Technological standardization by the private sector (de facto) is increasingly a means of evading existing law in network environments such as cyberspace. The U.S. government, the Federal Communications Commission (FCC), and theoreticians tend to view technological standards as the digital materialization of legal standards, and, like legal standards, technological standards are also optimally designed by decentralized regulatory institutions. This paper argues, however, that emerging classes of technological standards, such as digital rights management (DRM), should be analogized to legal rules, which are centralized, rather than decentralized legal standards. It does so from a critical viewpoint of the traditional law and economics literature on optimal lawmaking, with respect to the distinction and choice between rules and standards in the legal process. Arguably, for network environments, current developments show that technical standards are now going through a transformation from their traditional role of strictly regulating technical design of inanimate objects in the shape of legal form, to regulating behavioral performance of users in the shape of legal substance. Focusing on the latter, this paper concludes that when de facto standard setters create technological standards based on their policy preferences, rather than creating open-ended, less specific legal commands, they are turning their policy preferences into covert rules. Optimally, such rules would be created by centralized institutions. Nonetheless, this epistemological shift to technological standards regulating behavioral performance is also met by an opposite regulatory constraint due to high standardization costs for centralized institutions. Thus, while rulemaking is optimally performed by centralized institutions, the stealthy rulemaking activity of de facto standard setters requires an adapted checks and balances approach to technological standard setting. Given these invariable institutional constraints, this paper recommends treating the regulation of technological standards, such as DRM technology, with a rule-oriented approach.
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