Vigna & Casey argue that the technology underlying bitcoin may make the legal system unnecessary (though they later express some reservations about this argument). Whatever their view, bitcoin (or what they mean is the technology underlying bitcoin) will not do away with the law.

The authors suggest that a credit default swap could be automated using bitcoin technology; this would eliminate the need to rely on lawyers, judges, and bureaucrats. The authors make an important error. Let’s use the more familiar example of life insurance to show why. If the insured party dies, 99.999% of the time lawyers and judges do not need to be called upon. The insurer simply pays the beneficiary. Automating this process would reduce transaction costs by exactly zero.

Now consider a more difficult case. The insured party disappears while on a trek in the Amazon, or on an around-the-world boating trip. Must the insurer pay the beneficiary if death is ambiguous? Or suppose that the policy excludes liability in case of suicide, and the death of the policyholder looks like a suicide but it is not clear. What then?

There is no way around this problem: if the language of the policy is unclear, or the facts are unclear, someone must make a judgment. This cannot be automated.

Similar problems arises with CDSs. Sometimes, it is not clear whether the underlying bond has defaulted or not. In those cases, the legal system is needed. And where the legal system is not needed because the contract language is clear and the facts undisputed, bitcoin technology provides no advantage.

Maybe someday AI will enable computers to make judgments currently entrusted to lawyers and judges. Until that happens, bitcoin technology will not replace the legal system.