True Names and the Opening of the Cyberspace Frontier (8 page)

Many of us believe we are already seeing the imminent end of nation-states, with virtual communities attaining greater importance for many people. Certainly many of us are “closer” to our neighbors in cyberspace—those with whom we share certain interests—than we are to our physical neighbors. And the passions of these special interest groups (think of Aryan Nation, Greenpeace, Sendero Luminoso, Scientologists, etc.) are often vastly more intense than normal nationalistic sentiments. (This was the rap against the Catholic Church: that Catholics were often more loyal to the Pope and the Vatican than to their various provinces and kingdoms. Whether true or not, it has clearly been a concern for many centuries.)

In such “discretionary” communities, the time-honored enforcement mechanism of “shunning” is gaining new popularity. Using kill files or twit filters, nobody in these communities has to read the messages of those they dislike. They can just filter them out.

Reputations Matter

What will keep people from reneging on digital deals? What will keep them honest? If the government and the courts cannot track a person down, because they used untraceable or anonymous systems, how will digital societies and economies work?

Well, for starters, the systems are not really purely “anonymous.” The ability to use digital signatures and persistent digital pseudonyms, or “true nyms,” means that behaviors can and will be attributed to nyms. Some nyms will establish the reputation of being straight in dealings, others will establish a less savory reputation.

How does an escrow service (the classical definition of escrow, not the newspeak definition used by the U.S. government for key escrow) survive and prosper? By being in the business of releasing funds when conditions are met, and not otherwise. By not absconding with the funds. In the real world escrow services do quite well because the continuing future revenue stream from their good reputation exceeds what they could get by “burning” any particular customer. Sometimes this involves putting up a bond, which is a kind of secondary escrow.

Digital escrow services will operate along similar lines, with reputation playing the major role. Also, escrow services can be “pinged” (tested) by lots of small transactions. Inasmuch as digital money is untraceable, lots of small interactions can be used to test the trustworthiness of any bank or escrow service. Brand names, image, and product ratings will be as important in cyberspace as they are today, perhaps more so.

Private Law

As noted, virtual communities have their own rules, with usually little involvement of the outside world in the internal operations of the community. In some important examples, the virtual community is explicitly outside the law, as with the Mafia, Triads, and other such “outlaw” or “underworld” organizations—the very names suggest the status vis-à-vis the conventional legal system. For those who think of these groups as essentially criminal and coercive, à la truck hijackings and protection rackets, think also of the market services provided by the Mafia because government has decided to outlaw certain services: gambling, prostitution, high-risk loans, and “recreational” drugs. Since a bookie cannot use the court system to collect on bad debts, he has to use “private justice” systems, e.g., breaking legs. Other virtual communities have equally well developed private legal systems. The killing of informants is one obvious example. (Note that I am not condoning the killing of informants, cheats, whatever. I'm merely noting such examples in the context of this discussion.)

But more than just “voluntary” interactions are involved: the role of contracts becomes central. And contracts can be enforced in cyberspace. Bonding entities or escrow agents can hold digital money until some service is satisfactorily completed.

Most interactions in the real world depend more on these reputational effects than on actual enforcement of laws by governments. A “reputable” mail order company, for example, ships products because that's a more important longterm business for it to be in than ripping off a few customers would be. Just about any bank could, quite easily, forge simplistic withdrawal signatures and claim that a customer had withdrawn his money. That they don't do such things has a lot more to do with what banks perceive their business to be than with any technological or legal limitations.

In other words, reputations matter. And in cyberspace, they matter even more than in the outside world, where some people have shown irksome tendencies to declare bankruptcy to escape the obligation of repaying a debt, and then seek the protection of the American legal system, and where honesty, it sometimes seems, is presumed to be something for suckers. Under crypto anarchy, a nym's reputation is all he has, and honesty once again becomes a valuable trait.

What form legal structures may take in cyberspace is unclear. But the role of traditional legal structures is likely to diminish, unless governments around the world are successful in stamping out strong cryptography use. This lesser role for the formal legal system is especially likely as the Net becomes increasingly global, with even more tools for anonymous or pseudonymous interaction. Tools to make digital signatures and digital time-stamping more common will help to build what Nick Szabo calls “smart contracts.” Escrow services—even anonymous or pseudonymous ones—will make it possible to have “completion bonds” for cyberspace activities.

Individuals interacting in cyberspace will generally have to be more competent about arranging their fiduciary and contractual relationships, and less reliant on having government offices and agents bail them out of foolish actions. Caveat emptor. Of course, they are always free to contract to have a “nanny” screen their interactions and tell them what to do. They could even call this their “government.” They just can't force others to obey their nanny.

Crypto Anarchy

“The Net is an anarchy.” This truism is the core of crypto anarchy. No central control, no ruler, no leader (except by example, reputation), no “laws.” No single nation controls the Net, no administrative body sets policy. The Ayatollah in Iran is as powerless to stop a newsgroup—alt.wanted.moslem.women or alt.wanted.moslem.gay come to mind—he doesn't like as the President of France is as powerless to stop, say, abuse of the French in soc.culture.french. Likewise, the CIA can't stop newsgroups, or sites, or Web pages, that give away their secrets. At least not in terms of the Net itself. What non-Net steps might be taken is left as an exercise for the paranoid and the cautious.

This essential anarchy is much more common than many think. Anarchy—the absence of a ruler telling one what to do—is common in many walks of life: choice of books to read, movies to see, friends to socialize with, etc. Anarchy does not mean complete freedom—one can, after all, only read the books that someone has written and had published—but it does mean freedom from external coercion. And anarchy does not mean an absence of local hierarchies, or an absence of rules. Groups outside the direct control of local governmental authorities may still have leaders, rulers, club presidents, or elected bodies. Many will not, though.

Anarchy as a concept, though, has been tainted by other associations. The anarchy here is not the anarchy of popular conception—lawlessness, disorder, chaos. Nor is it the bomb-throwing anarchy of the nineteenth-century “black” anarchists, usually associated with Russia and labor movements. Nor is it the black flag anarcho-syndicalism of leftist writers such as Proudhon and Goldstein. Rather, the anarchy being spoken of here is the anarchy of “absence of government” (literally, “an arch,” without a chief or head). It's the same anarchy of “anarcho-capitalism,” the libertarian free market ideology that promotes voluntary, uncoerced economic transactions. “Crypto anarchy” is a pun on crypto, meaning “hidden,” on the use of “crypto” in combination with political views (as in Gore Vidal's famous charge to William F. Buckley: “You crypto fascist!”), and of course because the technology of crypto makes this form of anarchy possible. The first presentation of this was in my 1988 “Crypto Anarchist Manifesto,” whimsically patterned after another famous manifesto.

Politically, virtual communities outside the scope of local governmental control may present problems of law enforcement and tax collection. Avoidance of coerced transactions can mean avoidance of taxes, of laws that dictate to whom one can sell and to whom one can't, and so forth. It is likely that many will be unhappy that some are using cryptography to avoid laws designed to control behavior.

National borders are becoming ever more transparent to data. A flood of bits crosses the borders of most developed countries: phone lines, cables, fibers, satellites, and millions of diskettes, tapes, CDs, etc. A single CD or DAT can contain hundreds of megabytes of data—just the least significant bits (LSBs) of a musical recording can be replaced by a hundred megabytes of data without any means of distinguishing the data from ordinary audio noise. Stopping data at the borders is hopeless, with every tourist able to carry in and out vast amounts of data, undetectably.

Regulatory Arbitrage

The movement of cyberspace operations from nation to nation will rival or exceed the movement of economic production from nation to nation. Just as tax and financial policies of one nation can trigger movements of factories and offices to more favorable climes, so too can data and privacy policies trigger movements of cyberspace-oriented operations to more favorable locales. And this movement can happen as fast as typing a few keystrokes to whisk the site and its files to a new host system.

The issues of international enforcement of various laws and of regularizing laws across national borders have always been problematic; the ability of anyone from the privacy of their home or business to connect with sites nearly anywhere in the world catapults this issue to the forefront. The first international conference on “financial cryptography” was held in 1997 in Anguilla, a Caribbean tax haven.

The ability to move data around the world at will, to communicate with remote sites at will, means that what has been dubbed “regulatory arbitrage” can be used to avoid legal limits in any given country. For example, when remailing into the U.S. from a site in the Netherlands, whose laws apply? (If one thinks that U.S. laws should apply to sites in the Netherlands, does Iraqi law apply in the U.S.?)

This regulatory arbitrage is also useful for avoiding the welter of laws and regulations that operations in one country may face, including the “deep pockets” lawsuits so many in the U.S. face. Moving operations on the Net outside a litigious jurisdiction is one way to reduce this business liability. Law professor Michael Froomkin has written extensively about regulatory arbitrage and the implications of strong cryptography; his Web site has several interesting articles.

The implications for taxation policy are especially interesting. Incomes will tend to be less visible, as is already the case with international consultants. Imputing incomes and assets already requires intrusive probes into bank accounts, restrictions on funds transfers, and a loss of anonymity and privacy in financial transactions. An alternative—assuming taxes survive, which they probably will—is to tax real, physical assets, such as real property. Or to establish sales taxes and value-added taxes (VATs). Or, of course, to drastically reduce the size of governments and have people make their own arrangements for purchase of any services they may need, save perhaps for only the few services that only a larger group can purchase. David Friedman has discussed such matters in
The Machinery of Freedom.

It seems unlikely that any sort of “new world order” will be universally adopted. Thus, governments face the prospect of either limiting communication with sites in “rogue jurisdictions,” or accepting that this skirting of their laws will happen. Unfortunately, the U.S. has been showing disturbing signs of pushing for just such an international agreement, on crypto and Net access policy, despite the inevitable failure it faces, and the odd moral position of having the U.S. enforcing, say, Islamic nations' laws against mentioning certain topics. It is doubtful the Supreme Court would uphold any such attempts to limit speech in this way.

The whole issue has resonances with age and decency restrictions on material. The Net has made it easy for users of all ages to access any material they wish. This has resulted in calls for limits on material “harmful to minors,” à la the U.S. Communications Decency Act. But, of course, connecting to a foreign site would bypass even the CDA, exactly as Muslims, say, can connect to U.S. or European sites where discussions of pork, homosexuality, and other “banned” (to Muslims) topics are freely available.

The Morality of Crypto Anarchy

The political and moral implications of crypto anarchy as a form of government (or nongovernment) would itself require a long essay. Suffice it to say that many of us think giving power back to people to make their own choices in life without government interference would be a good thing. And regardless of whether it's a good thing or not, it doesn't appear that this trend toward crypto anarchy can be stopped.

Crypto anarchy ensures that men with guns cannot be brought in to interfere with mutually agreed-upon transactions, the only kind of economic interaction possible in crypto anarchy. Some people will of course scream “Unfair!” and demand government intervention, which is why strong cryptography will probably be opposed by the masses, unless of course, they are wise and take the long view. This may smack of elitism, but I have very little faith in democracy. De Tocqueville warned in 1840 that, roughly translated, “The American Republic will endure, until politicians realize they can bribe the people with their own money.” We reached that point several decades ago.

Another positive effect is to put an end to the modern form of guilds: the professional cartels that limit entry into some professions and confer special rights on certain groups. For example, the various medical and legal societies, which have various legal rights not given to, say, the local stamp-collecting club members. It may be argued that these special provisions are for the protection of patients and clients. But in a free society, persons are free to make arrangements to check the credentials of service providers as they see fit, not as some committee has decreed. This applies to all forms of professional licensing. Caveat emptor!