Digital Legal Institutions

1. Digital Legal Institutions Oliver R. Goodenough Vermont Law School Technology, Data and Computation to Promote the Rule of Law Law, Justice and Development Week Washington, DC November 19, 2015

2. Talk Outline • Importance of legal institutions for economic development • Embodying legal institutions in a digital framework • Law as computation • Stages in the application of technology to law • Blockchain as a use case • Much more than Bitcoin • Useful for many legal/governmental functions

3. Caveats • Views my own, developed and presented here in my academic capacity. • Not those of my various affiliations, and in particular not those of the Office of Financial Research or the Department of the Treasury or of the Vermont Blockchain initiative.

4. Importance of Institutions • Explicit or implicit rule structures that solve the problems of productive sociality • Game theoretic descriptions • In the field challenges • Institutional economics • Paul Romer • “Economic growth is driven by the coevolution of two sets of ideas, technologies and rules. Governments can increase the rate of growth—in ways that benefit all citizens—by creating systems of rules that are both encouraging of and responsive to new technologies.”

5. Importance of Legal Institutions • The things “Law” does are critical • A place to establish the rules – public goods aspects • Particularly the problems of economic development: property, investment, exchange, etc. • Engineering analogy: a toolkit for creating solutions to the challenges of gravity • Bridges: the arch has limits, so, the suspension bridge • Solutions of the future need not look like solutions of the past • Particularly when there is new technology

6. A Little History • The “old” model of American law was rooted in technological developments: cheap printing • Mass produced paper and automated presses • Books become much less a luxury • Mid-to Late Nineteenth Century • Langdell, law schools, and the case analysis method • The West reporter system • American Bar Association and professionalism • The regulatory state – Interstate Commerce Commission • The modern law firm - Cravath

7. Building Legal Institutions in Technology • We can build legal institutions in new technology as well • Lawrence Lessig insight: • Code is law • Reverse is true as well: • Law is code

8. Law and Computation • Why does this all work? • Conversion of legal processes to computation • Game theory/computation homology as well • What is computation? • Not just digital computers – those are a subset, if a critical one • Rather, the thorough specification of a process in a rule governed, stepwise way • Many things exemplify this: biology, games, etc. • Specification of the task also part of legal process management – useful on its own

9. Proof of Concept:Contract as an Automaton • Computation theory: • Several formal means of representing a computation: automata, lambda calculus, etc. • Several kinds of “Machines” or “Automata” • Turing Machine universal (can compute on memory) • Deterministic Finite Automaton (“DFA”) • Not software: an abstracted formalism • Can we restate law and legal formulations this way? Work with Mark Flood of the OFR • Paper available at OFR, SSRN websites

10. Simplified Contract • Simple two-page loan contract 1. The Loan: $1000, June 1, 2014 2. Repayment: • Payment 1, due June 1, 2015: $550 • Payment 2, due June 1, 2016: $525 3. Representations and Warranties 4. Covenants 5. Events of Default: • Borrower fails to make timely payment • Reps or warranties prove untrue • Borrower fails any covenants • Borrower files for bankruptcy 6. Acceleration on Default 7. Choice of Law 8. Amendments and Waivers 9. Courts and Litigation 10. Time of the Essence; No Pre-Payment 11. Notices

11. Graphical Representation • DFA as a chain of event and consequence: • Start state (q0) at the top • Terminal states (3) at bottom • “Happy” or intended path traced in green • More “interesting” ramifications traced in black

12. Stages of Technological Innovation • Apologies for the now clichéd 1.0 etc. classification – still useful • 1.0:Technology empowers the current human players within the current system. • 2.0: Technology replaces many of the human players within the current system. • 3.0: Technology overturns much of the current system and replaces it with something else

13. Blockchain as a Use Case • “Cloud Law” – Institutions instantiated in technology and available locally • Problem of property, process, etc.: Keeping accurate, hard to tamper records • What the blockchain does • Establishes facts and records in a VERY hard to tamper medium • How: Distributed ledger techniques

14. Much More than Bitcoin • Bitcoin has “sketchy” aspects • But it only is an application on a blockchain, not its defining ethos • Better reports • Bank of England • Economist Magazine: • “Blockchains: The great chain of being sure about things”

15. E.g. Property Records • Challenge of reliable property • Expropriation by the powerful • Just having access • Gender, other impediments • Honduras story • Available institutions a key part to making development work? Help build them into technology and then assist in their uptake • Legal Technology can be a force for providing the institutional basis for economic development