Say it Again: “Bad News is Good News”

By now, every interested news-junkie is aware that Bitcoin plummeted from $15,000 to $13,000 (USD exchange rate) on January 11, 2018. This morning, every news outlet and armchair analyst attributes the drop to the Korean government signaling that it will ban Bitcoin trading among its citizens.

With Donald Trump and Kim Jong Un butting heads over nuclear missile tests and the upcoming Winter Olympics, you would think that South Korea has other priorities than banning Bitcoin.

As with all news—except accidents—the Korean plans were known by a few insiders (in this case, government bureaucrats), and so the influence on value was bigger than the drop that occurred after the news story. In the days before this “event”, it was probably responsible for a drop of about $4500 in exchange value.

Listen up Wild Ducks! We have heard this before. On Sept 11, China announced the exact same thing. I wrote about it in the most popular article of my 7 years as Blogger: Bad News is Good News for Bitcoin Investors.

As an investor, am I worried? Not on your sweet bippy. I am ecstatic! There are some things that governments cannot ban: the mating of feral cats; water from seeping into cellars; communications networks that are distributed and permissionless. Ineffective and unenforceable regulation always spells opportunity. When I hear of such “bans” (or learn about Jamie Dimon claiming that Bitcoin is a ‘pyramid scheme’ before having all the facts), I become confused and excited

Investors often fail to recognize the way in which toothless government edicts work. I am confused that anyone would act on such flawed information. I am excited that they do. Why?—Because each time Bitcoin makes a quick dive due to crazy or irrelevant news, it makes an even bigger upward jump within days. In this case, the reverse correction has already begun.

I created the chart, below, for my presentation at the Cryptocurrency Expo in Dubai during the last days of October. During this 3 day conference, Bitcoin jumped from $6000 to 6500 because these days followed a hard fork that scared analysts. Within 5 weeks of the conference, Bitcoin touched $20,000, depending on the exchange from which you get quotes. But here’s an odd thing (not so odd, to me): With sudden market accessibility in the past 30 days, why is Bitcoin falling? [continued below]…

In the past month (Dec 10 2017~Jan 10 2018), Bitcoin and Bitcoin futures are finally becoming accessible to traditional brokers using familiar investment instruments. As a result of market accessibility, everyone and his brother is getting into Bitcoin. Since it is still difficult to take a negative position, you might expect this fresh interest to drive up value. This expectation is reinforced by my own anecdotal observation: Based on the large number of old acquaintances asking me to help them buy Bitcoin, it certainly feels like the sentiment is bullish. But no! Existing stakeholders are dumping their positions!

It’s not just because of yesterday’s news. Rather, it’s because anyone who has seen Bitcoin triple in just 3 months, feels that their personal stake experienced a “lucky” gain. They want to turn that paper gain into a profit before it tanks.

But then, there are the cognoscenti. That’s us…We are the individuals who have a feel for the natural, intrinsic value of Bitcoin. We understand that value does not require a redemption guarantee from Caesar. We have a reasonable vision of currency, inflation, economics, history, the role of government—and especially, of distributed trust. Just as important, we understand why an altcoin is unlikely to replace Bitcoin—even if it solves some of Bitcoin’s frustrating technical and governance issues.

Governments tend to react to perceived threats before understanding opportunities, motives and that which is fait accompli. There is a role for government in all of this, but it is not to ban what cannot be banned. That is simply good news for us stakeholders.

Related Reading:


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

Why would anyone attribute value to Bitcoin?

Oh, Cheez…We’re back to this question, again!

As a Bitcoin columnist, I get this question a lot. Today, an answer was requested at Quora.com, where I am a leading contributor on cryptocurrencies:

“Clearly, some people value Bitcoin. But How can
this be? There is nothing there to give it value!”

Many individuals, like the one who asked this question, suspect that Bitcoin was pulled out of thin air—and that it is not backed by gold, a government, or an authoritative redemption guaranty. After all, it is just open source code. What stops me from creating an ElleryCoin using the same code?!

Let’s start with the short answer:

  • Indeed, it was pulled out thin air
  • It isn’t backed by an asset, government or promise
  • You could easily clone Bitcoin (the entire mining ecosystem) and distribute it yourself. It would be exactly like Bitcoin. Yet, Bitcoin is clearly valued by everyone, and your new coin is unlikely to generate interest or adoption.

A More Complete Answer: What is value?

Bitcoin has more intrinsic value than a government printed paper bill. The value arises from a combiation of fundamental properties:

  • It has a capped supply
  • It is widely recognized, liquid, and resistant to legislation
  • It has attained the robust supply-demand of a growing, 2-sided network.
  • It is open and transparent. This elevates user trust
  • Unlike cash and credit, Bitcoin requires no back-end settlement. That’s because it is not a payment instrument. Rather, it is money itself.
  • Finally, it’s value is likely to be durable, because it is not printed by a country that spends beyond its means and racks up debt. In fact, it can never be inflated.

Downside and Risks

But wait! What about the long transaction delay and high cost? There are sharp disagreements anong miners, users and developers concerning block size, transaction malleability, and replay issues. Aren’t these a deal killers? And what about wild volatility in the exchange rate? Doesn’t this retard adoption as a functional currency?

These are transient issues associated with a new technology. Bitcoin is weathering growth pains that arise from a new and distributed governance technology (democracy can be messy!). But, all of these issues have sound solutions. We have witnessed and tested the solutions with various forked coins. Think of these imrpoved altcoins as beta tests. Even if current problems delay the day when you can spend bitcoin at every retail establishment—it is already sucking liquidity from national currencies and becoming the world’s de facto reserve currency.

Many individuals find all of this hard to accept. That is because we have been conditioned to think that ‘value’ arises from assets with ‘intrinsic’ value, the promise of redemption, or by edict. This is not true. In all things (including gold, a Picasso painting, or your labor), value arises from simple supply and demand.

Some individuals claim that all other factors are secondary. But, even this statement is false. All other factors are irrelevant. They may be related, but they are not the source of value.

I recognize that this answer may seem smug or definitive. So, allow me to suggest related questions with answers that are a bit more interesting, because they are subtle. Unlike the question of value, these two questions are open to analysis and opinion: (1) “Will people continue to value bitcoin in the future?” — And (2) “When will Bitcoin stop swinging wildly in value?” (measured by its exchange rate with other currencies).

This is fun! Let’s explore…


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

Why is Bitcoin Capped at 21M units?

I was asked this at Quora.com. But the query deserves a companion question, and so I approached the reply by answering two questions.


You might have asked “Why was Bitcoin designed to have a cap?” But, instead, you asked “Why is the cap set at 21 million bitcoins”. Let’s explore both questions starting with the choice of a circulation cap…

Why set the cap at 21 million BTC?

The choice of a cap number is arbitrary and in fact, it could be 1 or one hundred trillion. It makes no difference at all and it has no effect on the economy—even if Bitcoin wereStacks of Bitcoin to be adopted as a currency all over the world. If it were set to 1 BTC, we would simply discuss nano-BTC instead of 1 BTC for amounts of about $650.

In fact, we already do this today. For many purposes, people are concerned with very small payments. And to best discuss these payments, we have the Satoshi. There are 100,000 Satoshi to each bitcoin (BTC).

What is important, is that the total number of bitcoin (regardless of how many units there are) can be divided into very tiny fractions. That way, the total worldwide supply can be divided into smaller and smaller slivers as market adoption gains traction. Everyone needs to earn, save, spend or pay with a piece of the pie. All users need to know is what fraction of the pie do I control? and not how many ounces, pounds, Kg, or tons is the pie. That is just a number.

Incidentally, the same could be said of gold (it can be shaved very thin), but gold is not quite like computer bits. It has industrial and cosmetic value, and this intrinsic demand for gold (beyond it’s role as a pure monetary instrument) has an effect on supply and demand along with the influence of investment, circulation, savings and reserve.

Why is there a cap at all?

At the beginning of this answer, I suggested another question: Why is Bitcoin capped at all? After all, the monetary supply in every country grows. Even gold production is likely to continue for centuries to come. Why not Bitcoin?

Satoshi designed Bitcoin to eventually become a deflationary currency. I believe that he/she recognized inflation is an insipid tax that constitutes an involuntary redistribution of earned wealth. With a firm cap on the total number of units that exist, governments can still tax, spend and even enforce tax collection. They can go about business building bridges, waging war and providing assistance to the needy. But without a printing press in the hands of transient politicians, they can only spend money with the consent of their constituents and residents.

Of course, governments could borrow money by issuing bonds. But with a capped currency, they must convince creditors that the country has the will and the ability of to actually repay its debts from real dollars and not inflated dollars.

In effect, monetary policy is restricted to the business of the governed, but the money itself is not coined by a domestic treasury. It is the province of something that is far more certain than a human institution. It arises from pure math. It is open and transparent. Everyone is an auditor, because the bookkeeping is crowd sourced.

For prescient legislators and national treasurers, Bitcoin presents far more of an opportunity than a threat. It is good for government, business and consumers, because it forces an honest money supply. Ultimately, it builds trust in government, because no one can cook the books, water down wealth, or print their way out of debt.

What about recession. Isn’t it a result of deflation?

Deflation doesn’t lead to recession. Rather, it sometimes accompanies a recession. Recession is caused by an uncertain job market, war, a massive supply chain interruption or political upheaval. In one way or another, it boils down to a lack of confidence sparked by one of the economy’s core foundations: consumers, investors, business or creditors.

Bitcoin as currency removes a major impediment to confidence. By creating a system that cannot be rigged, it fosters trust in government along with an open and transparent treasury.

Ellery Davies co-chairs CRYPSA and was MC at The Bitcoin Event in New York. He writes for Quora, LinkedINWild Duck and Lifeboat Foundation, where he sits on the New Money Systems Board.

Can Bitcoin be defeated by legislation?

The question breaks down into two parts:

  1. For what public benefit?     —and—
  2. No, it cannot be achieved in this way

Governments are in the business of regulating certain activities—hopefully in an effort to serve the public good. In the case of business methods and activities, their goal is to maintain an orderly marketplace; one that is fair, safe and conducive to economic growth.

But regulation that lacks a clear purpose or a reasonable detection and enforcement mechanism is folly. Such regulation risks making government seem arbitrary, punitive or ineffective.

QR Code_CRYPSA-001«—  This is money. It is not a promissory note, a metaphor, an analogy or an abstract representation of money in some account. It is the money itself. Unlike your national currency, it does not require an underlying asset or redemption guarantee.

Bitcoin is remarkably resistant to effective regulation because it is a fully distributed, peer-to-peer mechanism. There is no central set of books, no bank to subpoena, and no central committee to pressure (at least not anyone who can put the genie back into the bottle). In essence, there is no choke point or accountable administrative party.

Sure—it is possible to trace some transactions and legislate against ‘mixers’ and other anonymization methods—but there is no way to prevent a transaction before it occurs or to know the current distribution of assets. Bitcoin can exist as a printed QR code and it can be transmitted from a jail cell with a blinking flashlight. Sending bitcoin from Alice to Bob has no intermediary. Settlement requires only that one of the parties eventually has access to the Internet. But, there is no credit authority or central asset verification.              [continue below image]…

feral_cat_mating-02-ts

If you are thinking of legislating against the use of Bitcoin, you might as well pass laws to ban the mating of feral cats or forbid water from seeping into underground basements. These things are beyond the domain of human geopolitics. You can try to shape the environment (e.g. offer incentives to cats and water levels), but you cannot stop sex or seepage.

Fortunately, Bitcoin is not a threat to governments—not even to spending or taxation. A gross misunderstanding of economics and sociology has led some nations to be suspicious of Bitcoin, but this improper perception is abating. Governments are gradually recognizing that Bitcoin presents more of an opportunity than a threat.

I have written more extensively on this issue:

Ellery Davies is co-chair of The Cryptocurrency Standards Association, MC for The Bitcoin Event in NY and monetary systems board member for Lifeboat Foundation. This fall, he will teach Cryptocurrency and The Blockchain in Massachusetts.

Privacy –vs– Anonymity

My friend and business partner, Manny Perez holds elective office. As New York State politicians go, he is an all around decent guy! The first things colleagues and constituents notice about him is that he is ethical, principled, has a backbone, and is compassionate for the causes he believes in.

Manny wears other hats. In one role, he guides an ocean freighter as  founder and co-director of CRYPSA, the Cryptocurrency Standards Association. Manny-guitar-sWith the possible exceptions of Satoshi Nakamoto and Andreas Antonopoulos, Manny knows more about Bitcoin than anyone.

But Manny and I differ on the role of privacy and anonymity in financial dealings. While he is a privacy advocate, Manny sees anonymity —and especially civilian tools of anonymity—as a separate and potentially illegal concept. He is uneasy about even discussing the use of intentionally architected anonymity in any financial or communications network. He fears that our phone conversation may be parsed (I agree) and trigger a human review (I agree) and that it could be construed as evidence of promoting illegal technology. This is where we differ… I agree, but I don’t care how anyone who is not party to a private conversation construes it! Yet, I see anonymity as either synonymous with privacy or at least a constituent component. You can’t have one without the other.

Manny was raised in Venezuela, where he was schooled and held is first jobs. He was involved in the energy industry. He acknowledges that experience with a repressive and graft-prone government, lead to a belief in a more open approach: free markets coupled with a democratic government.

Perhaps this is a key source of our different viewpoints. Manny comes from a repressive land and has come to respect the rules-based structure within his comfort zones of banking, energy and government. He is a certified AML expert (anti-money laundering) and believes strongly in other financial oversight rules, like KYC (Know Your Customer) and RICO (Racketeer Influenced and Corrupt Organizations Act).

Because Manny is appreciative of the opportunity and benefits conveyed by his adoptive country, he may overlook a fact that whispers in the minds of other privacy advocates: That is, we may one day need protection from our own government. After all, who but a conspiracy nut or white supremacist could imagine the US government suppressing its populace. Sure, they engage in a little domestic spying—but if you have nothing to hide, why hide at all?!

This week, Manny posted an open letter to the cryptocurrency community. His organization, CRYPSA is at the intersection of that community with law, technology and politics. His letter addresses privacy, anonymity and transparency, but the title is “How can you report a stolen bitcoin?” For me, the issue is a non-sequitur. You needn’t, you shouldn’t, the reporting superstructure shouldn’t exist, and in a well designed system, you can’t.* More to the point, the imposition of any centralized reporting or recording structure would violate the principles of a decentralized, p2p currency.

To be fair, Manny is not a sheep, blindly falling into line. He is shrewd, independent and very bright. But in response to my exaggerated and one-dimensional Manny, I have assembled some thoughts…

1. Privacy, Anonymity and Crime

Bitcoin pile-sThe debate about Bitcoin serving as a laundering mechanism for cyber-criminals is a red herring. Bitcoin does not significantly advance the art of obfuscation or anonymity. There have long been digital E-golds and stored value debit cards that offer immunity from tracking. They are just as easy to use over the Internet.

Moreover, it’s common for crime or vice to drive the early adoption of new technology, especially technology that ushers in a paradigm shift. The problem with linking Bitcoin to crime is that it drives a related debate on transparency, forensics and government oversight. This is a bad association. Transparency should be exclusively elective, being triggered only after a transaction—if and when one party seeks to prove that a payment was made or has a need to discuss a contractual term.

On the other hand, a good mechanism should render forensic analysis a futile effort if attempted by a 3rd party without consent of the parties to a transaction. We should always resist the temptation to build a “snitch” into our own tools. Such designs ultimately defeat their own purpose. They do not help to control crime—Rather, they encourage an invasive government with its fingers in too many people’s private affairs.

CRYPSA is building tools that allow Bitcoin users to ensure that both parties can uncover a transaction completely, but only a party to the transaction wishes to do so!. For example, a parent making a tuition payment to a college can prove the date, amount and courses associated with that payment; a trucker or salesman with a daily expense account can demonstrate to his employer that a purchase was associated with food and lodging and not with souvenirs. And, of course, a taxpayer under audit can demonstrate whatever he wishes about each receipt or payment.

But in every case, the transaction is opaque (and if properly secured, it is completely anonymous) until the sender or recipient chooses to expose details to scrutiny. I will never accept that anonymity is evil nor evidence of illicit intent. Privacy is a basic tenet of a democracy and a government responsible to its citizens. CRYPSA develops tools of transparency, because commerce, businesses and consumers often need to invoke transparency—and not because any entity demands it of them.

We are not required to place our telephone conversations on a public server for future analysis (even if our government saves the metadata or the complete conversation to its clandestine servers). Likewise, we should not expose our transactions to interlopers, no matter their interest or authority. The data should be private until the data generator decides to make it public.

2. Reporting a Transaction (Why not catalog tainted coins?)

Manny also wants to aid in the serialization and cataloging of tainted funds, much like governments do with mass movement of cash into and out of the banking network. This stems from an earnest desire is to help citizens, and not to spy. For example, it seems reasonable that a mechanism to report the theft of currency should be embedded into Bitcoin technology. Perhaps the stolen funds can be more easily identified if digital coins themselves (or their transaction descendants) are fingered as rogue.

The desire to imbue government with the ability to trace the movement of wealth or corporate assets is a natural one. It is an outgrowth of outdated monetary controls and our comfort with centralized trust-endowed. In fact, it is not even a necessary requirement in levying or enforcing taxes.

Look at it this way…

  1. Bitcoin transactions are irreversible without the identification and cooperation of the original payee (the one who received funds). Of course, identification is not a requisite for making a transaction, any more than identification is required for a cash purchase at a restaurant or a newsstand.
  2. There are all sorts of benefits of both anonymous transactions and secure, irrevocable transactions—or least those that cannot be reversed without the consent of the payee. This is one of the key reasons that Bitcoin is taking off despite the start-up fluctuations in exchange rate.
  3. Regarding the concern that senders occasionally wish to reverse a transaction (it was mistaken, unauthorized, or buyer’s remorse), the effort to report, reverse or rescind a transaction is very definitely barking up the wrong tree!

The solution to improper transactions is actually quite simple.

a) Unauthorized Transactions

Harden the system and educate users. Unauthorized transactions can be prevented BEFORE they happen. Even in the worst case, your money will be safer than paper bills in your back pocket, or even than an account balance at your local bank.

b) Buyer’s Remorse and Mistaken transactions

Buyer beware. Think before you reach for your wallet! Think about what you are buying, from whom, and how you came to know them. And here is something else to think about (issues that are being addressed by CRYPSA)…

i.   Do you trust that the product will be shipped?
ii.  Did you bind your purchase to verifiable terms or conditions?
iii. Is a third party guarantor involved (like Amazon or eBay)?

All of these things are available to Bitcoin buyers, if they only educate themselves. In conclusion, “reporting” transactions that you wish to rescind is a red herring. It goes against a key tenant of cryptocurrency. It is certainly possible that a distributed reverse revocation mechanism can be created and implemented. But if this happens, users will migrate to another platform (call it Bitcoin 2.0).

You cannot dictate oversight, rescission or rules to that which has come about from organic tenacity. Instead, we should focus on implementing tools that help buyers and businesses identify sellers who agree to these extensions up front. This, again, is what CRYPSA is doing. It is championing tools that link a transaction to business standards and to user selective transparency. That is, a transaction is transparent if—and only if— the parties to a transaction agree to play by these rules, and if one of them decides to trigger the transparency. For all other p2p transactions, there is no plan to tame the Wild West. It is what it is.

* When I say that you should not report a stolen coin, I really mean that you should not run to the authorities, because there is nothing that they can do. But this is not completely accurate.

20130529_102314a1. There are mechanisms that can announce your theft back into a web of trust. Such a mechanism is at the heart of the certificate revocation method used by the encryption tool, PGP (Pretty Good Privacy). CRYPSA plans to design a similar user-reporting mechanism to make the cryptocurrency community safer.

2. Authorities should still be alerted to theft or misuse of assets. They can still investigate a crime scene, and follow a money trail in the same way that they do with cash transactions, embezzlement or property theft. They can search for motive and opportunity. They have tools and resources and they are professionals at recovering assets.


 

Disclosure: Just like Manny, I am also a CRYPSA director and acting Co-Chairman. (Cryptocurrency Standards Association). This post reflects my personal opinion on the issue of “reporting” unintended, unauthorized or remorseful transactions. I do not speak for other officers or members.

Why are Governments Against Bitcoin?

bitcoin_accepted_here-aI contribute to LinkedIN community discussions on Bitcoin and other cryptocurrencies. That’s because in my day job, I am a principal at the standards organization that defines and promotes a framework of best practices and safety valves for this rapidly growing community.

You might think that a digital currency standards organization is comprised of Bitcoin miners, economic anarchists, Geeks and “bleeding-edge” adopters. If you do, then you would be mistaken. Our founders come from a background of compliance, anti-money laundering and Internet services. Interest from prospective members points to a broad cross section of government, academia, banks, brokers and exchanges.

Today, the event host for an industry forum posed this question (abbreviated version):

Why are regulators and governments afraid of Bitcoin?

Based on the elaboration, it seems that he is focused primarily on the US government.

I may be a minority voice in this particular discussion, but for what it is worth, I respectfully disagree with the fundamental assumption in the question…

Certainly, in some countries governments are concerned that Bitcoin presents a threat to banks, the reserve mechanism, commercial and consumer protection, and the centralized control of monetary policy & supply. But the US is not among these countries. The few official policies that have hit the streets advise caution (especially among banks and speculators), but recognize that Bitcoin is an asset—and in some states, even a currency. A few regulators have even suggested that in the long term, cryptocurrency may represent more of an opportunity than a threat.

Banks, card service collaboratives and regulators are warming up to Bitcoin. The evidence is legion. Influential individuals are tentatively embracing Bitcoin or waiting with an intent to jump in when they sense an alignment of interests, education, regulatory guidance and safety mechanisms.

These individuals are among the strongest voices calling for standards and well defined practices. Standards—even ones that are voluntary but verifiable—are the key to safety, and thereby to adoption and growth.

CRYPSA is an independent standards organization gaining attention within business and government. It is moving quickly on a plan that does not exclude anyone. In fact, the voluntary standards and applications that CRYPSA produce will not weaken the allure of Bitcoin to early adopters, including “Libertarians” or those who value privacy above the rule of law. That is, new standards and mechanisms do not force disclosure or impose rules on P2P transactions between trusted parties.

WildWest-3But what CRYPSA and other best-practices organizations hope to achieve is added trust, security, and even insurance—by demonstrating standards compliance in real time. Ultimately, they will make Bitcoin safe for the rest of us.

It’s not very different from the wild west. Gold, minerals, buffalo and opportunity abounded. But, in the early days, plucking this bounty was limited to the most strident thrill seeker. For all others, the risk of becoming a homesteader was too high. Threats came from all directions: Natives, rattlesnakes, gunslingers, stage coach gangs, and scam artists.

Gradually things change. The wild west was tamed.

The federal government deployed a network of sheriffs and marshals. Risk abated and productivity spread across the west. With Bitcoin, the solution won’t come from the federal government, because one of the key tenants of Bitcoin is a inherent decentralized and personally-empowering architecture. But the government is not blind to this, and a surprising number of politicians even recognize that an empowered consumer can be an asset to national financial health. For this reason, regulators are gradually moving from “wait-and-see” to “How can we help?”

WildWest-1For some, these observations defy the popular conception of government, because governments typically try to consolidate, regulate and enforce. But with Bitcoin, the CRYPSA staff is finding that representatives of government are generally receptive, and even acknowledging that the role of a Federal Reserve or of central banks may be greatly transformed in the next decade.

As with many of the members, I was surprised with the open and friendly nature of discussions. My conclusion is that a popular conception of government with its head it he sand—or one that is unwilling to work with “facts on the ground”—does not apply to US policy makers and regulators. The people in these roles are prepared to embrace change and they want to facilitate the process for everyone’s benefit.

So, the top-line question, “Why are governments (or regulators) against Bitcoin?” is a bit like asking “When will you stop beating your mother?” It is not possible to answer, because in my opinion, the question is based on a false assumption. Bitcoin is gaining steam, and legitimate objections are rapidly falling away.

WildWest-2

Trust a Bitcoin Exchange without Regulation

Yesterday, after the spectacular failure and bankruptcy filing of Mt. Gox, the world’s largest Bitcoin exchange, Peter Finn, an IBM architect, launched a survey within a LinkedIN discussion group. The single question and multiple choice options were:

“In Light of MTGOX what level of transparency should there be for Bitcoin Exchanges?”

1. None. Exchanges Can do as they please
2. All Public Keys Disclosed and Signed
3. Show Public Keys, Source Code, Processes
4. Fully Regulated, Monitored, Audited

One day after it was published, respondents were decidedly negative on the option #1 (no regulation). They responded like this: 1–14%, 2–28%, 3–28%, 4–28%. I am among the 14%: No regulation. But only because Peter failed to cover all the bases. There is a far better option than regulation. But I am getting ahead of myself…

Regulation in a Decentralized, P2P
market, with Open Source Tools 

Suggesting that Bitcoin be “fully regulated” is like demanding that feral cats be licensed to procreate. Perhaps the point can be better illustrated by a metaphor closer to home: Perhaps we should regulate the use of file encryption or bit torrent clients. After all, they can both be used for circumventing copyright law or transmitting illegal content.

Governments are inevitably weakened by legislating against what cannot be regulated. The US has already tried to regulate encryption (PGP/Zimermann and Clipper chip) and they tried to legislate against the use of torrents (Actually, it was a prelude to torrents. Who remembers Napster?)

You can enact laws and regulations, but when you ignore motives, access and facts in evidence, you promote bureaucracy with a head-in-the-sand morality. Feral cats don’t read edicts. Their compulsion to reproduce is strong and they possess the tools they need to procreate. The same is true for bit torrent, encryption and a fully-distributed, low-cost, p2p payment mechanism that is adding users like a wild fire.

Considered in another light, Bitcoin was created to circumvent—or at least—transcend regulation. For many legitimate users, the whole point of a distributed, p2p network built upon open source tools is to unfetter users and disentangle government.

So the real question is not whether we should engage in useless legislation that ignores the facts on the ground. A better question is “How can we make the Wild West a bit safer?” I understand the need for public trust. ! But trust comes from transparency, accountability and outside audits. It doesn’t come from government regulation. Peter alluded to this in the very last sentence the text accompanying his sruvey. He said:

Certified-01

“Will users decide through consensus that
exchange XYZ chooses to fully disclose?”

Bingo! Create standards and practices—especially for security and transparency. Then, make it simple for anyone choosing an exchange or entering into a transaction to determine if the organization complies with industry best practice. Finally, offer a modest level of consortium insurance (to the user, or at least compliant exchanges), so that public trust can be tied to something tangible.

On Feb 25, one day after championing a joint statement from the few credible Bitcoin exchanges, Coinbase took a big step toward this goal when then invited a research analyst from a competitor to audit their internal security practices and randomly compare a customer transaction log to the public blockchain. The report includes an explanation of the test conditions and the results.

Laws are meaningless in a market that cannot be regulated. But industry standards, audits and certification can certainly step up to the task. They can build trust, confidence and stability. Just as importantly, they won’t interfere with the fraction of users who demand personal, private, p2p transactions without auditing or oversight. After all, we must never forget that these individuals started the revolution from which we will all benefit… even the “legitimate” commercial transactions that require transparency, security and an audit trail.

So, let’s revisit Peter Finn’s survey: What level of regulation should be mandated for Bitcoin exchanges?…

I propose Option #5: None. Exchanges can do as they please. But establish an easily verified, independent certification of standards & practices that can be tested at the URL throughout user interaction. Users can avoid the tool, add the tool, or ignore its warning. The certification (and a gut-simple way to see it & test it), empowers the user instead of the government. It also avoids entangling a new technology with unimaginable potential in red tape.

Incidentally, a group of individuals from this discussion group is working toward this goal right now. Although they have barely completed introductions, the Virtual Currency Collaborative Cryptocurrency Standards Association [CRYPSA] has hammered out a charter that will lead to a set of voluntary standards and practices to facilitate open, transparent, safe and auditable transactions within a community that often takes pride in their inherent freedom from regulation. Taming the Wild West will not be too difficult. And it won’t even be necessary to restrict gunslingers from walking into the saloon at high noon.