I’m working on a new paper, and welcome input on ideas, technical stuff, research directions, flaws, etc.
Here is the current abstract:
Communication Problems and Systemic Risk:
How Imprecise Language Could Taint System-Wide Decisions on Blockchain Technology
Language choices shape our risk assessments and decisions, as we saw with the role mortgage-backed securities played in the 2008 Financial Crisis. The “AAA” ratings assigned to MBS by ratings agencies conveyed the idea that these securities were low risk, or even close to “risk-free.” Actors throughout the financial system incorporated this information into their own risk assessments, and made decisions based on it, embedding this mischaracterized risk system-wide.
Although much handwringing has occurred over how the mortgage securitization process, irresponsible subprime lending, and inaccurate ratings could ever have happened, it is clear that communication problems continue to exist, and probably always will. Humans tend to misunderstand each other, particularly as specialists in different fields of expertise talk to one another. Oversimplification, radiated out through a system, can embed significant amounts of risk.
This paper explores the language problems occurring in the red hot area of blockchain technology, how these language issues may lead to misunderstandings and poor risk assessments about the core features of the technology, and how decisions based on these faulty risk assessments could spread underappreciated risk throughout the financial system and other core recordkeeping and transactional systems in our societies.
The paper first describes the zeitgeist around blockchain technology, including the significant investments in the technology by the financial sector and others and the predictions that it will be as transformative as the Internet for areas as diverse as payment systems, voting, supply chain management, property records, health records, and more. If even a small portion of these projections pan out, it is possible that our financial market infrastructures and other social infrastructural systems could soon rely on this technology.
The paper then unpacks particular words commonly used to describe the core features of blockchain technology, focusing on the words “immutable,” “secure,” and “trustless.” Some of the problems around the usage of these words stem from bringing jargon from the cryptography or computer science worlds into the world of finance or even Main Street. While a word like “immutable” may have a particular meaning to cryptographers and coders, once it becomes coopted by the mainstream, it is used according it its more colloquial meaning, which can imply that the technology is more powerful than it actually is. Communication problems also arise when “blockchain technology” is discussed as if all variations of it inevitably share the powerful attributes of immutability, security, and trustlessness, when these attributes are actually completely fluid depending on the design of a particular blockchain.
The paper then explores how misunderstandings about fundamental features of the technology can lead to defective risk assessments and the adoption of inappropriate technology in extremely high-stakes areas, such as financial market infrastructures, property records, and health records, among others. With widespread unbridled enthusiasm for the technology, and luminaries trumpeting its transformative nature, it is easily conceivable that this technology could become part of many of our core infrastructures. Underappreciated risk could therefore lurk in any of the systems in which the technology is adopted.
The final section of the paper considers ways to remedy language and communication problems in the blockchain setting and others. Particular care must be taken when bringing a product or technology from a highly specialized area into the real world, whether it is from computer science, mathematics, or drug development, to ensure that the truths about the product/technology are accurately conveyed to those making decisions about the product or technology. Actors in these areas must be hyper-vigilant in ensuring accurate and complete communication across fields, with sloppiness or a lack of diligent inquiry able to easily cause misunderstandings that become, through further communications, seen as truth regarding the technology. This is a difficult problem for law to address, as the transmission of risk here is so organic, so it is vital to identify how to incentivize clear communications in this and other areas prone to similar misunderstandings.