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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