Coase Theorem in the World of Data Breaches

“This is a really serious security issue, and we’re taking it really seriously,…..I’m glad we found this, but it definitely is an issue that this happened in the first place.”

— Facebook CEO Mark Zuckerburg

(after the company’s security breach that exposed the personal information of 30 million users.[1])

We now live in a world of data. Every single day, each one of us generates some very personal data about what we see, where we go, who we talk to, what we think and even who we are. Data is quickly becoming one of the most critical factors of production in the current market economy. Yet, it also brings negative externalities that cannot and should not be ignored for the market to function effectively. Many economists have proposed theories and tools to tackle the problem of externalities. In this article, I am going to specifically focus on the solution proposed by Ronald Coase in 1960, and show how the theory can be applied to the modern world of data.

When the Market Fails

Before diving into the Coase Theorem, we first need to first talk about “externality”, which can be defined as the positive or negative consequences of economic activities on third parties [2]. The externality is considered to be a form of market failure — as it is the spillover effect of the consumption or production of a good that is not reflected in the price of the good [3]. That is, the market equilibrium fails to capture and reflect the real cost/benefit of economic activity. Some everyday externalities that people encounter including air pollution and cigarette smoking. Another classic example of a negative externality is described by Garrett Hardin in his scientific paper named “The Tragedy of the Commons”, which discusses how individuals tend to exploit shared resources so the demand greatly outweighs supply, and the resource becomes unavailable for the whole [4].

Pollution is a classic example of a negative externality.

Coase Theorem: Assigning Property Rights to Tackle Externalities

Prior to Ronald H. Coase, who was awarded the Nobel Prize for Economics in 1991, economists were prone to consider corrective government actions as the solutions to externalities. For instance, by setting numerical limits on activities with external effects (Command and Control regulation), placing a subsidy to increase consumption of positive externalities, and internalizing the externalities using price system (Pigouvian tax). However, in his publication “The Problem of Social Cost” in 1960, Coase argues that there is a real danger that such government intervention in the economic system, in fact, leads to the protection of those responsible for harmful effects [5]. Instead, he suggests that the market can potentially solve the problem of externalities by itself if property rights are complete and parties can negotiate costlessly.

“We may speak of a person owning land and using it as a factor of production but what the land-owner in fact possesses is the right to carry out a circumscribed list of actions.”

— — C., Ronald (1960). The Problem of Social Cost.

To see how this economic theory can be applied to a real-world problem, let’s take a quick look into the Cap-and-Trade system.

Cap-and-Trade: A real-world application of Coase Theorem

Facing the global challenge of climate change, the European Union created the world’s first international Emission Trading System (ETS) in 2005 with the goal to reduce greenhouse gas emissions. The EU ETS works on a Cap-and-Trade principle — — A cap is set on the total amount of certain greenhouse gases that can be emitted by installations in the system. The cap is reduced over time so that total emissions fall. Within the cap, companies can receive or buy emission allowances which they can trade with one another as needed [6]. In other words, the cap to some extent represents the right to emit certain greenhouse gases, whereas the trading reflects the negotiations Coase argues that can lead to more efficient market allocation.

“Trading brings flexibility that ensures emissions are cut where it costs least to do so. A robust carbon price also promotes investment in clean, low-carbon technologies.”

— The European Commission

According to the EU, the ETS has shown good results as the cap on emissions from power stations and other fixed installations is reduced by 1.74% every year between 2013 -2020 [7], and the emissions are estimated to be 43% lower than in 2005 by 2030 [8].

Coase Theorem in the World of Data Breaches

Living at the age of big data, data breaches have become increasingly common in our daily lives. According to the Identity Theft Resource Center, the number of significant breaches at US businesses, government agencies, and other organizations reached 1300 in 2017, compared to less than 200 in 2005 [9]. This increase is partly due to the fact that the world’s volume of data has grown exponentially over the past decade, giving cybercriminals a greater opportunity to expose massive volumes of data in a single breach [10].

Although it is normally defined as an “incident” where information is stolen or taken from a system without the knowledge or authorization of the system’s owner [11], I suggest viewing data breach (especially those ones involving personal information) as a modern form of negative externality. It is because when the data that institutions captured from individuals to run their business get breached, individuals get spillover effects in terms of privacy and financial loss. Yet, the liabilities of such harm are not clearly defined and therefore taken into account within the market mechanism.

“We found no evidence that any developer was aware of this bug, or abusing the API, and we found no evidence that any Profile data was misused.”

— Google Official Statement disclosing the data leak affecting up to 500,000 accounts [12].

Take Facebook’s security breach in September 2018 as an example. 30 million people (more than the whole population of Australia) had their names and contact details leaked, and within which 14 million of them further had their sensitive information (include gender, locale/language, relationship status, religion, hometown, self-reported current city, birthdate, education, work etc) exposed to the attackers [13]. With the significant harm that this “incident” brought to people’s privacy, what Facebook did was apologizing, saying that it was “a breach of trust” and that they “promise to do better” for the users [14]. Yet no matter how sincere those apologies might be, they cannot and will not solve the core of the problem.

Data breaches cause great harm to society as well as individuals. However, such negative externalities are not well captured and reflected in the market.

It is, however, not to suggest solving data breaches with one-fits-for-all governmental regulations. Because according to Coase, we need to recognize the reciprocal nature of the problem. That is, a data breach cannot happen without Facebook failing to secure its data, but at the same time, it also cannot take place without the users willingly inputting data to the platform. So what is missing here, based on the Coase Theorem, is the clear definition of the rights to data.

In the World of Data where Property Rights are defined and defended

Based on Coase Theorem, the property rights to data, in fact, refer to the rights to carry out a circumscribed list of actions. A couple of examples of actions shall include:

  • Right to control access to one’s data
  • Right to monetize one’s data
  • Right to donate/give away one’s data
  • Right to defend the privacy of one’s data
  • …….

When the above rights to data are clearly defined, individuals are empowered to have legal recourse and bargaining power against a “data breach incident” that inflicts their rights. In the case of Facebook, for example, users will be able to confront Facebook in court for its failure to defend the user’s data privacy and use the data only for the permitted purpose (intentionally or not). Or even before the outbreak of a data breach, which seems inevitable for centralized data storage, users can already negotiate terms with Facebook for the potential risks that Facebook exposes them to. Facing such confrontation and consequences, Facebook will be forced to better capture the costs and risks it bears when storing/utilizing its users’ data. This might lead to a change of business model for Facebook or a new user-platform relationship where Facebook openly compensates users for the risks they are exposed to.

In short, as argued by Coase, once the rights to data are clarified, parties can openly negotiate terms and compensations resulted from the negative externalities — just like how we do with greenhouse gases — and therefore lead to better market equilibrium.

Baby step at a time to tackle market failures in the world of data

The Facebook data breach is not the first of its kind, and unfortunately will not be the last. In fact, it is estimated that data breaches will just become more frequent, bigger and more expensive in the near future. Therefore, although Coase Theorem, similar to all economic theories, has its limitations with real-world applications, it still sheds lights on how defining the rights to data can be the first step toward solving digital world negative externality such as data breach and enabling a better-functioned market mechanism in the long-term.

References

[1] The New York Times (Sep 2018). Facebook Security Breach Exposes Accounts of 50 Million Users. Available at: https://www.nytimes.com/2018/09/28/technology/facebook-hack-data-breach.html

[2] Quickonomics. Positive Externalities vs Negative Externalities. Available at: https://quickonomics.com/positive-externalities-vs-negative-externalities/

[3] Intelligent Economist. Introduction to externalities. Available at: https://www.intelligenteconomist.com/externalities/

[4] Investopedia. Tragedy Of The Commons. Available at: https://www.investopedia.com/terms/t/tragedy-of-the-commons.asp

[5] C., Ronald (1960). The Problem of Social Cost.

[6] European Commission. EU Emissions Trading System (EU ETS). Available at: https://ec.europa.eu/clima/policies/ets_en

[7] European Commission. EU Emissions Trading System (EU ETS). Available at: https://ec.europa.eu/clima/sites/clima/files/factsheet_ets_en.pdf

[8] European Commission. EU Emissions Trading System (EU ETS). Available at: https://ec.europa.eu/clima/policies/ets_en

[9] Priceonomics. Why Security Breaches Just Keep Getting Bigger and More Expensive. Available at: https://priceonomics.com/why-security-breaches-just-keep-getting-bigger-and/

[10] Digital Guardian (Jan 2019). The History of Data Breaches. Available at: https://digitalguardian.com/blog/history-data-breaches

[11] Trend Micro. Data Breach. Available at: http://www.trendmicro.tw/vinfo/us/security/definition/data-breach

[12] Google (Oct 2018). Project Strobe: Protecting your data, improving our third-party APIs, and sunsetting consumer Google+. Available at: https://www.blog.google/technology/safety-security/project-strobe/

[13] Facebook Newsroom (Oct 2018), An Update on the Security Issue. Available at: https://newsroom.fb.com/news/2018/10/update-on-security-issue/

[14] The Verge (Mar 2018). Mark Zuckerberg apologizes for Facebook’s data privacy scandal in full-page newspaper ads. Available at: https://www.theverge.com/2018/3/25/17161398/facebook-mark-zuckerberg-apology-cambridge-analytica-full-page-newspapers-ads

By Hsiang-Yun L. on February 26, 2019.

Nobody is keeping track of your health. It’s up to you.

Nobody is keeping track of your health. It’s up to you.

I was wrong to think that having good health insurance meant I’d have good (complete) health records.

Written by Shelly Lai

Photo by Owen Beard on Unsplash

I went on a mission to collect my health records, and was surprised with what I found:

  1. Only the last seven years of my health records are intact and retrievable. All the previous records have been deleted.
  2. Even though I’ve had centralized, national health insurance for my entire life, my records are not all in one place. They are scattered among the doctors, clinics and hospitals where I’ve ever received care.
  3. I have begun keeping my own health records because I don’t trust the direction medical care is headed with AI or machine learning tools “predicting” diagnosis based on such limited health data.

I have really great health insurance because I live in Taiwan. Our National Health Insurance makes it easy and inexpensive to receive great care, because it’s built upon a simple system of centralized health records. When I was recently challenged to track down my medical records, I assumed it would be easy. I was wrong.

Image used in theBloomberg article linked below

I work as a researcher at Bitmark, helping find digital solutions for the issues plaguing the health industry: institutional data collection, medical record management, public health research at scale, and much more. Lately we’ve been heads down building an app to help people collect and own their medical records in order to pair their records with the daily health data already tracked by their smartphone, giving them an easy-to-access more holistic view of their health. [Shameless plug, if you want to know more about that app (it’s in beta, we need users!), jump to the bottom to read a bit more.]

I assumed the work we’re doing is to help people in countries without national healthcare manage their health records. Little did I know I’d need this just as much…

Most of the Bitmark team lives here in Taipei, Taiwan — it’s our main office. But Sean, our CEO, is American. He’s explained the plight of a fractionalized healthcare system, how in the US it’s difficult enough to just to sort through healthcare registration, let alone manage health records from so many insurance carriers and doctors’ offices. All along, I’ve assumed the work we’re doing at Bitmark is to help Americans and people in countries without national healthcare manage their records. Little did I know I’d need this just as much in Taiwan.

Sean said “If it’s that easy to collect your health records, show me.” I embarked on this task that appeared easy enough, even though I (and I’m pretty sure the majority of our Taiwan team) still didn’t believe it was necessary.

The Taiwanese National Health Insurance System (NHI)

Taiwan launched its national health insurance (NHI) in 1995 with comprehensive coverage including inpatient and outpatient care, dental care, over-the-counter drugs and traditional Chinese medicine. Taiwan’s NHI is touted as a model for other countries (hint hint, the US) since Taiwan had many of the same issues that plague the US like high insurance premiums, non-comprehensive (or no) coverage for people without private insurance.

NHI Smart Card (found at nhi.gov.tw)

The NHI has been a big success, now covering 99.6% of Taiwan’s residents, with service contracts with 93% of the country’s hospitals and clinics, according to the NHI’s 2017–18 annual report. Bloomberg ranks Taiwan’s NHI system #9 in the world for health care efficiency. (The US is #54).

Everyone in Taiwan has a NHI Card, which contains all their basic info and medical history. When someone visits a doctor or hospital or clinic, the doctor inserts her NHI card into the card reader, and can scan through key information like prescriptions, allergies, and past care or visit information.

With this card system, I thought it’d be easy to collect my records. According to the Taiwanese Medical Care Law, patients have the legal right to request copies of their medical records as well as medical imaging.

And it did start out easy enough. All the big hospitals have clear instructions on their website explaining the application process and fees. People can apply for their health records via phone, email, or in person, and the application form is easy to complete. Once submitted, it takes less than 3 working days before the applicant can collect the records.

Yes, hospitals and a centralized system made it relatively easy to retrieve what I wanted. However, there were some issues.

This centralized system isn’t so …. Hm, centralized?

You still have to go to multiple offices if you’ve received treatment from various spots.

If I saw a specialist across town once for a surgery, those records would be at that particular hospital. It turns out the Taiwanese NHI system doesn’t store my medical records — each hospital and clinic does.

In line to collect my health records.

Although our costs in Taiwan for healthcare may be drastically lower than in the States, our ability to personally collect our records may not be so dissimilar. In Taiwan, our healthcare system may not be as centralized as I thought.

To collect a comprehensive set of records, you need to remember every single hospital or doctor’s office you’ve ever had treatment. That poses a serious challenge. I knew this was a problem for Americans and people without a national healthcare system, but I didn’t expect it to be an issue for me.

They are mine, but they are very clearly not mine.

It was a disturbing feeling to have to ask and pay for something that should be my property. For all intents and purposes, these records are about my physical being, my body and health; they should be mine.

Nothing screams “this does not belong to you!” quite like having to pay for it.

Yet, ten pages of medical records cost approximately NT$ 150 (~$5 USD). It’s not an extraordinary amount of money, but it added up after going to every place. And nothing screams “this does not belong to you!” quite like having to pay for it. These are my records. Yet I have to pay every time I want to get a copy of them. Even if I retrieved a copy and then accidentally dropped them down a storm drain, if I went back to get a second copy the same day, I would have to pay again.

Did I mention that you get a literal stack of papers stapled together? And any images you request come on a CD — which only works on Windows. (Who has a CD rom anymore?) The hospitals/clinics I visited didn’t have the capability to offer me a digital file. If I cannot feasibly even see or read my records, this is a clear sign that my records don’t belong to me, they are not my property.

It’s incomplete! There’s a limit to the amount of data they keep.

This was the biggest shocker for me: The NHI is only required to keep seven years of your medical records.

The hospitals and clinics that I went to more than seven years ago do not store my medical records or imaging anymore. Eeeep! I assumed everything about me is safely stored in a centralized database, and that I can get it anytime I want. Nope. After the obligatory seven years, records are destroyed and there’s no way to get them.

Finding out that my health records from the first 20 years of my life are irretrievable, really scared me.

How can a health care system with only seven years of data on me truly make the best medical decisions for my optimal health? A doctor might not know of a major surgery, past medications, allergies that only showed up once. Those are the things that I would probably remember. But what about all of the detailed terminology that I wouldn’t remember about those medical appointments? Plus, diseases and health conditions develop over a lifetime, not just over seven years. The conditions that lead up to more serious illnesses need to be tracked over time. Without that lifetime of information, I feel I’m not getting the fullest medical treatment I can. It’s kind of scary when you think about it.

And what about the future of healthtech? As we start to use AI and machine learning for predictive medicine and patient engagement, will these robots only be using the last seven years of our data? Even if it’s only to make minor medical decisions to predict health outcomes, I don’t feel very comfortable with that. How can new tech be effective with such limited data history? I don’t want AI determining my health outcomes based on only the last seven years of my health information.

If nobody is keeping track of my records or health, it’s up to me.

So in the end, I’ve learned that even in the best of circumstances, like living in a country with a well-regarded national health system, I need to take control of my own medical records to have comprehensive info on my health. In order to only establish ownership over what should actually be mine, and to guarantee that I will be able to source my records when I most need them.

via Giphy

Bitmark Health

If you jumped down here to see about the Bitmark Health app (or made it through my story, thank you!) here are the details:

Bitmark is working on an app that will allow people to record and register their health data (the stuff already tracked by a smartphone) as well as their medical records (imaging, scans, photo uploads… if you can retrieve them all) and empower people to keep everything in one, secure, easy to manage place — to gain a more holistic view of their health.

Screen shot from Bitmark Health

We’d love your help as we work out the best version of the Bitmark Health App: download it on iTunes, and join the FB group to give feedback.

By Bitmark Inc. on October 30, 2018.

What is property?

Property is a titled asset.

The other day one of our engineers asked “Can I think of a property as a ballon?” Smiling, I asked what she meant. She drew me that picture. If I want to give you my ballon, she said, I would hand you the string, not the ballon itself. The string is like the property title, transferring the rights to use the asset.

Most of us have some idea what an asset is or could be. We are comfortable with abstract assets like money. Or scarce assets like water. Even ephemeral assets like time itself, can easily be accepted as valuable.

Property rights are one level deeper in abstraction. You need a string to get there. And then you are talking about how you and your ballon can interact with society at large. Property rights deal with interactions between entities.

Personal rights are property rights are therefore connected — two sides of the same coin.

By Sean Moss-Pultz on Nov 26, 2017.

Towards an Ecosystem of the Future by Property Rights

Towards an Ecosystem of the Future by Property Rights

http://www.henrikevensen.com/p2pe803aixjj08dr9r0b8p5aywg691

Environmentalists advocate for the health of the natural environment through changes in public policy, for example groundwater management, and changes in individual behaviors such as recycling or donating land to public trusts, or introducing concepts like property rights to promote sustainability and stewardship of resources. This positive effect of property rights on the commons was demonstrated in 1960 by the economist Ronald Coase, who was later awarded the Nobel Prize for his theorem.

Similarly, the collective of internet users acting as digital environmentalists advocate for the health of the digital environment. Both as individuals and entities, they self-regulate, champion policies such as net neutrality that protect the digital environment and its users, and invent technologies that aid in empowering the inhabitants of the digital environment against unethical uses of the resources of the internet and Internet of Things (IoT).

It is necessary to build on the analogy of the natural environment for the digital environment. For many of us, by nature of our heavy use of the internet, mobile devices, smart accessories, and social media, the ecosystem that we inhabit is simultaneously both of these environments. By acknowledging these two, we can ensure the health of both. While our current ecosystem is these two distinct yet simultaneous environments, our far future technological and biological progress could lie in an ecosystem where there is no distinction between the natural and the digital.

http://reubenwu.com/projects/23/crescent-dunes

Hence, establishing and adopting the concept of clean technology for the digital environment with the same intentions as it is used in the physical and natural environment is a forethought ensuring a healthy digital environment of the future. The efforts of resource management and sustainability of the environmental movement has generated clean technologies that work towards bettering the quality of the environment and lessening our negative impacts on it. Comparably we begin to see that many companies that have arisen for the necessity of a healthy digital environment can also be considered clean-tech for the internet.

These clean-tech companies span a spectrum of how they handle resources (data) in the digital environment:

  • Providing absolute privacy where little data as possible is put in the environment, like TOR browser and Signal;
  • Managing the data that is generated and exchanged, like identity management and self-sovereign identity with OpenID and uPort, password and security management such as LastPass and DashLane, or social media managers like Buffer, or an IoT manager like IFTTT;
  • Reinstating peer-to-peer trust by cryptographic proof and immutability of data by using blockchain technology, like Bitcoin.

In an ideal and healthy digital environment we know what is what, who is who, what belongs to whom, and what came from where. This can mean verifying data, verifying identity, verifying ownership, and verifying provenance of data, all of which can be private and anonymous. Any combination of the clean internet technologies outlined above aid us in being digital environmentalists and to tailor how we manage our data. However, currently our data is part of a commons—we’ve generated it through our use of internet companies like social media and our use of IoT technologies, but our data is sitting in a common grazing field for these companies to sell for profit. Where are our property rights to this data commons that is open to all for profit?

One of the most impactful essays for biologists is Garrett Hardin’s 1968 essay where he coins ‘the tragedy of the commons’ and introduces the concept of property rights to avert it. The example he gives of the tragedy is of the overgrazing of a common land by each herder who has access to it. Self-interest in the commons is not necessarily in the interest of the commoners as a whole. Since then, it has been repeatedly studied and proven that well-defined property rights applied to the commons creates incentives for each owner to act as a steward for the resource.

With the agency of ownership comes the responsibility of maintaining the integrity of the digital environment.

To answer the “tragedy of the commons” in the digital environment we need a new clean technology for the internet that gives us property rights to our data. These rights are not just for preventing ‘overgrazing’ by others, but to restore our power to our privacy with private property as opposed to common property, and to enable us to generate wealth from our data if we choose to. So the fourth type of internet clean-tech introduced above would be:

  • Enabling property rights to the data we generate.

This is what Bitmark does. It enables a transparent chain of ownership and attribution across the internet and Internet of Things that can be authenticated by anyone. With the agency of ownership comes the responsibility of maintaining the integrity of the digital environment of our collective data and digital assets.

Follow us to stay up-to-date on new posts, and Sign-up to stay up-to-date on our development and public beta release.

By Bitmark Inc. on April 6, 2017.

Defining Property in the Digital Environment. Part Three.

Bitmark, the property system for the digital environment.

In Part One of the series we took a look at the history of property while Part Two made the connection on how the prerequisite for privacy is property rights. This final post introduces a solution for defining digital property, Bitmark.

Bitmarks as property titles

The Bitmark system achieves extremely low transaction costs by supplanting conventional centrally controlled property systems with a shared, distributed ledger for recording digital property titles, or bitmarks, for any digital asset. A bitmark consists of four basic elements:

  • an asset fingerprint
  • asset metadata
  • an owner account
  • a digital signature

A bitmark’s asset fingerprint is created by applying a cryptographic hash function to a digital asset. The resulting fingerprint is an alphanumeric value that uniquely and permanently identifies the digital asset. The asset metadata consists of the property’s name and relevant attributes, as defined by the bitmark’s original issuer. The owner account identifies the current owner’s Bitmark account number, which is a cryptographic public key. The owner may choose to publicly link his or her identity with this account number, depending on the desired level of privacy. A digital signature is a secure mark of authenticity that is appended to the bitmark when first issued or whenever it is transferred to a new owner. One way to think of a bitmark is as an unforgeable chain of digital signatures that form the property’s provenance.

The Bitmark Blockchain

To enable this recording of property titles across the full depth and breadth of the Internet, Bitmark supplements existing methods for tracking provenance with a globally accessible property ledger known as the Bitmark blockchain. Blockchain technology is the key innovation of the Bitcoin currency and refers to a digital ledger that is publicly yet anonymously shared to all members of a peer-to-peer network. The Bitmark blockchain contains every single property title and ownership transfer ever recorded in the Bitmark system. This Internet-native ownership registry allows the Bitmark system to satisfy all the functional requirements of conventional property systems in a single public data resource:

The Bitmark blockchain.

At a more granular level, each bitmark consists of a chain of transfer records that weaves in and out of different blocks of transactions to create its provenance. The authenticity of each property’s provenance is maintained by continuously verifying this chain of owner signatures.

A bitmark’s chain of signatures.

As an example, consider the figure above, in which a Bitmark user named Alice issues a bitmark for a specific digital asset. Her Bitmark app first uses a cryptographic hashing function to generate a unique fingerprint for the digital asset along with an issuance record for the bitmark which lists Alice as the owner. Alice’s app also digitally signs the issuance record with her private key. Once it has been verified by the Bitmark network, this issuance record is aggregated into latest block of the Bitmark blockchain (let’s say block 13). When Alice later wishes to transfer ownership of the property to Bob, Alice directs her Bitmark app to create a transfer record that contains a link back to her previous issuance record, designates Bob as the new owner, and digitally signs the transfer record with her private key. Once this transfer record has been verified by the network to contain an authentic signature from the current owner (Alice), the transfer record is recorded in block 20 of the blockchain, at which point ownership passes to Bob. This method of requiring the current owner to digitally sign ownership transfers creates an unforgeable provenance for a property. The Bitmark system has been architected to support multiple digital signing methods, including digital signatures that guard against the possibility of future attacks from post-quantum computers.

Strength Through Decentralization

Unlike conventional property systems that rely on a handful of trusted government officials to act as centralized gatekeepers, the Bitmark blockchain is an open and transparent property system that is strengthened through the active participation of anyone on the Internet. The integrity of Bitmark’s open-source blockchain is ensured by a peer-to-peer network of voluntary participants running the Bitmark node software called bitmarkd. These software nodes are incentivized to participate in verifying Bitmark property transactions through the possibility of winning monetary and property rewards.

A more diverse and decentralized participant community means a more robust property system for everyone.

Every Bitmark property transfer requires a nominal transaction fee. One reason for this fee is to discourage vandals from spamming the blockchain. A second reason is to motivate the participating nodes to independently compete against one another to be the first node to verify the current block of transactions and “win” that block. A node wins a block by solving a difficult computational problem called a proof-of-work, which functions like a lottery to randomly select a winner.

Whenever a node announces itself to the network as the winner of a block, it presents its result so that the entire peer network can instantly check the proof-of-work and validate the block’s transactions. After confirming the block’s validity, non-winning nodes “vote” for the winner by adding the block as the next block in their local blockchains. The block winner is then awarded all the aggregated transaction fees for that block. As an added incentive, the Bitmark system treats the blocks that comprise its blockchain as digital properties in and of themselves, and the block winner is also issued a bitmark for that block. Block owners are entitled to collect royalties on all future property transfers for properties whose issuance records are recorded in their blocks. The ability for nodes to win ownership of blocks not only creates a further incentive for node participation but also reduces transaction costs for adding digital properties to the Bitmark system to near zero.

This strategy of rewarding an open network of peers for competitively verifying the results of one another’s work creates an impregnable security model that is an emergent property of the individual peer interactions themselves. Unlike centralized property systems, which suffer from increased negative externalities as larger populations exploit the shared resource, Bitmark’s decentralized blockchain grows more resilient and valuable as the network grows. As a method for encouraging the widest possible participant base, the Bitmark blockchain has been designed to resist centralized monopolization of network node resources. Unlike preceding blockchains, many of which have become vulnerable to the outsized influence of a few well-financed mining pools, the Bitmark blockchain has implemented a proof-of-work algorithm that has proven itself largely impervious to the high-end custom mining hardware that has led to the inequitable concentration of Bitcoin mining power, thereby diversifying node participation and fostering cost-competitiveness among independent participant nodes. Wherever possible, Bitmark has endeavored to build upon the lessons of pioneering blockchain systems to broaden network participation because a more diverse and decentralized participant community means a more robust property system for everyone.

Data Privacy Through Digital Property

Bitmark affirms individual privacy rights within the digital environment by, first, allowing anyone to create private property from any type of digital asset and, second, by implementing strong encryption measures for the digital assets themselves. The ability to convert any type of digital assets — whether content or metadata — into private property makes any unauthorized data access a violation of one’s property rights, thereby providing an added measure of legal defense against unwarranted search and seizure of digital properties. Asserting explicit private property claims are particularly advantageous in incipient domains where digital property rights remain murky, such as device location data, Internet-of-Things traffic, or collaboratively authored social media content. As more of our daily activities are inconspicuously scattered across different third-party cloud servers, Bitmark offers a mechanism for asserting clear ownership claims to personal data, even in cases where individuals have voluntarily consented to provide their data to third-party services.

There will undoubtedly be cases where governments or other entities succeed in circumventing Bitmark’s legal and technical privacy protections and obtain access to owners’ properties, whether through legitimate due process, abuses of power, or radical political upheaval. History is replete with examples of asset forfeiture, eminent domain, expropriation, and nationalization, in which the powers that be have forcefully seized selected populations’ properties and subsequently reallocated their property rights. One of the glaring liabilities of government-administered property systems is their inherent susceptibility to the vagaries of political climates. By providing a shared global property ledger independent from any single institution, regime, or hegemony, the Bitmark blockchain serves as a permanent and politically agnostic record of ownership claims. While the blockchain can never prevent the possibility of government confiscation of one’s assets, it does provide an enduring record of ownership claims that can serve as grounds for future contestation of property rights should political conditions change.

In addition to providing increased legal defensibility of digital properties, Bitmark employs strong technical measures for protecting digital assets during transfer and storage. By default, Bitmark encrypts all digital assets so that only verified property owners can access their properties. Whenever a property’s bitmark is transferred to a new owner, the corresponding asset is encrypted then transferred so that only the new owner can access it. This method of end-to-end encryption affords asset protection for local or remote storage in addition to safe asset transfer over the Internet or across peer-to-peer file-sharing networks.

Additionally, the Bitmark system protects owners’ identities by default. Even though every bitmark issuance and transfer record is freely accessible in the public Bitmark blockchain, these records only contain references to owners’ cryptographic public keys, which function as pseudonymous identifiers devoid of any personal information. In cases where owners wish to have their accounts tied to their personal identities, they can opt to publicly link their Bitmark public key to other verifiable means of identification, including web domains, Twitter accounts, and GitHub accounts. This combination of asserting private property rights over digital assets as a legal safeguard for data privacy in conjunction with leveraging strong encryption protocols for protecting the privacy and integrity of the digital assets achieves a level of privacy protection commensurate with long-standing protections for physical properties.

Bitmark allows creators to exert clear ownership claims to digital properties so that they can be fairly recognized and compensated for their efforts… Similarly, Bitmark extends real property rights to consumers by granting them full control over the disposition of their properties.

Towards a Healthy Digital Environment

The Internet’s earliest pioneers and homesteaders demonstrated little regard for something as prosaic and establishmentarian as property rights. To them, the early Internet held the promise of a vast, utopian frontier where humans could transcend the age-old restrictions of physical existence and come together in an unfettered society of the mind. For these early explorers, the Internet’s lack of property rights was not a bug, but a feature. Yet for all the romantic allure of frontiers, the Internet has turned out to be a pretty rough place, precisely because it lacks the rule of law that has developed to protect individual rights within modern societies. In frontiers, more often than not, might makes right, and one person’s new-found liberation is another’s negative externality.

The Internet has democratized communication to such a degree that today anyone with a networked device can instantly connect to hundreds of millions of people. A teenager with a smartphone and a Facebook account can become an Internet sensation overnight. But for most of its existence, the Internet has not possessed a similarly democratized means for valuing what happens in its spaces. E-commerce exists, of course, but primarily only as high-friction articulation points between the Internet and conventional financial systems. It is ironic that credit cards, whose security model hinges on absolute privacy of account numbers, have become the default payment method for the Internet. When limited to the physical point-of-sale payments for which credit cards were originally designed, their fraud risk was manageable. Credit card designers never anticipated that people would voluntarily give their credit card numbers to anonymous entities on the Internet. Retrofitting the ill-suited credit card system to underpin e-commerce has required a monumental centralization of technical and commercial infrastructure, which has largely come at the expense of increased fees for merchants and greater incursions on individual customer privacy than are necessary for the lion’s share of online transactions.

If one considers the level of decentralization and privacy afforded by simple physical cash, e-commerce gateways represent a large leap away from the decentralized spirit of the Internet rather than a step toward it. Only with the advent of Bitcoin in 2008 did the Internet have its own truly endogenous currency — a unit of exchange as decentralized as the Internet itself. Suddenly, anyone with a networked device could freely engage in the kinds of financial transactions that had previously been the exclusive domain of sovereign states and their monetary trustees. Suddenly, the frontier had a native means for anyone in the world to exchange money as safely and privately as one might exchange a text message or selfie.

Just as e-commerce sites offered an intermediate remedy to the problem of payments on the Internet, “digital rights management” (DRM) has served as a stopgap for the lack of an Internet-native property system. However, DRM concentrates too much power in the hands of a few centralized gatekeepers at the expense of individual property rights for everyone else. Although DRM platforms position themselves as altruistically doing the heavy lifting required to make the digital economy work, the reality is that DRM platforms only serve their own interests by further locking both creators and consumers into their platforms. While DRM offers the semblance of digital property rights, in actuality DRM functions more as an extralegal police force that — as cases like Amazon’s 1984 incident have made clear — is solely concerned with hamfisted enforcement of its own platform policies, even at the expense of trampling over long-established individual property rights.

Conversely, property rights offer an elegant solution that has already evolved to be decentralized in the same way that physical currency is already decentralized. Centuries of legal precedents have already balanced property rights to protect both creators and owners. What is needed, therefore, is not the engineering of a new kind of police force for the digital environment but rather an Internet-native property system that brings already established property rights to digital assets. What is needed is a system that allows anyone to safely and easily claim and transfer property rights in the digital environment as safely and easily as they can transfer physical properties.

Bitmark has built this property system for the digital environment. Particularly with the emergence of the Internet-of-Things, we are realizing that the Internet is not some idealized, disembodied, virtual realm that is discontinuous with our physical realities. Rather, the Internet is deeply embedded in our physical world and increasingly orders and controls its relations. This convergence between physical and digital environments makes establishing clarity around digital property rights all the more urgent.

The Internet can no longer be governed by a frontier code. The resultant negative externalities — from widespread privacy intrusions to rampant online piracy to entire asset classes mired in dead capital — are just too numerous and too acute to remain unaddressed. We have reached a tipping point at which we must pose the same question of the digital environment that we have previously asked of our physical environment: Are we creating the kind of world that we want future generations to inherit?

Bitmark both strengthens and expands the Internet’s essentially decentralized, open, and transparent ethos. The Bitmark blockchain supplants the byzantine jumble of archaic, expensive, and incompatible state-controlled property systems with a single cryptographically secure, extremely low-cost, and globally accessible system for tracking properties and provenance. By bringing both market forces and the rule of law to the digital environment, Bitmark allows creators to exert clear ownership claims to digital properties so that they can be fairly recognized and compensated for their efforts. Similarly, Bitmark extends real property rights to consumers by granting them full control over the disposition of their properties. As an all-inclusive property system that respects and accommodates jurisdictional differences, Bitmark broadens the types of commerce that can occur, thereby reducing the expediency of solutions that result in negative externalities. This ability to extend economic participation to every corner of the Internet creates value for the larger global economy by transforming the digital environment’s deepening morass of negative externalities into a new property boom capable of powering the next major economic revolution.

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By Bitmark Inc. on March 9, 2017.

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.

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.