Topic: Telecom, Internet & Information Policy

How Much Profit Is There in Thwarting Financial Innovation?

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it’s worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky’s work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the “real dangers” of Bitcoin, including use by “narco-terrorists.” (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense.” Shortly after producing it, his office violated New York’s Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

In Holding NSA Spying Illegal, the Second Circuit Treats Data as Property

The U.S. Court of Appeals for the Second Circuit has ruled that section 215 of the USA-PATRIOT Act never authorized the National Security Agency’s collection of all Americans’ phone calling records. It’s pleasing to see the opinion parallel arguments that Randy Barnett and I put forward over the last couple of years.

Two points from different parts of the opinion can help structure our thinking about constitutional protection for communications data and other digital information. Data is property, which can be unconstitutionally seized.

As cases like this often do, the decision spends much time on niceties like standing to sue. In that discussion—finding that the ACLU indeed has legal standing to challenge government collection of its calling data—the court parried the government’s argument that the ACLU suffers no offense until its data is searched.

“The Fourth Amendment protects against unreasonable searches and seizures,” the court emphasized. Data is a thing that can be owned, and when the government takes someone’s data, it is seized.

In this situation, the data is owned jointly by telecommunications companies and their customers. The companies hold it subject to obligations they owe their customers limiting what they can do with it. Think of covenants that run with land. These covenants run with data for the benefit of the customer.

“Just Follow the Damn Constitution”

At a hearing this week on mobile device security, law enforcement representatives argued that technology companies should weaken encryption, such as by installing back doors, so that the government can have easier access to communications. They even chastised companies like Apple and Google for moving to provide consumers better privacy protections.

As an Ars Technica report put it, “lawmakers were not having it.” But a particular lawmaker’s response stands out. It’s the statement of Rep. Ted Lieu (D-CA), one of the few members of Congress with a computer science degree. He also “gets” the structure of power. Lieu articulated why the Fourth Amendment specifically disables government agents’ access to information, and how National Security Agency spying has undercut the interests of law enforcement with its overreaching domestic spying.

Give a listen to Lieu as he chastises the position taken by a district attorney from Suffolk County, MA:

Mass Surveillance: From the War on Drugs to the War on Terror

At first glance, the USA Today headline seemed like many others in the nearly two years since Edward Snowden’s explosive revelations: U.S. secretly tracked billions of calls for decades. And while the program essentials were the same—the secret collection of the telephone metadata of every American– there were two key differences between this story and the hundreds before it on this topic. The offending government entity was the Drug Enforcement Administration, and the warrantless surveillance program was launched during the first Bush administration.

Justice Department officials told Reuters that, “All of the information has been deleted.”  “The agency is no longer collecting bulk telephony metadata from U.S. service providers.” However, DoJ provided no actual proof of the alleged data destruction, and the DoJ Inspector General only recently began an inquiry into the program. While it now seems fairly clear that the DEA’s “USTO” metadata collection program served as a model for the NSA telephony metadata program conducted under Sec. 215 of the PATRIOT Act, what is also clear is that Americans are now confronting a government surveillance apparatus that is truly vast. As Ryan Gallagher of The Intercept noted, this particular DEA mass surveillance program is just one of several undertaken by the agency over the past three decades.

How many other such programs exist at other federal agencies, whether inside or outside of the U.S. intelligence community? And how far back do such programs go? How many members of Congress knew, and for how long? Was this DEA program concealed from the agency’s inspector general for two decades, or did the IG simply fail to investigate the program year after year out of apathy or indifference?

If the past is any guide at all—and the surveillance scandals of the 1960s and 1970s are a very good guide—we are once again confronting a level of government over-reach that calls for a comprehensive, public accounting.

In is new book, Democracy in the Dark, former Church Committee chief counsel Fritz Schwartz notes that “…too much is kept secret not to protect America but to keep illegal or embarrassing conduct from Americans…the Church Committee also found that every president from Franklin Roosevelt to Richard Nixon had secretly abused their powers.” For the paperback edition of his book, Schwartz is going to have to add more American chief executives to his list.

Innovating Within an Overregulated Alcohol Landscape: A #CatoDigital Discussion

April is Alcohol Awareness Month. What better time to take a close look at one of our nation’s most heavily regulated industries and the inventive ways entrepreneurs are innovating within this realm?

The ratification of the 21st Amendment may have officially ended this nation’s failed experiment with alcohol Prohibition, but the policy hangover has had lingering effects. From dry counties to bans on Sunday sales, the sale of alcohol is severely restricted in a confusing patchwork of local, state, and federal regulations. Homebrewing was not legal in all 50 states until 2013 (and homebrewers still cannot legally sell their product). Eighteen states maintain a state monopoly over the wholesaling or retailing of some or all categories of alcoholic beverages. But, even in this stifling economy, intrepid businesses are finding new ways to serve thirsty consumers.  

One real-world example of this is Klink, formerly known as DrinkDrivers, a rapidly growing start-up with a strong foothold in the nation’s capital. The app-based alcohol delivery company relies upon the mechanisms of the sharing economy—which has faced its own share of difficulties from overzealous regulators—to navigate the treacherous legal landscape of the American alcohol industry.

The concept behind Klink is a simple one: modern consumers want the ease of on-demand goods and services, deliverable at the touch of a button, wherever they are. Yet, Klink is not an alcohol provider in the traditional sense.

Unlike many other businesses in the sharing economy, Klink is stringent in its adherence to the laws and regulations governing alcohol sales. When you place an order, the company does not itself process your payments or deliver your alcohol. Instead, Klink plays the role of middleman, partnering with licensed liquor retailers, providing an easy-to-use online platform to connect alcohol providers with customers and occasionally running localized marketing campaigns.

Tomorrow at noon, I’ll be moderating a live-streamed lunchtime discussion featuring my colleague Matthew Feeney, who is Cato’s leading expert on the sharing economy; David Ozgo, the Distilled Spirits Council of the United States (DISCUS)’s Senior Vice President of Economic & Strategic Analysis; and Klink’s Founder and CEO, Jeffrey Nadel.

We’ll be discussing the ways in which Klink is navigating the treacherous regulatory waters of both the sharing economy and the alcohol industry, the regulatory hurdles standing in their way, and what this means for the future of tech innovation and alcohol sales. The panel will be live-streamed, and at-home viewers are encouraged to participate in the Twitter discussion—and tweet their question—using #CatoDigital.

Congress’s Archaic Information Practices

There have been more than 2,700 bills introduced so far in the current Congress. That’s more than 30 bills per day, every day this year, weekends included. Ordinary Americans have a hard time keeping up, of course. Congress does, too.

The controversy around the anti-sex-trafficking bill in the Senate last week illustrates this well. Debate around the formerly non-controversial bill fell into disarray when Democrats discovered language in the bill that would apply the Hyde Amendment to fines collected and disbursed by the government. (The Hyde Amendment bars government spending on abortion. Democrats argue that it has only applied in the past to appropriated funds, not disbursement of fines.)

How is it that it took until late March for Democrats to discover controversial language in a bill that was introduced in January?

Well, Congress is awash in archaic practices. For one, bills are written in “cut and bite” style—change this line, change that word, change another—rather than in a form that lays out what the law would look like if the bill were passed. That makes bills unreadable—a situation Rep. Justin Amash (R-MI) has sought to remedy.

“BitLicense” Foolishness

When New York’s Superintendent of Financial Services first encountered Bitcoin, he evidently thought it was a way to build his reputation as a hangin’ superintendent of financial services. (Doesn’t quite roll off the tongue like “hangin’ judge,” does it…) He sent subpoenas to everyone in the Bitcoin world and went on TV talking about “narcoterrorists.” That was foolishness.

Unfortunately, he also hatched the idea of creating a thing called a “BitLicense” for firms wanting to provide Bitcoin-based financial services in New York. That program is now hanging like an albatross around his neck.

I know nothing of the details, but a couple of decades in public policy make the probable outlines of what happened pretty clear. The press seized on the “BitLicense” idea. Lobbyists and business people came around to fawn over the “BitLicense” idea with Superintendent Lawsky, each hoping not to get cut too deeply by its inartful sharp edges. And Lawsky, having come around to favoring Bitcoin (it’s fairly evident from his speeches) found himself committed to coming up with this “BitLicense” thing.

When the first draft came out in July of last year, it was pretty universally panned. The Bitcoin community savaged it. Bitcoin businesses said they would not do business in New York. The idea of a second round of proposal and comment was quickly on offer.

But the second draft isn’t that much better. When comments close at the end of this week (how to comment), the “BitLicense” will again have received strong criticism. There’s always that contingent whose stock in trade is always—always—to play ball. And to others the “BitLicense” saga has gotten boring…

But the outcome is very probably set. In order to avoid backtracking, which would look foolish, the Department of Financial Services will probably continue forward on the errant path of creating a peculiar special license for Bitcoin-based financial services providers in New York.

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