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Defining Property in the Digital Environment. Part Two.

Defining Property in the Digital Environment. Part Two.

Defining Property in the Digital Environment. Part Two.

The First Principles of Digital Property

In Part One of the series we took a look at the history of property. In this post we begin with a fundamental question, What is property?

What is Property?

At its simplest level, a property is an asset plus a property title. While most people probably consider property to be the stuff that they own, property is technically defined as the rules governing access to and control of assets, whether those assets are land, means of production, inventions, or other creative works. Within every society, laws known as property rights regulate which entities can assert ownership claims to which assets and what rights come with such property claims:

Property rights.

A valid ownership claim functions as a “bundle of rights” for a specific property and can include such rights as:

  • the right to exclusive possession
  • the right to exclusive use and enclosure
  • the right to transfer ownership (conveyance)
  • the right to use as collateral to secure a debt (hypothecation)
  • the right to subdivide (partition)

Property rights are neither absolute nor static; they can vary widely across different societies and can change over time. In Medieval Europe, common law considered all water resources as being statically tied to the land rights in which they were located, such that landholders owned parts of rivers with full accompanying rights. Over time, property rights for water resources have generally changed from being land-based to use-based, thereby allowing non-landowners to hold enforceable property rights. Also consider how different national flavors of political and economic ideologies, such as capitalism, socialism, and communism, have differently dictated who can own which properties, e.g., communism mandating that all means of production can only be owned by the state.

Within most property rights regimes, a property title is the legal instrument by which an entity claims ownership of an asset. Property titles are often embodied in a formal legal document, such as a real estate deed or a motor vehicle title, which serve as physical evidence of the possessor’s claim to property rights.

Property titles are the clearest legal means for defining private property rights.

One function of the property title is to uniquely identify the asset being claimed, most commonly by recording distinctive feature sets, such as geographic coordinates or geological features for land, or serial numbers, such as vehicle identification numbers (VIN) for motor vehicles. The moment that properties lose this unique identification, they become interchangeable commodities that behave more like money than like property. In order for money to circulate seamlessly and easily within a community, it must be completely fungible: It needs to be mutually interchangeable, functionally indistinguishable, and completely impersonal. The moment someone values one dollar bill more than another is the moment the dollar bill ceases to be money and starts to be property. However, the opposite is true for property. To establish an enduring record of a property’s authenticity, an asset’s unique identifier must be recorded in the property title as a permanent and immutable pointer to the asset, such that the asset can always be identified from its corresponding property title.

A second function of a property title is to make the bundle of property rights portable by acting as a container that allows its rights to be transferred from one owner to another. For assets that require a property title, transfers of ownership must be publicly recorded via a centralized government entity, such as a county land registrar or a state department of motor vehicles, in order for the transfer of property rights to be legally recognized. This history of ownership, or provenance, is most often tracked via a formal property system, which records the complete provenance of every registered property:

Property systems.

Piracy and Property Rights

In an ideal world, every property would have a property title. Property titles are the clearest legal means for defining private property rights. At the simplest level, property is provenance. The ability to demonstrate clean title is what protects one’s investment in a property by guaranteeing strong provenance. However, current property systems suffer from high transaction costs, which is why property titles traditionally have been reserved for physical properties whose valuations are high enough to justify the property title costs, such as real estate, vehicles, or works of art. However, if these transaction costs could be reduced to near zero, property titles could be issued for any asset, thereby clarifying property rights and further reducing negative externalities resulting from ambiguous ownership claims.

The Peruvian economist Hernando de Soto Polar has gone so far as to argue that, particularly in developing regions, the lack of access to robust property rights systems is the primary underlying cause of many nations’ most urgent negative externalities. According to De Soto, this inability to demonstrate legal ownership of assets compels many citizens, particularly small entrepreneurs, to seek extralegal remedies for their business problems since traditional means of judicial redress are only available to legal property owners. This massive exclusion from property rights systems results in the emergence of two parallel economies with disparate rules and risks: the official legal economy and a makeshift extralegal economy. It is the flourishing of extralegal shadow economies that generates many of the widespread negative externalities for their larger societies. De Soto coined the term “dead capital” to describe assets locked into such extralegal economies since their lack of property rights explicitly excludes them from becoming wealth-generating property within the larger global economy.

Within the digital environment, there exists a similar extralegal shadow economy in the form of online piracy of copyrighted works. While it is tempting to depict the rise of piracy as an unfortunate side effect of contemporary digital technologies, copyright infringement is as old as copyright itself. However, the recent prevalence of online piracy begs the question: What is it about the current state of digital assets that impels people, who in any other context would never commit crimes of piracy or theft, to engage in acts of piracy? While there are undoubtedly cases of piracy that are a simple matter of people wanting to get something without paying for it, De Soto’s research suggests that, more often than not, such recourse to extralegal solutions stems from too few property rights rather than too many. In the absence of readily available property rights for desired digital assets, otherwise law-abiding citizens resort to piracy to get what they want. Consider that a large portion of piracy occurs in countries that lack international licensing agreements to access high-demand digital assets. A more inclusive and universally accessible property system with low transaction costs that establishes clear property rights for digital assets could radically reshape the current piracy landscape by transforming disenfranchised pirates into invested property owners.

Privacy in the Digital Environment

Finally, it is important to recognize that, in the case of digital assets, there is a significant convergence of private property rights and rights to personal privacy. These seemingly unrelated sets of rights were once intrinsically linked. Historically, the ability to circumscribe an area of land as one’s own created an adequate level of protection of personal privacy through defense against unsolicited trespass. Thus, the fundamental right to private property also served as protection to personal privacy by clearly defining exclusive access rights to properties.

As new technologies have developed, courts have continuously needed to reinterpret the relationship between private property and privacy rights beyond the boundaries of physical properties by extending privacy protections to “people, not places.” These protections have included rights to privacy for posted correspondence, phone conversations, and any form of personal communication in which the content is presumed to be private. Unfortunately, however, these core personal privacy protections have not been as reliably applied to the Internet and personal data. A primary reason for these shortcomings is that most privacy laws are focused solely on protecting the content of digital communication while totally disregarding privacy protections for user metadata, which is often more revealing than the actual content itself. As an example, consider the fact that a mobile device’s detailed log of user location data is usually not protected, despite the fact that the ability to surveil someone’s daily movement patterns is, in most cases, a much more threatening privacy intrusion than monitoring any authored content transmitted from the device.

Online data privacy faces an additional complication with the continued popularization of social media applications and a growing trend towards centralized, third-party cloud computing platforms, both of which customarily require users to voluntarily store personal data on their remote servers. Under many legal systems, the act of voluntarily giving private information to third parties is considered an explicit forfeiture of any expectation to privacy rights over that information. The result of this voluntary surrender of privacy is that government authorities have been permitted to bypass traditional protections against search and seizure without first demonstrating probable cause and obtaining judicial search warrants. Within the context of digital data assets, this doctrine has been interpreted such that any third-party Internet service that stores user data — including everything from Internet service providers, cellular data providers, social media websites, and cloud storage services — must comply with government requests to access to that data, thereby significantly weakening privacy protections across nearly every category of contemporary digital communication practices.

The ability to convert digital assets into properties offers a way out of this privacy dilemma by realigning rights to private property and rights to personal privacy—

—that is, essentially creating the digital equivalent of a fence that affords digital property the same bundle of private property and privacy rights historically attached to land. It is in this potential to protect digital property that we most clearly recognize that private property and privacy are two sides of the same coin.

A property system for digital properties must therefore offer both legal and technical affordances for protecting property rights and privacy rights. At the legal level, the property system must integrate into existing property rights frameworks to such an extent as to guarantee exclusionary access to the data in the same way that exclusionary access is afforded to physical properties. At the technical level, the property system must provide a minimum capacity for heightened security and privacy through strong encryption practices and other barriers to unauthorized access in the same way that security fences or monitoring systems provide an added measure of privacy for physical properties.

In the final and third part of the series we’ll introduce how Bitmark is cleaning up the digital environment by bringing real property rights to digital assets and data.

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By Bitmark Inc. on February 22, 2017.
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Defining Property in the Digital Environment. Part One.

Defining Property in the Digital Environment. Part One.

A Brief History of Property

The evolution of property.

While physical goods are protected by a long history of private property rights, digital assets are, to date, essentially unownable. In this three-part series of blog posts we examine and propose solutions to the current problems of digital ownership by retracing the history of property in the West. We argue that the establishment of property rights for real property and intellectual property has decreased negative externalities and fueled the major socioeconomic revolutions of the modern world. Similarly, the digital environment’s most pressing negative externalities — from current epidemics of security breaches to rampant online piracy to the privacy intrusions inherent in mass surveillance — can be improved by the introduction of digital property rights. What is needed is a trustworthy, secure, and enduring property system that is flexible enough to incorporate digital properties into any community’s broader property rights traditions. As a solution, we propose Bitmark, a blockchain-based property system for the digital environment that expands and strengthens the Internet’s essentially decentralized, open, and transparent ethos. The ability to establish ownership claims to digital assets — of well-understood forms of intellectual property such as music, movies and books but also for emergent and increasingly critical ones such as computer code, digital art, user-generated data and metadata — will transform many of the 21st century’s largest negative externalities into a new asset class capable of powering the next economic revolution.

“It was a bright cold day in April, and the clocks were striking thirteen.” — George Orwell, 1984

On July 17, 2009, Amazon Kindle owners awoke to discover that their 1984 ebooks, which they had paid for and thought they owned, had mysteriously disappeared. Amazon had remotely deleted the book overnight and credited customers’ accounts for the purchase price. We have been led to believe that digital goods are like physical goods, only better. Yet this case proved otherwise. If Amazon had sneaked into its customers homes in the middle of the night, taken some books off their nightstands, and left a little cash behind, they would have been accused of breaking and entering, trespass, and theft. How could a company headquartered in a country that champions individual property rights even consider such an Orwellian scheme, let alone get away with it?

The reason is simple: ownership of digital goods is nothing like ownership of physical goods. The underlying causes of this difference are complex, and unwinding the mess requires a return to the history of property and its first principles so that we may gain a clearer view of the specific problems plaguing the digital environment. We will use the general term digital environment to describe the multitude of interconnected computer software spaces, whether localized to personal devices or spread across the wider Internet and Internet-of-Things, through which digital assets circulate in all their various forms. From this vantage point, we will discuss the kind of property system that is needed — not only to remedy the current problems — but to provide a sustainable foundation upon which the larger economy can continue to move forward and thrive into future generations.

Historically, Western economic progress has been pushed forward by two all-encompassing legal frameworks that followed parallel trajectories at different times: private property and intellectual property.

The Rise of Property

Historically, Western economic progress has been pushed forward by two all-encompassing legal frameworks that followed parallel trajectories at different times: private property and intellectual property. Before there was any modern notion of private property, all property was owned either by the Crown or the Church. In England, property did not actually have a legal definition until the 17th century when the term entered popular parlance in reference to land ownership. Monarchs awarded selected individuals by granting them a title (e.g., “Duke,” Earl,” “Lord”) which carried with it ownership rights to a specific parcel of land. These properties were made productive by the commoners who inhabited them as subsistence farmers. The commoners collectively worked the “commons” for the ultimate benefit of their landlords.

Starting in the 12th century, certain commoners undertook the radical enterprise of enclosing portions of land from the larger commons. Such acts were gradually recognized as a commoner’s assertion of an exclusionary right to ownership of the land as well as to the fruits of their labor produced from the land. This movement accelerated in the 16th and 17th centuries despite strong objections from various factions of the nobility, and legislation was proposed to counteract the process. But Parliament faced a major dilemma. Enclosed land improved agricultural productivity to such a degree that significantly fewer farmers were needed. In fact, the migration of these displaced commoners to cities provided much of the labor force fueling the Industrial Revolution that was making England so powerful at the time. After weighing the various political pressures, Parliament sanctioned large-scale land reform in 1801, thereby ushering in the British Agricultural Revolution and unleashing a powerful new catalyst in the form of individual private property rights for land ownership.

The evolution of intellectual property followed a similar trajectory. As with land, early Europeans tended to view knowledge as a kind of commons. All human understanding was ultimately an expression of God’s divine ingenuity and therefore was collectively held by everyone. However, in the same way that monarchs had awarded gifts of land titles to friends of the Crown, patents and copyrights emerged in the form of royally sanctioned monopolies. Patents conferred exclusive monopolies over specific markets or commodities, such as starch and salt. Copyrights conveyed the exclusive right of publishers to print and censor literary works. The Crown was so bold in its issuance of patent grants that commoners eventually revolted in 1624 and forced Parliament (again) to intervene and restrict patent awards to “projects of new invention” whose protections were only enforceable for a limited number of years. Shortly after, Parliament stepped in again to transform copyright protections from private legal privilege into a public law grant that was vested in individual authors rather than in publishers.

Private property rights for land ownership enabled any commoner to become the king of his own castle and protected the freedom to improve one’s “lot in life”.

This synergy of private and intellectual property rights catapulted Western societies out of the darkness of feudalism and into an era of unprecedented economic progress and prosperity. Private property rights for land ownership enabled any commoner to become the king of his own castle and protected the freedom to improve one’s “lot in life” through hard work and resourcefulness. Intellectual property empowered anyone to amass tremendous wealth through individual ingenuity and invention as a reward for creating something valuable to society. Both types of property secured a new form of sovereignty for individuals and together provided the necessary climate for the full flourishing of the Industrial Revolution, in which new mechanical inventions eased the burden on all humanity and increased the individual level of wealth and wellbeing across all classes.

The Need for Digital Property Rights

The enabling factor for this seismic social shift was the nascent realization that resources held in common are susceptible to inefficient use as well as to an inequitable depletion. This degradation of shared resources is caused by parties wishing to maximize individual gains at the expense of the collective, a condition often referred to as the tragedy of the commons. Present-day economists understand tragedies of the commons as the result of negative externalities, which are costs involuntarily incurred by parties external to an economic transaction. For example, air pollution from a factory is a negative externality if a factory does not pay to pollute the shared resource of clean air so that the larger society must bear the costs of the resulting damage to human health and the environment.

When properly implemented, property rights enable societies to convert tragedies of the commons into thriving new markets.

The economic solution to the problem of externalities is to “internalize” them by assigning property rights, such as carbon emission credits for the right to pollute the air. This understanding of the ability to internalize externalities via property rights was demonstrated in 1960 by the economist Ronald Coase, who was later awarded the Nobel Prize for work in which he showed that, in markets where there are externalities, assigning property rights allows the markets to value the externalities via private bargaining, assuming bargaining costs are low and property rights are clearly defined. Containerizing externalities via property rights transforms a complex social problem into a relatively straightforward business decision: the cost of the right to create an externality versus the cost of changing the business to avoid creating the externality in the first place. When properly implemented, property rights enable societies to convert tragedies of the commons into thriving new markets.

Our inability to clearly assign property rights in the digital environment has resulted in a catastrophic mess of externalities — a 12-trillion-gigabyte primordial soup of digital data as wide and as deep as the Internet itself and doubling in size every two years. In tandem, the repeated epidemics of centralized data breaches, mass surveillance, and state-sponsored incursions on privacy attest to the increasing negative externalities and prevalence of abuse. As with previous property revolutions, the most effective way to safeguard and develop undervalued resources is to establish property rights for them. What is needed is a property system for the digital environment that brings real property rights to digital assets, thereby transforming them from a growing social liability into an unparalleled new property class capable of fueling the larger global economy.

In part two of the series we’ll delve into property rights and privacy rights.

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By Bitmark Inc. on February 15, 2017.