Bitcoin is passé. But if the buzz is to be believed, the “block chain” technology behind bitcoin is going to revolutionize your toaster, the banking system, and everything in between. Block chain boosters often proclaim that it will transform the annoyance of buying a car—especially the part at the end where you have to write down a large number on a special piece of paper and hand it to the seller, and both of you have to anxiously wait to make sure the “check” “clears” while hoping you don’t get ripped off.
Block chains, the story goes, will make payments instantaneous, effortless, and secure. In fact, backers say, these new technologies can go even further. The car itself could be built with a digital interface, so that the instant your payment went through, your key would start working and the seller’s key would stop working. That would keep you from driving off with the car before you paid and keep a shady seller from skipping town with your money.
Is this the future? We don’t think so. Here’s where being old school is a good thing.
To understand why, it helps to compare and contrast bitcoin to a more traditional payment system: a debit card. Instead of handing your auto mechanic a wad of cash for a new radiator, you can just swipe your ATM card. Your bank decreases the amount in your account by $500, and the mechanic’s bank increases its account by the same amount. Nothing physical changes hands.
Bitcoin is like that, except there are no banks. You, and the mechanic, and the thousands of other bitcoin users, all keep track of one another’s account balances on your own computers. The 1.09 bitcoins you’d pay your mechanic (at current exchange rates) is assembled into a “block” with a few hundred transactions from other users. Every 10 minutes, a new block is added to the “chain” of all transactions so far. Everyone who wants may keep a copy of the block chain and can easily check it to see who has how many bitcoins.
The system disposes of real names and identities, but it works because of its clever use of digital signatures. A bitcoin transfer won’t be accepted as valid unless it bears a sequence of bits that show it was generated using a secret digital key that only the sender would know. Because he or she doesn’t know your key, the auto mechanic can’t pretend to be you, or vice versa.
Block chain-based innovations generalize this idea, allowing secure anonymous transfers of stocks, cars, houses, or just about any other commodity.
If a company issued its shares on a block chain, it wouldn’t need to deal with stock exchanges. People anywhere in the world could trade shares for bitcoins with one another without needing brokers or stock exchanges, or even knowing each other’s identities. A car with a smart lock might refuse to unlock for anyone except its block chain owner. Your digital key would be your car key. If you wanted to sell the car, you’d just transfer it to the buyer on the block chain and her digital key would start working. Paper car titles are so last century, and who wouldn’t like to skip a trip to the DMV?
But boosters who talk about a world in which everything and everything is on the block chain aren’t taking seriously the real-world problems that the legal system currently solves when dealing with who owns what.
The legal system has dealt with issues of ownership for centuries. While some of its rules may look like quaint and inefficient historical relics, they are actually sensible adaptations to the messiness of real life.
Take those smart car locks. The obvious threat that any system of ownership must guard against is theft. Mere possession of a car isn’t the same as ownership; otherwise anyone who found your car keys would own what used to be your car. Instead, we have the whole cumbersome system of state databases, title certificates, and lines at the DMV. Block chain advocates point out, reasonably enough, that this system is slow and expensive. But to equate possession with ownership of a key—no matter how sophisticated—introduces a whole new set of uniquely human problems.
Consider losing your paper title certificate to a fire or an over-excited puppy. The DMV can reissue new title certificates when needed because it has a cumbersome apparatus for checking identities. Now imagine losing the thumb drive on which you store your block chain key. Congratulations, your car won’t start, and no one in the world can help you without rewiring its locks—which they won’t do because you can’t prove you own it.
Or if a hacker gets access to your computer and can read your digital key, he’s home free because he can transfer the car on the block chain to a key that he controls. If he does, your car keys will instantly stop working. Not only can he drive off with your car, but he owns it outright. After all, the block chain says he does. As far as anyone can tell, you sold your car, and you can’t do anything to prove otherwise. Bear in mind that the block chain has no real names or identities, so it doesn’t give you a way to trace the theft, much less prosecute the thief. Suddenly, anonymous transactions don’t sound quite so appealing.
Or consider what happens when you buy a car that turns out to have hidden defects. This is another area where the government steps in—the U.S. has lemon laws that protect consumers. But if you bought the car on the block chain, the state doesn’t recognize your ownership, and so it can’t protect you. Many bitcoiners believe the market can solve the problem with private dispute resolution. But an arbitrator who can give you back your car is also an arbitrator who can take your car away from you. He’s an intermediary of precisely the sort the block chain was supposed to eliminate. The reason we needed lemon laws in the first place is that the market didn’t solve the problem by itself.
There is a trade-off in any system of property law. You can have hard rules: simple, cheap, and clear-cut. Or you can have soft rules: flexible case-by-case responses to unanticipated messes. Property law has been somewhere in the middle: Commerce needs clarity, but life is full of surprises. Block chains are the hardest property technology ever made. They’re impervious to dumb mistakes, like DMV clerks mistyping a vehicle identification number or losing your papers behind the radiator. But they’re so hard they’re brittle.
Consider your debit card again. If someone steals it and goes on a shopping spree, your liability is capped at $50 as long as you report the theft promptly. This makes debit cards messy for banks and merchants. A transaction isn’t a sure thing; it might have to be reversed if the cardholder says “It wasn’t me.” Some cardholders say it wasn’t them even when it was. But this liability limit is also what makes debit cards work. If someone could drain your bank account just by taking your card and there was nothing you could do about it, the only safe way to use your card would be to cut it up.
Block chains have many interesting and valuable applications. They might become useful for international transactions, especially in the developing world, where existing financial infrastructure is often weak. They could serve as back-end financial infrastructure for banks to carry out settlements or financial record keeping. They could provide a foundation for user-facing intermediaries that add better consumer protections and play nice with the legal system. And they are opening up promising new frontiers in computer science research. But they’re not about to make property law go away.
Bitcoin and the block chain were built by brilliant programmers. But the legal system knows a lot about something equally important: human nature.
This article is part of Future Tense, a collaboration among Arizona State University, New America, and Slate. Future Tense explores the ways emerging technologies affect society, policy, and culture. To read more, follow us on Twitter and sign up for our weekly newsletter.