Multi-sig, Ecclesiastes and the biggest pot of coffee in the world

One of the more interesting conversations I had during Berlin Blockchain Week involved multi-sig contracts and legal liability of key holders. It's a bit of a trick box, and one without a lot of direct caselaw on point.

As I suspected, if you go to Lexis and search for cases that use the word "multi-sig", "multisignature" or variations of the same you will come up with 4 cases, only one of which is at all connected to crypto but which happens to have nothing to do with this particular question (it involves a purchase agreement that went bad, involving a claimed multi-sig escrow).

There is some recent FinCEN guidance applicable to muti-sig wallet providers in connection with money transmission license obligations under the Bank Secrecy Act. It's kind of on point but unsatisfactory if you read it a few times.

FinCEN says that the creator of an un-hosted multi-sig wallet who "restricts its role to creating un-hosted wallets that require adding a second authorization key to the wallet owner's private key in order to validate and complete transactions, the provider is not a money transmitter because it does not accept and transmit value." On the other hand, if you "combine[] the services of a multiple-signature wallet provider and a hosted wallet provider, that person will then quality as a money transmitter."

In fairness to FinCEN, this is pretty deep in the weeds stuff and the guidance is helpful.  At the same time, it's focused on MSB obligations and doesn't really say much about the key holders themselves or what their legal liability or obligations might be (as opposed to the wallet provider.)

I find science fiction and scripture to be helpful in situations in like this. As any fan of either Battlestar Galactica or the bible knows, there is nothing new under the sun, really: "all of this has happened before, and this will happen again." For lawyers and judges, this principle has a practical application. We apply old precedent to new fact patterns and new technology. I've yet to see a judge throw up their hands and walk away from a new or novel scenario. It just doesn't happen.

One of my favorite "crypto" cases is an early 20th century opinion that actually has nothing to do with blockchain, cryptocurrency or computers for that matter. But it tells us a lot about how law can apply to disruptive tech (which I will also get to in a second.) The case is Thomas v. Maysville Gas Co., 180 Ky. 224 (1900). It was a wrongful death case, where a boy died after coming in contact with improperly insulated electrical wires: "The wires of the street railway company were constructed along the streets of the city, and a guy wire had been broken loose, and, not being properly insulated, it was charged with electricity; and as the plaintiff's intestate, a boy, was passing along, he came in contact with it, which resulted in producing his death."

One of the defendants was the local gas company, which generated and transmitted the electricity, which was used by the streetcar company, which was responsible for keeping the wires insulated. The question before the court on appeal was whether the gas company, which generated the electricity, was responsible for the death. No prior case had considered this precise fact pattern. As the court put it:

The exact question submitted has not, so far as we are aware, been answered by any court of last resort. Some cases are cited by counsel, but the facts of those cases are not similar to the facts of this case. Therefore we must find some signboard along the new road, and, if we cannot so find the way to a proper conclusion, we will be forced to swing a sickle into the field of reason, and there harvest a principle which can be crystallized into a just rule to apply to cases like this one.

Applying this principle, the court reasoned that because the gas company knew that electricity was dangerous it had a duty to make sure that it was distributed in a safe fashion, regardless of who owned the wires.  Also, because electricity is hard to understand and being used extensively for private industry, the Court reasoned that "electric companies should be held to the use of the utmost care to avoid injuring those whose business or pleasure requires them to come near such a death-dealing force."

While I can’t provide an answer in the abstract to the question of what the responsibility or liability of a key holder in a multi-sig contract is, there's no reason to doubt that basic legal principles and logic still apply. So if the keys provide access to or functionality for a good or service that is unlawful, it’s reasonable to assume that the key holder would be dragged into criminal or civil litigation involving that unlawfulness. You have to look at the way the key is being used, the person who is asking you to hold it, and the platform in which it’s being used. On the one hand, atomizing transactions to remove responsibility or fault can have the opposite impact, and can distribute liability instead of removing it.  At the same time, it can't be true that holding a key for your Uncle Ebenezer is necessarily a no go without full due diligence.  

So, refreshed by Battlestar Galactica, the Bible and some 120 year old caselaw, I go back to Lexis and search for the word "key" within 15 words of the word "safe" and I get 4,899 responses. My prediction is that somewhere in that haystack of cases there will be needles that provide guidance to future courts ruling on the rights, obligations and liability of multi-sig keyholders.  

Now all I need is the biggest pot of coffee in the world.