Safe Harbor Rule’in E-
Commerce Law”, www.chinalawinsight.com/2018/09/articles/e-commerce, p. 3.
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To summarize, online platforms’gatekeeping role is not a one-off action but requires a
continuous process of checking and verifying the information placed by users on their
platforms.
107
In this vein, it is critical to develop a model for platform liability to ensure
that the mechanism of liability is able to deter wrongs without creating an undue chilling
effect on innovation. Rather than imposing liability for the failure of platforms to monitor
the quality of the products and services marketed, it is more sensible to oblige them to
assess and verify the information provided by the vendors on their platforms.
108
Simultaneously, to supplement the liability regime with carefully devised safe harbor
rules would give stronger incentives for platforms to diligently monitor the authenticity of
the information provided by vendors and deal with complaints promptly.
10.5.2 Legislative History
This section reviews the legislative history of regulations relating to the Internet in
China, assesses the effects of the regulations, and discusses liability models imposed on
platform operators. Scholars have divided the development of the Internet into four
stages. In the Internet 1.0 era (1994–2001), regulation focused on anti-virus and web
security issues. During the Internet 2.0 era (2001–2008), a better-rounded regulatory
framework was put in place. The most important laws enacted include the Electronic
Signature Law of 2004and the Regulation for the Protection of the Right of Information
Network Communication of 2006. The Internet 3.0 era (2009–2014) witnessed the rise
of AI, connected data, and semiotic architecture to the Internet. Highly interactive
applications like WeChat became a phenomenon. Since 2012, China entered an age of
the “mobile Internet”where mobile communication services and the Internet were
fully integrated.
109
The focus of the legislation during this period has been on data
protection, regulation of activities related to e-commerce, and the protection of intel-
lectual property. The Internet 4.0 era, starting in 2015, saw the increasing utilization of
big data, IoT, and cloud computing, with new regulations extending to the commercial
sector and state security. The State Cyber Security Law came into effect on June 1,
2017. More recently, the Law of E-Commerce became effective on January 1, 2019.
The landscape of e-commerce has evolved with disruptive technologies and innovative
business methods in recent years. According to Report on the Data of Online Retail
Market in China 2017, the amount of transactions involving online retailing totaled 7175
billion yuan.
110
A persistent legal question during the development of e-commerce in
China is, to what extent can platforms be held liable for the misbehaviors committed by
vendors using their platforms? Laws pertinent to platform liability lie in the areas of
e-commerce, fin-tech, data privacy, intellectual property, and the sharing economy.
Lawmakers face two challenges: first, to define precisely what qualifies as an online
platform services provider and second, to devise an appropriate liability regime in which
107
Richard L Vining, Jr., and Phil Marcin, Explaining Intermedia Coverage of Supreme Court Decisions. in
Richard Davis ed., Covering the United States Supreme Court in the Digital Age (Cambridge University
Press, 2014), p. 94.
108
Bertin Martens, An Economic Policy Perspective on Online Platforms (2016) Institute for Prospective
Technological Studies Digital Economy Working Paper 2016/05. JRC101501.
109
By December 2017, Internet surfers who accessed the Internet through mobile communication services
reached 753 million, which amounts to 97.5% of the Internet users. See CNNIC, 41st Report on the
Development of Internet in China, available at www.cac.gov.cn/2018-01/31/c_1122346138.htm.
110
See www.100ec.cn/zt/17wlls.
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platforms can be held contributorily liable for IP infringement that transpire on their
platforms.
In a report published in 2010, the OECD uses the term “Internet intermediary”to refer
to a party that stores, links, or transfers content provided by third parties but does not
produce its own content.
111
However, this definition falls short of the reality of virtual
space where the boundary between content producer and service provider is often
blurred. In China, different laws have used terms like “online trading platform”
112
and
“third party e-commerce trading platform”
113
to refer to platforms, and “Internet services
provider”(ISP)
114
and “Internet information services provider”to refer to services
providers.
115
The diversity of existing laws calls for clarification and the adoption of
consistent terminology in future legislation. The 2019 Law of E-Commerce attempts to
deal with the issue of inconsistent terminology.
In the drafting of the E-commerce Law, the definition of “e-commerce platform
operators”was continuously broadened and now encompasses almost all types of traders
who use the Internet as a means to run a business. Article 2 of the E-Commerce Law
defines “e-commerce”as trading activities involving the selling of goods or providing
services through the Internet or other online information networks.
116
Article 9 provides
definitions for “e-commerce business,”“platform,”and “in-platform business.”E-com-
merce business means natural persons, legal persons, or organizations (without the status
of legal person) that engage in the business activities of selling commodities, or providing
services, through the Internet or any other information network, including self-built
websites. E-commerce platform business means a legal person or an organization,
which provides virtual space to host information for multiple parties, which they rely
on to independently conduct trading activities or provide match-making services between
suppliers and consumers. Finally, in-platform business means a vendor who sells com-
modities or provides services through an e-commerce platform. This three-layered
definition covers all online trading and is all-inclusive for business conducted through
social media, self-built websites, as well as centralized platform.
10.5.3 Practice in China
China adopts the gatekeeping model that allocates liability between the primary infringer
and the platform operator. On the one hand, platform operators may be liable for
contributory tort liability for the infringement committed by the primary infringer. On
the other hand, limited immunity is provided for platforms if they take prompt measures
to deter or terminate the infringement.
The 2006 Regulation on the Protection of the Right to Disseminate Works through
Information Networks (Information Networks Regulation) for the first time provided
111
Perset, K, “The Economic and Social Role of Internet Intermediaries”(2010) OECD Digital Economy
Papers, No. 171, (OECD Publishing, Paris), http://dx.doi.org/10.1787/5kmh79zzs8vb-en,. at p. 9.
112
Art. 44 of Law on Protection of Consumer Rights and Interests.
113
Art. 3.2 of Regulation on the Services Provided by Third Party E-Commerce Trading Platform.
114
Art. 36 of Tort Liability Law.
115
Art. 45 of Advertisement Law.
116
Note that “certain products or services offered and distributed online are excluded from this definition as
this Law shall not apply to financial products and services and news information, audio and video
programs, publication, cultural products, and other content services provided via information network-
s.”(art. 2).
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detailed safe harbor-like rules for ISPs. Article 22 provides that the regulation imposes
fault liability on ISPs. Second, following the American Digital Millennium Copyright
Act, it contains a notice-and-take-down mechanism to exempt search, linking services,
and information storage service providers from tort liability. Third, if a file-hosting service
provider or a search and linking service provider knew or should have known that linked
material was illegal and still continued to allow users to upload and distribute the
material, it is subject to contributory liability. Article 23 holds Internet service providers
jointly liable if they knowingly or negligently (should have known) that linked works were
copyright infringing. The courts have subsequently applied the rules of the Information
Networks Regulation to other types of intellectual property infringement.
The 2009 Tort Liability Law adopts similar liability rules to other fields other than
intellectual property law. According to Article 6, a person shall be subjected to tort
liability under two circumstances: (1) the person is at fault for an infringement upon a
civil right or interest of another and (2) the person who is presumed to be at fault by law.
Article 6 provides two principles to assess liability: fault and the presumption of fault.
Despite the lack of a clear definition, Chinese scholars generally agree that fault may
occur either intentionally or negligently.
117
On the one hand, Chinese textbooks define
fault as “knowing and willing,”
118
which can be interpreted as persons who foresaw the
consequences of their conduct and continued the improper conduct.
119
On the other
hand, negligence refers to the failure to foresee something that a reasonable and prudent
person would have foreseen or by failing to implement preventive measures.
Article 36 of the Tort Liability Law further clarifies the fault principle in relation to
platforms that provide services online. Two circumstances have been stipulated where a
network service provider will be considered liable either on its own or jointly with the
party that committed the wrong: (1) when a service provider receives a notification
concerning copyright infringement from a copyright owner and fails to promptly delete
or block access to the work and (2) when a service provider knows about the infringement
and fails to take necessary measures to stop the infringement or prevent further harm.
Joint liability aims to punish any entity assisting, abetting, facilitating or inducing the
commission of infringing acts.
The 2019 E-Commerce Law also positions e-commerce platform operators as gate-
keepers and provides them with a degree of immunity. Article 38 provides that if an
e-commerce platform operator knows or should have known that the products or services
provided by an in-platform business owner (vendor) may cause harm to consumers and
fails to adopt necessary measures to prevent the harm, the e-commerce platform operator
shall be subject to contributory liability. Moreover, if the e-commerce platform operator
fails to diligently check the qualification and license of the vendors (whose products or
services impact the life or health of consumers) and thereafter causes harm to the
consumer, the operator will bear contributory liability in accordance with the degree of
its fault. Clearly, platform operators have a duty of care to check and verify the informa-
tion provided by vendors for particular products and services.
117
Shengming Wang, Explanations to the Tort Liability Law of the People’s Republic of China (China Law
Press: Beijing, 2010), p. 41
118
Liming Wang, Course Book of the Tort Liability Law of China (People’s Court Press: Beijing, 2010), p.
207.
119
Lixin Yang, Detailed Explanations to the Tort Liability Law of the People’s Republic of China (Intellectual
Property Rights Press: Beijing, 2010) pp. 59–60.
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In addition to the liability incurred by quality problems of the products and services,
platform operators again are liable for infringement of intellectual property.
120
Article 42
provides that the platform operator has to take necessary measures and simultaneously
forward complaint notifications to vendors. The act of simply forwarding the notification
to the vendor does not satisfy the requirement of “taking necessary measures”and there-
fore cannot be used as a defense by a platform operator. The platform operator must take
measures to prevent the harm. Platforms are liable if they fail to notify vendors in a timely
manner or fail to take prompt action to prevent loss. Article 44 is a “red flag”rule for
platform operators to be imposed if the infringement is so obvious that it is almost
impossible for any reasonable platform operator to fail to detect. The judicial decisions
121
in the past have provided criteria for satisfying the knowledge requirement
122
and have
been codified in article 45.
Article 45 provides that a platform operator shall bear tort liability contributorily with
the in-platform vendor if it knows or should have known of the infringement of intellec-
tual property by the vendor but fails to adopt necessary measures like deleting, blocking
access, disconnecting the link or disabling the transaction. Moreover, noncompliance
with the statutory requirements may result in a fine of two million RMB and suspension
of platform operator’s license.
123
Article 42 develops the notice-and-take-down procedure for e-commerce platform
operators. It provides that the e-commerce platform operator shall bear contributory
liability for loss caused by delaying to taking action to prevent the infringement. This
liability rule is similar to Article 36(2) of the Tort Liability Law. The provision also gives
platform owners a right to bring a claim against IP owners that provide false notifications.
This rule can effectively prevent the complainants from abusing the notice-and-take-
down rule. Moreover, Article 43 gives in-platform vendors the right to send counter-
notices to defend the wrongful complaint. Once receiving a counter-notice, the platform
operator should forward it to the complaining party. If the complainant fails to substanti-
ate its claim or bring a legal action, the platform operator must terminate the injunctive
measures taken against the vendor within 15 days of the receipt of the counter-notice.
Numerous uncertainties remain over the meaning of some of the statutory provisions.
As mentioned earlier, Article 38 provides that platform operators are obliged to check the
qualifications and license of in-platform vendors who provide goods or services relating to
the health of consumers. On the one hand, it is unclear whether the platform operator has
a one-off duty to check the license when the in-platform vendor registers with the
platform, or a continuous duty to check the validity of the license. Obviously, a contin-
uous duty increases operational costs and exposes platform operators to a higher risk of
liability. Thus, the extent or scope of the platforms’monitoring function is unclear.
Unlike offline intermediaries, online platform operators do have the ability or opportu-
nity to inspect real products or services. Therefore, it is difficult for the platform operators
to fulfill the duty to monitor and assess the quality and safety of products and services.
120
Arts. 41–45 of the E-Commerce Law.
121
Yinian (Shanghai) Fashion Ltd v Taobao, Shanghai No. 1 Intermediary People’s Court, 2011, No. 40 (Hu
Yi Zhong Min Wu (Zhi) Zhong No. 40). Taobao was held liable for trademark infringement by a vendor
on the platform because Taobao should have been able to take more effective measures to deter the
infringement but failed to do so.
122
Ten Typical Intellectual Property Cases of 2011, published by the Supreme People’s Court, www
.chinanews.com/cul/2012/04-18/3827065.shtml
123
Art. 83.
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The trend of imposing a duty of care to verify the information of vendors can be
observed from other pieces of legislation. Article 44 of the Law on Protection of Consumer
Rights and Interests
124
provides that platform operators must check vendors’real names,
addresses and contact information. Furthermore, it must provide the vendor’s contact
information to consumers who suffer a loss. Failure to provide the correct information to
the consumer results in a shift of liability from the vendor to the platform operator. The
Food Safety Law has a similar provision.
125
But, it further provides that the platform
operator must verify whether vendors have valid licenses for providing food or catering
services.
126
The failure to verify licenses subjects the platform operator to fines and the
suspension of its license.
127
As observed above, the laws impose a heavier duty on platforms to monitor and assess
the information provided by vendors, while at the same time limits their liability through
safe harbor provisions. Article 42 of the E-Commerce Law provides that the platform
operator has to take “necessary measures”once it receives a notification from a right
owner. The phrase necessary measures include taking down and blocking access, as well
as taking further measures such as terminating the transaction.
128
Regulators have shown
a strong inclination to impose heavier liability on platform operators than ever before.
129
10.5.4 Trend of Liability
It is difficult for regulators to trace and identify infringers due to the voluminous size of
online data and the small scale of many online transactions. The rising costs of enforce-
ment and the marginalized effect of punishment render enforcement less effective. On
the other hand, the cost for individual platforms to monitor and detect cases of infringe-
ment is lower than it is for state law enforcement bodies. Therefore, the regulators tend to
rely on platforms to reduce its enforcement costs.
Nevertheless, this functionalist approach has its limits. Online and offline platforms
play different roles and provide different services.
130
The data processed by many online
platforms is mostly automated and impersonal. Compared with brick-and-mortar stores,
the online platforms’strength is to match suppliers with consumers, without having direct
contact with the products or services provided by the suppliers.
Against the backdrop of greater obligations of platforms to verify information and
liability for failing to act as gatekeepers is the difficulty of setting penalties to achieve
socially optimal outcomes. Thus, the government cannot simply rely on gatekeepers to
police the marketplace.
131
Rather, regulation and other policies are needed for dealing
124
English version available at www.law.hku.hk/cprivacy/archives/179.refel
125
Art. 131.
126
Art. 35.
127
Art. 131.
128
See Advertisement Law enacted on 27 October, 1994, and amended on 24 April, 2015; Food Safety Law
enacted on 28 February, 2009, and amended on 24 April, 2015; Methods of Monitoring and
Administration of Food and Drugs circulated on the Internet enacted on 7 November, 2017.
129
Shaoqing Guo and Jiaxi Chen, Legislation on the Internet in China in the Last Two Decades: Review,
Achievements and Reflection(2017) Social Science Front (6), p. 221.
130
Lixin Yang and Xu Han, “ISPs’Legal Status and their Civil Liability”(2014) Jianghan Luntan (5), 84.;
Hongjin Han, “Trading Platform Services Providers’Legal Status”(2009) Contemporary Law Review 23
(2), 99.
131
Lucian Arye Bebchuk, “Property Rights and Liability Rules: The Ex Ante View of the Cathedral”(2001)
Michigan Law Review, 100(3): 601–639 (showing that liability rules may fail to produce optimal incentives
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with enforcement failures. Admittedly, government regulations suffer from flaws of its
own, including the lack of information and the persistent tendency toward regulatory
capture and rent-seeking. Yet, since gatekeeper liability is also an imperfect, costly legal
mechanism, policymakers should weigh the costs of government regulation against the
costs of gatekeeper liability.
In China, Internet giants like Tencent contend that placing excessive liability on
platform operators for failing to monitor vendors that is beyond their capacity will bring
chilling effects and stifle the Internet industry.
132
Academics also point out that the
balance between platforms’rights and obligations is tilted against the operators.
133
The
rapid growth of the Internet and the lack of regulation have created cases of abuse. In
order to avoid being accused of over- or underregulation, government authorities have
deferred monitoring functions to platforms as gatekeepers, and avoid the problem of
informational asymmetry between regulators and the regulated.
134
A consensus of scho-
lars suggests that the government adopt a nonintervening approach and incentivize the
industry to come up with self-regulating norms.
135
It is also suggested that it will be
difficult to calibrate the optimal level of liability for platforms hosting copyrighted
content.
136
In sum, gatekeeping is a continuous process of data collection and processing.
137
Governments face the problem of identifying misconduct and locating the wrongdoers
on the platforms, due to informational asymmetry. Therefore, the challenge for law-
makers is to adjust the liability regime for platforms to deter wrongs without causing a
chilling effect on innovation. The balance is best struck by creating carefully devised safe
harbor rules aimed at providing incentives to platform operators to diligently check the
information provided by vendors.
10.6 The Way Forward
Blockchain and other emerging technologies have fostered innovative forms and organi-
zations to conduct business in both real and virtual spaces. Blockchain technology
proponents tend to overestimate the power of private ordering and minimize the impor-
tance of trusted intermediaries.
138
However, the reality is that a complex and changing
world often entails a more nuanced application of legal rules involving the human
to make investment ex ante); Steven Shavell, “Liability for Harm Versus Regulation of Safety”(1984) The
Journal of Legal Studies 13 (2), 357 (exploring conditions under which regulation is superior to liability for
harm).
132
Xiongshan Cai, “Transformation from Regulation of Internet to Governance of Internet”in Legislating in
the Internet Plus Era and Public Policy (Law Press: Beijing, 2016), p. 145.
133
Ibid at 221.
134
Hanhua Zhou, International Experience in Legislating for the Internet. in Internet Society of China (ed)
Law of the Internet (Publishing House of Electronics Industry: Beijing, 2016), p. 7.
135
Ping Zhang, “A Discussion on Several Issues in the Regulation of the Internet”(2012) Intellectual Property
(8), 3. Also see note 133, p. 222.
136
Ming Yang, “The Weakness of the Provision for Platform Liability in the E-Commerce Law”(2017) China
Policy Review (5), 48.
137
See note 112, p. 233.
138
Benito Arruñada, “Blockchain’s Struggle to Deliver Impersonal Exchange”(2017) Minnesota Journal of
Law, Science and Technology, 19 (1), 56, 106–112.
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element.
139
Smart contracts have mostly “escaped”the reaches of law because they have
been used only in the simplest forms of transactions.
140
In China, blockchain technology is booming. Both public and private sectors have
adopted smart contracts that are run on blockchains. Contract law faces challenges in
every aspect in regulating this new phenomenon, including formation of contract,
performance and modification of contract, enforcement, remedies, and methods of
dispute resolution. These challenges reflect the intrinsic limits of smart contracts that
are understandably rigid due to the nature of code and decentralization.
141
This article
proposes a twofold regulatory model: (1) state regulation consistent throughout the
country involving enforcement issues and (2) encouragement of the private sector to
reach for consensus on standards for self-regulation.
142
The need for fundamental change
in contract law is unlikely.
No matter how technology advances, many aspects of sophisticated commercial
agreements are not subject to automation, including matters requiring human judgment,
the rendition of sophisticated or human-intensive services, and the resolution of disputes.
Courts will continue to play an important role in adjudicating contract disputes involving
smart contracts.
143
Platforms will continue to evolve in matching suppliers with consumers both online
and offline.
144
Nevertheless, applications enabling business-to-business (B2B) transac-
tions mostly rely on “private”or “permissioned”systems, which are open only to pre-
approved users and in which consensus is established by a fixed set of nodes.
145
The
inherent contradiction of permissioned or private blockchains is that the smaller the
network, the fewer benefits of decentralization, and the greater risk of manipulation it.
146
The advantage of blockchain applications would be considerably enhanced if the tech-
nology fulfills its promise of enabling individual users to own and keep full control of
their historical record of transactional data, which is now in the hands of third-party
centralized data silos (such as, Google, Facebook and Tencent). However, most block-
chains perform simple transactions, such as trading in bitcoin, and continue to rely on
139
What Is Ethereum Classic, Cryptocompare (August 3, 2016), www.cryptocompare.com/coins/guides/
what-is-ethereum-classic. Also see note 143, 76.
140
Allens, Blockchain Reaction: Understanding the opportunities and navigating the legal frameworks of
distributed ledger technology and blockchain(2017) www.allens.com.au/data/blockchain/index.htm?
sku=fsdah5e556eqweqwg, pp 14–15.
141
See Section 2.1.
142
Harry Surden, “Computable Contracts”(2012) UC Davis Law Review, 46 (629), p. 72.
143
It is still very early to conclude that smart contracts will be able to revolutionize the existing legal
framework by introducing the so-called Lex Cryptographia. Aaron Wright and Primavera De Filippi,
Decentralized Blockchain Technology and the Rise of Lex Cryptographia (2015), www.ssrn.com/
abstract=2580664.
144
Admittedly, specialized enforcement and intermediation will entail agency costs. See David S. Evans,
Economic Aspects of Bitcoin and Other Decentralized Public-Ledger Currency Platforms, Coase-Sandor
Institute for Law and Economics, Working Paper No. 685 (2014), http://chicagounbound.uchicago.edu/
cgi/viewcontent.cgi?article=2349&context=law_and_economics. Admittedly, specialized enforcement
and intermediation will entail agency costs. See David Driesen and Shubha Ghosh, “The Functions of
Transaction Costs: Rethinking Transaction Cost Minimization in a World of Friction”(2005) Arizona
Law Review (47), 61.
145
Vitalik Buterin, On Public and Private Blockchains, Ethereum Blog (August 7, 2015), https://blog
.ethereum.org/2015/08/07/on-public-and-private-blockchains/ (describing the comparative advantages of
public and private blockchains).
146
Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller and Steven Goldfeder eds., Bitcoin
and Cryptocurrency Technologies: A Comprehensive Introduction (Princeton University Press, 2016), 88.
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intermediaries such as exchanges (digital marketplaces)
147
and wallets (digital storage
services).
148
Nonetheless, blockchain transactions are largely unregulated.
In contracts, regulation of digital platforms has expanded. Platform operators are
required to monitor the quality of certain goods and perform due diligence to detect
infringements of IP rights, and check and verify the licenses and qualifications of vendors
that provide food products and catering services. The reason why the duty of care is
placed on the platform operator is because it is an efficient form of regulation. However, it
is unreasonable to expect platforms to ensure the quality of goods and services. It is
recommended that regulation focus on the duty of authentication, maintenance, and
regular verification of vendor information.
149
10.7 Conclusion
Blockchain and other technologies have posed challenges that are fundamental to
commercial organizations and the legal system that regulates them. This chapter
explored whether the legal landscape will need to fundamentally change in China in
view of the emergence of smart contracts. The feature of decentralization supported by
blockchain technologies will continue as a way of growing the economy. In transactions
involving rights in persona, the blockchain is incapable of dealing with relatively complex
relational contracts due to the rigidity rising from codes as well as the structure of
decentralization. In transactions involving rights in rem, blockchain can serve best as a
consolidator of data. Hence, despite the claim that intermediaries will be eliminated due
to the decentralized architecture and trustless relationships enabled by blockchain
technologies, intermediaries will continue to play an important role, socially and legally.
The chapter concludes that despite regulatory gaps, the current legal framework can
accommodate or mitigate the legal risks brought about by smart contracts. Innovative
technology does not necessarily lead to innovative jurisprudence. The time is not yet ripe
to impose a new legal framework for blockchain-based smart contracts.
However, adjustments need be made to the existing regulatory framework relating to
online platforms to deter platforms’rent-seeking behaviors by overlooking signals of
infringement. The regulation must be targeted so as not to stifle innovation. In China,
the legal risks are becoming higher for platform operators who are not directly involved in
commercial activities of vendors using their platforms to provide various goods or services
to consumers. On the one hand, the scope of the duty of care to screen for misconduct
and to promptly respond to complaints has broadened. On the other hand, safe harbor
rules are limited in application. Regulators need to stay alert to misconduct by platforms
in their role of gatekeepers. Regulations should focus more on the duty of platforms to
monitor and verify the information of their vendors..
147
See note 151 above, pp. 88–94
148
Michael Abramowicz, “Cryptocurrency-Based Law”(2016) Arizona Law Review (58) 359, 413.
149
See note 133, 225.
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