Some Economic Consequences of the GDPR

With Darcy Allen, Alastair Berg, and Jason Potts

Abstract: The EU General Data Protection Regulation (GDPR) is a wide ranging personal data protection regime of far greater magnitude than any similar regulation previously in the EU, or elsewhere. In this paper, we explore the ways in which regulation changes the value of data and examine the potential impact of the GDPR on data markets. We suggest that the GDPR may result in unintended consequences analogous to previous government interventions into capital markets and financial services. Novel financial products of unknown complexity and systemic risk – and secondary data derivative markets – may emerge as a result, which suggests that market driven technological solutions, such as those using blockchain or distributed ledger technology, should be further examined.

Working paper available at SSRN.

Beyond Money: Cryptocurrencies, Machine-Mediated Transactions and High Frequency Bartering

With Sinclair Davidson and Jason Potts.

Abstract: As blockchain technology is adopted into modern economies, the underlying institutional protocols will evolve. In this paper we set out the reasoning behind how this will likely take us to an economy beyond both money and money prices. Money facilitates human-human exchange in the presence of cognitive limitations. However in the near future personal artificially intelligent machine agents will be able to conduct exchanges with a matrix of liquid digital assets (such as cryptocurrencies). We call this process high frequency bartering. The existence of markets without money present complex public policy challenges around privacy and taxation.

Working paper available on SSRN

Ledgers

With Sinclair Davidson and Jason Potts

Abstract: This paper develops the ledger-centric view of the economy. Ledgers provide an underlying infrastructure for exchange by allowing actors to prove, validate, and verify property ownership. In this sense ledgers map economic, political and social relationships. This paper provides some theoretical distinctions to frame the analysis of the economics of ledgers. First we offer a philosophical and institutional definition of ledgers. Second we provide three analytic categories of ledgers (general, actual, and perfect). Third we offer a ledger theory of the firm as a map of relationship between labour, capital, production processes, and information, and emphasise the economic significance of ledgerisation in the history of entrepreneurial firm creation. Fourth we draw some implications of our theory for the development of complex economies. This paper is based on the theory of institutional cryptoeconomics which was developed to understand the economic implications of distributed ledger technologies.

Working paper available on SSRN

A Genuine Commercial Justification for Interchange Fees

With Sinclair Davidson and Jason Potts

Abstract: Ronald Coase famously argued that “if an economist finds something – a business practice of one sort or other – that he does not understand, he looks for a monopoly explanation”. So it is with credit card interchange fees. Intellectual confusion has led to the phenomenon of interchange fees being misdiagnosed as being a monopoly problem leading to inappropriate policy intervention. Following George Stigler’s path breaking analysis of the US Security and Exchange Commission he claimed that financial regulation was “founded upon prejudice and … reforms are directed by wishfulness”. In our opinion, Australian regulatory attitudes towards interchange fees should be placed into the same category: reforms initiated by ignorance and anti-bank prejudice.

Working paper available on SSRN

Some public economics of blockchain technology

With Sinclair Davidson and Jason Potts

Abstract: Distributed ledger technology emerged in 2009 as the protocol behind bitcoin, a cryptocurrency with origins in the ‘cypherpunk’ community who sought to use cryptography to secede from government control of money. Bitcoin’s pseudonymous inventor, Satoshi Nakamoto said Bitcoin would be “very attractive to the libertarian viewpoint” and many in the crypto-anarchist community saw, and still see, cryptocurrencies as a means to free citizens from the monetary depredations of governments. But from these revolutionary secessionist origins, it has become apparent that not only are there many possible use cases of distributed ledger technology for government, but that government action through both regulation, legislation, and public investment might be a key factor in the adoption and development of this technological innovation. Governments can use blockchain technology to exploit the service efficiencies they may bring. But also, and perhaps counter-intuitively given their revolutionary origins, blockchain applications are likely to need government cooperation to facilitate adoption and the development of the blockchain economic system.

Working paper available at SSRN.

Exit, Voice, and Forking

With Alastair Berg

Abstract: This paper offers a new framework to understand institutional change in human societies. An ‘institutional fork’ occurs when a society splits into two divergent paths with shared histories. The idea of forking comes from the open-source software community where developers are free to copy of a piece of software, alter it, and release a new version of that software. The parallel between institutional choice and software forking is made clear by the function and politics of forking in blockchain implementations. Blockchains are institutional technologies for the creation of digital economies. When blockchains fork they create two divergent communities with shared transaction ledgers (histories). The paper examines two instances of institutional forks. Australia can be seen as a successful fork of the United Kingdom. The New Australia settlement in Paraguay can be seen as an unsuccessful fork of Australia.

Working paper at SSRN

Blockchains Industrialise Trust

With Sinclair Davidson and Jason Potts

Abstract: Blockchains are the distributed, decentralised ledger technology underlying Bitcoin and other cryptocurrencies. We apply Oliver Williamson’s transactions cost analysis to the blockchain consensus mechanism. Blockchains reduce the costs of opportunism but are not “trustless”. We show that blockchains are trust machines. Blockchains are platforms for three-sided bargaining that convert energy-intensive computation into economically-valuable trust.

Working paper available at SSRN.

The Institutional Economics of Identity

With Sinclair Davidson and Jason Potts

Abstract: Identification forms a key part of all but the least sophisticated economic and political transactions. More complex or significant transactions demand more formal identification of the parties involved. In this paper we develop an institutional economics of identity. We distinguish between a Demsetzian evolutionary view of identity institutions and a ‘legal-centric’ view of identity institutions. In the former view, identity is a contextual, fluid and subjective, and evolved for market, social and political exchange. In the latter, identity is uniform and permanent, and created (imposed) by governments. Governments have an interest in identity insofar as identity is used in the process of tax collection, entitlements, and conscription. Private organisations free ride off state-provided identification services. The paper concludes with a discussion about technological change and identity management. We characterise two possible futures: one in which new technologies enable states to create more comprehensive uniform identities, and one in which new technologies enable identities to be ‘federated’ and transferred to citizens.

Working paper available at SSRN.

Populism and Democracy: A Transaction Cost Diagnosis and a Cryptodemocracy Treatment

Abstract: This paper argues that populism in the era of Donald Trump and Brexit is a reaction to high transaction costs between citizens and the political class. In the Westminster system, voters delegate large amounts of decision-making power to elected representatives, who in turn delegate much of their decision-making power to an executive government. A transaction cost analysis helps make concrete the ideas of reduced individual political autonomy, lost national sovereignty, and alienation from political elites that run through populist rhetoric and action. The treatment for problem of populism should focus on reducing those transaction costs. Democratic structures are shaped by the prevailing institutional and technological limitations in which they were designed. One new technology, the blockchain, offers a set of mechanisms to significantly reduce transaction costs in matching, writing and enforcing contracts. The paper provides an outline of how a ‘crypto-democracy’ would function and how it might address the problems of political transaction costs. Crypto-democratic relationships treat political delegation as a series of contractual relationships from citizen to an executive decision-making structure. Citizens contract among themselves to delegate or reserve decision-making power. In a crypto-democracy, democratic structures – i.e. legislatures, electoral bodies, voting systems, and executive authorities – are not designed but rather emerge in a Hayekian process of contractual interactions between political citizens exercising their property rights. The analysis sheds new light on the underlying structure of our current system, its costs and the populist backlash to those costs, and directions for liberal reform.

Working paper available at SSRN.

Delegation and Unbundling in a Crypto-Democracy

Abstract: Representative democracy consists of a chain of delegation from voters to the executive and a corresponding chain of accountability, with some questions (particularly constitutional questions) reserved for popular vote. This structure reflects the high transaction costs of coordinating preferences among a large and diverse population, which has in part been determined by technological limitations. A new technology, blockchain, significantly reduces transaction costs. This technology turns out to have significant implications for democratic governance. In a crypto-democracy, voters have contractual relationships that allow them to unbundle, delegate, re-rebundle and reserve their voting power. Rather than planning our democratic structure and thus restricting opportunities for political exchange, the use of blockchain in a crypto-democracy allows us to ‘grow’ a democracy in a Hayekian framework.

Working paper available at SSRN.