THE BLOCKCHAIN, the technology that underlies bitcoin, has yet to live up to the hype surrounding it. Promising blockchain-based projects, such as a land registry in Honduras, have fallen short of expectations. Ersatz securities listings, called “initial coin offerings”, have attracted unfavourable attention from regulators.

Kevin Werbach is a legal scholar at the University of Pennsylvania’s Wharton School of Business and an expert on digital technologies. In the 1990s he was one of the leading thinkers, from his perch at America’s Federal Communications Commission, on how the internet would reshape regulatory policy. In his latest book, “The Blockchain and the New Architecture of Trust” (MIT Press, 2018), Mr Werbach explains how, far from being a radical technology that makes government obsolete, the blockchain relies on the social cohesion, political stability and rule of law that governments often provide.

The Economist’s Open Future initiative asked Mr Werbach to answer five questions, with replies of around 100 words apiece. His responses are below, and are followed by an excerpt from the book, on the idea of “law and quantum thought”.

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The Economist: There is so much hype over organisations using blockchain to “solve problems” where ordinary databases or non-blockchain systems would do, that it is hard to appreciate its real importance. In what sort of situations does blockchain technology best apply?

Kevin Werbach: Blockchains are trust machines, as The Economist recognised in a cover story over three years ago. They’re useful when trusted institutions and intermediaries are problematic, or to overcome a trust gap between transacting organizations. The issue isn’t whether a centralised database could be employed in theory; it’s whether one would be in practice. In contexts like supply-chain management, provenance and trade finance, companies lack a unified view of information because they don’t fully trust their business partners. Blockchain enables what I call “translucent collaboration”: sharing data without giving up control. Whether it’s an improvement over the status quo, however, is highly context-specific.

The Economist: You argue in the book that blockchain doesn't remove the need for law or governance but changes where it happens. Explain.

Mr Werbach: To be successful, blockchains must be trusted. They can produce immutable consensus over a transaction history. They can't guarantee you can trust who is transacting, what is transacted or who can change the rules. When someone exploited a hack to steal $60m from a blockchain-based crowdfunding system, or when $150m of cryptocurrency was locked irretrievably thanks to a programming bug, the blockchains themselves immutably executed the undesired transactions. Dealing with such inevitable problems is the domain of law, regulation and governance. These mechanisms must be called into play to help prevent conflicts, set boundaries and resolve disputes.

The Economist: What is needed, in terms of regulation, to enable blockchain technology to become widely adopted in mainstream areas?

Mr Werbach: Regulation and innovation are not necessarily opposed. Regulators can foster adoption of new technologies by removing barriers to competition, highlighting public-policy objectives and promoting consumer trust. Investors lost billions of dollars last year in initial coin offering (ICO) scams and thefts. A “Wild West” environment advantages only the bad actors. Regulators can start by going after the easy cases through aggressive enforcement. Then they should identify where existing rules may unintentionally restrain activities, as with the application of Europe’s General Data Protection Regulation to immutable decentralised ledgers, or financial regulations assuming clearing and settlement processes that blockchain replaces.

The Economist: Will bitcoin still exist in ten years?

Mr Werbach: Bitcoin is a cockroach. And I mean that as a compliment. It’s shown itself to be incredibly resilient over the past decade, through technical problems, developer personality conflicts, business disputes, price bubbles and price collapses. Resilience might be bitcoin's signal achievement; it certainly hasn’t become the widespread payment mechanism its early boosters envisioned. There will always be a community pursuing an uncensorable global digital currency, whether for illegal activity, creating “sound money," subverting authoritarian regimes or just making a quick buck. I expect bitcoin will represent a smaller share of cryptocurrency value in ten years, but it won’t be zero.

The Economist: Your book mentions the crisis of trust in institutions. Can blockchain overcome these human-specific, cultural forms of lack of trust? Or will that "trust gap" between people and power persist, even as blockchain use expands?

Mr Werbach: A blockchain by itself can’t redress structural power imbalances. It can even make them worse, by circumventing protective rules and intermediaries. And if you can’t trust those putting data into a blockchain, it doesn’t matter that no one can alter that data after the fact. In time, though, new institutions could arise that are built on blockchain trust. Some functions that required centralised power will shift to decentralised collaboration. As I stress in my book, blockchain is neither the end of, nor the solution to, trust. It’s a new form of trust that must develop and be evaluated on its own terms.

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Law and Quantum Thought

Excerpt from “The Blockchain and the New Architecture of Trust” (MIT Press, 2018), by Kevin Werbach

There is a factor that is often missing from business accounts of technological innovation: law. Law’s relationship to the blockchain is widely misunderstood by both its advocates and its critics. The blockchain is not a technology of radical lawlessness, any more than of radical trustlessness. Nor does it represent a full-blown alternative that will decisively shrink law’s application in the world. Whether and how blockchain-based systems will be regulated are important challenges to resolve, but even more important is the question of how blockchains regulate. These systems operate as mechanisms of law and governance, which will interact with established ones. There will be no universal answer. And in most cases, blockchain technology is likely to supplement or complement conventional legal regimes, not replace them.

“Quantum thought” is Nick Szabo’s term for simultaneously considering two mutually contradictory ideas, analogous to the odd finding in quantum mechanics that light exists simultaneously as a particle and a wave. Szabo is a computer scientist who conceptualized smart contracts, an important element of blockchain-related systems. He argues that this mental approach is important when operating at the edges of existing fields to create new concepts. Blockchain technology draws upon cryptography, computer science, economics, and political theory, among other bodies of knowledge. Those who fixate on one dimension, whether as advocate or critic, tend to miss out on other factors of critical importance.

Lawyers are also very familiar with arguments in the alternative: “Your Honor, my client was miles away from the scene of the crime. But if he was there, he did not fire the gun. And if he did fire the gun, it was in self-defense.” This much-mocked mode of reasoning is a valuable intellectual stance in the face of uncertainty. The judge or jury will resolve the outcome, but until that happens, the failure to fully evaluate any possibility is a mistake. Sometimes the unexpected happens. Sometimes it happens as a consequence of decisions based on other assumptions. Technologists inhabit the worlds of deterministic logic and computable probabilities, but lawyers are at home amid unpredictability, noncompliance, and even the possibility of catastrophe.

Law has much to contribute to the blockchain community. Concerns about money laundering, consumer protection, and financial stability do not disappear even when the cryptography works as promised. Taxation does not become unnecessary when there is a new mechanism for moving money secretly. Disputes do not go away because a computer can execute a transaction without human intervention. Bad actors will act badly. All these scenarios will give rise to calls for legal or regulatory action. Some will be justified. If the community flatly rejects every effort to ensure compliance with legal obligations, the blockchain will be an outlaw technology, active in the dark spaces online but largely irrelevant to the mainstream economy. That would be a tragic waste of potential.

At the same time, the blockchain offers important lessons for the legal community. Bitcoin demonstrates that a distributed network with no one in charge can govern itself well enough to avoid collapse and scale in value over an extended period. Trust, which previously required either the delegation of power or tight-knit relationships, can arise from a collection of independent actors running open-source software. The most important contribution that law can make here is not any particular set of rules, but the jurisprudential discipline of rule-making and rule enforcement, or what is often called “governance.” The communities building blockchain technologies and systems can in many ways govern themselves, but only if they take this challenge seriously. Regulators can also improve their effectiveness by leveraging the technology. Alternatively, ill-considered regulatory actions could push blockchain activity to other countries, send it underground, and stop valuable innovation in its tracks.

In fast-changing environments, there is a danger both of regulating too early and of regulating too late. The best approach is to use quantum thinking to assess the risks of each. Law and the blockchain are bound to engage in a shifting dance. This begs the question of what values should shape their relationship. Technology implemented in the world is never neutral. Transformative innovations can have various impacts based on their technical architectures, as well as the legal regimes under which they operate. Decisions made early on have an outsized impact. Once architectures and legal environments are put in place, they often become increasingly difficult to change.

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Excerpted from “The Blockchain and the New Architecture of Trust”. Copyright © 2018 by Kevin Werbach. Used with permission of MIT Press, Cambridge, MA. All rights reserved.