Bitcoin and Unbreakable Law
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.