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Bitcoin’s Creation of Order without Law

Concept Of Bitcoin Like A Computer Processor On Motherboard

Modern fiat currencies depend for their value on confidence in the laws of the states that issue them. Some nations, like the United States with its established central bank, inspire substantial confidence relative to nations that may debase for their currency for political objectives. But no nation can absolutely insulate its currency from political manipulation.

That is what gives Bitcoin the opportunity to succeed as a currency. But what gives users confidence in Bitcoin? It is precisely the fact that the rules regulating its currency do not depend on the currency law of any nation state. Bitcoin provides an example of order without law or at least without currency law.

Order without law is not unknown to society. Social norms often regulate behavior without the benefit of formal law. Rules of etiquette tell people how to behave at table without causing offense. Coordination rules help people walk down the street without bumping into one another. In a major work, Robert Ellickson showed that social norms, not law, governed responsibility in a community of cattle ranchers and farmers for the damage caused by cattle straying on the range.

But while order without law is possible without software, software can improve on the enforcement of that order. The beauty of Bitcoin’s design is that its mechanism for enforcement can not only be more powerful than the informal mechanisms that enforce social norms but even more powerful in some respects than the formal mechanisms of law. A software algorithm is not subject to the problem of defection from non-legal enforcement mechanisms. But it is also not subject to the risk of corruption in legal mechanisms of enforcement.

To be sure, the software is dependent on the distributed structure of verifying the blockchain, but that is hard to corrupt, because the community in charge of the software has strong incentives to maintain the value of the currency. The genius of Bitcoin, more fully explained in our recent article, is that the the so-called “miners” who maintain the ledger showing every Bitcoin transaction are paid for their efforts in newly “minted” Bitcoin. Thus, they have stronger incentives to maintain the value of Bitcoin than government officials may have to maintain the value of their currency, particularly when debasing the value may please particular special interests.  Money has been well described as a social contract, but when the contract is political, that contract is something of a fiction. Or to put it another way, the agency costs of those charged with enforcing this kind of political contract are very high.

It is certainly true that rise of Bitcoin will not mean the end of all law. In our article, we show how the Bitcoin ecosystem, such as the Bitcoin wallets in which most users hold their Bitcoin, depends on traditional rules of property and contract. Nevertheless, Bitcoin is a jurisprudential as well as technological innovation, because it is a bid to inject a greater mixture of order without law into a fundamental aspect of our commercial life.

Reader Discussion

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on March 20, 2017 at 03:51:38 am

Its true as you say that "Bitcoin wallets in which most users hold their Bitcoin, depends on traditional rules of property and contract." But I wonder how long this and some of the other major Bitcoin based systems will continue to rely on more traditional legal systems rather than building smart contracts and other strongly enforced systems. We never had a kind of verifiable world wide legal system in software before like this (this handles most of the problems of a property system similar to register of land titles), it's possible that a far more complete legal ecosystem will develop overtime. Perhaps predetermined systems of selecting judges (or as it is a private system arbitrators) to settle disputes and ways for those judges to announce their opinions in verifiable ways. Perhaps even the work of these judges will be reduced over time as the system automatically and provably be enforced. I would expect this to happen for bitcoin wallets, market based systems of trading bitcoin for other currencies, and contracts for the sale of goods and services.

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Devin Watkins
on March 20, 2017 at 08:57:27 am

Prof McGinnis:

Do you take your pay in Bitcoin?

Devin:

Will these Judges follow the lead of our own Black Robes and decide to "change" the social norms that McGinnis claims leads to continued compliance.

Gee, I seem to have observed that the social norms governing who is male and female seem to have changed - and here we are only talking about money - something subject (one would assume) to a far greater potential for change than is biology!

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gabe
on March 20, 2017 at 09:12:31 am

To Repeat:

Law describes, defines, but does not necessarily delineate observed social order and the relationships within it.

ORDER GENERATES LAW. LAW DOES NOT GENERATE ORDER. It does not delineate relationships. Law results from the identification, delineation, reconciliation (including enforcement) of obligations commonly recognized and accepted within the social orders extant and as they change over periods of time. Those actions may occur within or without an institutional framework. Those social orders which develop an institutional framework may be regarded as having some form of Rule of Law.

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R Richard Schweitzer
on March 20, 2017 at 09:18:30 am

This should probably have gone with Professor McGinnis's previous disquisition on currencies and governments:

For currencies (in the functions of money) there may be something similar to the concept of comparative advantage in commodities (and some services); that is, comparative utility.

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R Richard Schweitzer
on March 20, 2017 at 15:09:24 pm

To put it more simply, the computer code becomes the law (in effect).

As a person who write computer code for a living I have to say I am almost giddy thinking of the possibilities for law in the future. After all, when the world is run by computers, we computer programmers will run the world. And I would add that we are generally a more rational lot than the folks who make legislation today.

Bitcoin derives its security from a computer code called a blockchain. A blockchain is a software doohicky that is used to control documents. As I understand it (I'm not an expert on the subject), it's kind of like a computer file system that stores documents and has which has strict controls over who has access to the documents and strict controls over who owns those documents. A bitcoin is just another document to a blockchain.

I was reading this morning about how IBM set up its own cloud-based blockchain as a service. You can sign up and be part of an Internet based blockchain with IBM employees monitoring the ledger (the distributed structure thingy Mcginnis referred to). You can have managed documents that are secured by a blockchain that is owned and operated by IBM.

https://techcrunch.com/2017/03/19/ibm-unveils-blockchain-as-a-service-based-on-open-source-hyperledger-fabric-technology/

Of course if IBM can set up its own blockchain so can government. And so can government outlaw non-government blockchains that are used for bitcoins which are used as tender, thereby taking control of the bitcoin ecosystem. I'm still not convinced of the virtue of bitcoin. I'll be taking my paychecks in US $ for the foreseeable future, thank you very much.

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Scott Amorian
on March 20, 2017 at 15:17:18 pm

Here is a better story that illustrates why I think the technology of blockchains is actually very interesting.

https://www.nytimes.com/2017/03/04/business/dealbook/blockchain-ibm-bitcoin.html?_r=0

Blockchain helps ensure that documents have not been modified by any owner of the documents. This creates a more reliable trust in the documents. And isn't that really what money is about? We trust that an item has its presented value whether it is a real estate contract or a greenback.

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Scott Amorian
on March 20, 2017 at 16:06:47 pm

One more thought before I have to get to my day job--taking over the world.

Secure bitcoin transactions can be made in secret fairly easily, which means that large taxable financial transactions can be made, hidden from the prying eyes of government. Banks and other intermediaries need not be involved, which not only helps break the limitations of social norms but also helps prevent the creation of witnesses who can give testimony to a tax-hungry government.

Consider the consequences of that.

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Scott Amorian
on June 11, 2017 at 16:12:28 pm

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John38

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