Thursday, April 7, 2016

Blockchains and the Emergence of a Lex Cryptographia

Here’s an interesting idea. It’s taken from Aaron Wright and Primavera de Filippi’s article ‘Decentralized Blockchain Technology and the Rise of Lex Cryptographia’. The article provides an excellent overview of blockchain technology and its potential impact on the law. It ends with an interesting historical reflection. It suggests that the growth of blockchain technology may give rise to a new type of legal order: a lex cryptographia. This is similar to how the growth in international trading networks gave rise to a lex mercatoria and how the growth in the internet gave rise to a lex informatica.

Is this an idea worthy of our consideration? I want to investigate that question in this post. I’ll do so by explaining the rationale for Wright and de Filippi’s claim. I’ll start by going back to first principles and considering the nature of regulatory systems and the different possible forms of regulation. This will allow me to explain more clearly the proposed evolution to a lex cryptographia and the implications this might have.

1. The Nature of Regulation and Regulatory Systems
All human societies try to regulate the behaviour of their members. In simple terms, regulation is the biasing of behaviour. You want to encourage people to act in certain ways and discourage them from acting in other ways. You want to push them towards certain outcomes and pull them away from others. There are two main forms that this biasing can take:

Ex ante biasing: Guiding, directing and incentivising behaviour in advance.
Ex post biasing: Punishing or sanctioning behaviour that does not comply with preferred norms or standards of behaviour in order to encourage future compliance.

[This isn’t to rule out other potential purposes for punishment (such as retribution or revenge), it’s just to suggest that in the regulatory context the biasing function often takes precedence.]

How do we go about biasing people’s behaviour in the desired directions? What tools can we use? In his famous 1999 book - Code and Other Laws of Cyberspace, Lawrence Lessig argued that there were four main tools for regulation:

Architecture: Any natural or man-made structures that shape, constrain and/or permit certain forms of behaviour. Architectures are ubiquitous and are often the first and primary mode of regulation. Most of the other forms require some communication and/or signaling. Architectures don’t: they are structural limitations on possible forms of behaviour. For example, our biological architecture biases us in favour of breathing oxygen: if we didn’t we would die. Similarly, the construction of railroads permitted us to travel faster and further than we had gone before, but only along fixed tracks. The construction of the automobile and the building of modern roads allowed for additional but also limited possibilities. Technologies frequently create new possibilities for human behaviour and interaction, but those possibilities are controlled by the underlying architecture.

Social Norms: These are non-legal social standards, policed and enforced through peer pressure. A simple example would be table manners. There are all sorts of standards of behaviour for dining - these standards vary depending on the culture and the occasion. Formal dining has elaborate norms. You must hold your cutlery in a particular way; proceed through the courses in a particular order; fold your napkin just-so; be served by the waiting staff from a particular side; and so on. These behavioural standards are a creation of custom and social expectation. These forces create norms that govern many aspects of our lives. Failure to comply with these norms often leads to undesirable social repercussions: shunning, gossip, ridicule, mockery and so on.

The Market: Humans trade goods and services on markets. Markets then regulate human behaviour using a simple but often effective tool: They set prices. The prices bias human behaviour in various ways. Creators and suppliers are (usually) biased in favour of the goods and services that have the highest prices. Purchasers and demanders are (usually) biased in favour of those with the lowest prices. The market also disciplines behaviour: those who spend more than they take in are punished and disincentivised from continuing to do what led to that sad state of affairs.

Law: Most societies have a set of norms that are given a special social status. We call these norms ‘the law’. These are norms that are created and endorsed by recognised social authorities, and are usually enforced (ultimately) by the threat of violent coercion. In the modern world, it is governments and states that create these special social norms. They then use an elaborate institutional machinery to bias us in favour of compliance with those norms: police forces, courts, prisons and so on. [Note: I am aware that this assumes a potentially controversial, positivistic theory of law]

According to Lessig, these four tools exhaust the regulatory possibilities. How they are used by different societies, at different times, in response to different challenges, is the interesting thing.

2. Lex Mercatoria and Lex Informatica
The typical pattern over the course of human history has been that new technologies and new discoveries create new architectures. These architectures are the initial and primary regulatory tool: the only limit on behaviour is that provided by the architecture (and the conscience of those using it). Once the new architecture becomes widely available, the other regulatory tools flood-in and further constraints and limitations emerge. Users of the architectures adopt social norms to bias the behaviour of other users. If they exploit the architecture for financial gain, market norms emerge. Some tools are more effective than others. Ironically (given its special social status) legal regulation is often the last to flood into the new architecture and often simply codifies the pre-established norms.

Wright and De Filippi use two historical examples to illustrate this pattern.

The first example is the lex mercatoria. This was a set of (quasi?) legal norms that developed from trading networks in Europe during the middle ages. At the time, Europe was made up of small principalities and states. Within these principalities a local ruler had the authority to pass and create laws. However, merchants did business with people from outside the principalities. Indeed, trading networks were established that covered most of the continent. These networks constituted an architecture. The traders who operated in these networks needed some body of rules to regulate their behaviour. They could not rely on the local rulers to provide these rules since they only had authority within small geographical areas. So they developed them themselves. An impressive body of customary rules emerged that was known as the lex mercatoria. Over time, these rules became more formalised and started to be recognised by local legal systems (often because of tax benefits to the local rulers). That said, the relationship between the lex mercatoria and the local law was sometimes uneasy. Some argue that this is still the case: that there are norms and customs for international trade that constitute a modern day lex mercatoria, and that these norms have an uneasy relationship with national legal systems. You can read about this debate here.

The second example is the lex informatica. This was the set of norms that developed after the emergence of the internet. The internet created a new architecture for social interaction. People could communicate with one another in new ways — ways that minimised the relevance of traditional geographical and legal boundaries. It allowed them to engage in new methods of trade, to create and distribute new goods and services. In the early days, this architecture constituted something of a legal ‘wild west’. Users of the internet had to develop their own norms, relying heavily on private contractual methods such as End-User Licensing Agreements (EULAs). Because the internet wasn’t localised in any particular state or national legal system, these contractually established norms often ignored or supplanted pre-existing legal norms. Eventually, national and international legal regulations started to enter the new architecture, but there continues to be an uneasy relationship between these regulations and the lex informatica to this day.

The question now is whether the emergence of blockchain technologies gives rise to something similar - a lex cryptographia perhaps?

3. Lex Cryptographica: A New ‘Legal’ Order
This is what Wright and de Filippi suggest. To appreciate why they suggest this, you need to know something about blockchain technology. I have written two previous posts that try to explain how it works. I won’t go into the same depth here. Suffice to say, the blockchain is a distributed ledger that records and verifies transactional information (e.g. did X send money to Y; did Y receive it). The ledger (“the blockchain”) is maintained and stored on a network of computers. The network can be distributed over potentially any geographical area (anywhere with network connectivity). Every computer (or node) on the network stores a copy of the ledger. The network then verifies the transactional information using some sort of consensus or majority decision-making rule (e.g. does every computer on the network agree that X sent the money to Y? If so, the transaction is verified).

When explained in these terms, blockchain technology often seems unexciting, but that is far from the case. Any information that can be digitised and sent over a network can, in theory, be recorded and verified by the blockchain. With the growth of the internet of things, this means that the blockchain can be used to verify many different kinds of information and thereby regulate many different human interactions. As a regulatory mechanism, the blockchain has at least three interesting properties:

Decentralisation: The blockchain is set up and maintained by a decentralised network, not by any one individual or organisation. Indeed, one of the alleged virtues of the blockchain is its ability to breakdown the power of ‘trusted third parties’ in society, e.g. governments, banks, large corporations. You don’t need to trust these powerful organisations anymore; you just need to trust the network. This enables people to create their own bespoke blockchain-based regulatory architectures (“smart contracts”) for managing their relationships with other network users.

Encryption: The information that is recorded and verified by the blockchain is encrypted and hence, in principle if not in practice, anonymised. This is good for privacy and for facilitating ‘private ordering’ of how one relates to other users of the network, but means that it can be difficult for traditional legal systems to regulate these relationships.

Architecture-driven: Given the two preceding properties, the main regulatory tool in the case of the blockchain is the underlying technological architecture. What has the system been programmed do? What kinds of information will it receive and verify? How exactly will it verify it? How frequently? How will those who maintain the network be rewarded for their efforts? All these questions are answered at the level of coding. As a result, much of the regulation has to be baked-into the architecture of the system.

A lex cryptographia is likely to emerge from this. Users of these systems will develop norms that will be baked-into the programmes they develop on blockchain technology. How you feel about this largely depends on how you feel about traditional legal systems. Cyber-libertarians tend to love it. They think that the blockchain allows for the creation of self-governing communities that are outside the reach of the law. And since they think that state-driven law is basically evil, they also think we should welcome this new technological regulatory architecture. It is far more freedom-enhancing than what we currently have in place.

Others are less sanguine. They worry that the blockchain is technocratic and elitist. At present, relatively few people know how to create and code private regulatory architectures on the blockchain. How are they to make use of it? If they are not educated to develop their own architectures, they will have to rely on those with the relevant technical expertise. This would seem to create a new set of trusted third parties, with a lot of social power. And, as the old adage goes, power tends to corrupt.
The result is that some people would like for this new regulatory architecture to be brought within the reach of traditional legal systems. Is this possible? Wright and de Filippi argue that it probably is.

Traditional legal systems excel by (ultimately) using force or the threat of force to change how humans act. As long as these traditional legal systems can find the humans that run and operate the blockchain, they can use these tools to enact regulatory changes. What’s more, they don’t need to find everyone who runs and operates the blockchain. They just need to find the people that matter. Although the blockchain is, in theory, a decentralised network — and so, in theory, power is distributed across the network — the reality is that there are centralised “chokepoints” in the system. Internet service providers (ISPs) and other corporate intermediaries (e.g. software developers, hardware manufacturers) are such centralised chokepoints. They provide people with the technology they need to make use of the blockchain. If you bring the law to bear on them, it will be possible to bring some degree of legal regulation into the system.

It looks then like we could be heading for another uneasy relationship between our regulatory tools.

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