– March 8, 2017

But a closer look reveals a far more complex reality. Like our discussion of the impact of blockchains on the financial sector, the technology has the potential to either upend or further entrench existing ways of governing. It is not likely to do one or the other, but a combination of both is possible as the technology goes through still unforeseen stages of evolution. This article looks at how blockchain technology interacts with two core civil liberties, privacy and property ownership, as well as how it may change some of the basic functions of government, such as currency and taxation.

How private is the blockchain?
Privacy is one of the major factors restraining government control over our lives. While the desirability of privacy is debatable in criminal contexts, for example, most people regard it as an important right. One common misconception about transactions on blockchains is that they are entirely private or anonymous. This notion stems largely from the association of bitcoin, which uses a blockchain ledger, with black market online transactions from websites like the now-defunct Silk Road, best known for its drug trafficking. However, those transactions often also use anonymous web browsers and are potentially traceable. The Bitcoin.org website is very clear about the currency’s lack of privacy, and is worth quoting at length:

“Bitcoin works with an unprecedented level of transparency that most people are not used to dealing with. All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. These addresses are created privately by each user’s wallets. However, once addresses are used, they become tainted by the history of all transactions they are involved with. Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous. As the block chain is permanent, it’s important to note that something not traceable currently may become trivial to trace in the future.”

While blockchain transactions are not entirely private, they are in certain ways more private than the status quo. When you buy something online today, you usually send your data through a maze of banks and credit card companies. With a blockchain, the record of the transaction would exist for all to see. Someone making a concerted effort could view your data, but no central clearinghouse would own the data simply by means of its existence.

Once data has been written into a blockchain, it cannot be altered. Imagine, for example, having a permanent unalterable digital record of a document such as your birth certificate. The permanence of data in a blockchain, however, is a double-edged sword. Such permanence also makes it impossible to have a fresh start. If a government used a blockchain to record criminal histories, the data might be very safe, but it would be impossible to fully expunge anything from the record. More generally, the decentralized and encrypted aspects of the technology might make surveillance costlier, but like the data issues discussed above, they might make surveillance even easier for a government that chose to make a concerted effort.

One final positive aspect of the permanence of data on a blockchain is the flipside of government surveillance: government transparency. For the same reasons that citizens’ data could not be expunged, blockchains could provide unalterable records of our government’s communications and transactions. The 2016 election controversy over Hillary Clinton’s deleted State Department emails is just one example of an issue that could be avoided with blockchain technology.

Ownership of property and information
Because blockchains allow the storage and transmission of digital representations of assets rather than simply copies of data, a good deal of work has already been done on blockchain-enabled property registries. In Honduras, a pilot project was tested in late 2016 for what is slated to become a nationwide land registry using blockchain technology. The Property Rights Alliance wrote that “a reliable, secure asset base would increase lender confidence, lowering the cost of borrowing, and opening economic growth opportunities for Hondurans. An immutable register would lower the number of property disputes moving forward, providing respite to a region’s judicial system to work through the backlog of disputes.” As previously discussed, a blockchain-enabled land registry could also discourage government seizure of assets and ensure they are returned to rightful owners.

The development of such applications currently focuses on the world’s poorer countries, where the protection of property rights is particularly problematic. But one property right that lags behind others in the developed world is the right to own one’s data and information. Data about our demographics, views, and shopping behavior are a valuable asset, as many businesses that have grown out of the internet show. Currently, when we shop with an online retailer, use a search engine, or even click links in a browser, we implicitly exchange our data along with any monetary cost for the service. What if such data became a trade asset that we had the right to own? Blockchain technology could enable this in two ways. First, as discussed above, the decentralized peer-to-peer nature of the technology means that centralized entities are not automatically collecting data. Second, efforts by computer scientists are underway to add to the technology, allowing individuals to grant permission to see data and enabling individual ownership.

More efficient government, or just more government?
Because blockchain technology is so decentralized and potentially empowering to the individual, governments and big banks will likely use it for their purposes as well. This process could lead to gains for everyone in terms of efficiency or transparency, but it could also entrench undesirable aspects of a status quo that such a technology could otherwise overturn.

One example of this fork in the road is currency. Many of bitcoin’s earliest adopters like that it is not controlled and cannot be inflated by any government. Such evangelists would likely be horrified to read a 2015 Deloitte white paper that asks, “What would happen if we combined the best attributes of the technology of cryptocurrencies with the features of an established fiat currency under the sponsorship of a central bank?  The result very well may just be a new method of handling payments that would revolutionize the current system.” The report obviously does not consider the lack of inflation to be among the “best attributes” of bitcoin, as it notes that “the central bank could expand or contract the money supply just as it does today through open market operations.” No central bank has done more than exploratory research on the topic yet, but such a currency, relative to what exists today, could benefit economies in terms of speed and efficiency. But it would also further entrench a system that most of bitcoin’s biggest proponents believe should be overturned.

Taxation could also be affected by blockchain technology. A 2016 report (pre-Brexit) by the United Kingdom’s Government Office for Science recommends a European Union-wide value-added tax using a blockchain. It states that such a system could increase tax compliance, reduce companies’ administrative burden, and allow for taxation of corporate transactions in “real time.” This last point is an example of the great uncertainty that arises from such plans. Corporate taxation in real time could complicate and slow down the system if governments tried to apply Byzantine rules to transactions as they happen. But it could also reduce risk and uncertainty through the year, or even encourage simpler taxation rules to enable the smooth operation of taxation in real time.

Remaining vigilant
Blockchain technology will not enhance civil liberties or reduce government inefficiency simply because it is adopted. If properly managed, though, it could accomplish those goals. Privacy, property, and functions like currency and taxation are only some of the aspects of governance that the blockchain could change, but governments would be adopting the technology along with citizens. It is important for those who see blockchain as a means to increase individual freedom to also remain vigilant and keep abreast of new developments in the technology.

Max Gulker

Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015 and left in 2020. His research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.

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