A bylaw can be pictured as a rule that a smaller circle draws for itself, and that only counts inside that circle. Not the law of a whole country — the rule of this town, or of this club. Stand inside the circle and it binds you; step outside and it stops meaning anything. The two senses are the same picture with the circle drawn around different things.
From the word’s history
Wiktionary traces bylaw partly to Old Norse býjar ('town's, settlement's') plus lǫg ('laws'), with Danish bylov ('municipal law') on the same line. The by- was never the preposition by; it was the town. That is why the whole word still means a rule made by a smaller body for its own patch.
Wiktionary 記的來源之一，是古諾斯語的 býjar（城鎮的）加上 lǫg（法律），丹麥文的 bylov（市法）也在同一條線上。這裡的 by- 從來就不是介系詞 by，而是「城鎮」。所以整個字到今天還是那個意思：小單位替自己訂的規矩。
Wiktionary, "bylaw"
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