Programmable compliance: the rules a token enforces on itself

Graduate · enrolled learners

This lesson opens with The Post Office Horizon scandal, 1999 to 2015.

What happened

The UK Post Office ran an accounting system called Horizon that recorded the finances of its thousands of branches, and the Post Office treated Horizon's figures as authoritative truth. Horizon had software bugs that generated false shortfalls, showing money missing from branch accounts when it was not. Believing the system could not be wrong, the Post Office pursued the sub-postmasters who ran the branches for those apparent shortfalls, demanding they repay money they had never taken and prosecuting hundreds of them for theft and false accounting over more than a decade. People were bankrupted, imprisoned, and destroyed, and some died before they were cleared, in what became one of the most widespread miscarriages of justice in the country's history. Only after years of campaigning did a court establish that Horizon was flawed, and convictions began to be overturned, with compensation projected into the billions. The rule the system enforced, this account is short, therefore this person owes money, was executed as authoritative truth, and it was a bug executing as if it were true.

The decision point

Programmable compliance encodes a rule into software that enforces it automatically, and the power and the danger are the same fact: the code is the rule, so whatever the code does is what is enforced, and if the code is treated as authoritative, its bugs are enforced as if they were true. A tokenized asset uses programmable compliance to enforce its own rules, who may hold or transfer the token, what is permitted, how the asset behaves, automatically and on-chain, which is efficient and tamper-resistant, and also means an incomplete or buggy rule executes against holders automatically and authoritatively, with the same finality as a correct one. The Post Office Horizon scandal is the case, from before tokens, of an automated system trusted as authoritative: a flawed accounting system's false shortfalls were enforced as truth against real people because no one could believe the system was wrong, and lives were ruined. The lesson for programmable compliance is that automated enforcement must never be treated as unquestionable, because the code enforces its errors exactly as it enforces its rules. So the decision when building programmable compliance into a tokenized asset is to make it verifiable and contestable, auditable rules, a way to detect and challenge a wrong outcome, human recourse against an automated decision, rather than a system whose output is assumed correct, because a programmable rule trusted as authoritative will enforce its bugs on holders as authoritatively as Horizon enforced its false shortfalls on the sub-postmasters.

Recorded loss

$1,000,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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