Cyprus Goes Cashless The Hard Way

By Jon Matonis
Forbes
Sunday, March 24, 2013

http://www.forbes.com/sites/jonmatonis/2013/03/24/cyprus-goes-cashless-the-hard-way/

The rolling crisis in Cyprus should reach a crescendo this week. If the parliament votes yes on some type of deposit confiscation, it would mean the people of Cyprus have elected to go “all in” on the euro and link their fate with the fate of the single currency.

When given a clear opportunity to leave the eurozone, Cypriots will probably decide to stay rather than rebuild their banking infrastructure from scratch.

With the latest maneuverings and after going full-circle with a range of alternatives, it appears that European bailout terms could be met by a 20-25% levy on deposits only in excess of the guaranteed 100,000 euros. Cypriot Finance Minister Michael Sarris said yesterday that a deposit levy was back on the table as a way to come up with the 5.8 billion euros needed by the new March 25th deadline for the larger rescue amount to be approved.

Writing for SkyNews, Ed Conway described the raid on bank deposits as “a step across the financial Rubicon.” Indeed, it has ramped up expectations as to what is now within the range of options for other EMU member states. Politely calling it a levy or deposit tax doesn’t alter the fact that it still amounts to brazen theft. Others have called it legalized bank robbery.

The Statist quote of the day goes to Naomi Fowler, Taxcast producer for Tax Justice Network, who said, “I think Cyprus is a cautionary tale to citizens that their government’s adventures in tax havenry will cost them dearly.” She advocates for global penalties against the provision of financial privacy which to this observer warps the very meaning of the word justice.

“Only put money in the banking system that you can afford to lose,” advises financial commentator Max Keiser. This is no more true than last weekend in Cyprus when bank depositors had electronic transfers blocked and were initially told to prepare for a confiscatory levy of up to 9.9% of their deposit balances across the board. The government then ordered banks to keep ATMs stocked since cash and credit cards were the only remaining methods of transacting. However, it is not clear how much longer the credit cards will be functioning in the country.

With banks in Cyprus now scheduled to re-open on March 26th after eight days of consecutive closure, this would make the Cypriot banking-system shutdown tied with the U.S. (March 6-13th, 1933) for longest number of shutdown days, following only first place Argentina (April 20-29th, 2002) at 10 days. Should the crisis extend beyond eight days and the European Central Bank pulls the liquidity it has been pumping into Cypriot banks, the ATMs may become cashless.

“The future of the euro zone has been put on the line for a few billion euros. Yet, the assumption of Cyprus not being a systemic risk rests on a single expectation: that it stays in the euro zone,” according to Stephen Fidler at The Wall Street Journal. “Should it exit, all bets are off.” However, other countries should be sufficiently discouraged from taking that route if they see live television images of a full-blown banking panic and an economic collapse within an EU member nation.

For now, the general attitude among the troika appears to be let’s experiment with Cyprus and if things go badly, it’s not such a long-term big deal because Cyprus is too small to matter. That could prove to be an optimistic fantasy.

With capital controls to prevent a mass exodus from Cyprus banks now fait accompli regardless of the bailout decision, Jeremy Warner at the Telegraph says that it is the end of the single currency in all but name:

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

The era of free capital movement is behind us. Capital controls are about government keeping your money within easy reach should they ever want it. A decentralized and nonpolitical currency like Bitcoin starts to look attractive by providing a safer destination for wary depositors, allowing them to store their money securely in a digital account on their own computers, away from the big governments and politicians’ reach. It is possible to purchase bitcoins in Cyprus at LocalBitcoins.com.

“Money flows to where confidence exists” says Alan Safahi, CEO of ZipZap, Inc., a global cash network with over 700,000 locations in the world. “As bitcoin gains more acceptance, consumer confidence increases and more money will flow to bitcoins, causing a continuous rise in price due to limited supply which then increases consumer confidence even more,” adds Safahi.

As this trend continues, ZipZap, which processes more purchases of bitcoin than any other cash network stands to benefit tremendously from this trend. “The growth opportunity is not limited to Europe. We are seeing a significant increase in volume in the past few days from consumers in the U.S.,” says Safahi.

The emerging trend towards bitcoin as a flight to safety seems to be accelerating despite the recent regulatory guidance from FinCEN (Financial Crimes Enforcement Network). As part of the Treasury Department, FinCEN’s guidance on enforcement would extend traditional money laundering rules to most types of virtual currencies, including bitcoin. Although bitcoin proponents emphasize that a test case has not emerged yet.

“It’s almost a badge of respect when the Treasury starts regulating you,” said James Rickards, author of Currency Wars. “You must be doing something right.”

“Gold is a great way to preserve wealth, but it is hard to move around,” added Rickards. “You do need some kind of alternative and Bitcoin fits the bill. I’m not surprised to see that happening.”

The Cashless Utopia Mirage

By Jon Matonis
Forbes
Sunday, February 24, 2013

http://www.forbes.com/sites/jonmatonis/2013/02/24/the-cashless-utopia-mirage/

David Wolman's article The Anonymity Fantasy gets off on the wrong foot by claiming to know what we all "deserve" or "what we all want." As a reader, this is aggravating on multiple levels, but the pretentious fun doesn't stop there as we later learn that anonymous cash does not equal freedom and that "clinging to cash" is misguided.

I could be cynical here, but I really don't think it's about perfidiously advancing a thesis to promote his new book. I think David actually believes all of this despite what history teaches us.

Let's not kid ourselves, because the end of money, as we know it, really means the beginning of the transactional surveillance State, which makes this a serious debate about the boundaries of State power and the dignity of an individual.

Unfortunately, the real world extends beyond Wolman's polite corner of Oregon.

There are activists and dissidents in hostile regions paying for Internet blogs, food supplies, and safe harbor. There are payments being made to border guards on a daily basis to flee a murderous government somewhere. There are women selling baskets and blankets at street markets to feed their hungry families. There are cancer patients buying weed from a friend if their state doesn't accommodate medical marijuana. And even before and after the Third Reich, persecuted peoples have always needed a way to protect and transfer what little remained of their wealth.

The persistent war on cash has more to do with moralistic society than it does with civil society as Wolman claims. With ultimate tracking capabilities, how does Wolman decide when a government's "right" becomes a wrong? Does he defend the victimless crime laws against online gambling and consensual sex for money between adults? Does he defend confiscation of private sector wealth when a socialistic regime runs out of funds? Does he defend an orchestrated payments blockade against whistleblower site Wikileaks? Does he defend brutal government law enforcement measures in Syria and Gaddafi's Libya?

Anonymity and civil society do mix --- it is omnipotent violent government and civil society that do not mix.
Wolman is thinking like a technologist when he promotes the cashless utopia and, as a technologist, he's probably correct because paper cash is inefficient, problematic, and dirty. But it's mostly inefficient and problematic for the overzealous regulators and tax collecting apparatus.

Efficiency happens to be a very short-sighted and unintellectual argument. Selective breeding for certain 'preferred' traits is a vastly more efficient method and so is the training-from-birth selection criteria employed by totalitarian states that place athletes in the modern Olympics. I doubt Wolman would want to live in those efficient societies --- cashless or not.

Also, it's a good thing that Wolman partially credits consultant David Birch with his un-semantic argument about the differences between anonymity and privacy, because that way he doesn't have to shoulder the sole blame for such an untenable supposition.

Privacy, especially user-defined privacy, sits on a sliding scale that is defined by the individual. One person's idea of privacy may be anonymity from all and another person's idea of sufficient privacy may be privacy from aggressive marketing companies and governments but perhaps not from banks. The point being that it is the prerogative of the individual, not book authors or digital money consultants, to determine where one sits on that personal sliding scale.

Cash is not the enemy of the poor. Nor are the poor hurt by anonymity --- they are the ones who desire it the most. If that were not the case, we would see the informal, unlicensed economy shrinking rather than expanding. It's only the global repressionists who cannot accept human nature without moralizing that promote the end of anonymous cash.

As Web anthropologist Stowe Boyd proclaims, anonymous cash equals freedom and we should rejoice in that.

France Plans To Prohibit Cash Payments Over €1,000

By Jon Matonis
Forbes
Thursday, February 14, 2013

http://www.forbes.com/sites/jonmatonis/2013/02/14/france-plans-to-prohibit-cash-payments-over-e1000/

One of the best things about covering payments news is that you never run out of stories where various myopic governments attempt to restrict the flow of cash in a squeeze for revenue.

France becomes the latest as Prime Minister Jean-Marc Ayrault plans to erect new controls on cash transactions in order to tighten up tax collection and meet the country's optimistic budget deficit target of 3% of GDP. The government needs euros and they need some fast.

In the government plan labeled "Fight against fraud," France's fiscal residents would see the cash transaction limit decrease from €3,000 to €1,000 per purchase. However, in a nod to the exiled wealthy and what Wolf Richter calls the "Depardieu exception," those fiscal residents of a country other than France would have their cash transaction limits reduced from €15,000 to €10,000 per purchase. Legislative measures could be finalized by the end of 2013.

Richter illustrates the ban's impact with an example of purchasing a used car: "two crisp 500-euro bills and a single coin -- voilà, an illegal transaction." Used cars could easily cost more than €1,000 and accepting cash protects the seller, but the larger problem may be finding those 500-euro bills in the first place. While the southern coast of Spain was once believed to have the highest concentration of 500-euro notes in circulation, the distinctive purple bill has become more like the unicorn of Europe because they are rarely seen. The UK banned the sale of 500-euro notes at exchange offices in 2010.

"It has long been the dream of collectivists and technocratic elites to eliminate the semi-unregulated cash economy and black markets in order to maximise taxation and to fully control markets," writes Patrick Henningsen at the Centre for Research on Globalization. "If the cashless society is ushered in, they will have near complete control over the lives of individual people."

The anti-cashists have escalated this sad drama to a point where it has become like boiling a frog. The limits are incrementally lowered and lowered until one day, people wake up and realize that only fully traceable transactions are permitted in the new cashless society.

In many regions around the world, a strong and vibrant cash economy is actually underpinning the faltering national economies that no longer offer sufficient mainstream opportunities for their citizens. By some estimates, the global off-the-grid economy represents $10 trillion worth of economic activity per year. People will produce, consume, and trade in order to survive and bearer cash plays a critical role in that process.

The futuristic cashless society is marketed as being ultra-modern and at the forefront of technology. However, it is more like the last gasp of a dying behemoth and it is the poor that will suffer the most.

In responding to Simon's Black's description of Emperor Diocletian's 3rd-century tax reforms in All Transactions To Be Conducted In The Presence Of A Tax Collector, a reader commented that "Tax evasion always increases along with the tax burden." He continued, "In fact, it acts as a safety-valve against rebellion.  Since the rich will always have means to escape heavy taxation, the burden of bloated government bureaucracy will eventually fall the heaviest on those of lesser means."

Is there anywhere left to go if you don't welcome the fully-traceable cashless society? Spain recently banned cash transactions above 2,500 euros and Italy banned cash transactions above 1,000 euros.

France and other anti-cashist countries could quickly become nations of smurfs, referring to the practice of smurfing, which is a method of structuring cash transactions into smaller deposits of money to avoid cash reporting requirements.

Large Cash Transactions Banned In Mexico

By Jon Matonis
Forbes
Wednesday, October 17, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/17/large-cash-transactions-banned-in-mexico/

Outgoing Mexican President Felipe Calderon has signed into law a ban on large cash transactions. The ban will take effect in about 90 days and it is part of a broader effort to control monetary flows within the country.

Under the law, a Specialized Unit in Financial Analysis operating within the Attorney General's Office will be created to investigate financial operations "that are related to resources of unknown origin."

For real estate transactions, cash payments of more than a half million pesos ($38,750) will be forbidden and, for automobiles or items like jewelry, art, and lottery tickets, cash payments of more than 200,000 pesos ($15,500) will be forbidden. The law carries a minimum penalty of five years in prison.

In 2010, Mexico instituted strict limits on foreign exchange cash transactions to $1,500 per person per month, which caused several cash dollar exchanges to withdraw from the business and had the effect of penalizing tourists.

Of course, US dollars are a huge portion of the actual paper cash that this effort is aimed at, but the Mexican peso is the 12th most traded currency in the world and by far the most traded currency in Latin America.

Reuters reported that, "Sales of drugs from marijuana to cocaine and methamphetamine in the United States are worth about $60 billion annually, according to the United Nations. About half of that amount is estimated to find its way back to cartels in Mexico."

The Woodrow Wilson International Center For Scholars' Mexico Institute published a comprehensive study in May 2012 entitled "It's All about the Money." The report recommended tight integration and coordination with the United States in the areas of legal framework, financial institution regulation, intelligence on cross-border currency flows, and non-conviction based asset forfeiture.

Two years in the making, the new law also requires notaries, real estate brokers, and other dealers to report the forms of payment for transactions above the respective limits. Financial institutions will also be required to report monthly credit card balances in excess of 50,000 pesos ($3,875).

Although it's part of a global trend among governments, Mexico will still have a long way to go to catch up. Spain recently banned cash transactions above 2,500 euros and Italy banned cash transactions above 1,000 euros.

Cashless: The Coming War on Tax-Evasion and Decentralized Money

By Cris Sheridan
Financial Sense
Friday, March 30, 2012 

http://www.financialsense.com/contributors/cris-sheridan/cashless-coming-war-on-tax-evasion-decentralized-money

There are two major trends taking place that are shaping up as a recipe for disaster. On the one hand, we have massively indebted governments around the world desperate for tax revenues and, on the other, steadily growing multi-trillion underground economies whose main goal is to avoid paying them.

According to a recent study, the amount of uncollected tax revenues in the U.S. is estimated around a whopping 500 billion dollars per year¹—enough money to bailout most of Europe.

At 8 percent of GDP, the underground or shadow economy in the U.S. is much smaller percentage-wise than other nations like Greece (25 percent), Italy (27 percent), or Thailand (70 percent)², yet, given our overall size, America's untaxed economy is larger than “the official output of all but the upper crust of nations across the globe…bigger than the GDP of Turkey or Austria.”³

Question is: How long will the government allow this to last?

When times are good and the economy vibrant, there is less incentive to crack down on tax-evasion; but now, unemployment is at all-time highs, income and property taxes have fallen dramatically, and the government is supporting an increasingly large and record number of people through a wide range of benefits.

Desperate times call for desperate measures

In an interview with Jim Puplava titled “Never Underestimate the Desperation of a Broke(n) Government”, world renowned economist, Martin Armstrong, cites numerous examples of how the U.S. is following a well set historical pattern where, inevitably, the “government is going to be much more aggressive to tax people, chase them down, and put them in prison.”

Just recently, noted author and blogger, Charles Hugh Smith, cited how California—a case-study for high taxes, regulation, and smothering bureaucracy—automatically seized funds out of a previous resident’s bank account for not filing taxes in the year 2006—five years after he had long moved out of state. In response to this incident, Smith writes, “What is entirely believable is that the state of California, desperate for revenue, is churning out dubious income tax claims stretching back years and collecting the money without due process.”⁴

If true, and these types of aggressive acts are to become more common, it should be fairly obvious that they won't achieve the desired results. As taxes are raised, regulations and filing requirement made more stringent, more and more people will merely leave the system. Eventually, the government will have to think of a different way to collect.

We could change current tax laws and make it less burdensome but, when given a choice between simple or none, most people would rather choose none; and since many realize that by doing everything in cash their transactions are virtually untraceable, the risk of getting caught is quite tiny compared to the benefits of keeping much more of their income.

The only option left is to remove the very thing that fuels the underground economy in the first place.

Cash becomes illegal

Consider Italy Intensifies Its All-Out War on Tax Evaders

In addition to banning cash transactions, [Italy] has included an ad campaign comparing tax evaders to parasites. There have been headline-grabbing raids on stores, hotels and restaurants in affluent Italian cities. For good measure, tax officials have also been stopping luxury cars and asking drivers to show their licenses, then using the information to pull their most recent tax returns.

Recently, best-selling financial author and well-known investor, Doug Casey, offered his perspective on this issue by pointing out that “governments hate cash for lots of reasons…it costs a couple of cents to print a piece of paper currency, and they have to be replaced quite often. As the US has destroyed the value of the dollar, they’ve had to take the copper out of pennies, and soon they’ll take the nickel out of nickels. Furthermore, with modern technology, counterfeiters—including unfriendly foreign governments—can turn out US currency that’s almost indistinguishable from the real thing. And the stuff takes up a lot of space if it’s enough to be of value. So sure, governments would like to get rid of tangible currency. They’d like to see all money kept in banks.”⁵

Italy or Sweden?

Aside from how governments personally feel about cash, some societies are choosing to abandon it voluntarily. As recently reported by the Associated Press, cash only represents 3% of Sweden's entire economy—a trend that isn't being enforced through law but rather embraced by a strongly technological and innovation-loving people.⁶ No "headline-grabbing raids", automatic seizure of bank funds, or stopping luxury car owners to check their most recent tax returns. Then again, Sweden is also known for having the highest tax rates in the world.

Although the total amount of money changing hands in America's shadow economy is quite massive, again, with respective to our total economy it is fairly small—about 8 percent of GDP. Given the sheer convenience and accessibility of electronic payment options almost everywhere you go, the transition towards a cashless society is certainly "in the cards."

However, given the diversity of America's population, our strong desire for privacy and longstanding hatred towards taxes, there will always be a strong demand for some form of cash or non-traceable currencies—something I doubt the U.S. government won't try to supervise or restrict.

Resistance is futile. You will be assimilated

Given the trends taking place, a hot or cold war against non-traceable decentralized forms of currency is almost inevitable. Like Italy, the U.S. could hit such transactions head on and declare them illegal—although not without a massive uproar. On the other hand, the government could take a more indirect and technological approach that forces compliance overtime.

Specifically, we should expect to see some form of the following if the U.S. made a goal of collecting the estimated $500 billion in potential tax revenues:

1. Make cash transactions illegal
2. Merge all your information into one account and flag for any discrepancies between income and expenditures
3. Make it impossible to receive any form of government-provided or government-regulated assistance (Social Security, Medicare, health insurance, bank loans, credit, etc.) unless all taxes are current and accounted for

Obviously, if cash transactions were made illegal it would be very hard for anyone operating outside the system to freely exchange goods and services within the wider economy. However, it’s very easy to transfer cash balances onto a stored value card and then use that instead. Also, people could start using gold, silver, Bitcoins, or any other form of decentralized payment methods within various sub-networks.

For the second option—merging all your information into a database—this would further help in cutting down uncollected revenues but would also require voluntary participation by most non-regulated providers of goods and services. You would also expect to see a large number of costly and intrusive audits for those operating businesses on a cash-basis.

The last option—slowly making it impossible to receive aid, loans, insurance—would effectively strangle the shadow economy into submission and mitigate the chances of a revolution by declaring war on decentralized methods of payment. Incidentally, I believe a very eye-opening glimpse of what's truly in the works was revealed when the Social Security Administration released a report highlighting the Big Brother right-to-access approach in conjunction with various other government agencies.

Consider SSA seen going 90 percent electronic

The Social Security Administration has little choice but to move toward a goal of processing 90 percent of all transactions electronically in the coming decades, according to a new report adopted by an SSA advisory panel...

The “Re-imagining Social Security” report was published recently on the panel’s website after being adopted by the group at a meeting in May.

In practical terms, the full picture of SSA's electronic processing would mean that hospitals would create an electronic medical record for each birth and communicate data about those births to SSA, which would set up a password-protected electronic account for each child.

Thereafter, as adults, people could log into their personal SSA account to verify information for jobs, name changes, widowhood, disability and retirement. Furthermore, SSA would communicate electronically with Medicare and with private doctors and hospitals to obtain patients' medical information if needed for a disability or benefits claim.

The proposed birth-to-death electronic system described in the report does not exist. The envisioned medical data-sharing network is based on the Health and Human Services Department’s Nationwide Health Information Network, and the job-verification system is based on the Homeland Security Department’s E-Verify, neither of which is widely used [currently]. More spending would be needed to create the necessary systems and networks, the report states...

To serve the small percentage of people with complex transactions or those who are unable or prefer not to use newer technologies, SSA should look into creating joint service centers with other federal agencies, such as the Internal Revenue Service, the report states.

There you have it: the merging of all your information (and money?) into one easily accessible electronic file. Want to get Social Security or other benefits? Apply for a loan? Get health insurance? You’re going to have to be part of the system. Otherwise, except to hear from the IRS!

References

[1] America's Underground Economy: Measuring the Size, Growth, and Determinants of Income Tax Evasion in the U.S.
[2] Hiding in the Shadows: The Growth of the Underground Economy
[3] America’s ‘shadow economy’ is bigger than you think – and growing
[4] Welcome to the Predatory State of California—Even If You Don't Live There
[5] Doug Casey on Cashless Societies
[6] In Sweden, Cash Is King No More

Reprinted with permission.

Argentina Begins Tracking All Credit Cards

By Jon Matonis
Forbes
Tuesday, September 4, 2012

http://www.forbes.com/sites/jonmatonis/2012/09/04/argentina-begins-tracking-all-credit-cards/

In an eerie glimpse of what a cashless society enables, the government of Argentina has taken the drastic step of mandating banks to report every credit card purchase to the tax authorities, AFIP. Also introduced on Friday, another measure adds a 15 percent tax surcharge every time a purchase is made outside the country using a credit card issued by an Argentine bank.

This action targets those people that have been using credit cards as a way to purchase at the official rate rather than the black market rate, in effect creating a dual credit card exchange regime. Capital flight is high in Argentina due to the depreciating peso and currency controls are becoming more and more aggressive.

The black market peso price has spiked as the government has tried to close off any and all avenues for people to legally convert out of pesos and into US dollars. A 15 percent tax surcharge will close some of the gap between the regulated official rate and the black market rate, currently at 4.63 pesos per dollar and 6.39 pesos per dollar respectively. In theory, this new surcharge is deductible against future taxes owed so it's really an advance payment. But in practice, its real value as a deduction will have been eaten up through inflation and it's meaningless for those that don't earn enough income to owe taxes.

On Monday, this new rule was broadened to include debit cards and purchases at any online site outside the country, which targets Amazon and eBay purchases.

But the measures go much farther, according to Michael Warren of Associated Press, "giving the government powerful new tools to combat widespread tax evasion." He writes:

"Tax and customs agents now will be able to compare better what Argentines declare to the customs and tax agencies with what their credit card bills say. Before, the reporting requirements applied only to expensive charges of more than 3,000 pesos (about $645). Now, every single purchase by every co-signer must be reported. And if the totals show people are living large while claiming to be paupers, they could get into big trouble."

Even the socialist President Jose Mujica of Uruguay called the new measures "crudely protectionist" in a radio interview from Montevideo. Tourism and investment to the area has already been suffering.

This article is the third in an ongoing series of country focus pieces where the cashless society utopia has actually advanced the cause of financial repression. The SWIFT monetary blockade of Iranian banks was the first report and MintChip digital currency in Canada was the second report.

These are brutal, important lessons in why a cashless society should not strip everyone of their transactional and financial privacy. For those people in Argentina that want to bypass currency controls and also shelter their money from government-induced inflation, this Buenos Aires exchange community claims to buy and sell bitcoin for Argentine pesos. And, the mercaBit.eu exchange sells bitcoin for Ukash vouchers which are available in Argentina.

For further reading:
"Argentina tightens grip on credit card purchases abroad", Ian Mount, Financial Times, August 31, 2012
"Cashless: The Coming War on Tax-Evasion and Decentralized Money", Cris Sheridan, March 30, 2012

My Answer To A VC’s Bitcoin Question

By Jon Matonis
Forbes
Saturday, August 11, 2012

http://www.forbes.com/sites/jonmatonis/2012/08/11/my-answer-to-a-vcs-bitcoin-question/

Fred Wilson is a venture capitalist and principal of Union Square Ventures. On his popular blog, he recently solicited feedback (for the second time) on the bitcoin cryptocurrency. I was tempted to reply directly on the blog, but with over 400 comments posted already I did not want to be lost in the scroll.

My reply is directed first at Fred for sparking the discussion but also to those many other investors pondering bitcoin deals. Throughout, I will refer to bitcoin investments as investment in bitcoin-related deals as opposed to a direct investment in the currency itself which an entirely different business proposition.

Let's get some basics out of the way. First of all, an investment in a bitcoin entity will be a gut-wrenching, difficult investment to make if a particular VC has an inherent fundamental belief in any of the following: (1) the cashless society as promoted by the anti-cashists; (2) capital controls enforced at national borders; (3) the appropriateness of any government monetary policy; and (4) the taxation of income.

For a VC, this can be a soul-searching exercise. But it does not mean that the decentralized digital currency is political by nature. It means that through its cryptographic nature bitcoin reduces the monetary Statist to irrelevancy. Bitcoin has some pretty powerful and disruptive byproducts.

With optional, user-defined transaction privacy, the use of money for purposes of identity linking falls by the wayside. True, it enables a paper cashless society but not with the attributes that the tax-efficient anti-cashists want. Without government checkpoints for financial institution wire transfers, bitcoin capital flows freely, without limits, and perhaps anonymously. The harmful tools of centralized monetary policy would also not exist. And finally, the taxation of income that began in the United States in 1913 would operate on the honor system -- the honor of the taxpayer, that is. This could be welcome news for some as a progressive income tax was a fundamental tenet of Marxism.

In his first post, Fred mentioned "the emergence of currencies that are not controlled by nation states in my lifetime." He clearly acknowledges that significant ramifications result from the "decoupling of currencies from governments," but I wonder if he has come to terms with what that actually means.

What sounds cool and hip because it is technologically advanced can also turn a lifetime of engrained political assumptions on its head. If a VC happens to believe that Greece's problems can be solved by eliminating anonymous paper cash transactions and that the taxation of income is morally justified, how does he reconcile that with bitcoin dominance?

Definitely not for the faint of heart, those skilled and experienced venture capitalists entering the arena will be
playing with fire. This is not a game of targeting an app and throwing seed money at developers located in Silicon Valley or Silicon Alley. Nor is it like catching the social media wave or jumping on the mobile payments bandwagon.

Bitcoin is the quintessential disruptor for not only does it disrupt established primary-level players in the field of payments, like VISA, Mastercard, and PayPal, but it disrupts the very nature of monetary authority.  Bitcoin is disruption within supreme disruption.

Failing to recognize this maxim, especially as a venture capital investor, can be fraught with pitfalls. Regulatory acquiescence will be tempting, but counter-productive. In a company's strategic plan, relegation of bitcoin to just another national currency type among equals fails to exploit its incredible transformative properties. The venture capitalist could become boxed in by the lack of courage to set legal precedent, by the unwillingness to go overseas, or even by the reluctance of the board. To be fair, there will be VC plays in the regulation-friendly exchange space and processor space but they won't be the home runs!

The home runs will be transformative and that just may not be possible for a NewCo in all countries. I maintain that it is more a game of multiple jurisdictions that leverages the relative strengths of competing legal jurisdictions for the best foot into the global infrastructure.

Gibraltar made an early, and deliberate, strategic decision to embrace and promote the online gambling business. They executed it brilliantly and Gibraltar is now home to the industry's leaders like publicly-traded bwin.party [BPTY:London]. Just as with online gambling, some jurisdictions around the world will be more bitcoin-friendly than others. Negotiating that outcome is the real frontier.

Many readers have commented and agreed that the investment opportunities will revolve around bitcoin-related services more than any type of client software play or attempt to control the mining and transaction fees. While I generally agree, I also think that a new company does not have to be bitcoin focused exclusively.

Also, keeping bitcoin value in bitcoin on the block chain will be the key. It may be an opportunity that moves significantly beyond an existing business model simply by having bitcoin in its arsenal. For example, a third-world e-commerce platform could bring massive shopping to the unbanked by leveraging the non-national and frictionless attributes of bitcoin. Or, asset vehicles could be designed that transfer inter-generational wealth without the need for trusts or trust administrators.

So, my advice to VCs seeking their piece of the block chain is study the FATF blacklist of 15 non-cooperative countries, go to airports you never heard of, and most importantly, surround yourself with management teams that mentally embrace bitcoin's powerful derivative byproducts.

For further reading:
"Sit down and shut up!", BLOGDIAL, August 13, 2012
"Cash Is Essential For A Free Society", Stowe Boyd, August 10, 2012
"Secure multiparty Bitcoin anonymization", Edward Z. Yang, July 20, 2012
"Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation", Nikolei M. Kaplanov, March 31, 2012

TORwallet Sparks Trust Without Jurisdiction Debate

By Jon Matonis
Forbes
Tuesday, June 19, 2012

http://www.forbes.com/sites/jonmatonis/2012/06/19/torwallet-sparks-trust-without-jurisdiction-debate/

In the world of the Internet, entities can provide online services without any consideration for a legal jurisdiction. But, in the world of Tor or Onionland, entities can do so anonymously.

Intended to protect users' personal freedom, privacy, and ability to conduct confidential business, Tor (The onion router) is a system that improves online anonymity by routing Internet traffic through a worldwide volunteer network of layering and encrypting servers which impedes network surveillance or traffic analysis.

TORwallet has just announced an online bitcoin wallet run as a TOR hidden service (to access the service users must run the onion proxy software on their computer). They do not log any information except the current account balance and the bitcoins from many TORwallets can be mixed instantly to a single address in a single transaction to make them extremely difficult to trace. The same anonymity and untraceability of that crumpled paper money in your pocket is now available in electronic form.

Obviously, the cashless society people do not want this because full transaction traceability is the unstated motivation behind eliminating cash. Don't fall into this complacent attitude of a 'cashless society represents the future' because if we lose the monetary privacy features that we already have, it is a grim future indeed! Game over.

With Tor, the trade-off then becomes near total anonymity versus the ability to have legal recourse in a national jurisdiction. In relinquishing the option for legal recourse and for identifying the site operators, users must be content with the ongoing trustworthiness of the service. How do users become content and satisfied? Is anonymous reputation even possible? Trust will always be relative so is that enough?

eBay pioneered large-scale reputation credentials with its buying and selling platform that rewarded excellent service and punished repeat offenders. Long-standing positive reputations became very valuable in the competitive online marketplace, but users still had limited legal recourse against eBay and even though they may not know the other party to a transaction at least eBay did. The digital marketplace Silk Road currently operates a platform with a participant reputation system. However, in a two-party online Tor wallet service, you only have the earned trust of the non-jurisdictional site operator and that is comprised mainly of longevity and customer service. Only time will tell.

Essentially, the principle behind all mixing services is the ability to remove or obscure any linkage to a real-world identity because the bitcoin blockchain maintains a public transaction log of all transactions. Since the method used to obtain or purchase bitcoin may have revealed certain financial or personal links, it becomes necessary to render the blockchain useless for traffic analysis. Properly mixing bitcoin with other users' bitcoin will cause a chain of custody to break down and thereby provide plausible deniability for any transactions.

The privacy advantages of Tor-based mixing services are numerous. For instance, compared to proxy servers or VPNs, there are usually no IP logs kept which would be vulnerable to a court order or a server raid even if you paid for the VPN anonymously. A court order can also force a VPN to commence logging at any time.  According to TORwallet, "Any service not on Tor probably keeps logs of your IP address and could be coerced into giving up your information. Anyone wanting to force us to talk would have to find us first." They also claim that moving clean coins around from several large disconnected pools decreases the risk of matching inputs and outputs to trace client coins. Additionally, "being a Tor relay mixes your traffic in with other people's traffic, making it more difficult to do timing and correlation attacks." And from the user's perspective, the use of multiple wallets and mixers distributes risk.

Another Tor-based mixing service is Bitcoin Fog which charges between 1%-3% (randomized for obscurity). Perhaps the earliest and original bitcoin mixing service is Bitcoin Laundry which acquired the BitLaundry service running on Google App Engine in 2011. 

Disclaimer: bitcoin is not a recognized currency or monetary instrument in any jurisdiction.

For further reading:
"Review: TORwallet", Vitalik Buterin, Bitcoin Magazine, June 19, 2012
"Tips for Running an Exit Node with Minimal Harassment", Mike Perry, June 30, 2010
"Plaintext over Tor is still plaintext", phobos, June 1, 2010
"Anonymity and the Tor Network", Bruce Schneier, September 20, 2007

Be Your Own Bank: Bitcoin Wallet for Apple

By Jon Matonis
Forbes
Thursday, April 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/04/26/be-your-own-bank-bitcoin-wallet-for-apple/

Have you ever wanted to be your own bank? There's an app for that. With the new Blockchain bitcoin wallet for Apple’s iPhone, iPad, and iPod touch, anyone can emulate the functionality of a bank. Simply download the free app from the App Store and you have a fully-functioning send and receive online wallet that allows value transfer without the need for a bank or other financial intermediary. This is the proper path to a cashless society!

Blockchain.info is an offering from UK-based Qkos Services Ltd. that provides online wallet management services and real-time data analytics from the bitcoin block chain. Run by Ben Reeves, the small company has released several reliable services and products for the thriving bitcoin community including charts, statistical data, the web-based My Wallet, an Android wallet app, and most recently an impressive bitcoin wallet app for Apple’s iOS.

The reviews coming in so far are excellent. "Welcome to the future. This is going to change the game," writes one app user. Blockchain has combined powerful payment functionality with ease-of-use and an aesthetically pleasing interface. "The pace of innovation in the Bitcoin-related space is accelerating — something that could be revolutionary even, considering it all comes from participation by individuals as there is no corporation or industry group overseeing Bitcoin endeavors," observes the BitcoinMoney blog.


Apple has long had their eyes on the lucrative mobile payments space strategizing on an entry point. This non-dongle iPhone app is especially important now that the 'dongle wars' have heated up between Apple mobile payment competitors Square and PayPal. Ironically with mountains of existing iTunes customer accounts, Apple could find itself in the best position to capitalize on a robust cash-like ecosystem that completely bypasses the banks via apps. If they chose to do so, Apple could quickly become the premier bitcoin exchanger for retail.

Company founder Ben Reeves explains, "The beauty of bitcoin is that it's fully decentralized -- no government or corporation can block payments or revoke accounts. My hope is that this app allows bitcoin to reach a more mainstream audience." The company also plans to release an SDK (Software Development Kit) which will allow developers of iPhone apps to accept bitcoin payments in their own apps. Interviewed for this article, Reeves said that Apple wallet downloads have been averaging about 250 per day which should allow it to quickly surpass the number of downloads for the Android version.

So, what's new for Apple users worldwide? Firstly, financial privacy is paramount and it's protected by requiring only a password as identifying information and by shielding your Internet location from the network. International payments are now free without using credit cards and without the risk of chargebacks. Transactions are received in milliseconds and they become irreversible within a hour. There is capacity for up to 400 bitcoin addresses so you can open new bank accounts and instantly receive deposits at the touch of a button. Addresses are clickable to display a QR code and you can also scan QR codes to make payments. Keys are stored securely on your phone and encrypted on Blockchain's servers so if you lose your phone, no sweat -- you're protected.

Empowering your own monetary future has never been so accessible. I might even wait in line to purchase the new iPhone 5. Why approve the Blockchain app at this time when it was mysteriously rejected before? Maybe Apple no longer wanted it as an illicit app on the Cydia website. "Or perhaps Apple saw the Android version of the app and prefers to maintain its strong iPhone market share," posits BitcoinMoney. Whatever the reason, Blockchain now joins 16 other bitcoin-related apps currently available from the App Store.

Bitcoin and the State: Asking Permission to Be Free

By Beautyon
Irdial Discs
Friday, April 20, 2012

https://plus.google.com/104476128363316281935/posts/G8fFSkgNW4E

Should people who want to see the widespread and rapid adoption of Bitcoin seek tight regulation and integration with the State, or should they rely only on their skills as developers, marketers and entrepreneurs to create the rock solid, reliable and trustworthy products that people will use in their millions, like the other well known internet companies that have changed the way we do things?

A Bitcoin innovator has just applied for and received a registry entry from the US Federal Government's Financial Crimes Enforcement Network:

http://www.fincen.gov/financial_institutions/msb/msbstateselector.html

On that linked page you can read the following statement clarifying FinCEN's position on each entry they list:

"The inclusion of a business on the MSB Registration Web site is not a recommendation, certification of legitimacy, or endorsement of the business by any government agency."

This disclaimer appears on the certificate as the first paragraph, in large letters. The certificate also says that, “FinCEN does not verify information submitted by the MSB. Information provided on this site reflects only what was provided directly to FinCEN”.

It appears that anyone, can register as an MSB, and the department does no thorough checking into the business, its capitalization, the backgrounds of the directors, who funds it, where those funds originate, the security of the software that powers the service or anything else about it. Registrants are not required to be insured, or make a deposit of money as a guarantee to their customers should something go wrong. Applicants simply fill out a form, and then are entered on the FinCEN database unscrutinized. If registration with FinCEN is being done by anyone in the vain hope of securing some sort of government legitimacy or seal of approval, it really does not pass muster by any stretch of the imagination.

Showing that you are registered with FinCEN cannot act as a guarantee of any kind whatsoever, and FinCEN explicitly warns consumers not to rely upon a company's appearance on their register as proof of suitability, solvency or fitness for any purpose of any kind.

On the other hand, registration with FinCEN should serve as a warning to anyone thinking about using a business that is registered with them, and who also wants to maintain their privacy. A company listed with FinCEN has explicitly entered into a legally binding agreement with them to spy on its customers and partners and has a duty to report 'large and suspicious' transactions to the State. This means that in order to be compliant, you as a customer of a FinCEN registered business must be authentically identified and contactable by the registrant so that they can interrogate you should you move 'too many' of your own Bitcoins through their service.

For the record, there is no case law, no legal requirement, no legal precedent, and no legal opinion on the status Bitcoin of any kind. As is the case with almost all of the software that connects to the internet, what you think Bitcoin is, and what you choose to do with it is entirely your business, and that is how it should be. You are responsible for who you get into bed with, and it is not the place of the State to hold your hand and bottle feed you.

The real problem behind this FinCEN registration is the thinking driving those entrepreneurs who so desperately seek a stamp of legitimacy from the State. Rather than build secure services that are sticky, viral, disruptive and useful, it appears that these well meaning people are trying to get a psychological boost by receiving the blessings of the State. This simply will not work to catapult their businesses into widespread acceptance and profitability. And it will not help to gain them users; on the contrary, in the long term, it may make it impossible for them to even operate at all.

We have been here before. Other very fine, insightful people have initiated contact with 'the financial authorities' in the hope that they can integrate their businesses with the State to gain credibility, thankfully, only to find themselves rebuffed with the retort, "Bitcoin is not money".

Entrepreneurs breathed a sigh of relief and a little surprise on reading this correct conclusion from the State, for it means that there will be a significant amount of time before they reverse their position and weigh in to crush Bitcoin businesses, if they ever bother to do so at all. If they do, it will mean going back on their previous lengthy categorical statement that Bitcoin is not within their purview.

The bottom line question is this; do the advocates and entrepreneurs who pine for the mass adoption of Bitcoin want this world-changing event to be stillborn or not?

If they want it to succeed, and become rich and famous in the process, it is logical to refrain from doing anything that will prevent a miscarriage from happening, and any sort of registration other than that which provides operators with limited liability protection is surely a grave error.

Recent history has demonstrated amply that the State is not needed to make the magic of the market happen. The evidence for this is all over the internet and is represented by the internet itself. Bitcoin is a threat to traditional banking and the State, just as the internet is a threat to censorship, telecoms businesses, companies like Kodak, Penguin, EMI and many others. Anyone who has even a slight grasp of history understands that Bitcoin is dangerous to the status quo in a very real, and absolutely lethal sense. Why then would you even think of asking for permission to operate from the very people who stand to be wiped out by the success of the innovation you are working on? Not only that, but if other companies eschew registration and avoid all the inevitable fees and restrictions that are to come, they will be able to out compete you in terms of price and ability to pivot, putting you out of business. Trying to force Bitcoin to behave like money from a legal standpoint doesn’t make any sense either in terms of the definition of money, or the entrepreneur's requirement of a frictionless market space.

The FinCEN registration in question lists the company's MSB Activities: as 'Money transmitter', with the Number of Branches equaling 1. Clearly the language of this certificate is meant to refer to physically located bricks and mortar money services with branches on the street, not a network based Bitcoin business. More importantly are the facts of how this business actually works. The company accepts money and then provides its clients with Bitcoins, and it accepts Bitcoins from its clients and remits money to them in return. It does not at any stage, transmit money directly from one client to another. Quite how this business has been construed as a money transmitter is baffling; it is no different to Amazon, in its role as a second hand book trade intermediary, because all Bitcoins are second hand goods, if they are goods at all.

As I have said before, Bitcoin is not money. I say this both because it is not money, and because it is money. If Bitcoin is money, it will either be regulated to death or hampered into a crippled, non disruptive form, or taken over by the State. On the other hand, if Bitcoin is not money, it can flourish on the strength of its features just like SSL has, protecting everyone's transactions and communications world-wide.

If no regulation touches it, what you believe Bitcoin is, and how you choose to characterize it will ultimately not affect its utility; only the software built on it will define its nature. Building services based around Bitcoin is what counts, not registering with the State. Registering with the State will not cause users to adopt Bitcoin; only a compelling service will do this.

You need only look at the newest companies with tens of millions of users like Pinterest, Tumblr and Tinychat to understand what a compelling service looks like, and of course, none of those companies sought the registration of the State before gaining many users.

What we are seeing now is a myriad of experimental Bitcoin services emerging, as developers try and discover the correct balance of features that will make up the killer Bitcoin service. You will know what this service is when the number of people using it is increasing exponentially. No registration with the State, no banking license or other poisonous anointing will cause users to flock to your service.

But what if Bitcoin really is money? If Bitcoin is declared money by fiat, then this will kill it as a platform for small software developing entrants to write and launch services. Hysteria over money (which is actually the unquenchable thirst of the State for tax) has erected very large barriers to entry for anyone who wants to set up a disruptive financial service. In the USA, entrepreneurs have the Federal Government and then the State Governments to contend with. See Facebook's recent adventures in approval, licensing and certification, as they went from State to State paying exorbitant and ridiculous license fees and submitting applications. Facebook has the money and manpower to do this, so for them it is as simple as making a decision, allocating staff and sitting back and waiting. For the starving entrepreneur however, registering as a money service in every state of the Union is an impossibility. Bitcoin as it stands now, has no such artificial and offensive barriers, and you can operate at will across the entire USA, without having to expend capital on anything other than the bones of the service itself and Ramen to keep you alive.

If Bitcoin is not money, everything changes. Essentially, it means that the world of money transfers is subjected to the same network effects that caused the internet to explode over the last twenty years, with benefits to all mankind of a similar if not greater extent.

It is hard to imagine the scale of the cascade of the prosperity that will flow from Bitcoin becoming 'the money of the internet'. The imaginations of millions of people will be focused on creating new and exiting services built around it and fueled by it, in the same way that there are new websites and services popping up that no one could have imagined in the time before the internet.

Bitcoin in the hands of millions of innovators who are free to experiment and fail with it without any cost or regulation will change everything for the better, just as the internet has. What the people who seek the baptism of the State for Bitcoin are saying is analogous to saying in 1997 that anyone who wants to run a website should be forced to obtain a license from government before she puts it online. The internet that has so changed the world for the better simply would not exist in its current form if all entrants were forced to register with the State and pay for a license. The net would have ended up as a MiniTel 2.0. Go Google MiniTel.

I find the thinking behind the idea that Bitcoin services should be registered to be perplexing and fascinating. No one would dare suggest that a man wanting to publish a magazine, newspaper or book should be required to register with the State, but when it comes to money, or something that is money-like, that people are not even sure what its true nature is like Bitcoin, a different set of rules springs into being. It is well understood and accepted that, despite being an incorrect use of the word 'right', the power to publish is a right that all free men have. Why do people not understand that this right extends to publishing anything, not just words on a page?

Extending this line of thought, if Bitcoin services need to be registered by default, why then should not booksellers be registered? Why is there no 'PubCEN' for book publishers, or any other type of seller, and why do the people who advocate registration of Bitcoin businesses not advocate the registration of book publishers? There is a long history of book banning in the west, but publishers in free countries have never been required to register before they enter the business of book printing and distribution, and books are always banned after publication, not before publication and passing through a censorship board.

There are people who assert that financial regulations and registration are needed because money can be put to bad use. If you accept this premiss, you must also accept that plain information is as dangerous as money. The Dutch government works from this position, and does not allow scientific papers to be published without the permission of the State. Yes, that is correct; scientists need to obtain export licenses to publish academic papers; sheets of A4 with type on them. This is because the information in scientific papers “could be put to bad uses”. Correctly thinking people are scandalized by the idea of having to obtain a license to publish a scientific paper, but for some reason, when it comes to money or something that is money-like, like Bitcoin, the 'thinking' changes and all of a sudden, not only is registration seen as correct, desirable and beneficial but it is actively sought out, before the applicants even have a client base.

Why does the registration fetish not apply to every good that can be sold or transferred between two people? In the USA the parasites from the State have asked this question and answered, "Why not?!". This is the reason sellers of Raw Milk and organic vegetables have found themselves raided and placed in handcuffs as armed thugs point automatic weapons at their heads. It is why people who sell their old possessions in 'garage sales' are being harassed by the State. People who are thinking properly understand that these examples of State interference in publishing and exchange are unacceptable on principle; the question that I have not had a good, fallacy free answer to however is this, “Why is a money business a special case for registration by the State?”.

Bitcoin, living on the internet as it does, can be sent and received from anywhere and on any device. If the Americans developing Bitcoin services cripple themselves with a self inflicted wound of onerous regulations, the Bitcoins will see this as damage and flow around those services. The only answer to this effect is a world-wide harmonized Bitcoin law, so that there is no jurisdiction to escape to. This is not going to happen any time soon, as we have seen with ACTA. The various states of the world reflexively imitating the American way of doing things is coming to an end, and there are markets out there that are bigger than the USA, whose government and its malignant influence has been disproportionately large. Take for example, the fallacious idea of copyright and its term of the life of the author plus 70 years. China has just passed a law essentially limiting copyright exclusivity to three months:

http://www.techdirt.com/articles/20120409/09381318430/chinese-copyright-proposal-would-allow-compulsory-licensing-music-after-three-months.shtml

If Bitcoin becomes popular in any jurisdiction other than the USA, any American FinCEN regulations will become meaningless. American companies will simply be Balkanized, marginalized and excluded from the action. Note that only companies will be affected by this; individuals on the internet spending Bitcoins in China or anywhere else will not be affected at all. Anyone who has had the experience of buying exceptionally well made and inexpensive hand made clothes from Hong Kong knows what this will mean.

Thanks to the resilient nature of the internet, a Balkanized Bitcoin at the user level is not possible. There is no way that Bitcoin transfers can be stopped as they cross borders, just as it is not possible to prevent people from pirating Warez or downloading copies of films and TV shows.

What the State can do however, is prevent entrepreneurs from building a large central hub service built on top of Bitcoin. They can make it impossible to build a business based on Bitcoin or that overtly accepts it as a payment option. As long as some countries take no action against businesses accepting Bitcoin, there will be a vibrant market on the internet running with it. If that country is China, or Indonesia, or India or Brazil or any combination of countries with large populations, there will be a huge market operating on Bitcoin. The question then becomes how can people from the repressed western economies get a piece of the action? True entrepreneurs will smell the coffee (more likely, green tea) and simply flee the evil, crony capitalist jurisdictions for freer shores. Whatever solution is found by the creative people, the public that could use and benefit from the services is the ultimate loser, as they are reduced to using buggy, buggy whip, legacy surveillance systems from the twentieth century to make purchases online. That's credit cards over the internet by the way.

If you want to have a glimpse of what the repression of a service provider that is a central hub for Bitcoin might look like, you need look no further than the recent Hollywood sponsored armed raid and shut down of the file locker service Megaupload. People are still sharing files by the billion, but this business has been shut down and has had its assets seized. Rapidshare and several other file locker services have unilaterally capitulated and neutered their services so as not to attract the vicious attentions of the State. The Megaupload raid demonstrates the lengths parasites will go to to violently attack entrepreneurs.

Fundamentally this is a problem in morality and ethics. There is a difference between creating a piece of software and keeping its source code proprietary and secret, like Adobe's Photoshop, and using the State to kill competition. One is selfish and evil, and the other is a legitimate form of business practice arising out of the technology.

In crony capitalist countries, businessmen have the ability to use the State to kill and restrict competition. They do this because they do not have the will or the ability to survive in a free market; its easier to kill the competition than to be creative.

People who try and gain advantage through the leverage of the State are evil in my opinion; through no one's fault but theirs, they are not able to compete on a level playing field, and so they use violent tactics to keep competitors from entering.

It's rather like mobsters setting fire to businesses that try to emerge in their territory that compete with existing firms that they 'tax'. It is immoral, unethical, criminal and short sighted, and ultimately will fail, because the world is not suffering under a single mob's jurisdiction.

Now that computing in hand held devices has permeated every corner of the globe, we are beginning to see beneficial services emerge that are changing everything. M-PESA is a good example, where in a country with a population that is mostly unbanked, mobile phones have served as the platform for prolific money transfers. Superimpose the features of Bitcoin on the M-PESA success and then scale it to the entire world and you begin to see just what sort of revolution we are on the cusp of.

People talk of Bitcoin in terms of revolution. I agree with this sentiment, however a revolution, by definition, cannot happen by command or sanction of the State. The State is the carbon rod for your back that prevents critical mass. The State destroys revolutions in the field of business especially when those businesses constitute an attack upon it and its ability to control. Bitcoin cannot become a revolutionary service if it is regulated by the State. If you want this revolution to happen therefore, asking the State to authorize, shackle and penalize you doesn’t make any sense.

Bitcoin businesses will need to survive on very low margins. In order for them to spread into every transaction on the internet, the cost of getting them has to be very low. More market players will drive the cost of getting them down, and cause entrepreneurs to innovate. Artificially high barriers to entry will winnow out the small, agile entrants, and allow the remaining large players to charge a higher percentage for transactions. This will function as a form of friction when you enter or exit the Bitcoin ecosystem, slowing down the adoption and rates of transfer of money to and from Bitcoin. This is why no interference from the State of any kind is desirable. From a purely business point of view, regulations, license fees, guarantees, KYC reporting requirements, secured deposits and all arbitrary rules are very damaging to Bitcoin business models because the customer ultimately pays for them. Useful services will be crippled, delayed and even prevented from emerging by the State. What is needed is a plethora of different businesses and outlets, not a small number of State protected and sanctioned monopoly players. This is best for the consumer as well as the entrepreneur.

There is nothing anyone can do to stop a determined Statist from trying to shut out competitors by running to the State for protection. I guarantee you however, that someone is going to go to court to challenge the idea that Bitcoin is money, and that arbitrary licenses, fees, guarantees, registrations and everything else that comes from the State are applicable to Bitcoin businesses. Someone is going to make this challenge, perhaps on a purely philosophical basis, and the facts are going to be on their side.

When this happens, the court is going to either have to declare that Bitcoin is money, or that it is not money. Both of these outcomes have significant repercussions. If the court decides that Bitcoin is money, it means that anyone downloading the source and starting their own Block Chain has de-facto started their own currency. The last person who tried to start their own currency, Bernard von NotHaus, faces 15 years imprisonment and a fine of not more than $250,000 after being found guilty of counterfeiting by a jury. This will be the penalty for running an unlicensed Bitcoin Block Chain in the USA, should the Statists get their way and have the court rule that Bitcoin is money; anyone trying to set up a Block Chain will be branded a counterfeiter.

The next logical outcome is that the Bitcoin client will be regulated and re-engineered by the State or its agents so that it works (or doesn’t work) in ways that they stipulate. The lead developers of Bitcoin will either be coopeted by the State or replaced. If Bitcoin is money, the State will demand that it has absolute control over the network, since it is a part of the national infrastructure. This is exactly what they are doing now with the internet, threatening everyone with their vile 'kill switches', Domain Name seizures and bogus legislation.

Money is like plutonium to the State. They know its true power, and are obsessed with controlling it because they understand that by controlling the supply and nature of money and its flow, they control everything and everyone. To imagine that they will allow Bitcoin to be regulated with a 'light touch' is naïve in the extreme. The State will do anything they can to strangle Bitcoin if they cannot control it absolutely, and as the move to all digital money gathers steam (see MintChip http://onforb.es/IKPO5T and the fact that Denmark is openly and seriously considering going cashless: http://bit.ly/JeRgj9) the threat of Bitcoin will become absolutely clear even to the lowest and most stupid apparatchik.

This is entirely separate from the threat that the established money businesses will wake up to when Bitcoin takes off. These established businesses will work overtime to kill Bitcoin from both sides, the legislature and the service, to destroy Bitcoin businesses. They will lobby hard for equal regulation turning Bitcoin businesses into banks, while at the same time, denying service to any Bitcoin business, cutting off their ability to remit monies to their clients. Just ask those Bitcoin businesses that have had their bank accounts summarily terminated in a coordinated attack what this is like.

Bitcoin is a threat to the State, and in an all electronic money world, it is an existential threat. There is no possibility that the State will allow Bitcoin to supplant or even co exist with their centralized electronic fiat currency; the only way Bitcoin can win is if it becomes too big to destroy without dealing a fatal blow to the economy. I assure you that if SSL did not exist, it would not be adopted now because of 'fears over terrorists hiding their communications'. At the very least all SSL communications would require a back door in the form of the secret key being deposited with the State. This was actually legislated in France with PGP key pairs. It follows from all of this that what is required is the building of the world-changing Bitcoin services that are needed, without running to the State for prior approval or licensing, so that they become a de facto standard service that if it is tampered with in any way, will kill society.

Running to the State does not confer legitimacy. Amazon, Ebay and Underwriter's Laboratories didn’t need the state to confer trust or ensure reliability; they built consumer powered systems to protect their users and have grown very large and very trustworthy. Building trust takes time, and the people running to the State for its stamp of approval as a substitute for building trust over time and the related mechanisms that manage it are not thinking long term and are not willing to do the hard work of entrepreneurs.

If people think that a registration entry with the State will help them raise capital, they are mistaken. The evil talisman of the State will not convince any venture capitalist that an idea is sound; voo-doo signs and badges are not what VCs are looking for. Venture capitalists are looking for the killer idea, and the team that can execute it. The idea does not have to be particularly new or innovative, as we can see with TransferWise, which is as dull and disruptive as dishwater, and registered to the hilt. What is needed with Bitcoin is a single compelling idea, an irresistible concept and solution to a problem that only Bitcoin can solve.

We know that Bitcoin is revolutionary and extraordinary and that it is as disruptive as the internet itself. What is missing from the disruption equation is a consumer friendly set of features and capabilities that will cause its adoption to go viral.

Integrating with the State is not one of these features. No user out there cares that you have jumped through some arbitrary hoops for approval by the State. You need look no further than Skype to see what a proper approach to innovation looks like. No Skype user cares whether or not Skype has a license to operate as a telephone service; all they care about is that they can download the software and make perfect calls world-wide for nothing straight out of the box. The same is true for Bitcoin. All people want is to be able to download it, use it, buy what they need and transfer money to their friends and family as easily as possible. In order to make that happen, software expressing the correct small feature footprint and business model needs to be designed and developed, which has nothing to do with licenses from the State.

This registration of a Bitcoin business with FinCEN is a mistake, but it is not a big deal. FinCEN registration is not compulsory for Bitcoin businesses and they can painlessly de-register. What is wrong here is the signal that is being sent and the thinking driving the voluntary registrants to submit themselves to this, and it is this thinking that needs to be addressed.

As Bitcoin grows, this precedent of reflexively registering Bitcoin services as money services will be used to compel other entrepreneurs to register their businesses, and eventually they will all be made to pay fees and obtain arbitrarily crafted licenses, and that is an entirely bad thing. For anyone that wants to run a Bitcoin business in the United States of America that is. Banks in Switzerland are shunning Americans, closing the accounts of all U.S. citizens precisely because the U.S. regulations are completely over the top. The sensible, rational people of the world are simply not willing to put up with this mania. There is no money in it and it is immoral.

Finally let me be make my position on Bitcoin developers and entrepreneurs clear. Bitcoin is a tool and business for heroes. It is an unprecedented and unique invention, that straddles the abundance world of digital information and the world of scarce physical money. Bitcoin has the potential to transform the world. The people who involve themselves with it at any level are the forward thinkers, the brave and the innovative. They are the true entrepreneurs and pioneers, the risk takers and leaders. They are the sorts of people who make the world a better place to live in. I support them and their efforts.

The urge to succeed and to be a part of this revolution is very strong for entrepreneurs, and the desire to cover every possible eventuality to avoid pitfalls is just as powerful. In trying to reassure a skeptical public, some people make the critical mistake of believing that obtaining the stamp of approval of the State will help them reach their goals. This is a fundamental error, but it does not mean that they are bad people, in fact quite the contrary. These entrepreneurs are willing to fully expose themselves to the State and its humiliating scrutiny as a sacrificial demonstration of their clean purposes, good will and intention to offer a useful and trustworthy service. In the world of software however, there is absolutely no need for the State to certify people for any particular purpose.

The risk of involving the State in the early stages of Bitcoin's development is high. It could at the very least, retard the progress of Bitcoin and at worst, prevent the mass adoption of this new idea. And that would be a tragedy as great as if the internet had ended up as a world-wide AOL.

Reprinted with permission.