Articles by Jerry Brito

Jerry is a senior research fellow at the Mercatus Center at George Mason University, and director of its Technology Policy Program. He also serves as adjunct professor of law at GMU. His web site is jerrybrito.com.


Paul Heald on the public domain

by on April 23, 2013 · 0 comments

Paul J. Heald, professor of law at the University of Illinois Urbana-Champaign, discusses his new paper “Do Bad Things Happen When Works Enter the Public Domain? Empirical Tests of Copyright Term Extension.”

The international debate over copyright term extension for existing works turns on the validity of three empirical assertions about what happens to works when they fall into the public domain. Heald discusses a study he carried out with Christopher Buccafusco that found that all three assertions are suspect. In the study, they show that audio books made from public domain bestsellers are significantly more available than those made from copyrighted bestsellers. They also demonstrate that recordings of public domain and copyrighted books are of equal quality.

Since copyrighted works will once again begin to fall into the public domain starting in 2018, Heald says, it’s likely that content owners will ask Congress for yet another term extension. He argues that his empirical findings suggest it should not be granted.

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Silk Road proprietor: Bitcoin’s volatility doesn’t really matter

by on April 18, 2013 · 0 comments

2013-03-07_0113-4A couple of weeks ago I wrote that bitcoin’s valuation doesn’t really matter for the currency to effectively function as a medium of exchange. Now comes word from none other than the proprietor of the notorious Silk Road encrypted black market that indeed the recent wild volatility has not affected the transactions on his site. As Andy Greenberg reports:

In a rare (and brief) public statement sent to me, the Dread Pirate Roberts (DPR) said that despite Silk Road’s reliance on Bitcoin, commerce on the site hasn’t been seriously hurt by Bitcoin’s wild rise and fall. “Bitcoin’s foundation, its algorithms and network, don’t change with the exchange rate,” the pseudonymous site administrator writes. “It is just as important to the functioning of Silk Road at $1 as it is at $1,000. A rapidly changing price does have some effect, but it’s not as big as you might think.”

Silk Road’s customers, after all, aren’t generally interested in Bitcoin’s worth as an investment vehicle, so much as in how it makes it possible to privately buy heroin, cocaine, pills or marijuana. They use Bitcoin because it’s not issued or stored by banks and doesn’t require any online registrations, and thus offers a certain amount of anonymity. …

Silk Road has built-in protections against Bitcoin’s spikes and crashes. Although purchases on Silk Road can only be made with Bitcoin, sellers on the site have the option to peg their prices to the dollar, automatically adjusting them based on Bitcoin’s current exchange rate as defined by the central Bitcoin exchange Mt. Gox. To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive their orders via mail, and vendors are given the choice to turn on a setting that pegs the escrow’s value to the dollar, with Silk Road itself covering any losses or taking any gains from Bitcoin’s swings in value that occur while the drugs are in transit. So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value.

What this shows is that Silk Road is separating the “unit of account” function of money from the “medium of exchange” function. Prices are denominated in dollars (as a unit of account) but payments are made in bitcoin (as a medium of exchange). Hedging is used to smooth out volatility.

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Marc Hochstein on bitcoin

by on April 16, 2013 · 0 comments

Marc Hochstein, Executive Editor of American Banker,  a leading media outlet covering the banking and financial services community, discusses bitcoin.

According to Hochstein, bitcoin has made its name as a digital currency, but the truly revolutionary aspect of the technology is its dual function as a payment system competing against companies like PayPal and Western Union. While bitcoin has been in the news for its soaring exchange rate lately, Hochstein says the actual price of bitcoin is really only relevant for speculators in the short-term; in the long-term, however, the anonymous, decentralized nature of bitcoin has far-reaching implications.

Hochstein goes on to talk about  the new market in bitcoin futures and some of bitcoin’s weaknesses—including the volatility of the bitcoin market.

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Begun the next crypto wars have

by on April 10, 2013 · 0 comments

34890833The mid-to-late 90s saw the crypto wars, probably the Internet’s first major victory against government attempts to control information online. At stake was the public’s right to use strong encryption, which facilitates commerce and allows individuals to maintains their personal privacy, but which government feared would allow “drug lords, spies, terrorists and even violent gangs to communicate about their crimes and their conspiracies with impunity,” as FBI Director Louis Freeh told the Senate Judiciary Committee in 1997. In the end, popular opinion overwhelmed government efforts to include back doors in publicly available encryption, which might as well have been no encryption at all.

Leading the charge in the crypto wars were the cypherpunks, many of whom were radical libertarians who predicted that privacy and anonymity powered by strong encryption would fundamentally shift the balance of power between individuals and the state. For example, in this paper (also from 1997) Tim May, one of the cypherpunk’s founders, describes the some of the social implications of “untraceable digital cash”:

Some of these “marginal” uses are terrible to consider. Extortion, kidnapping, and even murder contracts become easier to set up. Extortion, for example, becomes almost unstoppable at the usual place: the collection of a payoff and/or the spending of the payoff money. The extortionist makes his threat from the safety of his home PC, using networks of remailers and message pools, and demands payment in untraceable digital cash… .

Similar to extortion are markets for kidnappings (riskier, due to the physical act), and even untraceable markets for murders. For murder contracts, the usual risk is in setting up the hit—asking around is almost a guaranteed way of getting the FBI involved, and advertising in traceable ways is a similar invitation. This risk is largely removed when anonymous contact and payment methods are used. To ensure the job is completed, third party escrow services—anonymous, of course, but with an established cyberspatial reputation—hold the digital cash until completion.

The thing is, untraceable digital cash has not been a reality until now. Over at Reason, I write that while much of the discussion about Bitcoin is focused on whether the virtual currency has all the attributes of money and whether it can ever be a viable alternative to state-backed fiat currency, its real revolutionary potential is as untraceable digital cash.

Time will tell whether the gold bugs or the skeptics are right, but what’s being overlooked is that it doesn’t matter whether Bitcoin makes it as a store of value or a unit of account for it to work as a medium of exchange. Even if the Bitcoin market remains volatile and never pans out as a good store of value or unit of account, one can imagine users converting their dollars or euros to bitcoins for just long enough to make a transaction; perhaps just minutes. And as long as it works as a medium of exchange, it is the true digital cash that was missing from the cypherpunks’ predictions.

With a little bit of effort, today you can purchase bitcoins anonymously with physical cash. You could then do all sorts of things the government doesn’t want you to do. You could buy illegal drugs on the notorious Silk Road, an encrypted website that has been operating with impunity for the past two years facilitating annual sales estimated at almost $15 million. You could gamble at various casinos or prediction markets, buy contraband Cuban cigars, or even give money to WikiLeaks. Dissidents in Iran or China can use Bitcoin to buy premium blogging services from WordPress, which now accepts payment in the currency. Perhaps more importantly, Bitcoin makes the cypherpunks predictions of markets for stolen secret information and even assassinations feasible.

I predict that we will soon see another round of the crypto wars. Now that Bitcoin has broken through to at least some public notice, I suspect we will see greater use of the currency and with it greater illicit use. I also suspect we will see the intelligence community, law enforcement, and child safety advocates take greater notice of Bitcoin as an anonymous payment processor. (Indeed, you can glean from this speech by the director of the Financial Crimes Enforcement Network that they see decentralized virtual currencies like Bitcoin as “emerging payment systems.”) And I suspect that traditional payment processors who might be in competition with Bitcoin to take notice as well. If these stars align, I imagine we will see public calls to “do something” about Bitcoin.

Although Bitcoin’s decentralized nature makes it difficult to regulate, its ecosystem (and even the network itself) is not impervious to attack. Those of us who see the benefits, and not just the costs of digital cash should begin preparing for this likely confrontation.

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Andy Greenberg on WikiLeaks and cypherpunks

by on April 9, 2013 · 0 comments

Andy Greenberg, technology writer for Forbes and author of the new book “This Machine Kills Secrets: How WikiLeakers, Cypherpunks, and Hacktivists Aim to Free the World’s Information,” discusses the rise of the cypherpunk movement, how it led to WikiLeaks, and what the future looks like for cryptography.

Greenberg describes cypherpunks as radical techie libertarians who dreamt about using encryption to shift the balance of power from the government to individuals. He shares the rich history of the movement, contrasting one of t the movement’s founders—hardcore libertarian Tim May—with the movement’s hero—Phil Zimmerman, an applied cryptographer and developer of PGP (the first tool that allowed regular people to encrypt), a non-libertarian who was weary of cypherpunks, despite advocating crypto as a tool for combating the power of government.

According to Greenberg, the cypherpunk movement did not fade away, but rather grew into a larger hacker movement, citing the Tor network, bitcoin, and WikiLeaks as example’s of its continuing influence. Julian Assange, founder of WikiLeaks, belonged to a listserv followed by early cypherpunks, though he was not very active at the time, he says.

Greenberg is excited for the future of information leaks, suggesting that the more decentralized process becomes, the faster cryptography will evolve.

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Why bitcoin’s valuation doesn’t really matter

by on April 5, 2013 · 632 comments

Bitcoin on front page of the Financial TimesOver the past few days, interest in bitcoin has exploded as its valuation has reached stratospheric levels. Most of the media attention has been focused on that valuation and on bitcoin’s viability as money. For example, the Financial Times had the run-up in bitcoin’s price on its front page yesterday, emphasizing its volatility and its commodity-like qualities. It quoted one analyst saying, “It’s gold for computer nerds.” For many folks, this is how they will be introduced to bitcoin, and it’s a shame because it misses what’s really interesting about the crypto-currency.

It’s no secret that bitcoin excites libertarians above all others. What’s less understood is that there are two distinct reasons driving this enthusiasm. The first is that bitcoin is not issued by any authority, so there’s no central banker to monkey the money supply. This attracts what we can affectionately call the “gold bugs” or “audit the Fed” types. They are interested in bitcoin as a new, more moral form of money. And bitcoin as money is what’s been getting all the attention given it’s rising valuation.

But there is a second reason libertarians should be excited about bitcoin, and it’s the reason I am an enthusiast: bitcoin as a payments system. As the world’s first completely decentralized digital currency, there is not only no central banker, there is no intermediary of any kind needed for two parties to make a transaction. Today we rely on third parties to transact online, and when government wants to restrict how we can spend money online, it’s these intermediaries they turn to. PayPal, Visa, MasterCard and other traditional payment processors don’t let you transmit money to WikiLeaks, or to UK gambling sites, or to people in Iran, or to buy illegal goods and services on anonymous black markets. Bitcoin disrupts the ability of governments and intermediaries to control your transactions, and because there is no bitcoin company or bitcoin building anywhere, it can’t be shut down.

Tim Lee gets this when he writes that bitcoin is no competition for the dollar as a currency,

Rather, the future demand for Bitcoins will largely come from applications where conventional currencies don’t perform that well. Bitcoins have some unique properties that no other financial instrument has. They combine the irreversibility of cash transactions with the convenience of electronic transactions. And, the lack of middlemen and regulations greatly reduces the barrier to entry. You don’t need to get permission from big banks or financial regulators to create a Bitcoin-based financial service. All of this means it makes sense to think of Bitcoin less as an alternative currency than as a new platform for financial innovation.

One objection to this view comes from Felix Salmon in a very thoughtful and nuanced essay. He recognizes that bitcoin is “in many ways the best and cleanest payments mechanism the world has ever seen,” but he laments that it is “an uncomfortable combination of commodity and currency.” He goes on to ask rhetorically, “If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next?”

The answer is that bitcoin doesn’t need to be a good unit of account or a good store of value to be a good medium of exchange. Indeed, the prices of products and services being sold for bitcoin online today are denominated in dollars and are converted at the market rate for bitcoin when the transaction happens. This is how WordPress, one of the most prominent companies accepting bitcoin, does it. In fact, WordPress never even handles bitcoin. They employ the services of a very interesting company called Bitpay that manages bitcoin payment processing for them.

When you check out at WordPress using bitcoin, Bitpay quotes you the total of your dollar-denominated shopping cart in bitcoin at the current exchange rate, takes your bitcoin payment, and then deposits dollars in WordPress’s account. This allows WordPress to sell to persons in Iran or Haiti or anyone of the dozens of other countries where PayPal, Visa and MasterCard are not available. It also highlights bitcoin’s true disruptive quality as a payments system—one that is unstoppable, largely anonymous, and incredibly cheap to boot.

To answer Salmon more directly: It doesn’t matter what the price of bitcoin is for it to operate as the amazing payments system that it is. It doesn’t matter if it is very volatile. Dollars go in and dollars come out and the fact that some folks are (probably unwisely) treating it as a store of value doesn’t really matter.

That all said, there are some caveats to point out. Bitcoin will work as a seamless payment system so long as you can get in and out of it quick enough to mitigate volatility. That is largely a technical consideration, but it could also depend on the market’s liquidity, which conceivably could be hurt by speculative hoarding. I haven’t given this much thought yet, but given that bitcoin can be denominated down to eight decimal places, I’m not sure it will be a big problem anytime soon.

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Joshua Gans on the economics of information

by on April 2, 2013 · 0 comments

Joshua Gans, professor of Strategic Management at the University of Toronto’s Rotman School of Management and author of the new book Information Wants to be Shared, discusses modern media economics, including how books, movies, music, and news will be supported in the future.

Gans argues that sharing enhances most information’s value. He also explains that the business models of traditional media companies, gatekeepers who have relied on scarcity and control, have collapsed in the face of new technologies. Equally important, he argues that sharing can revive moribund, threatened industries even as he examines platforms that have, almost accidentally, thrived in this new environment.

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Sean Flaim on the private enforcement of copyrights

by on March 26, 2013 · 2 comments

Sean Flaim, an attorney focusing on antitrust, intellectual property, cyberlaw, and privacy, discusses his new paper “Copyright Conspiracy: How the New Copyright Alert System May Violate the Sherman Act,” recently published in the New York University Journal of Intellectual Property and Entertainment Law.

Flaim describes content owners early attempts to enforce copyright through lawsuit as a “public relations nightmare” that humanized piracy and created outrage over large fines imposed on casual downloaders. According to Flaim, the Copyright Alert System is a more nuanced approach by the content industry to crack down on copyright infringement online, which arose in response to a government failure to update copyright law to reflect the nature of modern information exchange.

Flaim explains the six stages of the Copyright Alert System in action, noting his own suspicions about the program’s states intent as a education tool for repeat violators of copyright law online. In addition to antitrust concerns, Flaim worries that appropriate cost-benefit analysis has not been applied to this private regulation system, and, ultimately, that private companies are being granted a government-like power to punish individuals for breaking the law.

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Susan Brenner on cybersecurity and bureaucracy

by on March 19, 2013 · 0 comments

Susan W. Brenner, associate dean and professor of law at the University of Dayton School of Law,  discusses her new paper published in the Minnesota Journal of Law, Science & Technology entitled “Cyber-threats and the Limits of Bureaucratic Control.”

Brenner argues that the approach the United States, like other countries, uses to control threats in real-space is ill-suited for controlling cyberthreats. She explains that because this approach evolved to deal with threat activity in a physical environment, it is predicated on a bureaucratic organizations. This is not an effective way of approaching cyber-threat control, she argues. 

Brenner also explains why congressional efforts at cybersecurity legislation are flawed and why U.S. authorities persist in pursuing antiquated strategies that cannot provide an effective cyberthreats defense system. She outlines an alternative approach to the task of protecting the country from cyberthreats, and approach that is predicated on older, more fluid threat control strategies.

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So far, cellphone unlocking bills do little to nothing to fix the real problem of anti-circumvention restrictions

by on March 12, 2013 · 4 comments

Since we last visited the cellphone unlocking question, three bills have been introduced in Congress that address the issue. My sources tell me that forthcoming shortly here on the TLF will be a Ryan Radia patented Radianalysis™ of the bills. While that’s still cooking, though, I wanted to give you my quick impressions.

The bills range from “meh” to crafty.

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