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Another NFT Explainer

by on March 29, 2021 · 0 comments

I don’t understand the hype surrounding Non-Fungible Tokens (NFTs). As someone who has studied copyright and technology issues for years, maybe because it doesn’t seem very new to me. It’s just a remixing of some ideas and technologies that have been around for decades. Let me explain.

For at least 100 years, “ownership” of real property has been thought of as a “bundle of rights.” As a simple example, you may “own” the land your house sits on, but the city probably has a right to build and maintain a sidewalk across your yard and the general public has a right to walk across your property on that sidewalk. The gas company has the right to walk into your side yard to read your gas meter. Pilots have a right to fly over your house. Some other company or companies may have rights to any water and minerals in the ground below your house. Your homeowners association may even have a right to dictate what color you paint the exterior of your house.

This same “bundle of rights” concept also applies to copyright. Unless explicitly granted by contract, buying an original painting doesn’t mean you have the right to take a photograph of the painting and sell prints of the photograph. If you buy a DVD, you have the right to watch the DVD privately and you have the right to sell the DVD when you’re no longer interested in it. (That second right is called the “first sale doctrine” and there have been numerous Supreme Court cases and laws defining it’s exact boundaries.) But unless explicitly granted by contract, purchasing a DVD doesn’t mean you have the right to set up a projector and big screen and charge members of the public to watch it. That requires a “public performance” right.

When you buy most NFTs, you get very few of the rights that typically come with ownership. You might only get the right to privately exhibit the underlying work. And if you decide to later resell the NFT, the contract (which is embedded in digital code of the NFT) may stipulate that the original artist gets a 10% royalty on every future sale of the work.

The second thing you need to understand is the concept of “artificial scarcity.” As a simple example, in the art world, it’s common for photographers and painters to sell numbered, “limited edition” prints of their works. There’s no technological reason why they couldn’t print 1,000 copies of their work, or even register the print with a “print on demand” service that will continue making and selling prints as long as there are people who want to buy them. But limiting the number of prints made (even if each print is identical to any other print), is likely to raise the price. This is artificial scarcity. Most NFTs are an edition of one. Even if there are other exact copies of the underlying artwork sold as NFTs, each NFT is unique. This is like an artist selling numbered prints but not putting a limit on how many numbered prints they make. Each numbered print is technically unique because each has a different number. But without some artificial scarcity, the value of any one print may stay very low.

So if buying a NFT doesn’t get you any real rights and the scarcity is purely artificial, why are NFTs selling for hundreds of thousands of dollars? Here’s where all the technology really makes a difference. If you spend millions on a Picasso painting, you’re taking a lot of risks. First, you’re taking the risk that it’s a forgery, which would drop the value to near-zero. Second is the risk that the painting will be stolen from you. Insurance can help deal with both problems, but that adds more complications. If you’re buying the painting as an investment, these complications reduce the “liquidity” of the asset. Liquidity is the ease with which an asset can be converted into cash without affecting the market value of the asset. Put more simply, liquidity is how easily the asset can be sold. Cash has long been considered the most liquid asset, but NFTs are arguably much /more/ liquid than cash. NFTs don’t require anything physical to trade hands. And even electronic currency transfers take time and are subject to government oversight. NFTs are so new, they’re barely regulated. But by using blockchain technology, they can be easily and safely bought and sold anonymously. NFTs are a money launderers dream. It’s unclear if NFTs are actually being used to launder money, but it’s a concern.

The other reason I think NFTs are so popular is speculation. Because NFTs are so liquid and because there basically doesn’t even need to be an underlying work, the initial cost to “mint” (create) a NFT is near zero. And by using blockchain systems, NFTs can be resold with little overhead. (Though they can also be configured to ensure a certain overhead, e.g. that 10% of every resale goes to the original artist.) These characteristics, along with the newness of NFTs make it a popular marketplace for speculators, people who purchase assets with the intent of holding them for only a short time and then selling them for a profit.

NFTs started to enter the public consciousness in February 2021, after the 10-year old “Nyan cat” animation sold for over half a million dollars. This is also just a few weeks after the Gamestop stock short squeeze made a compelling case that average investors, working in concert, could upset the stock market and make millions. So it’s no wonder that there is rampant speculation in NFTs.

In conclusion, NFTs will be a tremendous benefit to digital artists, who did not previously have a way to easily prove the authenticity of their works (which is of tremendous importance to investors) or to provide a digital equivalent to numbered prints in the physical art world. But the hype about NFTs is just that. It’s driven by speculators and you’d be crazy to think of this as a worthy investment opportunity.

Content moderation online is a newsworthy and heated political topic. In the past year, social media companies and Internet infrastructure companies have gotten much more aggressive about banning and suspending users and organizations from their platforms. Today, Congress is holding another hearing for tech CEOs to explain and defend their content moderation standards. Relatedly, Ben Thompson at Stratechery recently had interesting interviews with Patrick Collison (Stripe), Brad Smith (Microsoft), Thomas Kurian (Google Cloud), and Matthew Prince (Cloudflare) about the difficult road ahead re: content moderation by Internet infrastructure companies.

I’m unconvinced of the need to rewrite Section 230 but like the rest of the Telecom Act—which turned 25 last month–the law is showing its age. There are legal questions about Internet content moderation that would benefit from clarifications from courts or legal scholars.

(One note: Social media common carriage, which some advocates on the left, right, and center have proposed, won’t work well, largely for the same reason ISP common carriage won’t work well—heterogeneous customer demands and a complex technical interface to regulate—a topic for another essay.)

The recent increase in content moderation and user bans raises questions–for lawmakers in both parties–about how these practices interact with existing federal laws and court precedents. Some legal issues that need industry, scholar, and court attention:

Public Officials’ Social Media and Designated Public Forums

Does Knight Institute v. Trump prevent social media companies’ censorship on public officials’ social media pages?

The 2nd Circuit, in Knight Institute v. Trump, deemed the “interactive space” beneath Pres. Trump’s tweets a “designated public forum,” which meant that “he may not selectively exclude those whose views he disagrees with.” For the 2nd Circuit and any courts that follow that decision, the “interactive space” of most public officials’ Facebook pages, Twitter feeds, and YouTube pages seem to be designated public forums.

I read the Knight Institute decision when it came out and I couldn’t shake the feeling that the decision had some unsettling implications. The reason the decision seems amiss struck me recently:

Can it be lawful for a private party (Twitter, Facebook, etc.) to censor members of the public who are using a designated public forum (like replying to President Trump’s tweets)? 

That can’t be right. We have designated public forums in the physical world, like when a city council rents out a church auditorium or Lions Club hall for a public meeting. All speech in a designated public forum is accorded the strong First Amendment rights found in traditional public forums. I’m unaware of a case on the subject but a court is unlikely to allow the private owner of a designated public forum, like a church, to censor or dictate who can speak when its facilities are used as a designated public forum.

The straightforward implication from Knight Institute v. Trump seems to be that neither politicians nor social media companies can make viewpoint-based decisions about who can comment on or access an official’s social media account.

Knight Institute creates more First Amendment problems than it solves, and could be reversed someday. But to the extent Knight Institute v. Trump is good law, it seems to limit how social media companies moderate public officials’ pages and feeds.

Cloud neutrality

How should tech companies, lawmakers, and courts interpret Sec. 512?

Wired recently published a piece about “cloud neutrality,” which draws on net neutrality norms of nondiscrimination towards content and applies them to Internet infrastructure companies. I’m skeptical of the need or constitutionality of the idea but, arguably, the US has a soft version of cloud neutrality embedded in Section 512 of the DMCA.

The law conditions the copyright liability safe harbor for Internet infrastructure companies only if: 

the transmission, routing, provision of connections, or storage is carried out through an automatic technical process without selection of the material by the service provider.

17 USC § 512(a).

Perhaps a copyright lawyer can clarify, but it appears that Internet infrastructure companies may lose their copyright safe harbor if they handpick material to censor. To my knowledge, there is no scholarship or court decision on this question.

State Action

What evidence would a user-plaintiff need to show that their account or content was removed due to state action?

Most complaints of state action for social media companies’ content moderation are dubious. And while showing state action is hard to prove, in narrow circumstances it may apply. The Supreme Court test has said that when there is a “sufficiently close nexus between the State and [a] challenged action,” the action of a private company will be treated as state action. For that reason, content removals made after non-public pressure or demands from federal and state officials to social media moderators likely aren’t protected by the First Amendment or Section 230.

Most examples of federal and state officials privately jawboning social media companies will never see the light of day. However, it probably occurs. Based on Politico reporting, for instance, it appears that state officials in a few states leaned on social media companies to remove anti-lockdown protest events last April. It’s hard to know exactly what occurred in those private conversations, and Politico has updated the story a few times, but examples like that may qualify as state action.

Any public official who engages in non-public jawboning resulting in content moderation could also be liable to a Section 1983 claim–civil liability for deprivation of an affected user’s constitutional rights.

Finally, what should Congress do about foreign state action that results in tech censorship in the US? A major theme of the Stretechery interviews ist that many tech companies feel pressure to set their moderation standards based on what foreign governments censor and prohibit. Content removal from online services because of foreign influence isn’t a First Amendment problem, but it is a serious free speech problem for Americans.

Many Republicans and Democrats want to punish large tech companies for real or perceived unfairness in content moderation. That’s politics, I suppose, but it’s a damaging instinct. For one thing, the Section 230 fixation distract free-market and free-speech advocates from, among other things, alarming proposals for changes to the FEC that empower it to criminalize more political speech. The singular focus on Section 230 repeal-reform distracts from these other legal questions about content moderation. Hopefully the Biden DOJ or congressional hearings will take some of these up.

On January 7, with the Pai FCC winding down, the agency made an important rule change that gives US households more broadband options. Small, outdoor broadband antennas installed on private property will be shielded from “unreasonable” state and local restrictions and fees, much like satellite TV dishes are protected today. The practical effect is most consumers can install small broadband devices on their rooftops, on their balconies, or on short poles in their yards in order to bring broadband to their home and their neighbors’. The FCC decision was bipartisan and unanimous and will open up tens of millions of new installation sites for certain 5G small cells, WISP systems, outdoor WiFi, mesh network nodes, and other wireless devices.

Previously, satellite dish installation was protected from most fees and restrictions but most small broadband antennas were not.

Disparate treatment.

The rule change involved the FCC’s 20 year-old over-the-air-reception-device (OTARD) rules, which protect consumers from unreasonable local fees and restrictions when installing satellite TV dishes. The rules came about because in the 1990s states and cities often restricted or imposed fees on homeowners installing satellite TV dishes. Congress got involved and, circa 1998, the FCC created the OTARD rules, aka the “pizza box rules,” to protect the installation of TV dishes less than 1 meter diameter.

In recent years, homeowners and tenants increasingly want to install small, outdoor broadband antennas on their property to bring new services and competition to their neighborhood. However, they face many of the same problems satellite dish installers faced in the 1990s. From my comments (pdf) to the FCC in the proceeding:

For instance, a few years ago a woman in the Charlottesville, Virginia, area switched from cable to less expensive satellite TV service in order to save money after being laid off. She had a satellite dish installed in her front yard—the only place the dish could receive an adequate signal. A city zoning official sent her and about 30 neighbors letters informing them that their (OTARD rules-covered) satellite dishes were, per local ordinance, unpermitted accessory structures. Any homeowners who did not remove their dish faced fines of $250 per day.

Fortunately for the homeowners, the woman was familiar with the OTARD rules and informed the local officials of the FCC’s authority.38 After being informed of the FCC’s OTARD regulations, the city officials declined to enforce the local ordinance and agreed to revisit the ordinance for compliance with FCC rules.

Today, WISPs and other broadband providers face similar issues when trying to install antennas on private property. It’s hard to know how much the OTARD rules helped expand satellite TV penetration but it helped. The FCC rules coincided with the installation of 20-30 million small dishes on private property.

With the rules extended to broadband antennas, operators will have millions more low-cost siting options. One provider, Starry, wrote to the FCC that today “it takes on average 100 days to complete the permitting process for a single base station, which accounts for about 80% of the time that it spends in activating a site.” Starry says that with the January 2021 rule change, they’ll likely activate 25-30% more antenna sites in the next year, bringing a broadband option to 1 million additional households. Take projections with a grain of salt, but it’s clear the new rules will improve coverage and competition.

There are some exceptions. States and cities are able to restrict antenna installation if they can show a safety hazard or a historic preservation issue. Generally, however, the rules are protective of homeowners and tenants. The changes faced some opposition from cities, counties, and homeowners associations but it’s great to see a bipartisan and unanimous decision in the final days of Chairman Pai’s broadband expansion-focused tenure to give consumers more protection for installing and self-provisioning small broadband antennas.

In a five-part series at the American Action Forum, I presented prior to the 2020 presidential election the candidates’ positions on a range of tech policy topics including: the race to 5GSection 230antitrust, and the sharing economy. Now that the election is over, it is time to examine what topics in tech policy will gain more attention and how the debate around various tech policy issues may change. In no particular order, here are five key tech policy issues to be aware of heading into a new administration and a new Congress. 

The Use of Soft Law for Tech Policy 

In 2021, it is likely America will still have a divided government with Democrats controlling the White House and House of Representatives and Republicans expected to narrowly control the Senate. The result of a divided government, particularly between the two houses of Congress, will likely be that many tech policy proposals face logjams. The result will likely be that many of the questions of tech policy lack the legislation or hard law framework that might be desired. As a result, we are likely to continue to see “soft law”—regulation by various sub-regulatory means such as guidance documents, workshops, and industry consultations—rather than formal action. While it appears we will see more formal regulatory action from the administrative state as well in a Biden Administration, these actions require quite a process through comments and formal or informal rulemaking. As technology continues to accelerate, many agencies turn to soft law to avoid “pacing problems” where policy cannot react as quickly as technology and rules may be outdated by the time they go into effect. 

A soft law approach can be preferable to a hard law approach as it is often able to better adapt to rapidly changing technologies. Policymakers in this new administration, however, should work to ensure that they are using this tool in a way that enables innovation and that appropriate safeguards ensure that these actions do not become a crushing regulatory burden. 

Return of the Net Neutrality Debate 

One key difference between President Trump and President-elect Biden’s stances on tech policy concerns whether the Federal Communication Commission (FCC) should categorize internet service providers (ISPs) as Title II “common carrier services,” thereby enabling regulations such as “net neutrality” that places additional requirements on how these service providers can prioritize data. President-elect Biden has been clear in the past that he favors reinstating net neutrality. 

The imposition of this classification and regulations occurred during the Obama Administration and the FCC removed both the classification under Title II and the additional regulations for “net neutrality” during the Trump Administration. Critics of these changes made many hyperbolic claims at the time such as that Netflix would be interrupted or that ISPs would use the freedom in a world without net neutrality to block abortion resources or pro-feminist groups. These concerns have proven to be misguided. If anything, the COVID-19 pandemic has shown the benefits to building a robust internet infrastructure and expanded investment that a light-touch approach has yielded. 

It is likely that net neutrality will once again be debated. Beyond just the imposition of these restrictions, a repeated change in such a key classification could create additional regulatory uncertainty and deter or delay investment and innovation in this valuable infrastructure. To overcome such concerns, congressional action could help fashion certainty in a bipartisan and balanced way to avoid a back-and-forth of such a dramatic nature. 

Debates Regarding Sharing Economy Providers Classification as Independent Contractors 

California voters passed Proposition 22 undoing the misguided reclassification of app-based service drivers as employees rather than independent contractors under AB5; during the campaign, however, President-elect Biden stated that he supports AB5 and called for a similar approach nationwide. Such an approach would make it more difficult on new sharing economy platforms and a wide range of independent workers (such as freelance journalists) at a time when the country is trying to recover economically.  

Changing classifications to make it more difficult to consider service providers as independent contractors makes it less likely that platforms such as Fiverr or TaskRabbit could provide platforms for individuals to offer their skills. This reclassification as employees also misunderstands the ways in which many people choose to engage in gig economy work and the advantages that flexibility has. As my AAF colleague Isabel Soto notes, the national costs of a similar approach found in the Protecting the Right to Organize (PRO) Act “could see between $3.6 billion and $12.1 billion in additional costs to businesses” at a time when many are seeking to recover during the recession. Instead, both parties should look for solutions that continue to allow the benefits of the flexible arrangements that many seek in such work, while allowing for creative solutions and opportunities for businesses that wish to provide additional benefits to workers without risking reclassification. 

Shifting Conversations and Debates Around Section 230 

Section 230 has recently faced most of its criticism from Republicans regarding allegations of anti-conservative bias. President-elect Biden, however, has also called to revoke Section 230 and to set up a taskforce regarding “Online Harassment and Abuse.” While this may seem like a positive step to resolving concerns about online content, it could also open the door to government intervention in speech that is not widely agreed upon and chip away at the liability protection for content moderation. 

For example, even though the Stop Enabling Sex Trafficking Act was targeting the heinous crime of sex trafficking (which was already not subject to Section 230 protection) was aimed at companies such as Backpage where it was known such illegal activity was being conducted, it has resulted in legitimate speech such as Craigslist personal ads being removed  and companies such as Salesforce being subjected to lawsuits for what third parties used their product for. A carveout for hate speech or misinformation would only pose more difficulties for many businesses. These terms to do not have clearly agreed-upon meanings and often require far more nuanced understanding for content moderation decisions. To enforce changes that limit online speech even on distasteful and hateful language in the United States would dramatically change the interpretation of the First Amendment that has ruled such speech is still protected and would result in significant intrusion by the government for it to be truly enforced. For example, in the UK, an average of nine people a day were questioned or arrested over offensive or harassing “trolling” in online posts, messages, or forums under a law targeting online harassment and abuse such as what the taskforce would be expected to consider. 

Online speech has provided new ways to connect, and Section 230 keeps the barriers to entry low. It is fair to be concerned about the impact of negative behavior, but policymakers should also recognize the impact that online spaces have had on allowing marginalized communities to connect and be concerned about the unintended consequences changes to Section 230 could have. 

Continued Antitrust Scrutiny of “Big Tech” 

One part of the “techlash” that shows no sign of diminishing in the new administration or new Congress is using antitrust to go after “Big Tech.” While it remains to be seen if the Biden Department of Justice will continue the current case against Google, there are indications that they and congressional Democrats will continue to go after these successful companies with creative theories of harm that do not reflect the current standards in antitrust. 

Instead of assuming a large and popular company automatically merits competition scrutiny  or attempting to utilize antitrust to achieve policy changes for which it is an ill-fitted tool, the next administration should return to the principled approach of the consumer welfare standard. Under such an approach, antitrust is focused on consumers and not competitors. In this regard, companies would need to be shown to be dominant in their market, abusing that dominance in some ways, and harming consumers. This approach also provides an objective standard that lets companies and consumers know how actions will be considered under competition law. With what is publicly known, the proposed cases against the large tech companies fail at least one element of this test. 

There will likely be a shift in some of the claimed harms, but unfortunately scrutiny of large tech companies and calls to change antitrust laws to go after these companies are likely to continue. 

Conclusion 

There are many other technology and innovation issues the next administration and Congress will see. These include not only the issues mentioned above, but emerging technologies like 5G, the Internet of Things, and autonomous vehicles. Other issues such as the digital divide provide an opportunity for policymakers on both sides of the aisle to come together and have a beneficial impact and think of creative and adaptable solutions. Hopefully, the Biden Administration and the new Congress will continue a light-touch approach that allows entrepreneurs to engage with innovative ideas and continues American leadership in the technology sector. 

Cover of the Pathways DocumentOn July 23rd, the U.S. Department of Transportation (DoT) released Pathways to the Future of Transportation, which was billed as “a policy document that is intended to serve as a roadmap for innovators of new cross modal technologies to engage with the Department.” This guidance document was created by a new body called the Non-Traditional and Emerging Transportation Technology (NETT) Council, which was formed by U.S. Transportation Secretary Elaine L. Chao last year. The NETT Council is described as “an internal deliberative body to identify and resolve jurisdictional and regulatory gaps that may impede the deployment of new technologies.”

The creation of NETT Council and the issuance of its first major report highlight the continued growth of “soft law” as a major governance trend for emerging technology in the US. Soft law refers to informal, collaborative, and constantly evolving governance mechanisms that differ from hard law in that they lack the same degree of enforceability. A partial inventory of soft law methods includes: multistakeholder processes, industry best practices or codes of conduct, technical standards, private certifications, agency workshops and guidance documents, informal negotiations, and education and awareness efforts. But this list of soft law mechanisms is amorphous and ever-changing.

Soft law systems and processes are multiplying at every level of government today: federal, state, local, and even globally. Such mechanisms are being tapped by government bodies today to deal with fast-moving technologies that are evolving faster than the law’s ability to keep up.

The US Department of Transportation has become a leading candidate for Soft Law Central at the federal level. The agency has been tapping a variety of soft law mechanisms and approaches to deal with driverless cars and drone policy issues in particular. (See the essays listed down below for more details).

The NETT Council represents the next wave of this governance trend. We might consider it an effort to bring a greater degree of formality and coordination to the agency’s soft law efforts. Continue reading →

Cheers to Post-Yoga BeersFew things unify people in America more than beer and liquor regulations. On one side you have the forces of repression, who either favor strong liquor taxes and regulations on moralistic grounds, or because they favor curtailing competition and choice for a variety of reasons. On the other side you have those of us looking to end the insanity of quasi-Prohibitionary rules that do nothing to boost public health but do plenty to annoy the living hell out of us (and cost us plenty). And the really interesting thing is that these two groups contain plenty of people of radically different political persecutions. Liquor regulations are the greatest destroyer of political partisanship ever!

For those of us who favor liberalization, as I write in my latest AIER column:

The good news is that evasive entrepreneurs and an increasingly technologically-empowered public will keep pushing back and hopefully whittle away at the continuing vestiges of Prohibition Era stupidity. Where there’s a will, there’s a way, and when people want a drink, crafty entrepreneurs will usually find a way to deliver.

I talk a walk back through history and discuss how efforts to evade ridiculous liquor controls have been a longstanding feature of the American experience. People can be remarkably creative when seeking to circumvent silly rules–both before, during, and after Prohibition. Continue reading →

ImageI was very sad to learn that James Gattuso passed away this week. James was a friend and a wonderful mentor to me. I actually took his position at the Heritage Foundation in the early 1990s, which he had vacated a few years prior to go to work in the White House. But after I left Heritage in 2000, James returned shortly thereafter to take back essentially the same position. We often joked that Heritage should just name the position after us and let us play musical chairs there forevermore! 

I learned so much from James through the years and regularly sought his advice on matters. In fact, when I first started this blog in 2004, James was one of the first three people I reached out to and asked to join. He contributed dozens of essays here. His entries read like newspaper dispatches from the frontlines of a battle. I always thought James would have made a terrific reporter, but his love of liberty made him want to fight for a cause. Hence, his life-long devotion to policy advocacy and the freedom to innovate in particular. 

But the most important thing I learned from working with James was how to properly conduct myself as an analyst and a human being. James was such a kind soul, and he always had time for everyone. Most importantly, he treated them with enormous respect, even when he violently disagreed with them. He listened carefully, digested arguments, and addressed them with a cool tenor, but also a powerful wit.

James famously developed a set of “10 Rules for Policy Analysts” that reflected much of that wisdom. His first rule: If the answer looks easy, you’ve missed something. There’s probably a reason no one has thought of it before.” His third: “Don’t assume everyone has read your paper, even if it is really, really good. Most people didn’t get past the first paragraph. Most of those only read the title.” There are many other gems like that in his Top 10 list. 

But his second rule is perhaps the most important piece of advice he ever gave me: “Don’t assume the other guy is evil. He may be, but will be on your side later.” That’s great advice because so many young people in the world of public policy (and it included me for awhile) tend to look at their opponents as nefarious-minded dimwits who are without hope or a moral compass.

As you age, you realize that’s nonsense, of course. But James taught me early on to avoid falling into this trap. I used to be pretty hot-headed in my early years as an analyst, but James would gently caution me about why I might be better off considering my intellectual opponents in a different light and granting them the same measure of respect that I hoped to garner from them myself. It’s a simple but powerful notion that is too often ignored–in all aspects of life. But James lived by that rule and everyone I know respected him enormously as a result. His advice and his example provide us with a model to live by.     

Thank you for everything you taught me, James. You will be missed, but never forgotten. 

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My research focus lately has been studying and encouraging markets in airspace. Aviation airspace is valuable but has been assigned to date by regulatory mechanisms, custom, and rationing by industry agreement. This rationing was tolerable decades ago when airspace use was relatively light. Today, regulators need to consider markets in airspace–allowing the demarcation, purchase, and transfer of aerial corridors–in order to give later innovators airspace access, to avoid anticompetitive “route squatting,” and to serve as a revenue stream for governments, much like spectrum auctions and offshore oil leases.

Last month, the FAA came out in favor of “urban air mobility corridors”–point-to-point aerial highways that new eVTOL, helicopter, and passenger drones will use. It’s a great proposal, but the FAA’s plan for allocating and sharing those corridors is largely to let the industry negotiate it among themselves (the “Community Business Rules”):

Operations within UAM Corridors will also be supported by CBRs collaboratively developed by the stakeholder community based on industry standards or FAA guidelines and approved by the FAA.

This won’t end well, much like Congress and the Postmaster General letting the nascent airlines in the 1930s divvy up air routes didn’t end well–we’re still living with the effects of those anticompetitive decisions. Decades later the FAA is still refereeing industry fights over routes and airport access.

Rather, regulators should create airspace markets because otherwise, as McKinsey analysts noted last year about urban air mobility:

first movers will have an advantage by securing the most attractive sites along high-traffic routes.

Airspace today is a common-pool resource rationed via regulation and custom. But with drones, eVTOL, and urban air mobility, congestion will increase and centralized air traffic control will need to give way to a more federated and privately-managed airspace system. As happened with spectrum: a demand shock to an Ostrom-ian common pool resource should lead to enclosure and “propertization.”

Markets in airspace probably should have been created decades ago once airline routes became fixed and airports became congested. Instead, the centralized, regulatory rationing led to large economic distortions:

For example, in 1968, nearly one-third of peak-time New York City air traffic–the busiest region in the US–was general aviation (that is, small, personal) aircraft. To combat severe congestion, local authorities raised minimum landing fees by a mere $20 (1968 dollars) on sub 25-seat aircraft. General aviation traffic at peak times immediately fell over 30%—suggesting that a massive amount of pre-July 1968 air traffic in the region was low-value. The share of aircraft delayed by 30 or more minutes fell from 17% to about 8%.

This pricing of airspace and airport access was half-hearted and resisted by incumbents. Regulators fell back on rationing via the creation of “slots” at busy airports, which were given mostly to dominant airlines. Slots have the attributes of property–they can be defined, valued, sold, transferred, borrowed against. But the federal government refuses to call it property, partly because of the embarrassing implications. The GAO said in 2008:

[the] argument that slots are property proves too much—it suggests that the agency [FAA] has been improperly giving away potentially millions of dollars of federal property, for no compensation, since it created the slot system in 1968.

It may be too late to have airspace and route markets for traditional airlines–but it’s not too late for drones and urban air mobility. Demarcating aerial corridors should proceed quickly to bring the drone industry and services to the US. As Adam has pointed out, this is a global race of “innovation arbitrage”–drone firms will go where regulators are responsive and flexible. Federal and state aviation officials should not give away valuable drone routes, which will end up going to first-movers and the politically powerful. Airspace markets, in contrast, avoid anticompetitive lock-in effects and give drone innovators a chance to gain access to valuable routes in the future.

Research and Commentary on Airspace Markets

Law journal article. The North Carolina JOLT published my article, “Auctioning Airspace,” in October 2019. I argued for the FAA to demarcate and auction urban air mobility corridors (SSRN).

Mercatus white paper. In March 2020 Connor Haaland and I explained that federal and state transportation officials could demarcate and lease airspace to drone operators above public roads because many state laws allow local and state authorities to lease such airspace.

Law journal article. A student note in a 2020 Indiana Law Journal issue discusses airspace leasing for drone operations (pdf).

FAA report. The FAA’s Drone Advisory Committee in March 2018 took up the idea of auctioning or leasing airspace to drone operators as a way to finance the increased costs of drone regulations (pdf).

GAO report. The GAO reviewed the idea of auctioning or leasing airspace to drone operators in a December 2019 report (pdf).

Airbus UTM white paper. The Airbus UTM team reviewed the idea of auctioning or leasing airspace to UAM operators in a March 2020 report, “Fairness in Decentralized Strategic Deconfliction in UTM” (pdf).

Federalist Society video. I narrated a video for the Federalist Society in July 2020 about airspace design and drone federalism (YouTube).

Mercatus Center essay. Adam Thierer, Michael Koutrous, and Connor Haaland wrote about drone industry red tape how the US can’t have “innovation by regulatory waiver,” and how to accelerate widespread drone services.

I’ve discussed the idea in several outlets and events, including:

Podcast Episodes about Drones and Airspace Markets

  • In a Federalist Society podcast episode, Adam Thierer and I discussed airspace markets and drone regulation with US Sen. Mike Lee. (Sen. Lee has introduced a bill to draw a line in the sky at 200 feet in order to clarify and formalize federal, state, and local powers over low-altitude airspace.)
  • Tech Policy Institute podcast episode with Sarah Oh, Eli Dourado, and Tom Lenard.
  • Macro Musings podcast episode with David Beckworth.
  • Drone Radio Show podcast episode with Randy Goers.
  • Drones in America podcast episode with Grant Guillot.
  • Uncommon Knowledge podcast episode with Juliette Sellgren.
  • Building Tomorrow podcast episode with Paul Matzko and Matthew Feeney.
  • sUAS News podcast episode and interview.

America’s small towns are underpopulated, while big cities of plague, protests, and panic are overpopulated, overpriced, and overpopularized. We could start by ensuring rural spaces high-speed internet (still unavailable as I can attest in the rural center of supposedly high-tech California)…. Victor Davis Hanson

proposal by Congressman G.K. Butterfield of North Carolina could be a big step in the right direction of opening up rural spaces to full participation in the modern economy.  

His proposal would expand the eligibility of who can receive Federal support for building infrastructure in unserved areas, making it easier for cable operators, satellite providers and others to complete with traditional telecommunications carriers. 

The Butterfield vision is gaining bipartisan support and may possibly be included in a stimulus package.  It certainly should be.  

The proposal would simply eliminate the requirement that a competitor must receive designation as an Eligible Telecommunications Carrier (ETC) from a state public utility/service commission as a prerequisite for receiving Federal support.

This requirement harkens back to a bygone era when cable, wireless and satellite services were not substitutes for landline telephone service.  At that time, small rural telephone providers worried that a competitor would “cherry pick” or “cream skim” their most lucrative (enterprise) customers—such as the local hospital—and strand the small rural telco in a potential death spiral serving only the barely profitable (or even unprofitable) consumer segment.

Now that cable, satellite and wireless services are a substitute for many consumers, the requirement for ETC designation does nothing to protect small rural telcos from competition.  It is an anachronism.  However, it does create an unnecessary hurdle for cable, wireless and satellite providers to qualify for Federal support to help close the digital divide—which is an urgent priority.

Originally intended to prevent the loss of telecommunications services in rural areas, the requirement now serves to prevent the necessary expansion of those services to keep up with the modern world economy.  

As awful as this horrible pandemic is, at least we are driving less and spending more time with our families.  Many have learned that a daily commute may not be necessary.  Broadband seems to be boosting productivity and reducing air pollution at the same time.  Hopefully broadband can also help facilitate a revival of rural America.  

By Brent Skorup & Connor Haaland

We think drones are exciting technology with the potential to improve medical logistics, agriculture, transportation, and other industries. But drones fly at low altitudes and, to many Americans, drones represent a nuisance, trespasser, or privacy invasion when they fly over private property. This is why we think the FAA and states should work together to lease airspace above public roads—it would free up millions of miles of low-altitude airspace for operations while avoiding many lawsuits from public and private landowners.

In the meantime, states and landowners are pushing back on certain drone activities. Per Prof. Stephen Migala, about 10 states have created “no-fly zones” for drones, prohibiting flights over government property, state forests, or sensitive areas. Most state airspace rules prohibit drones at low-altitudes over “critical infrastructure” like nuclear, gas and electric facilities, bridges, dams, and communication networks. Some states prohibit drones over jails, prisons, and schools.

In Texas, in fact, there is litigation over a state ban on photography drones above critical infrastructure, sports venues, and prisons. One of the legal issues is whether state police powers over trespass, nuisance, and privacy allow states to exclude drones from low-altitude airspace. As we’ve pointed out in a GovTech piece, this is a festering issue in drone regulation—no one knows at what altitude private property (and state police powers) begins.

For private property owners who don’t want drones flying over their property, they might be able to bring a trespass lawsuit under existing state law. Around 20 states expressly vest air rights with landowners. However, many states also recognize a privilege of non-disruptive flight, so it’s unclear if a landowner would win a lawsuit in those states. We’re unaware of the issue being litigated.

Unfortunately, many landowners and annoyed neighbors are taking matters into their own hands and shooting drones out of the sky. We’ve identified over a dozen such encounters in the past eight years, though there are likely some near-misses and unreported cases out there.  (Don’t shoot a drone–it’s dangerous and, as the cases below show, you risk being arrested and convicted for criminal mischief or some other crime.)

  1. In November of 2012, unknown shooters in Bucks County, Pennsylvania shot down a drone that was flying over their hunt club. The drone was flown by an animal rights group to bring scrutiny to pigeon shooting and this was the fourth time the activists’ drone had been shot down. No criminal charges appear to have been filed.
  2. In October of 2014, a man shot down a drone in Lower Township, New Jersey. It’s unclear if the drone was hovering over his property or a neighbor’s. The man plead guilty to criminal mischief. 
  3. In November 2014 in Modesto, California, a man allegedly instructed his minor son to shoot his neighbor’s drone out of the sky, and the drone was destroyed. The neighbor claims the drone was not over the man’s property and won $850 in small claims court from the man for damages and costs.
  4. In July of 2015 in Bullitt County, Kentucky, William Meredith,  annoyed at a drone flying over his backyard while grilling with friends, shot the drone when it flew over his property. The drone’s owner, a neighbor, called the police upon discovering his destroyed drone. Meredith was arrested and charged under local law for firing a gun in a populated area. At the highly publicized trial in state court, the judge dismissed the charges with a brief statement that Meredith was justified in shooting because of the invasion of privacy.
  5. In April of 2016, an unnamed woman shot down a drone in Edmond, Oklahoma. The drone was flown by a construction company employee who was inspecting gutters in the neighborhood. It’s unclear if the drone was flying over the woman’s property. The case was investigated by the police, who said that they did not expect to file charges
  6. An unknown shooter in Aspen, Colorado shot down a drone during 4th of July fireworks in 2016. It’s unclear if the drone was over the shooter’s property. The pilot of the fallen drone filed a report with local police and the FAA but the shooter remains a mystery.
  7. In August of 2016, a woman allegedly shot down a drone in The Plains, Virginia with her 20-gauge shotgun. The woman alleged that the drone hovered 25 to 30 feet above her property and she believed it was being used to spy on her movie-star neighbor, Robert Duvall. The two men flying the drone left the scene when she told them she was calling the police. No charges were filed. 
  8. In April of 2017, an unknown person in Morgan County, Georgia shot down a drone with a .22 rifle. It’s unclear whose property the drone was flying over. The drone owner filed a report but a suspect was never identified.
  9. In October of 2017, a man allegedly shot down a drone in Jackson County, Oregon with his pellet rifle and later turned himself in for arrest. The photography drone was flying over a state recreation area. The local prosecutor charged the shooter with first degree criminal mischief, a felony in Oregon. (The drone’s owner feels that a felony charge is excessive. With a Google search, it’s unclear whether the man was convicted.)
  10. In May of 2018, a man allegedly attempted to shoot down a drone with his handgun in Bradenton, Florida. It was a neighbor’s drone and the man claims it was on his property, hovering a few feet above the ground. Police were called and warned the man about the danger and legal risk of shooting drones. No charges were filed.
  11. In February of 2019, a man allegedly shot down a drone in Long Island, New York with a shotgun. The drone was being used by an animal rescue group to find a lost dog. It’s unclear if the drone was flying over the man’s property. He was charged with third-degree criminal mischief and prohibited use of a weapon.
  12. In May of 2020, a man allegedly shot down a drone flying over a chicken processing plant in Watonwan County, Minnesota. The drone operator was apparently taking video of the plant as a citizen-journalist. The man was charged with two felonies: criminal damage to property and reckless discharge of a firearm in city limits. 
  13. In June 2020, someone shot a drone flying somewhere in western Pennsylvania at 390 feet above the ground. Despite being grazed and damaged, the drone managed to safely operate and land. It’s unclear if the drone was over the shooter’s property. The shooter is unknown and the drone operator contacted state police but has not filed a complaint.

As you can see, the legal penalties for shooting a drone vary based on the circumstances and the prosecutor. Some got off with warnings but a few were charged with a felony under state law. Arguably, someone shooting a drone violates federal law, which imposes penalties on anyone who

willfully . . . damages, destroys, disables, or wrecks . . . any civil aircraft used . . . in interstate . . . commerce.

Federal penalties for willfully damaging an aircraft are stiff—fines and up to 20 years’ imprisonment. We’re unaware of federal prosecutors bringing a case against someone for shooting a drone. Perhaps federal prosecutors feel it’s excessive to use this statute, which was written with passenger planes in mind. Further, it’s unclear when drones are used in interstate commerce. As one federal judge said in a 2016 drone regulation case, Huerta v. Haughwout:

the FAA believes it has regulatory sovereignty over every cubic inch of outdoor air in the United States. . . . [I]t is far from clear that Congress intends—or could constitutionally intend—to regulate all that is airborne on one’s own property and that poses no plausible threat to or substantial effect on air transport or interstate commerce in general.

Hopefully lawmakers will clear up the ambiguity and demarcate where property rights end. As we pointed out in our recent 50-state drone report card, creating drone highways would prevent many issues. Congress should also consider drawing a federal-state dividing line in the sky, much like it drew a dividing line in the ocean in the Submerged Lands Act for energy development. For now, landowners, drone operators, the FAA, and state governments are all trying to determine the limits of their authority.