Digital Decentralization and Its Effects on Democracy

Digital decentralization extends beyond just the internet and web platforms, affecting telecommunications and financial systems, infrastructure underpinning these mediums, and data their use generates. It also implicates the hardware supply chains required to build, maintain, and operate digital infrastructure.

The United States’ leadership position in the global technology landscape depends on an understanding of decentralization’s opportunities and risks. Technology Policy Lab participants considered the drivers of decentralization and the key players involved in its promotion, in addition to how U.S. policymakers can ensure digital decentralization is a positive force at the international, national, and individual level. The group also pondered how decentralization factors into the broader competition between democracy and autocracy. A few key questions guided the group’s discussion:

• What are the primary objectives of the key players promoting digital decentralization? Which questions are being debated now, and what should be receiving more attention?
• How will digital decentralization affect democracies, and how can democracies promote digital decentralization as a positive force?
• What are some short- and long-term steps to balance increased data access with protection against potential security, economic, and privacy concerns?
• What should an updated U.S. approach to data access look like, compared to that of the Chinese Communist Party (CCP) or some European governments?

Participants discussed the data privacy, access, and ownership challenges associated with digital decentralization. Most existing privacy regulations assume that data is collected, owned, and stored by a single entity. Web3’s distinguishing characteristics—decentralization and user ownership of data—mark an important shift in the concentration of digital power from a few big technology companies to a broader network of users. Web3 could thus transform data privacy norms and compel a shift in permission controls because data is more dispersed and widely accessible.⁹

U.S. policymakers must therefore build protections for internet users into the fabric of Web3. Web3 promises to benefit individual liberties by bolstering anonymity and freedom from surveillance and censorship, but it could also enable the exploitation of individual customers’ identities. U.S. policymakers must identify and support trustworthy data holders and pursue a federal data privacy law to capture the positive potential of Web3.

Participants further observed that digital decentralization and Web3 present complex governance challenges. For example, Web3 assigns control of data aggregation to a group of private citizens who may use it for malicious purposes. Absent government intervention, malign actors could leverage their control of data aggregation to prey on marginalized members of society, exacerbate political grievances, erode confidence in democracy, and advance authoritarian ideals.¹⁰

The proposed Web3 structure also enables bad actors to evade detection and lacks a centralized authority to provide accountability. Consequently, most of the tools that are available to monitor and regulate behavior on the current web ecosystem—such as content moderation and denial access—lose effectiveness with Web3. Federal governments, law enforcement agencies, and technology companies could use artificial intelligence to monitor aggressive and incendiary behavior in the short term but will need to develop new tools to mitigate cybercrime in a decentralized space.¹¹

Despite the governance challenges associated with Web3, it also presents opportunities for democracies to enhance multilateral cooperation. Democracies have ingrained structural and systemic advantages that could streamline Web3 implementation, as well as existing alliance structures that could be used to foster collaboration and develop transparent Web3 standards. To harness these advantages, however, democracies must confront the trend toward data sovereignty and localization, which could limit information sharing, complicate the adoption of regulation regimes, and contribute to Web3 fragmentation.¹²

Participants further noted that digital decentralization intensifies competition over critical digital infrastructure, a key enabler of Web3 and a target for authoritarian states attempting to mold the accessibility of information. Control of critical infrastructure and the hardware required to build and operate it give autocratic states leverage to limit internet accessibility, which could threaten emerging digital nations’ capacity to adopt Web3.¹³

Based on these observations, the group developed several policy recommendations:

The U.S. interagency should provide regulatory clarity about Web3 behavior. The United States lacks a single authority that specifies legal requirements for Web3 builders. In some cases, relevant agencies even offer contradictory guidance. The U.S. Department of Justice has referred to digital tokens as commodities in its enforcement actions, while the Securities and Exchange Commission (SEC) has enforced them as securities.¹⁴ Harmonized legal guidance could foster innovation and improve consumer protection by encouraging more companies to build within U.S. regulations.

The White House should develop a privacy rating system and general framework for categorizing Web3 risk. U.S. policymakers should classify the relative importance of various types of digital data—including personally identifiable information, as well as financial, medical, lifestyle, and social network–related data—and build processes to protect information deemed most sensitive.

Key U.S. stakeholders—including policymakers, industry partners, and individual web users—can work together to outline a Web3 risk classification system. The system should model existing structures, such as Stanford’s classification system, which organizes information assets into three risk-based categories to determine who is allowed to access certain information and what security precautions are required to prevent unauthorized access.¹⁵

The risk classification system should encompass processes related to data collection, data sharing, data access rights, data deletion policies, user control, tracking, and encryption. Such a system would enable U.S. policymakers to hold platforms accountable for data privacy violations and advance democratic ideals and systems of governance.

The White House should lead the charge on harmonizing international standards. The Biden administration should direct U.S. regulatory agencies to cooperate with counterparts in allied countries to define shared Web3 principles and standards. Specifically, the SEC and European Securities and Markets Authority (ESMA) should build mechanisms to jointly combat fraud and protect investors in both regions. Like-minded democratic states can build upon and identify best practices from prior efforts to regulate virtual currency, such as Switzerland’s regulatory framework enabling the issuance and trading of digital assets.¹⁶

Digital decentralization challenges traditional understandings of internet governance, value creation, and stakeholder participation. Harnessing its potential and mitigating its risks require agile policies centered on reinforcing U.S. economic and social competitiveness. The onus is on U.S. policymakers to drive data and internet governance frameworks, standards, and processes conducive to a democratic digital future.

Acknowledgments

This CNAS Technology Policy Lab was made possible with the generous support of Schmidt Futures. CNAS also thanks all experts who participated in this Lab.

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About the Technology Policy Lab

This policy brief is a product of the CNAS Technology Policy Lab, a working group structure designed to incubate solutions to crucial yet underdeveloped technology policy problems. Each lab is composed of subject matter experts from academia, industry, and the policy community collaborating to develop concrete recommendations to bolster U.S. national security interests and promote American competitiveness. We thank all experts who participated in this Lab.