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Bitcoin and Unbreakable Law

June 13, 2013

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Imagine that you were entertaining a business deal with a man with an supernatural ability to make two kinds of promises: 1) promises that are impossible for him to break and 2) ordinary, breakable promises. Why would you accept anything other than the unbreakable promises from him? If he offered to make  breakable promises you might grow suspicious about his intent.

It’s easy to see how unbreakable promises would be a revolution for contracts and law. Enforcement costs for contracts would be drastically reduced. It would enable a new era of globalization, allowing people to participate in contracts with each other without regard to jurisdiction. The rights promised to a citizen of a country could be guaranteed instead of relying on the benevolence and caprice of their sovereign.

This is why I find Bitcoin so exciting. Sending someone a bitcoin is like making a promise that can’t be broken because the rules governing the transfer of bitcoins are secured by cryptographic algorithms which cannot be broken. Bitcoin is a system of rules for the accounting and transfer of property rights in a way that is completely verifiable and unforgeable. The regulation and enforcement of property rights is a big portion of what governments do so bitcoin opens the door to more efficient and trustable decentralized forms of governance.

In contrast, transactions in the traditional banking system rely on a fragile chain of trust and threats of force. If I try to send you money you must trust that your bank and my bank will not make a mistake or attempt to defraud us. You must trust that the government regulators which oversee banks are reliable, thorough, and honest. You must trust that banks fear the consequences of the law if they break a promise and that they haven’t captured their regulators. And with most methods of electronic bank transfer in the USA, the recipient will not be able to verify that the transaction went through for several days.

But in practice we know that people sometimes write checks that they can’t cover. We know that government banking regulators sometimes freeze accounts. And we know that banks and countries sometimes become insolvent. This year depositors in Cyprus and Argentina have seen their property rights in their bank accounts violated. Cypriots were promised the money in their bank accounts, but then their government together with the EU decided to change the rules. When rules change too often they cease to become rules at all.

Auditing and enforcing promises made in the traditional financial system requires tremendous resources, employing hundreds of thousands of people and costing billions of dollars a year. There are middlemen that guarantee transactions against fraud, regulators that ensure that those middlemen remain solvent and comply with banking regulations, police men and lawyers that prosecute fraudsters, intelligence agents that monitor transactions for illegal purchasers, banks to keep your money safe, and many other specialties. All of that overhead is obsoleted by bitcoin because promises cannot be forged or broken.

The importance of Bitcoin is bigger and broader than just a new kind of currency. It also represents a breakthrough technology in rule-making. The technology underlying bitcoin can be used to create systems for the maintenance and transfer of property rights in other goods, such as domain names (see the namecoin project). I hope that people continue to find astonishing new uses for this technology.

Property rights based on cryptography are a remarkable advance in governance technology for several reasons. First, they are unbreakable. Second, they are opt-in rulesets – nobody forces you to join the bitcoin ecosystem just because you are born in some jurisdiction. Third, it eliminates a mountain of compliance and auditing costs. Far fewer regulators, banks, courts, and cops are needed to maintain order when forgery is impossible. Fourth, it is universal – anybody can choose to opt-in to the system.

Cypherpunks and crypto-libertarians are way ahead of me. For decades they had the vision of property without government and of laws without force. Now that I see an example of it in the wild I finally understand what all the fuss is about.

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12 Comments leave one →
  1. Bob Robertson permalink
    June 13, 2013 1:25 pm

    As an anarcho-capitalist, I am often told by those who come to “anarchy” from what is now the “left”, that is, Socialists, that somehow private property requires coercion and therefore cannot exist without the state.

    Thank you for demonstrating what you call “property without government and of laws without force”.

  2. June 16, 2013 2:36 am

    Great article, and very much in line with my own thinking!

    The Open-Transactions (http://bit.ly/12G9c0f) software we are building on at Monetas (http://monetas.net) is essentially a smart contracting platform. It allows users to create and execute any kind of legal contract and financial instrument human ingenuity can dream up—including legal entities such as partnerships, corporations, communities, etc., with functionality such as voting systems built right into the system.

    The question then arises, why bother incorporating in some brick-and-mortar jurisdiction which is costly, bureaucratic, etc. with inflexible rules, etc. if one can just conclude a cyberspace digital contract with one’s business partners at no cost, using creative entity rules limited only by one’s ingenuity (and by principles of natural law)? This would require using appropriate choice of law and choice of forum and choice of enforcer clauses, of course, but that’s easily done.

    This may seem like a radical idea, but—at least in some of its forms—it’s legal and indeed widely practiced in the real world and has been for thousands of years (e.g. in many jurisdictions, common law partnerships require no registration, just an agreement between the partners). But what are the limits? What are the risks and costs? What innovative new structures can be designed to suit various entrepreneurial purposes?

    We are building tools that will enable users to think up a business idea, then set up a legal entity right from their mobile phone within minutes at virtually no cost, and be ready to do business worldwide using our virtually free global payment system, all within minutes and without requiring specialized legal advice and without requiring a bank account or credit card. This could lead to an explosion of entrepreneurship and wealth creation in those parts of the world that need it most.

    The possibilities are limitless! But there is still a good deal of work to be done. We’re currently interested in hearing from people who can help us develop suitable contract templates for the common types of legal agreements, with standardized clauses that can be selected from a menu in a few clicks. A lot of the hard work has already been done—see, for example:

    Contractual Freedom enabled by Choice of Law and Choice of Forum clauses: http://goo.gl/iDI2Q
    http://www.oneclickorgs.com/
    http://www.contractstandards.com/
    ALI Restatements of the Law: http://bit.ly/13KhEJx
    Translex Principles: http://bit.ly/13KhFNE
    UNIDROIT Principles: http://www.unidroit.org/

    But there is a lot of room for further simplification, standardization, creative innovation, etc.

    Also, businesses such as Modria and Judge.me are pioneering internet age dispute resolution.

    Integrating all these elements into a powerful, userfriendly solution will revolutionize how we live and work.

    If you’re interested in helping this become reality, contact me at johann@monetas.net.

  3. wróżka metylia permalink
    June 17, 2013 2:03 pm

    First of all, in the world of Bitcoin only one part of a transaction, the one that is to send the money is forced by the system design to make an unbreakable commitment. The other side may still well fail to deliver. There are even services designed to mitigate this problem.

    Second, Bitcoin doesn’t establish unbreakable property rights, at least so far, but an unbreakable control power. If you lend me a Bitcoin for a month time, and after this month I refuse to pay you back, you are legally and morally entitled to a Bitcoin from me, and this should be reflected in the property rights system, that is you should have means to repossess said Bitcoin, but you don’t have any (except in the old fiat & physical world).

  4. June 19, 2013 7:53 pm

    > the rules governing the transfer of bitcoins are secured by cryptographic algorithms which cannot be broken

    This is a factually incorrect statement, or — at a minimum — is misleading. With current technology it is not *feasible* to break those algorithms, but the introduction of quantum computing as well as the natural progression of Moore’s Law will allow these algorithms to be broken.

  5. June 19, 2013 8:18 pm

    http://www.digicert.com/TimeTravel/math.htm

    ^^ a word on the resources and time need to break 2048 bit.

  6. June 19, 2013 8:29 pm

    … a good video on EC crypto which is more difficult to crack. This is what Bitcoin uses.

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