Across the board, bitcoin requires forceful and aggressive legal
defense, not complicity with governments in crafting policy and
regulations. It's going to get a lot rougher for bitcoin in the months
and years ahead. We have to be prepared.
As Rick Falkvinge, author of Swarmwise, states,
"The copyright monopoly war wasn't the war, it was the tutorial
mission. The Internet generation is using technology to assert its
values and its place in society, the old industrial generation is
pushing back hard against irrelevance. Things are about to get much
worse."
It is a superb analogy. Legal tender is essentially an unearned
copyright privilege over the production of money. It is unlikely to be
easily disrupted.
Only the naive can delude themselves into thinking that governments
will embrace bitcoin in the name of monetary innovation or a modern
techno-transition to the 'Internet of Things'. What government permits
with one hand, it restricts and strangles with the other. Therefore, any
regulatory gains by the bitcoin community are elusive, because they are
designed to appease, while government enforcement actions reveal a
contradictory agenda.
The real battle lies elsewhere, beyond the public policy debate.
There hasn't been a judicial test case for bitcoin legal issues yet,
primarily because at least two candidates that got sufficiently close to
a legal challenge elected to comply with authorities rather than risk
the uncertain outcome of a test case.
On November 27, 2013, Mike Caldwell of Casascius Coinssuspended
the operations that made his branded coins the global standard for
physical bitcoin rather than adopt a legal stand. While writing Bitcoin Ideology and Tale of Casascius Coins, I had the opportunity to consult with Caldwell and his attorney personally, so I fully understand their decision.
Also more recently, Las Vegas-based Robocoincapitulated to FinCEN pressure
and started requiring all ATM operators to obtain customer information
in an effort to comply with know-your-customer (KYC) regulations.
In my opinion, this was a missed opportunity to determine the legal
categorization of a bitcoin vending machine and to set solid precedent.
What if bitcoin vending machines dispensed only candy bars with 'paper
wallet' wrappers or soda cans with removable wallet decals?
Recommended bitcoin legal areas for mounting a strong, concerted
defense include: mandatory key disclosure, restrictions on freedom of
transaction, attacks on bitcoin fungibility via blacklisting and
whitelisting, and denying the principle of code as protected speech.
Mandatory key disclosure
Key disclosure laws
may become the single most important government tool in asset seizures
and the war on money laundering. These refer to the ability of the
government to demand that you surrender your private encryption keys
that decrypt your data when charged with a criminal offense. If your
data is currency, such as access control to various amounts of bitcoin
on the blockchain, then you have surrendered your financial transaction
history and potentially the value itself.
Jail time for refusing to comply with mandatory key disclosure hasn’t
occurred in the US yet. But, it’s already happening in jurisdictions
such as the UK, where a 33-year-old man was incarcerated for refusing to turn over his decryption keys and a youth was jailed for not disclosing a 50-character encryption password to authorities.
Key disclosure will become increasingly important in civil assets seizures, since Kim Dotcom's pretrial legal funds would have been safe with bitcoin.
It is very likely that a significant key disclosure case will make it to the US Supreme Court, where it is far from certain that the Fifth Amendment privilege, as it relates to a refusal to decrypt bitcoin assets, will be universally upheld.
Freedom of transaction
In support of an individual's freedom to transact without requiring a license to operate a 'money services business', the Bitcoin Foundationfiled an amicus brief
in a Florida state criminal case tied to alleged bitcoin transactions.
In that case, an individual faces one count of being an unauthorized
money transmitter under state law and two counts of money laundering.
The charges against the individual were filed in March 2014 and it is
the first known state criminal case involving the alleged buying and
selling of bitcoin. Another defendant was arrested at the same time
based on similar alleged conduct and has been separately charged. This
Florida case has received wide-spread media attention, such as from Bloomberg.
The foundation’s amicus brief supports the individual defendant’s
motion to dismiss the count charging him with being an unauthorized
money transmitter based on the core position that state prosecutors are
improperly applying Florida statutes regulating 'money services
businesses' to individuals conducting peer-to-peer sales of bitcoin.
This case is a big deal
because it specifically targets high-dollar-value transactions and
prosecutions like these could shut down one of the last remaining
avenues for purchasing bitcoin anonymously.
Denying an individual's freedom to transact violates freedom of
choice in currency, which is similar to an outright ban on bitcoin. In a
ban, government authorities prohibit pricing or use of a currency other
than the nation's 'official' currency, as witnessed in Bolivia, Ecuador, Kyrgyzstan, Bangladesh and Russia.
The ban in Bangladesh extended to even informing or educating others
about bitcoin, prompting the nonprofit and educational Bitcoin
Foundation Bangladesh to suspend operations temporarily.
In a slightly more positive development this month, Russia’s Ministry
of Finance reduced potential fines facing both individual and
institutional bitcoin users who create, issue or promote digital
currencies.
The draft bill, which still seeks to outlaw the use of 'money surrogates' like bitcoin, decreases penalties for
individuals to 50,000 rubles ($1,050) from 60,000 ($1,314). Legal
entities would now face a maximum fine of 500,000 rubles ($10,781) for
this action, down from 1m rubles ($21,563).
Fungibility
Fungibility
refers to the concept that every unit or subunit remains equivalent and
identical to any other unit or subunit. It is the property of a good or
commodity whose individual units are capable of mutual substitution.
Fungibility is a complex issue, because it can be described in economic terms, cryptographic terms and policy-based terms.
Hashcash inventor Adam Back states that cryptographic fungibility is stronger than policy-based fungibility. Cryptocurrency expert Jonathan Levin replies
that there is actually no cryptographic fungibility in bitcoin and that
the best suggestion of this is simultaneous creation and destruction.
Zooko Wilcox-O'Hearn, a computer security specialist, asserts that policy-based fungibility ends at the jurisdictional border.
While bitcoin public addresses do have a traceable history, the
sub-unit components that make up a single bitcoin transaction do not
have unique identifiers,
such as the serial numbers on paper bank notes. Since individual
transactions are able to be broken apart, each component unit can only
be traced realistically to its creating miner. This complicates reliable
ownership and thus provides an element of plausible deniability for the entire infrastructure.
I maintain that the US Marshal Service's first, and now second sale, of seized bitcoin demonstrates
current fungibility at least in the US jurisdiction. Just as the
government doesn't spend confiscated dollars at a discount, they don't
sell 'tainted' bitcoin at a discount and, furthermore, none of the
offered coins are blacklisted or whitelisted. A commercial precedent has
been set.
Varying tax treatments for bitcoin may have an impact on bitcoin fungibility within certain geographic areas, however. Also, read what a landmark legal case from mid-1700s Scotland tells us about monetary fungibility.
As governments attempt to steer bitcoin deployment to small and microtransactions and wholesale payment networks become politicized,
the issue of international fungibility looms large, because large
cross-border and permission-less value transfers may become bitcoin's
sweet spot. Now, that's a sweet spot for a strong legal defense too.
Code as speech
Transmitting a bitcoin message to the network blockchain is the same
as sending an encrypted, private email message and, as such, is
protected under the First Amendment to the US Constitution. This
important principle extends to both the development and usage of the
code.
For the last 24 years, the Electronic Frontier Foundation
(EFF) has been at the forefront of defending civil liberties in the
digital age, championing user privacy and free expression. Activism
director Rainey Reitman's brilliant editorial opposing New York's proposed 'BitLicense' scheme is a powerful declaration of privacy rights.
"Digital currencies such as bitcoin strengthen privacy and are
resistant to censorship. We should consider this a feature, not a bug,"
Reitman said in a statement.
The EFF also defended
MIT student bitcoin developers in a New Jersey court to oppose a
subpoena issued over their prize-winning bitcoin mining program. The
program known as Tidbit was designed to serve as an alternative to
viewing online advertising by allowing website users to help mine
bitcoins for the site they're visiting instead.
In a move that could strengthen bitcoin-related privacy, Senator Rand Paul of Kentucky recently introduced a bill to extend Fourth Amendment protections to include electronic communications.
Also, anticipating potential Fourth Amendment-related challenges, the Bitcoin Foundation's global policy counsel Jim Harper compared New York's BitLicense regulation to an inspection of an entrepreneur's garage:
"The comprehensive financial surveillance that the
'BitLicense' proposal requires at proposed sections 200.12(a)(1) and
200.15 is unwarranted, and the Department has put forth no evidence or
argument that it is calibrated to cost-effectively achieve any public
interest goal. Requiring businesses to maintain detailed surveillance of
their customers anticipating later law enforcement seizure is itself a
constructive seizure, which is unconstitutional under a proper
interpretation of the Fourth Amendment to the US Constitution."
Now, if India had Fourth Amendment protections, egregious office raids,
such as the ones carried out last December against two bitcoin
exchanges, could have been effectively challenged. India may need to
seek out alternative avenues for defense.
The way forward
I am hopeful that with criminal defense and trial attorney Brian Klein
more closely associated with the Bitcoin Foundation, other defense
attorneys will be encouraged to engage with the bitcoin community,
domestically and internationally.
Taking a principled stand in Bangladesh,
for instance, will send a strong message to the entire world. When it
comes to impact litigation, the EFF cannot do it all. We should view
this as an opportunity for bitcoin advocacy groups to grow a backbone.
Jon Matonis is resigning as executive director of the Bitcoin
Foundation, a trade group that supports and advocates for the
development and expansion of bitcoin, the digital currency.
Effective
Friday, Mr. Matonis will be replaced by Patrick Murck, who has been the
foundation’s general counsel. Messrs. Matonis and Murck, both founding
members, played key roles containing the fallout surrounding bitcoin
during some harmful scandals...
A formal ISO currency code will spur global mainstream adoption of bitcoin more than any other single action.
When a new currency code becomes adopted by the independent and nonpolitical International Organization for Standardization (ISO), it immediately enters the database tables upon which Visa, MasterCard, PayPal, SWIFT and other clearing networks rely.
ISO 4217 is a standard published by the ISO, which delineates
currency designators, country codes (alpha and numeric) and references
to minor units in three separate tables.
Now, a distributed currency having an identifiable code in a centralized database may not seem like much of an accomplishment.
However, when we consider what this means for integration into
existing networks, trading systems and software accounting systems, it
becomes much more significant. All the more so when we consider that a
code prefix of 'X' denotes a non-national affiliation or a monetary
metal such as gold or silver.
Instantly, bitcoin as XBT will be available as a selectable clearing
and settlement unit for any business that chooses to offer and implement
bitcoin. Of course, designing and managing the necessary settlement and
hedging mechanisms will be a different matter altogether. Certain
clearing networks may effectively become bitcoin exchanges.
With the three-character code having been in informal usage since early 2013, a formal application for XBT is nearing completion by the Financial Standards Working Group within the Bitcoin Foundation. This effort has its origins in a petition submitted by Emelyne Weiss that circulated on Change.org, the world's platform for change. The petition closed with 836 supporters.
Since the decentralized bitcoin has a peer-to-peer block chain rather
than an 'official' currency manager, a central bank or an existing
institution such as SWIFT may also be necessary to support the ISO
application for XBT. As leaders of financial innovation through their Innotribe
initiative, early indications from SWIFT senior management are that
they would be supportive of such an application, if required.
Recently, the topic of XBT and the need to standardize various subunits has been much debated on Reddit
and other social media outlets, unfortunately causing more confusion
than clarification. Let's examine some of the top-level issues.
Why was XBT selected and what happens to BTC?
The code XBT was selected because the prefix 'X' denotes a
non-national affiliation or a monetary metal such as gold or silver.
Technically, BTC would be unavailable due to the fact 'BT' already
represents the country of Bhutan.
The first two letters of the code are the two letters of the country
code (as with national top-level domains on the Internet) and the third
is the initial of the currency itself. In the case of the dollar (USD),
US represents the country and D represents the initial of the currency.
Most likely, BTC would still remain in colloquial usage because it is already widely recognized by the community. Just as slang terms
for money exist around the world, BTC shorthand would be used similar
to how 'bucks' or 'quid' are used for other currencies. In this
scenario, I expect BTC to continue to represent one full bitcoin unit.
Why does XBT have to represent a full unit of bitcoin?
One XBT unit as listed and recorded within ISO 4217 would have eight
subunits or decimal places to the right of the decimal point. The
rationale for this is that a neutral global default for bitcoin around
the world cannot deviate from the unit's representation on the block
chain (as expressed in the reference implementation) and the bitcoin
integer in the core protocol is not changing.
One bitcoin on the block chain must equal one bitcoin in the formal
standards world or else processing errors would be potentially
catastrophic.
Even though eight decimals was selected as the starting point for the
bitcoin integer, that number may need to be increased over time and
increasing the amount of decimal places for bitcoin would hardly be a
contested issue by the miners when the time comes.
The code representation within ISO 4217 cannot be changed up and down
due to the varying number of decimal places in the core protocol. It
must remain static.
Bitcoin is correctly placed, alongside gold, as a digital
cryptographic commodity. So, just as gold (XAU) may trade in some areas
as kilos or kilograms, the global default standard for pricing and
measuring quantities of gold bullion remains the troy ounce.
One troy ounce is currently defined as 31.1034768 grams and is equivalent to approximately 1.09714 avoirdupois ounces. XAU denotes one troy ounce of gold and 'XAU/USD' means the price of 1 troy ounce of gold in US dollars.
How are the subunits related to XBT and the ISO standard?
Despite the fact that several names for bitcoin's minor units have been proposed, only three of the minor units, or subunits, have achieved a consensus within the bitcoin economy.
The third space after the decimal point (10−3) is commonly referred to as 'millibit' or mBTC. The sixth space after the decimal point (10−6) is commonly referred to as 'bit' or μBTC. The eighth space after the decimal point (10−8) is commonly referred to as a 'satoshi', the smallest available amount of bitcoin today.
These existing minor units of bitcoin will be submitted in the ISO
application for XBT and it is not required for all of the individual
minor units to be submitted.
To better facilitate consumer applications, some
bitcoin operators may elect to provide a choice for display
preferences. Several applications and web sites, such as BitcoinAverage, already permit toggling between bitcoin and millibit for display purposes.
Recently, some exchange operators have also expressed an interest and willingness to display prices in bits, so that only two decimal places exist to the right of the integer. For instance, KnCMiner embraced
the bits display option for its wallet app. These moves could be
especially useful for accounting packages that typically accommodate
only two decimal points.
Strong opinions exist on all sides for going to a bits display, a millibits display, or remaining with a full bitcoin display.
As a consensus emerges, it is also perceived as useful to utilize one
expression for retail consumers and to maintain a full bitcoin
expression for wholesale level or institutional trading. This structure
is entirely achievable because dual display options can be easily
adopted by software providers.
WASHINGTON, D.C. (October 7, 2014) — The Bitcoin Foundation (/)’s Financial Standards Working Group is underway with chairperson Beth Moses, an aerospace engineer, formerly with NASA and now with Virgin Galactic, at the helm. The group’s priorities for 2014 Q4 and 2015 Q1 will focus on applying for ISO 4217 approval for a Bitcoin currency code as well as drawing up recommendations for a Bitcoin currency symbol and Bitcoin subunits.
“Standardization is an important step towards removing obstacles for mainstream adoption — this is especially true with a technology for financial innovation that is global in reach,” said Jon Matonis, Executive Director of the Bitcoin Foundation.
The first task of the Financial Standards Working Group will be to apply for ISO 4217 approval for a Bitcoin currency code. Obtaining an internationally recognized currency code for Bitcoin will enable more fluid international transactions and currency conversion. ISO 4217 is the International Standard for currency codes and currencies are traditionally represented as a 3-letter alphabetic code. Currently, BTC is the leading candidate as it is in common use globally. However, ISO 4217 standards expect a leading letter “X” for global commodities like gold (XAU) and emergent supranational currencies like the precursor to the Euro (XEU). To this effect, some leading foreign exchange tools and services have already adopted the leading code “XBT” such as Xe.com, Oanda and Bloomberg.
Secondly the working group will examine the options for and recommend a Bitcoin currency unicode symbol. A currency symbol (https://en.wikipedia.org/wiki/Currency_symbols) is a graphic symbol used as a shorthand for a currency’s name, especially in reference to amounts of money. Many are familiar with $ for USD, € for Euro and ¥ for Yuan. Currently, the leading symbols for Bitcoin are B , ฿, and Ƀ. The working group will deploy a consensus based process for reaching an agreement for the official currency symbol. In addition, the working group will recommend Bitcoin subunits. In a currency, there is usually a main unit (base), and a subunit that is a fraction of the main unit. Currencies today operate with two decimal spaces to the right ($1.00). In Bitcoin, there are currently eight so one could theoretically pay you 0.00000001 or one hundred-millionth of a Bitcoin. Not only is this confusing for consumers, it does not fit in existing systems and software for accounting practices.
With a shared goal of achieving standardization for mainstream adoption, the volunteer working group of 20 Bitcoin Foundation members is led by volunteer chair Beth Moses, who led the standardization and testing of extravehicular interfaces for the International Space Station while at NASA. Like the International Space Station, Bitcoin is an emerging technology with global implications that requires a shared, basic language in order to enable successful mainstream utilization.
The working group will be hosting roundtable discussions with industry leaders, experts, and stakeholders in the coming weeks.
ABOUT // Established in July 2012, the Bitcoin Foundation (/) is the world’s first and leading member- driven non-profit digital currency trade organization dedicated to serving the business, technology, government relations, and public affairs needs of the Bitcoin community. The foundation works to protect and standardize the Bitcoin protocol and software, to broaden the use of Bitcoin through public education and by fostering a safe and sane legal and regulatory environment, and to support local Bitcoin efforts by connecting a network of Bitcoin communities worldwide. Think Globally, Act Locally. Join us! (../../join/)
The ultra-resilient bitcoin network is the world's largest
distributing computing project in terms of raw computational power,
having long ago surpassed 1 exaFLOPS (1,000 petaFLOPS) – over
eight times the combined speed of the top 500 supercomputers.
Although since increasing to an amazing 3.2 zettaFLOPS (3,200 exaFLOPS), the project was quietly removed from Wikipedia's list of distributed computing projects. This is probably due to the fact that the exaFLOPS estimate breaks down with bitcoin's specialized ASICs, since they are not capable of floating-point operations.
Instead, the estimate may be used for estimating how well other
supercomputers and distributed networking projects would be able to mine
bitcoin, since supercomputers have the capability to perform the
integer operations used in hashing.
Therefore, today's fastest supercomputer, China's Tianhe-2 with a performance of 33.86 Pflop/s, would measure at about 0.001% of the bitcoin network.
Monitoring network health
As bitcoin matures and starts to compete with legacy retail payments
networks like Visa and MasterCard, and wholesale networks like Swift,
the health of the decentralized network becomes vital to its performance
capabilities.
Community site Bitcoin.org does an excellent job of maintaining the historical archive of network status alerts and vulnerabilities.
The assembled report below lists the critical statistics for
monitoring the ongoing health of the distributed bitcoin network,
covering the measurements important for reachability, scalability,
security and transaction processing speed.
Bitnodes estimates the size of the bitcoin network by finding all the
reachable nodes in the network. The current methodology involves
sending getaddr message
recursively to find all the reachable nodes in the network starting
from a set of seed nodes. It performs this polling every 24 hours and
displays the results on a world heat map of countries, including
rankings and version of bitcoin reference client.
Source: Bitnodes
The Bitnodes Project launched in April 2013 with the Bitcoin
Foundation’s sponsorship as a community resource. The project's latest
report can be seen here.
Source: BitcoinStats
The information exchange in the bitcoin network is all but
instantaneous. Exactly how fast is information being propagated in the
network though? Maintained by BitcoinStats, the propagation evolution
chart shows the 50th percentile of the inv-messages received by
peers (ie: the plot shows the time since a transaction or block enters
the network until a majority of nodes has received and processed it).
DNS seeds are used by almost all bitcoin clients to identify a set of
nodes to connect to when starting. The seeds are run by volunteers
using a multitude of mechanisms to ensure the returned seeds represent a
good sample of nodes currently online.
Source: BitcoinStats
Except for bitseed.xf2.org, the seeds aim to return nodes that are
currently online and reachable. Also provided by BitcoinStats, the chart
shows results from regular bootstrap attempts using the seeds with the
plot representing the average hourly connection success rate for each of
the seeds. The closer to 100%, the better the seed is.
An auxiliary chart with response time of DNS seeds to queries is also
provided, which indicates the response times in milliseconds (ms)
elapsed between sending the query and receiving a response.
Provided by developer Pieter Wuille, this series of graphs display
hashing difficulty and the estimated number of terahashes per second
(computation speed) that the network is performing for various time
windows (1 terahash equals 1,000 gigahashes).
Calculated by dividing maximum target by current target where target is a 256-bit number, difficulty measures
how difficult it is to find a new block compared to the easiest it can
ever be. Difficulty adjusts every 2,016 blocks (or two weeks) and to
find a block, the SHA-256 hash of a block’s header must be lower than or
equal to the current target for the block to be accepted by the
network.
This pie chart from Organ Ofcorti is an estimation of hash rate
distribution amongst the largest mining pools at a weekly interval. It
is important to monitor because the integrity of the network depends on a
single actor not exceeding 50% of the overall hashing power.
Source: Organ OfCorti
A table of solved block statistics lists all statistics that can be
derived from the number of blocks a hash rate contributor has solved for
the past week. Block attributions are either from primary sources such
as those claimed by a particular pool website, or secondary sources such
as coinbase signatures, or known generation addresses.
When dependent on secondary sources only, data may be inaccurate and
miss some blocks if a particular block-solver has gone to some trouble
to hide solved blocks and this will result in an underestimate of the
block-solver hash rate.
An alternate chart across 24-hour, 48-hour and four-day time horizons is provided by Blockchain.
Produced by Coinometrics, this metric attempts to measure the
likelihood and prevalence of bitcoin miners engaged in a subset behavior
of the 'Selfish Mining' strategy, as described by Ittay Eyal and Emin
Gün Sirer in their paper, Majority is not Enough: Bitcoin Mining is Vulnerable.
Source: Coinometrics
Since the bitcoin protocol relies on miners following the rules laid
out by the software, as soon as miners have found a block they need to
announce it to the network.
Selfish mining defies this rule, because certain miners, once they
have found a block, can withhold it from the network and start working
on their next block. Once they have a number in their hidden chain, they
can release them to invalidate the blocks that the network thought were
part of the main chain.
The lower the probability that at least k (actual
distribution) blocks will be found in the time represented by the first
bucket, the more likely that miners are engaging in quick succession
behavior under the Selfish Mining strategy.
Coinometrics explains:
"One way to estimate the likelihood of such a strategy
being implemented is to measure the distribution of the time between
blocks against the expected distribution. The rate of creation of
bitcoin blocks is determined by how quickly the first miner solves for a
hash meeting the difficulty requirements of the protocol. Every attempt
to meet this difficulty has a set probability of being correct. By
definition, the probability is independent between hashes. As a result
the rate at which blocks are generated should follow an exponential
distribution."
Source: Blockchain
Orphaned blocks are valid blocks which are not part of the main
bitcoin block chain. They can occur naturally when two miners produce
blocks at similar times or they can be caused by an attacker with enough
hashing power attempting to reverse transactions.
Initially accepted by the majority of the network, orphaned blocks are
those that are rejected after proof of a longer block chain is received
that doesn't include that particular block. In other words, a user
could see a transaction as having one confirmation and then revert to
zero confirmations if a longer blockchain was received that didn't
include the transaction.
Blockchain maintains a real-time monitor for double spends detected
in the last 500,000 transactions utilizing a 10-minute cache. This could
be used to alert users to potentially malicious transactions on the
network.
Source: Blockchain
Blockchain also maintains this live updating list of new bitcoin
transactions waiting to be included in a block. The monitor displays
total number of unconfirmed transactions, including total fees and total
size in kilobytes.
Source: Blockchain
This measures the average (mean) amount of time in minutes that it
takes for a transaction to be accepted into a block. Reasonable
estimates differ on the amount of time and confirmations for a
transaction to be considered cleared and ‘good’, but that appropriate
risk level would be associated with the transaction’s value.
Source: Blockchain
The block chain total size is important because of the storage space
considerations as it grows as well as the time it takes for initial
synchronization after installing the reference client for the first
time. This measurement shows total size of all block headers and
transactions not including database indexes.
Source: Blockchain
Measured here in fractions of a megabyte, the block size will become a heated debate once the bitcoin network starts approaching its current throughput limit of approximately seven transactions per second.
Ultimately important for scalability, the stated block size limit
will have to be increased, linked to another variable, or remain the
same with more confirmations pushed off chain, each path having
corresponding implications for decentralization of the system.
Please let us know in the comments section below if we have
omitted any measurement critical to network operations or if any
references are out-dated.
Last week's advisory from the US Consumer Financial Protection Bureau
(CFPB) warning consumers about the risks of virtual currencies such as
bitcoin diligently listed several obvious risks, but simultaneously
omitted the very consumer protections provided by certain cryptographic
monies.
Citing malicious hackers, potentially high mark-up fees,
exchange-rate volatility, lack of governmental insurance, and risk of
private key loss is laudable given that so few market participants
conduct proper due diligence before jumping in to a new alternative. The
majority of companies involved in the bitcoin ecosystem have been
highlighting these risks for years.
To be fair, the CFPB charter may not include stressing the particular
benefits of some payment methods over others. However, when the words
'financial protection' are in your agency's official name, it appears
disingenuous to intentionally omit features from what may be one of the
world's most protective financial instruments ever designed.
Who benefits most?
Bootstrapping a competing free-market alternative in a field of
national currencies with so many pre-existing and unfair legal tender
advantages resembles the solving of the great chicken-or-the-egg
debate: which came first, the merchant or the consumer?
A recent New York Timesarticle on bitcoin merchants sparked an instructive debate
about whether bitcoin was mostly a payment method benefiting merchants
or if consumers also gained substantial benefits from the digital
currency.
Merchants need an incentive to accept the new currency before
consumers can spend the new currency. And similarly, consumers need
reasons to hold the new currency before merchants can accept it. The CFPB advisory warning does little to instill confidence in the latter.
Therefore, in order to better assist consumers, I will describe some of bitcoin's superior attributes in the area of financial protection:
1. Protection from counterfeit bank notes
As the most counterfeit-proof currency in existence today, bitcoin protects consumers from the risk of accepting or receiving counterfeit bank notes in commerce, which continues to plague the world's fiat note issuers. By virtue of the innovative bitcoin block chain,
transactions are chronologically recorded in a shared database
preventing double-spending and it is computationally impractical to
modify once recorded in the chain.
2. Protection from financial surveillance
Just as massive digital surveillance of our email correspondence,
telephone conversations, instant messaging, and web surfing habits has
escalated in the last 20 years, so has surveillance of our income,
spending, and financial transactions. Individuals and corporations are
under the financial microscope now more than at any time in history – a
fact that has significantly eroded any remaining vestiges of financial
privacy. As we move from a paper money world to a digital money world,
maintaining our analog equivalent rights becomes a necessity.
Governments crave this information in the name of preventing money
laundering, fighting terrorism, collecting taxes, and fighting the drug,
gambling and pornography wars. Bitcoin restores the balance with
financial privacy and financial sovereignty by placing responsibility
for how transparent we want to be in the hands of the user where it
belongs, hence user-defined privacy. This is also permission-less
privacy and, if opted for, it includes total balance privacy in addition
to transaction date, type, amount, and recipient privacy.
3. Protection from identity theft
Bitcoin provides excellent protection from both identity theft and
fraudulent charges, primarily because it functions as a push-method
rather than a pull-method for personal financial details. Since account
details and identity are not transferred to the merchant for payment
purposes, the potential for malicious hackers and internal corporate
security breaches are reduced to zero. With current payment
methodologies, however, identity theft and resulting consequences to the victims are significant negative issues.
4. Protection from physical loss of assets
In this sense, bitcoin is virtual, however the comparison is to
trusting the safekeeping of your assets to a third party like a
financial institution or wallet provider. Of course, when utilizing a
third-party, a host of new risks is introduced which government
regulation and government deposit insurance seek to address. But, not
using bitcoin because it doesn't come with government assurances is like
not flying because you might fall out of the sky.
Bitcoin possesses the option of simply not having to trust a
third-party intermediary and, in this way, it resembles a digital bearer
instrument such as gold or paper cash. However, bitcoin's unique
exceptions include the ability to safely backup your assets multiple
times and to transfer them digitally without sacrificing their bearer
nature.
5. Protection from cross-border restrictions and excessive fees
Some money services businesses and financial institutions charge
exorbitant fees just to execute a simple monetary transfer often preying
upon those that are most financially vulnerable. Other countries
severely restrict the amount and type of national currencies that may
enter their borders causing hardship
for many American citizens and residents needing to transfer living
funds to family members overseas. Without requiring an intermediary,
bitcoin insulates individuals and businesses from these detrimental
restrictions and fees.
6. Protection from payment blockades
Blockades such as these are typically enacted in the name of
'political correctness' as witnessed by the aggressive payment blockade
against WikiLeaks
in 2011. As the US government leaned strongly on payment processors
Visa, MasterCard, and PayPal to discontinue donations to the
whistle-blowing site, donations in bitcoin continued to provide a
valuable method for WikiLeaks to maintain an ongoing financial stream
for operations.
7. Protection from government-sponsored inflation
As the so-called 'hidden tax', inflation represents one of the most
insidious methods ever devised by governments to boost their wealth at
the expense of the fleeced middle-class. Without significant assets to
appreciate and keep pace with government-induced inflation, it is the
poor and middle-class that suffer the most during inflation, despite the
fact that the decline in purchasing power may only be noticeable over a
longer time horizon. Bitcoin, with its fixed and predictable supply, provides a store of value alternative to the currency of nations with printing presses run amok.
8. Protection from confiscation
Arbitrary and capricious confiscation of assets has emerged as a new trend among debt-saddled countries in the euro zone. Cyprus and Spain
are two examples, but any government with control over its banking
system assets has the potential to enact a 'deposit levy' or a 'wealth
tax' if revenues from taxation are insufficient to meet ongoing
government obligations. The protections afforded by bitcoin in this area
prevent loss of wealth due to random government asset seizures.
Let the buyer beware
Today, I was reminded that Confucius once said: "The beginning of
wisdom is to call things by their proper name." So, let's not forget the
ongoing bitcoin word game played by governments and other wordsmiths.
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
While we should definitely heed the risks within a digital currency
environment, just as we heed the risks inherent with physical money, we
should be equally aware of the additional financial protections provided
by bitcoin that are so critical for maintaining a free society. Caveat
emptor!
With New York's BitLicense scheme officially three months away,
sophisticated traders are already devising strategies to profit from the
potential arbitrage opportunities.
If implemented in the regulation's final version, the physical address and identification requirements (Sections 200.12 and 200.15) for both sides of a transaction will dilute the inherent privacy of the overall bitcoin network.
Due to potential IP address blocking and other techniques to identify
and block New York-based traders, the exchanges operating within
the jurisdiction may end up 'ring-fencing' themselves and their
customers' bitcoin.
Of course, this was not New York's intention, but if other parties
begin to shun 'New York' bitcoins, then those parties that do choose to
accept them may only accept them at a discount, making it costly to
transfer 'non-private' bitcoins out of New York.
Tainted by government
Typically, we refer to a loss of essential fungibility
occurring as a result of some type of positive coin validation required
by the government. In this case, it would be the government-approved
coins that would be tainted. Perhaps, New York could mandate complete
fungibility of their exchanges' coins through legislation, but that
would imply subsidizing the exchange rate.
Arthur Hayes, CEO and co-founder of BitMEX (Bitcoin Mercantile Exchange), who has strong derivatives experience with an institutional trading background, explained:
"These regulations are going to make some
savvy traders a lot of money. Because there is a premium placed on
privacy, the 'clean' coins trading on exchanges with BitLicenses will
trade at a discount to coins trading on exchanges that operate in more
laissez-faire jurisdictions. Traders with the ability and risk appetite
will be able to arbitrage the price differential."
Based in Hong Kong, Hayes is launching a bitcoin futures and options
exchange similar to the currency futures exchanges that sprouted up in
Chicago after the 1971 collapse of Bretton Woods.
Hayes recently
participated on CoinSummit's derivatives panel
in London, where he said he is counting on large speculators and
commercial hedgers to utilize exchange-traded futures and options as a
risk management tool for bitcoin.
Jurisdictional differential
Just as WTI (West Texas Intermediate) crude oil contracts vs North Sea Brent crude oil contracts trade at a differential
and Chicago wheat contracts vs Kansas City wheat contracts trade at a
differential, certain jurisdictional bitcoins can trade with a
differential. For now, only a single-type bitcoin futures contract will
be traded on BitMEX.
Indeed, newly mined 'virgin' bitcoin have commanded a premium for
some time now in certain circles. In 2013-14, Mt. Gox coins frequently
traded at either a premium or discount to other bitcoin depending on
politics and exchange liquidity.
With physical bitcoin over the counter or with person-to-person trading, Hayes describes a likely scenario:
"The best example would be citizens of New
York who wish to anonymously buy Bitcoin. Buyers will need to pay an
increased fee to a trader who does not possess a BitLicense. The fee
will cover his or her costs of acquiring coins outside of New York, and
extra profit for the trader compensating him or her for the extra risks
taken."
Bitcoin black market
Free markets solve political and structural problems to increase liquidity, and currencies are no different.
Today, one of the best examples of this is the 'blue dollar' exchange rate in peso-ravaged Argentina, which trades at a 60% premium to the official US dollar exchange rate with the central bank.
The BitLicense-based
exchange rate may be the closest thing to an official central bank rate
for bitcoin and maybe this is a conscious attempt to develop an
institutional wholesale market.
Ultimately, it could be a bonanza for
those that find themselves with the unofficial bitcoin, just like the
happy tourists to Argentina.
It's quite possible that, at the end of the day, we will see a three-tier rate structure for bitcoin:
Virgin bitcoin
Free market bitcoin
Tainted jurisdiction official bitcoin
Hayes added, "At the end of the day these regulations will do nothing
but push more trading off exchange and make it more expensive for
honest people to obtain financial privacy."
According to the proposed 17th July bitcoin regulation from New York
State, the public now has 45 days to comment and then a 45-day grace
period prior to full adoption. But what's after 17th October? More
importantly, what's after New York?
The poor regulators are in a quandary. It's hard not to be
sympathetic sometimes. They are practically in a no-win situation,
because regulators must use their tools to regulate, but the more they
do, the more they inadvertently encourage market-based responses.
With the New York framework
for bitcoin businesses, financial regulators need to demonstrate that
they have not ceded control of the payments mechanism and the wholesale
money transfer business, while simultaneously trying not to be accused
of squashing technological innovation.
If improved financial privacy is considered a bitcoin innovation, then, yes, government choke points do stifle innovation.
Sitting on a razor's edge, their actions can either propel bitcoin
more into an off-the-books counter-currency or retard US monetary
progress for decades as more nimble jurisdictions exploit the economic
benefits of cryptographic money. However, in the regulator's mind, they
have no good options and permitting unimpeded bitcoin growth is
unacceptable – so act they must.
Regulators and their red herrings
It is this general desire for enforcement action that so fatally
misses the mark, because it blindly ignores the societal consequences of
the great cryptocurrency wealth transfer and the temporary turmoil for
the wave of people caught ill-prepared.
If anything, governments should encourage greater bitcoin savings and
user-friendly open-source software. Seismic shifts that will transform
existing financial and political institutions are now occurring directly
underneath our feet.
And, while all of that happens, what do New York regulators choose to focus on?
Among many
red herrings, they focus on perceived problems, like identifying
physical addresses of bitcoin transactional parties and prohibiting
bitcoin-related companies from maintaining profits in bitcoin.
Contrary to what the alarmist Perianne Boring states,
bitcoin's fate will not be decided by lawmakers and regulators in the
next 18 months. The only fate that will be decided is that of New York
and any other regions that would adopt such a harsh line of regulatory
thinking. In other words, the New York Department of Financial Services
(NYDFS) doesn't harm bitcoin, it harms only the citizens of that
jurisdiction who suddenly become disadvantaged relative to citizens in
the rest of the world.
Here's what happens on 17th October: bitcoin continues to be
a juggernaut, rolling over the promiscuous money printers and corrupt
kingpins of the centrally planned banking system, albeit with some market-based
adjustments. Markets perceive regulation as 'damage' and route around
it. This is true with Internet-related damage and it is equally true
with bitcoin-related damage.
For starters, don't be discouraged by the New York regulatory
proposal, because while exchanges and banking interfaces are useful for
price discovery, they are optional for everyday bitcoin usage.
Government attempts to exploit systemic choke points is all part of the
natural transition process.
Similar to the Electronic Frontier Foundation's Tor Challenge to circumvent government censorship, the bitcoin community needs a challenge to support and encourage true financial privacy, compared to the sanctioned privacy permitted under the guise of consumer protection. Privacy is claimed – it is not sanctioned.
Without privacy by default in the original Satoshi bitcoin client
software, additions and workarounds for various wallet implementations
have been the norm.
Writing in Forbes, Andy Greenberg explains that an upcoming version of bitcoinj – the software that powers many of the most popular bitcoin apps like Multibit and Bitcoin Wallet– will route all connections to the bitcoin network over Tor’s anonymity network before reaching another bitcoin node.
Bitcoinj creator Mike Hearn said:
"The fact I use bitcoin isn’t a secret, but I don’t want
all my transactions in an NSA database. When I use bitcoin in a bar, I
don’t want someone on the local network to learn my balance. The way
bitcoin is used today, both those things are possible."
Thanks to IP tracking, it’s "possible that the NSA and GCHQ have de-anonymized most of the block chain by now," he added.
Also, various implementations of the CoinJoin method have emerged recently, including Shared Coin from Blockchain and the Dark Wallet alpha release from developers Cody Wilson and Amir Taaki.
Relying only on bitcoin for operations and avoiding the regulatory
glare implicit via banking relationships, Blockchain's modern uniqueness
is in tune with bitcoin's principles, including user-defined privacy.
Despite some prior user claims to the contrary, Blockchain does not block Tor exit nodes – although
individual account owners can block Tor IP access. Denial-of-service
defenses may also cause some Tor exit nodes to be blocked temporarily.
In an enormously important three-minute interview,
political theorist and global resilience guru Vinay Gupta recognizes
that "[bitcoin] cannot be divorced from pre-existing political theory."
Gupta goes into explicit detail on the meaning of power and the significance of property rights:
"The vast majority of the people using bitcoin are
politically shallow. The problem is that bitcoin has succeeded
technically and is midway through the process of failing politically."
Gupta explains that the fundamental underlying issue for bitcoin and
its future success is how to do strong property rights within the system
and no property rights to operate the system as whole. The answer lies
in what we already know about political theory and similar economic
arrangements.
Foreshadowing the coming slew of ambitious regulatory restrictions,
he surmises that "until the bitcoin community admits that it's got
political problems rather than technical problems, they're trapped".
Tensions over bitcoin's long-term security have eased following a
hastily-arranged roundtable of mining participants on 9th July in
London.
With representatives from all areas of bitcoin mining and ASIC hardware manufacturing in attendance, the most significant thing about the meeting was that it even occurred at all.
A forum for discussing these issues is critical to maintaining the
integrity of the bitcoin network, as its overall health depends on
smooth mining operations with a minimum amount of orphaned blocks, hard
forks and dominant players capable of executing a 51% attack.
Last month, Jeffrey Smith (CIO of bitcoin's biggest mining pool, GHash.io) announced a
new focus on openness, reiterating the company's willingness to
"address the decentralization of mining as an industry". Thus, it was
natural for Smith and GHash to convene the first forum on bitcoin
mining.
According to Ittay Eyal and Emin Gün Sirer from Hacking, Distributed:
"[GHash] got brazen at 55% from 2014-06-12 11:53:05 until
2014-06-13 09:45:24 GMT, for almost 24 hours. And prior to that, it
seems to have tested the waters over a period of 10 days or so, perhaps
gauging the public's reaction."
With GHash, the pool operators are known and they willingly initiated
this important step. Conversely, stealth mining operators such as
Discus Fish do not take steps to make themselves known, although it is
claimed that they operate as China-based f2pool.
Then
they got brazen at 55% from 2014-06-12 11:53:05 until 2014-06-13
09:45:24 GMT, for almost 24 hours. - See more at:
http://hackingdistributed.com/2014/06/18/how-to-disincentivize-large-bitcoin-mining-pools/#id1
The consolidated hash rate from GHash has backed off significantly, with its network statistics from 13th July displaying approximately 34.6% of bitcoin's total.
As the foundation's representative present at the meeting, I agree with BitGo’s
Will O'Brien, who said "we cannot and should not rely on one or more
trade organizations to set the rules. Bitcoin is decentralized, and we
must build solutions that support that original framework of
decision-making."
The technical solution, if there is to be one, will ultimately come
from the open-source developer community ratified by the miners and
users.
In the meantime, we have temporary ways to mitigate the risk of a 51% attack, such as GHash's agreement to "do all it can to limit its share of the total bitcoin network to 39.99%."
Generally, participants understood this pledge to be a very
unenforceable solution fraught with potential pitfalls, namely GHash's
concern that they are being punished for their own success and how
meaningful the pledge will be when other mining operators approach the
same self-imposed threshold.
Potential solutions
In the last month or so, there have been a wealth of proposed
technical solutions to minimize the likelihood of a successful 51%
attack.
Gavin Andresen first made a recommendation for utilizing P2Pool, a decentralized bitcoin mining pool that works by creating a peer-to-peer network of miner nodes.
Mike Hearn expanded on that thinking with a detailed description of 'freemining' – regaining miners' ability to select their own block content.
These are immediate solutions available today. Hearn states:
"Freeminers mine in such a way that they both reduce
their payout variance but also create their own blocks, a process that
always requires running a fully validating p2p node like Bitcoin Core. If you aren’t running one, you aren’t decentralising the mining process."
Newer technical solutions are most likely nine to 12 months away, given the development and testing cycles.
One of those solutions includes the Two Phase Proof of Work
(2P-PoW) to disincentivize large mining pools yet enables existing
miners to continue using there current mining hardware, as outlined by
Cornell's Ittay Eyal and Emin Gün Sirer in "How to Disincentivize Large
Mining Pools." This proposal is based on the research work of Andrew Miller and others at University of Maryland, College Park.
“Would an attack be disruptive? Sure. Would it be fatal? No.”
Another solution, proposed by mathematician Meni Rosenfeld, involves the creation of Multi-PPS, a platform that allows miners to mine in multiple pools simultaneously.
Since a small pool could find either 10 blocks in a day or 0 in a
week, many miners elect to use larger pools that offer a more consistent
payout. Once the payout instability of small mining pools is reduced,
it makes them a viable alternative.
According
to Rosenfeld, the basic premise of Multi-PPS is "that miners should
mine in multiple pools simultaneously, in proportion to each pool’s
strength, which has two important features," these are:
(1) The miner enjoys performance that is equivalent to that of a pool with a combined size of all pools he uses together
(2) The stable equilibrium is not consolidation in one pool, but
rather, maintaining a distribution between many pools according to the
merits of each.
called
Two Phase Proof of Work (2P-PoW), to disincentivize large mining pools.
We - See more at:
http://hackingdistributed.com/2014/06/18/how-to-disincentivize-large-bitcoin-mining-pools/#sthash.i9Eo2RQV.dpuf
called Two Phase Proof of Work (2P-PoW), to disincentivize large mining
pools.
The reality of bitcoin mining today is that we are in a crypto arms
race and this ASIC-driven computational power massively strengthens the
network from outside attack by malicious actors or disgruntled states.
Would an attack be disruptive? Sure. Would it be fatal? No.
In many ways, it is the price we pay for a distributed, resilient
cryptocurrency, for if we wanted to abolish all uncertainty on mining,
we would simply centralize the block chain and anoint a trusted party like the Fed.
The 9th July roundtable meeting was a great start. It is my sincere
hope that the participants of the bitcoin mining community continue to
hold a regular forum to maintain an open dialogue on the
decentralization of mining.
The Organisation for Economic Co-operation and Development (OECD)
recently published a working paper on bitcoin and the implications of
financial trust without intermediaries, authored by economist and
Special Advisor to the Secretary-General on Financial Markets at the
OECD, Adrian Blundell-Wignall.
Entitled ‘The Bitcoin Question: Currency Versus Trust-less Transfer Technology’, the paper represents one of the first official analyses on bitcoin in the context of contract law, legal tender, and plenary powers.
Besides grossly misunderstanding the economic nature of bitcoin, the
general prescription for public policy would be disastrous, accelerating
a 'parallel' monetary system faster than normal and simultaneously
depriving millions of people of seamless participation.
The author fundamentally views bitcoin as something that must replace
legal tender in order to be successful, so he is dismissive of bitcoin
the monetary unit. Moreover, the author fears bitcoin more as a
competitive alternative within a freedom-of-choice scenario and
thus outlines policy behavior that attempts to extinguish any interface
with established institutions.
However, monetary freedom has already arrived, demonstrating that the
state's compulsory monopoly over money is unearned and unjustified.
Government powers now need to be directed at removing hindrances for
participation in alternative monetary units, because excluding large
swathes of society from engagement with bitcoin exacerbates the problem
of inevitable integration.
This article gives a critique of the general public policy prescriptions contained in the OECD working paper:
1. A general ban on cryptocurrencies in the interbank clearing system
Bans and prohibition are totally ineffective. A ban on bitcoin
would increase global awareness for bitcoin, inspiring alternative and
parallel clearing systems. This result would end up harming the existing
clearing system even more and it would probably take the form of
denying bitcoin a currency code such as XBT. Gold currently has code XAU within the ISO 4217 standards body.
2. Recognition that bitcoin the network is separable from bitcoin the unit
A bitcoin network separable from the bitcoin unit would be neither
decentralised nor secure. The technology underpinning the bitcoin
network is distributed and massively decentralised for a reason – it had
to be immune to plenary power shutdown and strong enough to sustain an
attack from outside computational power. The bitcoin unit provides the
incentive for maintaining the security and integrity of the block chain,
which makes it inseparable.
3. Best practice registration to verify the owner's identity
I am assuming that this recommendation is made only for the exchange
endpoints that interface with national currencies (not merchants),
thereby treating bitcoin exchanges like financial institutions. Physical
cash transfers do not typically demand owner identity verification, but
of course when an exchange business is involved, the operating
jurisdiction defines the required conditions around getting in and out
of national fiat currency. In some jurisdictions, this best practices
registration may be conducted on an opt-in basis.
4. Balance sheet and income statement reporting for all networks
Again, I am assuming exchange networks because the bitcoin block
chain is already a publicly accessible transparent ledger of
transactions. Market competition will demand exchange solvency and
reporting of financial status.
5. Mandatory capital should be held by exchanges (in the form of legal tender)
Jim Harper, Global Policy Counsel at the Bitcoin Foundation, suggests that consumer protection
may differ in the future bitcoin era as the assumption of government
regulation providing sophisticated commercial oversight becomes
challenged.
Cryptographic proof of reserves can deliver responsible public audits of exchange assets as bitcoin's cryptography-based public ledger allows an organization to prove control of bitcoin assets without revealing private information about customers or account holders.
Harper continues, "multisignature transactions
are a second innovation that may remake consumer protection. 'Multisig'
allows any combination of consumer and business entities to exercise
control over a bitcoin-based asset."
"These innovations, and others to come, will tend to make consumer
oversight of bitcoin businesses easier – and government oversight a less
important part of the mix. Consumers will be better positioned to do
their own monitoring and, in the best case, to enjoy cryptographic proof
that they are being properly served."
6. Implement some form of backing for cryptocurrencies, such as gold
Requesting gold backing for bitcoin is one of the rookie mistakes
made by new analysts, because the transportation costs, audit issues,
and potential confiscation are all issues that bitcoin seeks to bypass. A
gold-backed bitcoin would lead to centralisation in the way of specie reserves and
would irreparably damage the incentive structure for securing the
distributed block chain, which includes the process of new bitcoin
issuance.
Despite the fact that our working paper author appears to support
gold, he is mostly an apologist for ‘The State Theory of Money’ myth
that the sovereign’s power to collect taxes and declare legal tender
imbues a currency with ultimate value. Bitcoin is the primary value unit
and requires backing from neither state sanction nor gold. I recently
attempted to explain that logic to legal-tender poster boy Paul Krugman,
in 'The Fiat Emperor has no Clothes'.
7. Use of government plenary powers to restrict contracts in bitcoin
Given today's cryptographic protocols and smart contracts with
time-release amounts and multisignature transactions, it is simply
infeasible to restrict private party contracts that would not require
the judicial system. Potentially, contracts could be banned by statute
within aggressive jurisdictions, but that would probably only drive them
underground.
Blundell-Wignall references the 1935 gold clause cases where the
Supreme Court decided in a 5:4 majority in all of these cases that "the
power to regulate money is a plenary power". The author concludes that
"the abrogation of all gold clauses was considered to be within the
powers of Congress when such clauses presented a threat to Congress’
control of the monetary system." He then posits that "if bitcoins begin
to undermine the financial and tax systems they will be shut down and
all contracts between traders would be unenforceable."
According to law professor Henry Mark Holzer, the abrogation of gold contracts and gold clauses
during the Roosevelt administration in the US marks one of the saddest
periods in worldwide monetary history, because it restricted freedom to
transact.
Market-based legitimacy
Ironically, the items that the author highlights with respect to
legal tender and monetary contracts are precisely what the bitcoin
protocol alters with its 'trustless transfer technology.' Governments
will no longer maintain a monopoly position over money because an
alternative exists and that alternative does not rely on legal tender
status for its legitimacy – it relies on global acceptance of the
mathematics behind the protocol for its market-based legitimacy.
The implications of bitcoin are quite simply "Money Without Government." We don't need kings to coin our money. Trust has become decentralised.
The die has been cast. All that remains is the jurisdictional competition to determine if any nation-state has the political will to harness and benefit from nonpolitical money.
The US Marshals Service (USMS) will auction off the bitcoin seized
from Silk Road to the highest bidder tomorrow. It amounts to 29,656.51
BTC contained in wallet files residing on Silk Road servers.
In total, there will be nine blocks of 3,000 bitcoin and one block of
around 2,656 bitcoin offered in the auction, representing the amount
stated in the forfeiture order by the court on 15th January, 2014.
Although the authorities hold more coins, the auction does not include the approximate 140,000 BTC contained in wallet files that resided on computer hardware belonging to Ross William Ulbricht that were seized on 24th October, 2013 and are known as "DPR SEIZED COINS".
Establishing equivalent value
Regardless of the morality of pre-trial asset forfeiture,
the sale via auction of approximately $17 million worth of bitcoin by
the USMS will establish the first governmental precedent for bitcoin fungibility, which could become significant for future bitcoin-related cases involving 'blacklisting', or 'tainted bitcoin'.
Fungibility refers to the concept that every unit or sub-unit remains
equivalent and identical to any other unit or sub-unit. It is the
property of a good or commodity in which individual units are capable of
mutual substitution.
Blacklisting and the notion of tainted bitcoins refers to the concept
that certain bitcoins may be treated different due to their origin
and/or usage, thereby resulting in a valuation differential.
Each bitcoin sold in the government's auction is made without
representation and also without any disclaimer or restrictions on their
subsequent usage and transfer within the bitcoin block chain.
In additional clarifying statements, the auction notice says:
"The USMS will not answer any questions regarding (a) the
associated criminal or civil cases that resulted in the seizure of the
bitcoins being auctioned, (b) Bitcoin characteristics, uses or value, or
(c) specifics of the auction process other than information provided in
these documents;
The USMS will not sell to any person who is acting on behalf of or in
concert with the Silk Road and/or Ross William Ulbricht, and bidders
will be required to so certify;
The USMS will not transfer bitcoins to an obscene public address, a
public address apparently in a country restricted by the Office of
Foreign Assets Control (OFAC), a public address apparently associated
with terrorism, other criminal activities, or otherwise hostile to the
United States;
The winning bidder will receive a signed Bill of Sale from the United
States Marshals Service prior to the transfer of the bitcoins."
A bitcoin is a bitcoin
None of these statements carry any indication that the USMS or the
Department of Justice view these coins to be 'legally different' or
'subject to special treatment' by exchanges and market participants.
Conversely, the USMS is attempting to maximize its return of the sale of
these bitcoin assets by specifically not disrupting their implied
fungibility.
No special discounts apply to the sale and if they are bulk
discounted by virtue of the wholesale bidding process, it would neither
be due to the source of the bitcoin assets nor their alleged use on the
Silk Road for various transactions.
“For now, a legally-orchestrated sale of bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.”
Furthermore, there is no intent to blacklist or whitelist the coins
for subsequent circulation, because this would negatively impact the
valuation at auction. All bitcoins obtained from the auction sale
process are able to be freely transferred and circulated around the
world.
An interesting Scottish monetary case
from the 1700s suggests that blacklisting or mandatory coin validation
is a misguided premise. Fortunately, in that particular case, the judges
upheld the principle of unrestricted fungibility.
The auctioned bitcoin are theoretically being sold at par to other
circulating bitcoin. In the future, governments or free markets may
determine that certain bitcoin addresses carry a taint or don't trade at
par for some reason, but, for now, a legally-orchestrated sale of
bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.
Market role
As covered on Bloomberg TV, SecondMarket's Barry Silbert even organized
a bidding syndicate to allow smaller investors the opportunity to
obtain bitcoin at favorable bulk pricing, where 10% of any auction fees
received by SecondMarket will be donated to the Electronic Frontier Foundation.
While the government's actions and announcements regarding bitcoin
fungibility play a critical role in setting expectations for the market,
the globally distributed bitcoin network spans many jurisdictions and
true fungibility is ultimately determined by what the market will bear.
Not all market participants have to adhere to fungibility determinations
in the same way.
The list of possible Silk Road bitcoin bidders can be seen here and the introductory form to participate in the syndicate organized by SecondMarket and the Bitcoin Investment Trust can be found here.
I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.
"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002
"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996
"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995
Across the board, bitcoin requires forceful and aggressive legal
defense, not complicity with governments in crafting policy and
regulations. It's going to get a lot rougher for bitcoin in the months
and years ahead. We have to be prepared.
A formal ISO currency code will spur global mainstream adoption of bitcoin more than any other single action.
Last week's advisory from the US Consumer Financial Protection Bureau
(CFPB) warning consumers about the risks of virtual currencies such as
bitcoin diligently listed several obvious risks, but simultaneously
omitted the very consumer protections provided by certain cryptographic
monies.
If implemented in the regulation's final version, the physical address and identification requirements (Sections 200.12 and 200.15) for both sides of a transaction will dilute the inherent privacy of the overall bitcoin network.
According to the proposed 17th July bitcoin regulation from New York
State, the public now has 45 days to comment and then a 45-day grace
period prior to full adoption. But what's after 17th October? More
importantly, what's after New York?
The US Marshals Service (USMS) will auction off the bitcoin seized
from Silk Road to the highest bidder tomorrow. It amounts to 29,656.51
BTC contained in wallet files residing on Silk Road servers.
