law

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.