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Tin Soldiers and Nixon may be Coming, but Ohio Will Recognize Your Blockchain-Based Transactions*

October 18, 2018 By Bruce Antley

Starting Nov. 2, the State of Ohio will officially recognize electronic records that are generated or signed using blockchain technology.

Gov. Kasich signed SB220 , which amends the Ohio electronic transactions law in two ways: (1) “electronic records” are redefined to include a “record or contract that is secured through blockchain technology” and (2) “electronic signatures” are redefined to include a “signature that is secured through blockchain technology.”

“In Ohio, blockchain innovators can thrive in their efforts to develop new products and applications for the financial industry and beyond,” said Valentina Isakina, Financial Services Managing Director for JobsOhio, the private economic development corporation for Ohio. “Many companies looking to expand their blockchain and R&D operations are rapidly growing job creators, and Ohio is now even more attractive to these businesses.”

Ohio is one of 47 states that adopted what is known as the Uniform Electronic Transaction Act (also known as UETA). UETA is model legislation designed in the late 1990s, as the Internet was gaining mainstream adoption, to ensure that courts and state agencies would recognize transactions conducted digitally, rather than through paper contracts. Ohio joins three other states — Arizona, Nevada and Tennessee in amending its electronic transactions law to recognize blockchain-based transactions, according to a American Bar Association report. Two of the three states that have alternatives to UETA in place — Illinois and New York (Washington state is the third, in case you’re wondering) are considering amending their laws to recognize blockchain-based transactions. Florida and Nebraska also are considering amending their UETA statutes to recognize blockchain.

*The author expresses his sincere apologies to the fine state of Ohio (fine, not applying to its two professional football teams) for the allusion to Crosby, Stills, Nash & Young’s “Ohio,” which anachronistically played nightly on a mix tape in the newsroom of his college newspaper when he was a young journalist, long before blockchain, or the even the Internet, was really a thing.

Judge Orders Halt to Blockvest ICO

October 15, 2018 By Bruce Antley

SEC alleges in court filing that defendants used logo of “Blockchain Exchange Commission” to mislead investors.

SEC alleges that company created a fictitious regulatory agency called the “Blockchain Exchange Commission” to aid in misleading investors.

A federal judge imposed a temporary restraining order on a planned Initial Coin Offering and pre-sales of Blockvest BLV tokens.

In an order issued October 5, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California issued an order that freezes the assets of Blockvest LLC and its founder Reginald Buddy Ringgold III and stops the sale of the business’s BLV digital tokens.

The complaint filed by the SEC alleges that defendants Blockvest and Ringgold:

Falsely claimed that the ICO had been “registered” and “approved” by the SEC, the Commodities Futures Trading Commission and the National Futures Associated and even used their logos in marketing materialsof the SEC on its website.
Claimed an association with the Deloitte accounting firm that did not exist.
Created a fictitious regulatory agency called the “Blockchain Exchange Commission” with its own logo and mission statement that are similar to the SEC’s and that lists its business address as the address of the SEC’s DC headquarters.

“Here, Defendant’s use of the SEC and CFTC’s seals and logos of the NFA and Deloitte create a false appearance of legitimacy for the Blockvest ICO,” wrote Judge Curiel. “Moreover, Defendant’s creation of the BEC, a false “regulator” , to promote the validity of the ICO as regulated is deceptive. Furthermore, the BEC’s adoption of the SEC’s seal, the SEC’s mission statement, the SEC’s headquarters address, and even a link to the SEC’s website created a false appearance that the ICOs are regulated when in fact, they are not.”

Judge Curiel scheduled a hearing in the case for October 18. Copies of the orders are available here:

BlockvestTRO Download

BlockVestOrder2 Download

Judge Affirms CFTC Jurisdiction Over Cryptocurrency

October 11, 2018 By Bruce Antley

Federal Court holds CFTC has authority to take action against My Big Coin, a cryptocurrency that was alleged offered subject to fraudulent claims.
The court’s decision is consistent with another holding and CFTC’s stated position and should have no effect on non-fraudulent use of cryptocurrency.

Although it’s received a fair amount of press, a recent U.S. federal court decision affirmed what we already knew — the Commodities Futures Trading Commission has authority to regulate cryptocurrencies.

The ruling came in a case involving the CFTC’s enforcement action against My Big Coin Pay, the offerer of a virtual currency called My Big Coin, and a number of individual defendants.

The court held that CFTC has authority over My Big Coin because My Big Coin is a virtual currency, and the CTFC has authority over virtual currencies because some virtual currencies are traded via futures contracts. The court followed a line of cases involving natural gas that held the Commodity Exchange Act gives the CFTC authority over commodities if any of that general type of commodity is traded via futures contracts, regardless of whether the specific type of commodity at issue is traded via futures contracts.

The CFTC alleged in its complaint that “My Big Coin is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin),” wrote Senior Judge Rya W. Zopel of the District of Massachusetts. “That is sufficient … to allege that that My Big Coin is a ‘commodity’ under the (Commodity Exchange) Act.”

A copy of the opinion is available here:

MyBigCoinOpinion_2018_09_26 Download

The decision is consistent with the ruling in a case earlier this year, CFTC v. McDonnell, in which New York federal court entered final judgment ordering the defendants to pay over $1.1 million in civil monetary penalties and restitution in connection with a lawsuit brought by the CFTC alleging fraud in connection with virtual currencies, including Bitcoin and Litecoin.

This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets. This ruling, like the one in McDonnell from Judge Weinstein in the Eastern District of New York, recognizes the broad definition of commodity under the CEA, and also that the CFTC has the power to prosecute fraud with respect to commodities including virtual currencies. We will continue to police these markets in close coordination with our sister agencies.
James McDonald, CFTC Director of Enforcement

The opinion, though, is fairly unremarkable. It supports a position that the CFTC claimed four years earlier, and also is consistent with the McDonnell case.

It also won’t make much of a difference to users and investors of cryptocurrencies, except to the extent that it means the CFTC has authority to take action against fraud and market manipulation involving cryptocurrency.

“When it comes to fraud and manipulation, we need to be strong. When it comes to policy making, I think we need to be slow and deliberate and well informed,” CFTC Chairman J. Christopher Giancarlo told CNBC in September.

U.S. Congress Moves on Blockchain

October 5, 2018 By Bruce Antley

Pennsylvania Avenue by Vlad Podvorny / CC BY 2.0

Members of House introduce another blockchain-related bill. Reps ask SEC for clarity on treatment of cryptotokens.

Although Capitol Hill has been preoccupied over the last few weeks with the Senate’s consideration of Supreme Court nominee Brett Kavanaugh, that hasn’t stopped the introduction of several blockchain-related bills.

Late last month, Rep. Tom Emmer, a Minnesota Republican, introduced three blockchain-related bills. This week, Democrat Rep. Doris Matsui of California and Republican Brett Guthrie of Kentucky introduced H.R. 6913, the Blockchain Promotion Act of 2018, which would create a working group to establish a common definition of blockchain.

“Blockchain technology could transform the global digital economy. Opportunities to deploy blockchain technology ranges from greatly increased transparency, efficiencies and security in supply chains to more-opportunistically managing access to spectrum,” said Congresswoman Matsui in a press release. “As our economies become increasingly digital, more organizations are turning to blockchain to keep track of their business transactions,” said Guthrie. “Blockchain can be a great resource for innovation and technology, but we must figure out exactly what best common definition is and how it can be used.

Although the legislation would reflect a welcome acknowledgment of the value of blockchain technology, it does not address some key points of regulatory uncertainty. To that end, another bipartisan group of members of Congress sent a letter this week to Jay Clayton, the chairman of the Securities and Exchange Commission. The letter asks the SEC to provide clear guidance about when blockchain based tokens will be treated as securities, which are subject to restrictive regulations.

“This letter is the byproduct of months of work and conversations with industry, trade groups, and my fellow members of Congress,” said Rep. Ted Budd, a North Carolina Republican. “Sending this letter now is one Congress can do to make sure we stop this new technology from being driven offshore. The bottom line is that we must make sure the United States of America is the world’s leader in financial technology.”

California Adopts 2 Pro-Blockchain Laws

October 4, 2018 By Bruce Antley

California State Capital Building By Jeff Turner / CC BY 2.0

Although new legislation is a step forward in recognition of the important of blockchain technology, regulatory uncertainty is harming innovation.

California has adopted two laws that promote the use and development of blockchain technology in an effort to maintain the state’s position as a leader in technology development.

One of the laws — AB 2658 — requires the formation of a working group to report to the legislature on the potential uses, risks and benefits of the use of blockchain technology by state government and California businesses. The report is due by July 1, 2020. The second law — SB 838 — enables companies incorporated in California to use blockchain technology to record the issuance and transfer of company stock. Gov. Jerry Brown signed the laws on Sept. 28.

Blockchain has the potential to revolutionize many industries in the near future. It is vital that California recognizes and supports this industry as an economic driver in our state. These are common sense bills that send the message that California supports innovation and the blockchain industry ….
Ally Medina, Director of the Blockchain Advocacy Coalition

What is blockchain technology? Blockchain is a digital ledger — a log of transactions. The ledger is shared across a network of computers, and transactions are recorded onto the ledger only if the computers on the blockchain network reach consensus on the validity of the transaction. Transactions are logged on the ledger as part of a block, and the blocks are strung together in a chain, with each including a reference to the preceding block – thus the name “blockchain.” It’s the same technology that powers Bitcoin and other “cryptocurrencies,” but, in part because transactions recorded on a blockchain are resistant to tampering, it is well-suited to tasks such as maintaining records of assets. If you’re interested in learning more, check out Blockchain Explained in 1000 Words.

The California laws, although they reflect a significant recognition by the legislature of the potential of blockchain technology, do not address many of the regulatory uncertainties surrounding certain implementations of blockchain.

For example, the U.S. Securities and Exchange Commission has not provided clear guidance on the circumstances under which cryptocurrencies will be subject to the same regulations as corporate stock. The Internal Revenue Service has not provided guidance about issues affecting owners of cryptocurrencies, such as how the tax law should treat owners of blockchain-based currency that has undergone a split called a “hard fork.”

The lack of clear guidance from regulators threatens development of blockchain-related businesses in the United States, including in California, the center of so much of the innovation in the digital age. The Blockchain Advocacy Coalition published a chart showing how California is losing its global share of blockchain businesses.

Earlier this year, Perianne Boring, president and founder of the Chamber of Digital Commerce, an industry group, told The New York Times that the current regulatory landscape is “unorganized and incredibly complicated, and it’s really putting the U.S. at risk of falling behind from an innovation and technology perspective. There are turf wars between the different regulatory agencies and turf wars between the feds and the states, and none of this is in the best interest of the U.S. or the blockchain technology industry.”

Will Blockchain Technology Determine Control of the U.S. Senate?

September 28, 2018 By Bruce Antley

West Virginia has begun accepting absentee ballots cast in this fall’s general election via a smartphone app, marking a first in U.S. general elections. The app, built by Voatz, a startup based in Boston, uses blockchain technology along with features on voter’s smartphone to try to ensure the identity of the voter and the integrity of the vote.

West Virginia is targeting the app for use by residents who are overseas, in particular members of the military to use the app in this year’s general election, according to an article in Slate.

“The hardships that our overseas servicemen and women have in voting and returning a ballot are much greater than those that we see in the state,” West Virginia elections director Donald Kersey told The Washington Post.

According to Voatz, the app will work on recently-manufactured smartphone models from Apple, Samsung and Google that include security features, such as fingerprint and facial recognition. These devices provide hardware-based security to store private keys that allow highly secure, encrypted transactions to be conducted over the public Internet. Votes will be stored on a permissioned blockchain that will eventually be controlled by stakeholders such as state elections officials so that votes can’t be changed.

Votes cast via the Voatz app could play a critical role in determining not only the outcome of races in West Virginia, including the U.S. Senate race between incumbent Democrat Joe Manchin and Republican challenger Patrick Morrisey, but also control of the U.S.Senate. The West Virginia Senate race is close. Although most polls have shown Manchin holding a reasonably comfortable lead, the most recent poll published on the FiveThirtyEight website shows the race is tied, with each candidate at 45%. Republicans hold a slim, 51-49 majority in the U.S. Senate, and with several close races across the country, “the race for control of the Senate is as tight as it can be.”

Some are raising questions about Voatz’ security practices and more generally the security and integrity of using a smartphone app for voting. Security blogger Kevin Beaumont alleged numerous issues with Voatz in a series of Tweets. Joseph Lorenzo Hall, the chief technologist at the Center for Democracy and Technology, told CNN, “Mobile voting is a horrific idea. It’s internet voting on people’s horribly secured devices, over our horrible networks, to servers that are very difficult to secure without a physical paper record of the vote.”

For its part, Voatz responded to specific security concerns in detail, noting:

The Voatz platform goes to significant lengths to prevent a vote from being submitted if a device is compromised. Only certain classes of smartphones that are equipped with the latest security features are allowed to be used. Detecting a compromised mobile network is particularly challenging for a mobile application, which is why ensuring end-to-end vote encryption and vetting the certificates represented by unique IDs stored on the smartphone, are two of the approaches we use to mitigate a compromised mobile network.

Although critics have raised concerns about the implementation in West Virginia, blockchain technology will almost certainly play a role in voting, beyond the small-scale rollout in in the Mountaineer State. The tamper-resistance of records stored on the blockchain, particularly when combined with biometric features on modern smartphones make it a promising solution to make it easier for voters to cast their ballots.

“There have been a number of proposals to use blockchains for voting,” Vipul Goyal, associate professor in the Computer Science Department at Carnegie Mellon University told ZDNet. “It’s an active and exciting area of research. Certainly it seems like blockchains bring some missing components to make online voting a reality.”

Could the Same Technology that Powers Bitcoin Empower Victims of Sex Crimes?

September 27, 2018 By Bruce Antley

Black and White Justice by Phil Roeder / CC BY 2.0

One of the revelations of the #MeToo movement is the fear of victims of sexual assault or harassment to report crimes. Modern psychology can explain the fear, but society and our legal system tend to discredit victims who don’t report crimes promptly, and in some cases the perpetrators of crimes may even escape punishment because of a delay in reporting.

The news is filled with accounts of sex crime accusations being made in some cases decades after the alleged attack. This week, comedian Bill Cosby was sentenced to prison for drugging and sexually assaulting a woman 14 years earlier. Some of the allegations against film producer Harvey Weinstein date back to the 1990s and late 1980s. A report last month by a Pennsylvania grand jury described sex crimes by Catholic priests over a 70-year period, and as of the time of this writing, Supreme Court nominee Brett Kavanaugh was fending off allegations of a sexual assault that allegedly occurred 36 years ago.

A relatively new technology — called blockchain technology, which also power Bitcoin — may, however, provide victims of crime with a method of creating a credible written record of the facts.

Why Victims Delay Reporting

Psychotherapist Beverly Engel describes 10 reasons why victims of sexual assault may not immediately (if ever) report a sexual assault. These reasons include shame, self-blame, fear that they won’t be believed, and fear of retaliation, among others.

Being sexually assaulted is one of the most shame-inducing traumas that a person can experience. So it is understandable that victims don’t need to be further shamed by being shamed for not reporting the crime. And yet, that is exactly what happens whenever we hear, for the first time, about a sexual assault that occurred months or years ago. “Why didn’t she report it before?” we ask. “Why didn’t she come forward a long time ago, right after it happened?”
– Psychotherapist Deborah Engel

Statutes of Limitations Limit Prosecutions

The #MeToo movement may have helped to remove some of the stigma from victims of sexual assault and harassment and encouraged them to come forward, but fears remains a factor in the decision to come forward. The law in many states has not caught up with the recognition of the psychology of a crime victim. In most of the United States, laws called statutes of limitations prevent prosecutors from filing criminal charges if a certain amount of time has passed following the crime.

Statutes of limitations are designed to protect people from prosecution after a period of time when physical evidence may have disappeared or memories may have faded.

According to a report by PBS NewsHour, some states have recognized that it may take time for victims to come forward and have begun extending the period for prosecuting sex crimes, particularly those involving young victims, but states are “behind the curve” in extending or eliminating statutes of limitations for adult victims.

Even if a crime can be prosecuted within the applicable statute of limitations, the success of that prosecution may be hampered by faulty memories and even a jury’s bias against victims who delay in reporting a crime.

Crime victims have always had the ability to write down contemporaneous details of the crime, which could aid in a prosecution and in convincing the police and prosecutors (not to mention, the general public) of the truthfulness of a claim, but these writings may be subject to attack in a courtroom or the court of public opinion. Handwritten notes could have been written at a later date. Even techniques such as emailing a written account to yourself may be problematic as emails could still subject to forgery and victims could be spooked by new reports that the content of emails may be scanned by service providers.

How Blockchain Technology Can Help Create a Credible Record

This is where blockchain technology comes in. What is blockchain technology? Blockchain is a digital ledger — a log of transactions. The ledger is shared across a network of computers, and transactions are recorded onto the ledger only if the computers on the blockchain network reach consensus on the validity of the transaction. Transactions are logged on the ledger as part of a block, and the blocks are strung together in a chain, with each including a reference to the preceding block – thus the name “blockchain.”

It may be best known for being the technology behind Bitcoin, but blockchain also has uses outside of digital money. These uses already include keeping track of goods in a supply chain, maintaining the security of health care records and securing financial transactions. The process for recording transactions on a blockchain makes it very difficult to change what has been recorded but at the same time it also allows for the storage of records in a very private, secure manner. That’s why blockchain technology is being used by various services that attempt to replicate the services of notaries public. A notary public is a person with authority granted by the state to certify the proper execution of documents. The notary public places a stamp on the document and signs and dates it.

One of the blockchain based notaries is called Stampd. Stampd offers a web application for the time-stamping of documents. Stampd claims that “notarizing your content on the blockchain is totally straight forward and cannot be forged by anyone.” Stampd uses a technique called hashing to produce a digital fingerprint of a document and then attaches that fingerprint to the Bitcoin blockchain where it is stored in a tamper-resistant manner. The document itself never leaves the user’s device; no copy is stored by Stampd or anywhere else. It would be virtually impossible to take digital fingerprint and derive the original document. The digital fingerprint Stampd provides a certificate via email that would allow the user to prove with a high degree of certainty the date and time of the original document (the user would need to keep a copy of the original). Below are screenshots of the Stampd process and certificate.

A test document written in Google docs and downloaded as a .txt file.

Digital fingerprint of document after uploading it. The cost was only $6.09, payable via PayPal.

Confirmation that a digital fingerprint of the document is ready to be recorded on the Bitcoin blockchain.

Certificate of the transaction sent by email.

Confirmation that the transaction has been recorded on the Bitcoin blockchain

Typically, in U.S. courts documents notarized by a traditional notary public are considered authentic. Although there are no reported cases of courts considering blockchain-notarized documents (and they wouldn’t be given the automatic deference of traditionally notarized documents), the fact that the digital fingerprint recorded on the blockchain could be matched with the original would make it likely that the document is admissible in court.

This piece is not advice to victims to not report crimes, and there is no guaranty that a victim’s story will be believed (or that a case would move forward) even with blockchain notarized documentation. Obviously, it would be better if victims of sexual assault did not feel fear in coming forward and even better if sexual assault never occurred. But the reality is that sexual assault does occur and that there is real fear of reporting, and this article outlines one option victims can consider to protect themselves if the day arises when they feel than can report the crime.

3 Bills in U.S. Congress Seek to Encourage Blockchain Development

September 26, 2018 By Bruce Antley

U.S. Capitol by Kevin Burkett / CC BY-SA 2.0

The U.S. Congress will consider three bills that aim to relieve regulatory uncertainty and encourage the development of blockchain technology.

Rep. Tom Emmer, a Republican from Minnesota and co-chair of the recently formed Congressional Blockchain Caucus introduced (1) a resolution that supports blockchain technology, (2) a bill that would clarify that processors of blockchain transactions are not subject to regulations for “money transmitters” and (3) a bill that would provide a temporary tax “safe harbor” for owners of cryptocurrencies that have undergone a split known as a “hard fork.”

“The United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth, which is why I am introducing these bills,” said Congressman Emmer in a press release.

Blockchain is a digital ledger — a log of transactions. The ledger is shared across a network of computers, and transactions are recorded onto the ledger only if the computers on the blockchain network reach consensus on the validity of the transaction. Transactions are logged on the ledger as part of a block, and the blocks are strung together in a chain, with each including a reference to the preceding block – thus the name “blockchain.” Bitcoin and other “cryptocurrencies” are “digital” money that ride on blockchain technology.

While countries such as Malta, Bermuda and Liechtenstein have been proceeding with legislation to encourage development of blockchain technology, more than three years have passed since pro-blockchain legislation was introduced in Congress. In late 2014, Texas Republican Steve Stockman introduced legislation in the U.S. House of Representatives to impose a five-year moratorium on regulation of blockchain technology, but that legislation has not made it out of committee.

Resolution Expressing Support for Digital Currencies and Blockchain Technologies

The first piece of blockchain legislation introduced by Congressman Emmer is a resolution “expressing support for digital currencies and blockchain technologies.” The resolution outlines the usefulness of blockchain technology in exchanges of value, the provision banking services to financially underserved people, identity and rights management, security for the Internet of Things, government record-keeping and increased efficiencies in industries such as insurance, healthcare and energy. It further notes “the emergence of blockchain networks in many ways parallels the emergence of the internet at the end of the 20th century.”

Blockchain Regulatory Certainty Act

The second piece of legislation, called the “Blockchain Regulatory Certainty Act” clarifies that miners of cryptocurrency are not subject to licensing and registration requirements for “money transmitters.” Miners use powerful computers to process cryptocurrency transactions and post them to a shared ledger of transactions.

Although the miners typically receive a fee to process transactions, they do not control the digital funds that are being exchanged in a transaction. The U.S. Financial Crimes Enforcement Network (FinCEN) issued rulings that stated that cryptocurrency miners and investors would not be subject to money transmitter regulations. Emmer’s legislation would appear to put into law the regulatory guidance from FinCEN.

Safe Harbor for Taxpayers with Forked Assets

The third piece of legislation introduced by Emmer provides some protection for U.S. taxpayers who own cryptocurrencies that have been “hard forked.” A hard fork occurs when a cryptocurrency essentially splits into two versions (with one following the path of the original blockchain, and the other following a new path. (Two of the most prominent cryptocurrencies — Bitcoin and Ethereum — have undergone hard forks.) Owners of the original currency then own both versions, and tax experts have noted that U.S. tax regulations are not clear on whether the owner of the receives income (for tax purposes) from the split and if so, when that income is deemed to have been received. The Section of Taxation of the American Bar Association submitted comments in March 2018 asking the U.S. Internal Revenue Service to create a safe harbor for taxpayers who owned forked currency in 2017, but the IRS has not issued guidance in response. Emmer’s legislation would require the IRS to issue regulations or guidance on the tax treatment of forked cryptocurrency.

Trust, Blockchain and the Law

September 15, 2018 By Bruce Antley

Trust. I did not truly grasp how badly technology had damaged trust until I took my two kids on a trip to the new World Trade Center last summer. After stopping for a few moments of reflection at the 9/11 memorial and looking up at the top of the new skyscraper, we presented our tickets and took the elevator to the observation deck, 1,250 feet (almost 400 meters) above Manhattan. When we exited the elevator, we were greeted by a grand view of the New York cityscape. My daughter and I owed and awed, said “OMG” and all of the other things one does when presented with something unbelievably spectacular.

My daughter — by far the most observant of the three of us — must have noticed her younger brother wasn’t joining in our fascination. “Isn’t that amazing?” she asked him. I looked down and saw that he had the same mouth-twisted expression of cynicism that I have when my wife and I are told that no one knows anything about what happened to the peanut butter despite an empty jar in the trash, a spoon in the sink and two children with breath wreaking of Skippy.

My daughter repeated the question. “Isn’t that amazing?” “No,” he said. “It’s not real.” My daughter said, “What do you mean it’s not real? Look outside.” She pointed to a helicopter passing by the building and a ferry on the East River. “Yeah, that’s not real,” he responded.

I was baffled by his response. I simply could not process what he meant. How could he doubt that the view from the window was real. Then I realized this brilliant boy, who spends every minute we allow him watching YouTube videos and playing realistic video games; this boy, who will innocently ask me as I catch up on work emails in the evening, “Dad, can you come over for a minute and help me set up a Minecraft server?” has seen such spectacular simulations of reality, that spectacular reality seems like a simulation.

After some coaxing, he acknowledged that what he was seeing was real, although I’m not certain whether he was saying that because he believed or because he wanted us to stop haranguing him.

Law and Technology Have Combined to Destroy Trust

That was the moment, though, when I grasped how our amazing technology has destroyed trust. Artificial reality has progressed to the point that what we see is not necessarily real. Our most personal information has been amassed and then stolen. Three times in one year I received replacements for the same credit card because of data breaches. Large health care insurers have had sensitive information stolen, and government agencies have seen personal details of some of their most valuable employees taken by foreign agents.

What has the law done about these breaches of trust? Virtually nothing. Surely, every once in a while, you’ll see an indictment of mysterious foreign agents, although they never seem to go to jail. In fact, the only party that seems to be routinely punished is the company that was hacked, not to mention the thousands of people who hold accounts who now have to deal with the loss of their personal information. I don’t really question laws that require companies to use some reasonable level of security and to report data breaches, but is that the best the law can do — punish the homeowner for not locking the backdoor and then waiting too long before she calls the police?

Our commercial systems depend on trust. For centuries and beyond, people traded primarily with people they knew, and trust was enforced within that small group. If you live in the Arctic tundra with a few dozen other people and you get caught selling spoiled fish, you’ll find yourself pretty quickly alone on an iceberg with wolves and polar bears as your only companions. When you’re transacting with people continents away through a global computer network, it’s a little hard to use shunning as a defense against bad-faith dealing.

Blockchain Technology Has the Potential to Restore Trust

When the Postal system, railroads and the telephone enabled commerce to spread beyond neighbors and across regional borders, the United States responded with numerous laws aimed at fraud that crossed local jurisdictional lines. It led to the Federal Trade Commission Act, which prohibits unfair and deceptive trade practices, and the Securities Act of 1933, which requires registration of securities (the law that is at the heart of the controversy over the offering of Initial Coin Offerings). Other countries have similar laws. But the effectiveness of these laws is limited when the parties to a transaction are beyond the reach of the jurisdiction of anti-fraud laws. That’s where blockchain technology comes in.

Blockchain technology holds the promise of restoring that trust. The Economist called blockchain technology the “trust machine.”

“In essence it is a shared, trusted, public ledger that everyone can inspect, but which no single user controls. The participants in a blockchain system collectively keep the ledger up to date: it can be amended only according to strict rules and by general agreement. Bitcoin’s blockchain ledger prevents double-spending and keeps track of transactions continuously. It is what makes possible a currency without a central bank.”
The Economist

How does blockchain technology encourage trust? There are two main ways: it has the power to verify transactions in a low-cost manner and it reduces the cost of networks.

Its power to verify transactions is perhaps the better known of its qualities. Its “records can’t be duplicated, manipulated or faked, and increased visibility … promotes an unprecedented level of trust,” says a report from the World Economic Forum. It means governments can better protect citizens, while business partners can be certain trading documents are real. Consumers can check the quality and provenance of products, and banks can reduce processing time.”

But, perhaps even more powerful, particularly in an age when the business practices of the dominant tech giants — including Facebook and Google — are called into question, is the power of blockchain technology to reduce the cost of networks. Platforms, such as Facebook and Google, are inherently more useful the more users they have. The greater the number of your friends are on Facebook, the more compelling it is to share photos of your kids, your dog and your cat doing funny tricks. The more people use Google for searches, the better Google can tune its algorithms to improve your search results. With these strengths of broader networks, comes the downside: market power, which allows Facebook and Google to engage in data collection and other practices that users might not tolerate if there were viable alternatives.

A blockchain platform that is open to all participants (permissionless), however, mitigates this downside by distributing control across the network. “A permissionless system guarantees that no single entity can control the network. If you cannot control it, then you cannot exert market power over it,” says Economist Cathy Barrera.

So, blockchain technology has the promise of restoring trust. It can help to verify transactions and ensure that bad actors don’t change records, and it can reduce the power of market participants. But to succeed, blockchain will have to overcome negative public perceptions and to do so, it will have to come under the rule of law. The use of blockchain-based cryptocurrency for illegal transactions, Initial Coin Offerings that ignore securities laws and the theft of millions of dollars worth of cryptocurrency without consequences will undermine trust. To fully realize the potential of blockchain technology, regulators and blockchain proponents will need to reach consensus on application of know-your-customer, anti-money-laundering and securities registration requirements (among others).

The decentralized nature of blockchain technology will make the application of law, which tends to centralize power, a challenge, and that is what this blog will chronicle, so that perhaps one day when my son becomes an adult, he can trust what he sees, how he does business and how his personal information is handled.