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.

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