Our submission to the British Government’s “Digital currencies: Call for Information”
We made the following submission to the British Government’s “Digital currencies: Call for Information”. There is at least one Parliamentarian that understands Bitcoin. Steve Baker, who was recently elected to a seat on the Treasury Select Committee, says that Bitcoin should be regulated just as any other product or service is, via existing laws, and no new laws are required for it. If the sane voices in Parliament hold sway, it bodes well for Britain.
What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall to different groups e.g. consumers, businesses, government, the wider economy? How do these benefits vary according to different digital currencies?
Before attempting to answer this question, the true nature of Bitcoin which emerges from tools built from Satoshi Nakamoto’s basic innovation, “The Blockchain” needs to be clarified.
The distinction made by unnamed people in the government, who consider that “Virtual Currencies” differ from “Digital Currencies” is a false one. The fact that what are described as “Virtual Currencies” are issued and usually controlled by their developers is no different to “Digital Currencies”. Both of these products are software, engineered by software developers.
In the case of Bitcoin, the virtual community and control of it is global it is not constrained to a single domain, person or company. In the case of Linden Dollars used by Linden Labs in their proprietary game Second Life the virtual community and control of it’s currency are constrained to interactions on servers under a single domain. The use of the software in both of these contexts is for all intents and purposes identical; it is an economic simulation and there are several of these currently active (1). The scale of the simulation is irrelevant to the nature of the activity and how it should be defined. Bitcoin is usable only inside and between the members of the specific community of Bitcoin users, the same way that Linden Dollars are only usable to the people who are members of the virtual world created by Linden Labs.
You cannot say that Linden Labs is beyond the scope of this call for information, without explaining precisely why Linden Dollars are different from Bitcoin; they are not, save in the manner that the transactions are recorded and the scope. The nature and purpose of the two systems is identical; the recording of who owns what arbitrary token that is redeemable in a closed system.
By the act of a government asserting an artificial distinction between Virtual Currencies and Digital Currencies, it would be impossible to make a businesses case for Linden Labs to switch the software running its in game currency to a Bitcoin Blockchain, which is more efficient, removing much of the management and security of Linden Dollars from Linden Labs’s servers. If the government regulates the Blockchain, moving from a less secure model to a more secure one would expose Linden Labs to arbitrary regulation. Making people less secure should not be the aim of the government. This side effect is true no matter who the company wishing to use the Blockchain is, whether it be a game developer or a company providing another service.
The benefits of The Blockchain and Bitcoin are many, and are only just beginning to emerge. The Blockchain is a distributed programmable database, and it is this that will be the subject of any regulation. You cannot regulate Bitcoin alone, and it cannot be separated from the function of the Blockchain. Saying, “I like Blockchain technology but not Bitcoin” is completely irrational, and people who say this betray a deep computer illiteracy.
There are many software developers working on unprecedented applications for the Blockchain, and in these very early days, it is impossible to predict what these innovations may yield. Five years into the beginning of the modern Internet, YouTube did not exist. No one in the 1990's would have been able to predict YouTube in its present form. The same goes for Twitter and every other “Web 2.0” service that is now live. It is therefore almost impossible to predict what the business models and the benefits of digital currencies and the Blockchain will be.
What we can say with absolute certainty, is that the potential benefits, given only what we can imagine now, will be highly significant. Any new tool or software that saves time and expense across the entire economy can be said to bring significant benefits, and this is what the Blockchain in the Bitcoin context will do at a minimum.
For consumers, micro-payments in pennies are now possible, changing the way online content is paid for on a global basis. This will mean businesses can charge for services in ways that were previously impossible, because the means to move tiny amounts of money used to incur charges that made micro-payments uneconomic.
Local Government will also reap the benefits of Bitcoin, by being able to charge for services in a fine grained manner. Parking is just one example; it will be possible to charge for parking in a way that eliminates the need to collect cash from machines, without requiring Credit Cards and their astronomical fees. The uses to which Bitcoin will be put are as varied as all economic activity.
As for how the benefits vary according to different digital currencies, this question presupposes that there is a difference between the digital currencies. There is no difference. Each of the various “coins” that are derivatives of the original Bitcoin source code are carriers of money in the money substitute context; Bitcoin is not money in and of itself. Each of the different “coins” have a capacity to carry the same amount of money; the only variation between them is the ratio of the amount of “coin” to the amount of money held by it. It is an arbitrary number in every case, determined entirely by the market, and this is the measure of the utility of each “coin”. How many people accept it, what software has been written on it, etc. is what matters.
Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it take?
The government should not intervene to support the development and usage of digital currencies. What it should do is declare a 150 year moratorium on legislation that touches any individual or company that is engaged in the buying and selling of digital currencies, or that engages in the development of any software that touches it. The status quo is working, but Britain’s pre-eminence in this rapidly emerging sector can be absolutely guaranteed by a moratorium on new law or regulation.
Britain’s 150 year lease on Hong Kong is the model to follow. Sitting next to Communist China, the low tax, low regulation island of Hong Kong was a showcase for how an economy should run, thanks to British foresight. In the digital era, when companies can incorporate in any jurisdiction, Britain must make itself attractive to entrepreneurs if it desires to be the number one destination for businessmen to base their Bitcoin businesses. Even today, innovative consumer Blockchain companies like Brawker (2) are incorporating in Hong Kong, despite its return to China.
If you do not take this measure, all of the Bitcoin start-ups will avoid the UK. Skype, the globally popular internet telephony company incorporated in Estonia (3), not Britain. This will happen again, and Britain will miss the boat in the digital currency revolution that is beginning right now.
Lawyers will insist that there need to be laws specific to the Blockchain and Bitcoin, but this is a mistake. There are sufficient laws on the statute books to cover every imaginable Bitcoin dispute, and of course, the Blockchain makes possible all manner of new forms of enforceable contract. The only special interest that is relevant here is the interest of Britain itself. By allowing Blockchain companies to flourish in Britain, it is Britain that will benefit across the board. This should be the ultimate aim of the government, and a moratorium on regulation will effectively achieve this.
Remember also that all Blockchain businesses that incorporate in the UK will be paying corporation tax on the hundreds of billions of Bitcoin transactions that they will be processing. Those transactions can be processed in any jurisdiction. This is a matter of the most grave importance to the future place of Britain in the global economy. We want the UK to be at the centre, and the only way this can happen, is if entrepreneurs are left free to innovate here.
If the government were to regulate digital currencies, which types of digital currency should be covered? Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are the possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?
The government should not regulate digital currencies. In order to understand why I am making this assertion, you need to understand what a digital currency is with precision.
Digital currencies are pieces of text moving over the internet. They are nothing more than text, and they are always text. If you believe that you can regulate digital currencies, then there is no reason why you cannot regulate Tweets on Twitter. Tweets and Bitcoin transactions are indistinguishable from each other save the context in which they are displayed. The Blockchain in the context of the money use, Bitcoin, appears to be a form of money, but it is not. It is this profound confusion that has triggered much discussion and this review; if that were not the case, a review would have been called to ask whether or not Twitter users should come under a bespoke regulatory regime. No one in their right mind would suggest such a thing, but these same people also cannot say with precision why Twitter is different to Bitcoin.
The current misunderstanding of the Blockchain is being promoted by a small group of people who make their living off of the side effects of regulation. It is in their interests to see that Bitcoin is regulated; it will mean that they can specialize in consultation, association, certification and licensing of Bitcoin start-ups and charge fees for their services. These people do not have Britain’s best interests at heart; they only want to profit from the imposition of regulation. Software developers on the other hand, do not have an interest in regulation. They have their users best interests uppermost in their list of priorities. Regulation will only harm developers by causing them to move their operations into different jurisdictions. Developers and Britain have common cause in this respect. Britain must not imitate Blockchain-hostile jurisdictions like Russia and New York.
The unintended consequences of irrational regulation, quite apart from creating barriers to entry and huge, unnecessary compliance costs, will be the creation of classes of software that completely exclude the government from participation in Bitcoin and sectors of society. This new software will not come exclusively from individual hackers, but will emerge from multi billion dollar corporations like Apple and Google.
Apple have just released iOS8, which explicitly excludes the security services from being able to access iPhone user data. The built in military grade encryption in Apple’s FaceTime and iMessage tools are good examples of how companies will react to Bitcoin regulation. FaceTime calls and iMessages are encrypted and cannot be deciphered by anyone other than the sender and recipient. Google has made changes to its Android software to offer similar protections. As Bitcoin grows, it is absolutely guaranteed that Bitcoin clients will be added by default to all mobile phones, just as email is now included by default, alongside voice calls and texts. These companies will build Bitcoin into their offerings in a way that will completely exclude access by government. This cannot be stopped and is inevitable, but what the government can do is profit from the transformation, by making their jurisdictions Bitcoin attractive.
If the beginning and end points of all Bitcoin transactions is Shoreditch, then Britain will reap the benefits of hundreds of millions of pounds worth of transactions. It will also reap the benefit of software developers being in high demand, and the training needed to bring them up to standard. The knock on effects and consequences will be many, and each will be a multiplier for the other. What we can say for sure, is that the possibility of this happening in Britain will be destroyed if there is another country, a better country, where entrepreneurs and developers can put down roots with guarantees that their work will not be artificially hampered.
There are other side effects of the Blockchain which must be understood fully to make a proper determination of what is and is not rational or even possible in terms of regulation.
Multi Signature Transactions (4) (Multisig) are transactions that require the consent of more than one key holder. This makes possible transactions that take place entirely on the Blockchain, without a merchant needing to “receive” and “store” Bitcoin in its locally controlled wallet as if it were performing a money function simulation. I put the words receive and store in quotes because these two acts never actually happen in a Bitcoin transaction.
The website Brawker is a perfect example of this. Brawker is a service that puts together owners of Bitcoin with Credit Card holders. If you want to buy something from a vendor that does not accept Bitcoin, you can use Brawker to find someone who will buy the goods for you with their Credit Card, and you pay the buyer with Bitcoin. Brawker acts like a match maker to facilitate the transaction.
In the Brawker system, Bitcoin is never transferred to them directly for storage. They instead, use a Bitcoin Multisig Transaction to “store” the Bitcoin on the Blockchain. When the goods are delivered, the buyer signs off on the transaction, and so does Brawker (a “two of three” transaction) and the Credit Card holder receives her Bitcoin. Brawker describes it in this manner:
“When you create an account at Brawker you are not required to deposit any bitcoins. Instead, your funds will go through a multisignature address controlled by at least two of three different keys. The Bitcoin spender receives a key, the buyer has the second one and Brawker the third key. Two keys are required to transfer the funds. You control your private key, securing it with your password. What does this mean? That the funds involved in the transaction are not controlled by Brawker, but by the two parties to the transaction. Brawker intervenes only to settle a dispute.”
In this scenario Brawker does not take charge of any Bitcoins and is never in receipt of them, or any money; it acts only as a match maker. No financial regulation can possibly apply to them, even if a legislator mischaracterizes Bitcoin as money; Brawker never takes control of the Bitcoin used to purchase any goods.
Multisig transactions like this ensure that all the actors are honest, and it removes the need and risk of vendors taking control of Bitcoin as deposit holders. The Blockchain acts like a Silent Automated Guardian over transactions; completely neutral, provably honest. No money changes hands, even if you wrongly believe that Bitcoin is money.
This is only the first of many new possibilities that are beginning to emerge thanks to the Blockchain. Clearly legislation cannot take into account the myriad ways software developers and entrepreneurs are going to leverage the Silent Automated Guardian that is the Blockchain.
In the above real world example I just cited, which entity will the computer illiterate claim should be regulated? The Credit Card company and seller are already tightly regulated and operating normally. Brawker cannot be regulated since it does not accept Bitcoin, goods or money, and is only a match maker without any power over or part in the transaction. The Blockchain itself is not a legal entity, is everywhere, not in a single jurisdiction and cannot be regulated for that reason alone, quite apart from it being a mere ledger.
Not even the most ardent, strident proponent of “Bitcoin as a threat to civilization” is suggesting that every owner of Bitcoin should be licensed, which is the only option left in a Multisig world. Brawker proves that it is possible to create a service that cannot be regulated at all in the current rules or outside of them, since none of its constituent parts can conceivably fall under any statute.
Finally, being incorporated in Hong Kong, the UK government’s position on Brawker is completely irrelevant. The government only has a say in what Brawker does if it decides to abandon Hong Kong and move to Shoreditch, which if the government makes the wrong move re Bitcoin and Blockchain businesses, will never ever happen.
Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?
There are none. Anyone can start a Blockchain or Bitcoin business and then put it on the market. This is exactly as it should be, and the biggest and greatest of all Bitcoin companies, Qkos, the UK incorporated creators of “Blockchain (5)”, the nearly perfect Bitcoin Wallet for iPhone and Android is a fine example of this.
Qkos is now the biggest provider of Bitcoin wallets on Earth. Their software offering is highly innovative, in a way that many others are not. Qkos demonstrates exactly what Britain is capable of producing, and we can expect more of this sort of innovation coming from Britain if the government takes the long view and commits to a multi-generation moratorium on any legislation that touches the Blockchain.
What are the potential benefits of this distributed ledger technology? How significant are these benefits?
The Blockchain is not just a platform to facilitate a new form of money, or digital barter or bearer instruments, or investments as the non software developer will claim. The Blockchain is a way (amongst many other things) to identify that someone owns something, without having to rely on a third party.
The databases used by the Land Registry, DVLA, Birth and Death Registries and any other registry that is centrally administered can be entirely replaced by the Blockchain. The potential benefits of this are many. With the Blockchain as the backbone, it becomes impossible to forge owner registrations once they are made. There will be significant savings across the entire economy as people use the Blockchain to store, look up and transfer registrations. The distributed ledger that is infallible, incorruptible, public and secure changes the way anything can be certified to be owned; it is the ultimate arbiter of titles.
Clearly there are potential benefits to government, but the software applications that will bring these benefits needs to be written. They can either be written in London, or San Francisco. For decades government was forced to use Microsoft Windows and its “Office” suite because, everyone was repeatedly told, “its is the standard”. This American software, with all its many flaws, including built in surveillance, could have easily been replaced entirely with a 100% British equivalent, had a software company capable of writing one been encouraged to start in the UK. Now, the Open Source Libre Office (6) is slowly replacing Microsoft Office, and Windows is being replaced by GNU/Linux (7) globally. Bitcoin will take root in another jurisdiction and eventually make its way to Britain via a foreign company; this is absolutely inevitable, unless the companies are started here.
Ultimately, the benefits of distributed ledger technology are as a blue touch paper to ignite the British Tech Revolution. Britain has the talent, which is the crucial element.
What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to different digital currencies?
There are risks in any software that is exposed to users. Microsoft Windows has exposed its users to serious risk for decades, and to this day, millions suffer from Trojans and Viruses, foreign corporate espionage, theft from bank accounts and Credit Card accounts and other invasions of computers, thanks to the Windows operating system. Nevertheless, the information economy boom has managed to transform how everyone in Britain communicates and works and even shops for their groceries despite these acknowledged flaws.
Bitcoin users will encounter problems, just as users of Microsoft Windows do, but none of these problems are as massive and society changing as the benefits brought by the software. The Blockchain technology itself is secure. When used on a platform that is secure (iPhone using the Blockchain Bitcoin App, or Multibit (8) on a computer running Linux) the risks are far lower than those associated with entering your Credit Card details on a web form in Internet Explorer, or doing online banking on the Microsoft Windows platform.
This is the correct way of characterising the risk associated with digital currencies. There will always be risk, but Bitcoin completely eliminates a large class of risk, making their adoption an obvious choice. “Card-holder not present fraud” in Credit Card transactions is widespread. Readers of this submission will be aware that there are markets where Credit Card information is sold to fraudsters. Bitcoin will eliminate this activity entirely. Target (40 million users compromised)(9) and SONY (77 million compromised) (10), to name but two, had over 100 million Credit Card details copied from their servers. With Bitcoin as the payment method this is absolutely impossible.
Bitcoin will make the theft of Credit Card information a thing of the past. No one will ever again be the victim of charges on their Credit Card made by a criminal. The savings from this side effect of the Blockchain alone will be measured in billions. All of the effort put into securing Credit Card transactions will be abandoned once Bitcoin is the default way of buying online; this is because all the transfers in Bitcoin are guaranteed to have come from the person making the order. Bitcoin completely eliminates payer fraud. A Bitcoin accepting businesses therefore, has no need to perform the expensive checks and automated anti-fraud procedures that plague Credit Card users today, all of which will seem like the most absurd antiquated nonsense in the Bitcoin world.
The inevitable legal risks that will emerge when a billion people are using a single technology can all be dealt with by existing legislation. Fraud is fraud, whether it is done by merchants accepting Bitcoin or any other form of payment. When a merchant makes a promise to do something under contract, that contract is not invalidated because he is being paid in Bitcoin. An understanding of basic legal principles is crucial in forming a correct opinion on Bitcoin, as much as is a correct understanding of what Bitcoin is.
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action? Would the market be able to address these risks itself?
If the government intervenes to address imaginary risks, it will be a monumental and corrosive mistake. First of all, there is no way of knowing what the true risks are, since the form of future software developments that will automatically mitigate those risks is un-knowable. A perfect example of this process is Multisig.
Multisig transactions require that more than one person approve a Bitcoin transaction before it takes place. These transactions will be useful in new forms of letters of credit, and other instruments that do not yet exist. The government cannot regulate what does not exist, or what it does not understand; and I do not say this to imply that the government cannot understand the impact of these applications; no one does, because the applications are only just beginning to emerge as possibilities and potential in alpha stage software.
The status quo now is “heads down and keep at it”. Developers and entrepreneurs are racking their brains, risking time and money trying to make things that no man has imagined. They do not need to be disturbed by threats of regulation and legislation that will cripple and block off the fruitful directions they want to take their imaginations and software.
The market can most definitely manage, mitigate and solve any risks itself. Multisig Transactions are a very good example of this. When millions of pounds worth of Bitcoin are sitting in a single company account, previously any man with access to the wallet could have transferred the Bitcoin to any address. Now, if that Bitcoin is in a multi signature address, a majority of the directors (for example) must approve any transaction from that wallet address. It will be provable that they approved the transfer to a standard of proof which will hold up in a court of law. This is a remarkable innovation in corporate transparency and responsibility, and it has come about without the direction of government; it was done because it is in the best interests of Bitcoin companies.
If the government had intervened earlier in Bitcoin, Multisig might not have emerged, as developers and users would claim that they can always rely on the government to redress any losses. Intervening now in the early stages of Bitcoin and the Blockchain will prevent future tools like Multisig from being developed, at least in Britain, which will ultimately harm business and consumers by making Bitcoin activities less safe.
Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?
I quote from the “5 reasons we’re calling for information” page:
“The safety net of a regulator can give firms the assurance they need to start up in the UK and ensure consumers and businesses are protected.”
The government cannot give assurance to firms in any other way than the promise that they will not be regulated or interfered with. It has no expertise in software, and in fact contracts out all of its requirements in that area. They are not in a position to make a judgement on what Bitcoin business or tools are sound, and there is nothing wrong with that; Microsoft Windows is a perfect example of a completely unregulated and fundamentally flawed software service that is beneficial to society.
The government cannot protect users through regulation, and neither can it provide a safety net. It could not make whole the people wiped out by the banking crisis, and it will not be able to make whole anyone hit by entrepreneur or developer error in Bitcoin. It is unethical to take money from the treasury to replenish the wallets of Bitcoin users or entrepreneurs who make mistakes that are their sole responsibility.
If the government wants to indemnify and make whole Bitcoin users (who are essentially users of software), they must explain why they will not indemnify all users of Microsoft Windows from losses caused by viruses and the resulting theft of information leading to losses of any kind. You cannot make a case for certification of Bitcoin businesses without extending the logic to all software tools and developers. Bitcoin is not money, it is software performing money simulation as one of its many possible functions.
Bitcoin users are at risk in the same way that users of Microsoft Windows are at risk from being hacked. No legislation can stop a user of Windows from being compromised; if the aim of the government is to protect users, legislation and regulation are not the tools to do it.
To put it into context, millions of users of Microsoft Windows are compromised by viruses on a regular basis. This has been going on for decades, and yet, people still use this software, which is widely known to be extremely vulnerable, to do all their computing successfully. Anti-Virus software companies have built billion pound businesses (11) with the sole task of keeping Windows users safe. Bitcoin will be no different, and the measures to protect consumer’s Bitcoin will be developed as time goes on, probably by the same companies that specialise in protecting users of Microsoft Windows. Encrypting your wallet and using Multisig, or refraining from keeping your Bitcoin on a machine that is compromised out of the box will all reduce the consumer’s risk.
Then there are the devices like Trezor (12), and Ledger Wallet (13) from companies based in the Czech Republic and France respectively, which make dedicated hardware wallets that remove Bitcoin from the risk of Microsoft Windows and the attacks made against it. No government can predict what sorts of software and hardware innovations are around the corner, any of which might be made impossible to develop in Britain should the government decide to try and regulate the Blockchain.
What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary according to different digital currencies?
The risks with Bitcoin as a tool in the commission of a crime are the same as the risks of any tool used in any human activity. The risks are remarkably low as a percentage of all the harmless, lawful activity. Presently, much noise is being made about the use of Bitcoin to purchase illegal drugs. Putting this into context can help us determine the proper position to take.
All over the United States, the prohibition era is ending. In 15 years time, there will not be a single state in which marijuana growing and consumption is not legal for all. In the future the Silk Road arrests will seem like the highest farce; Britain should not make laws now that impact Bitcoin’s development here, based on unthinking opinions and bad law that are widely held in contempt by the public and which are being dismantled globally.
Britain must look to the future, where these problems do not exist. Prohibition is ending; legislating now as if it will not ever end is not sensible, and does not reflect the reality of what is happening in society. Remember; the goal should be to make Britain the home of all Bitcoin companies and innovation. This means looking at the trends and planning for the future, not getting mired in today’s hysteria.
The only risk associated with digital currencies is the risk of Britain missing the once in a century boat to prosperity and global influence. This is the most important factor, and distractions like this that absorb time and effort are not beneficial.
This question would not be asked about the internet itself, or computers or iPhones, all of which are used in the commission of crimes. No one would suggest that the makers of these companies should come under a bespoke regime because a statistically insignificant number of miscreants use their tools to commit crimes. The criminals committing the crimes themselves should be punished, not the ordinary users who use the tools completely innocently and normally.
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action?
Intervening in Bitcoin and the Blockchain should be out of the question. Maintaining the status quo is an option, but not a satisfactory one, given the immense power the government has to influence business. The government should encourage Blockchain businesses to incorporate in the UK by guaranteeing that there will be no surprises in the long term future.
Software development is hard to do, and with many competitors all over the world, all working in the same space, it is difficult to deliver products that are not superseded overnight. In a jurisdiction where you are competing against other developers globally but also fighting the local government, precious resources are frittered away for no benefit to anyone.
Britain should provide a flat pitch to developers where the landscape is guaranteed not to change. Entrepreneurs will settle here knowing that they are on the strongest possible footing to concentrate entirely on their product, to the exclusion of all else. This will cause the best products to emerge from Britain consistently. This will be the effect of a 150 year moratorium on any legislation that touches Bitcoin or the Blockchain.
The consequences of taking no action are to risk that Britain might become the centre of Bitcoin activity, by luck. If the threat of legislation is always there, people will hesitate to invest in setting up a company in Britain. Why would anyone take the risk that five years down the road after four years and eleven months of development, an absurd “BitLaw” is to be introduced in Britain, killing innovative business models, forcing people to flee these shores? No one with any sense would take that risk, especially with the constant threat of Labour being re-elected. Entrepreneurs thinking rationally will opt for the best long term base, wherever that is, rather than risk being mired in a country where an anti-business government can spontaneously be elected.
If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What has been the impact of FinCEN’s decision in the USA on digital currencies?
Bitcoin is the same as any other tool; it can be used for good purposes and bad purposes. Bitcoin is not money, and so it cannot be used for financial crime in a way that is different from the exchange of any good or information in the moving of the proceeds of crime. This question is a distraction from the important central thrust of the Blockchain’s nature. There are a few voices who will say that these questions are key; anyone with an understanding of the history of software will know that they are not.
Britain should not introduce regulation or use other powers. If the government introduces regulation, Bitcoin entrepreneurs will incorporate in other countries. It should not regulate through national, European or an international regime. The disadvantages of this have been spelled out in other answers, including the unintended consequences, the least of which is a barrier to entry due to compliance costs which can easily be avoided. This has in fact, just happened in Australia, with the Bitcoin company CoinJar.
The impact of the American “FinCEN” on digital currencies in the USA has been to cause all Bitcoin businesses not run by Americans to strike America off of their list of possible bases. New York in particular is exceptionally toxic, since it is bringing in a local and absolutely absurd “BitLicense” that betrays a catastrophic computer illiteracy and misunderstanding of the Blockchain. Quite apart from these facts, Britain is a sovereign nation, and should only do what is rational and in its own best interests. What other people are doing in their own countries should not form the basis of what the British do; in fact this is an opportunity to capture American entrepreneurs and have them incorporate in Britain.
Any discussion of the impact of regulation of the Blockchain on other jurisdictions should be made in the context of how Britain can outperform other countries, not how it should slavishly imitate them and duplicate their mistakes.
What difficulties could occur with digital currencies and financial sanctions?
We are now entering a world where many of the old policy tools will cease to function. Financial sanctions are one of the tools that will need to be abandoned for tools that work. The government cannot expect everything to remain the same forever, including the policy tools it regularly uses today.
Financial sanctions will be made toothless by Bitcoin; I offer the possible future scenario, describing what this might look like:
Russia comes to its senses and completely embraces Bitcoin. It is now impossible to stop money flowing in and out of Moscow. SWIFT has largely been abandoned as the majority of the world moves its money using Bitcoin.
The flow of money cannot be stopped. There are billions of Bitcoin transactions every day. There is no way to keep track of them all, even though each one is absolutely secure and tracked in the publicly viewable Blockchain.
The old tools of financial sanctions, having been abandoned have been replaced by banning orders and other tools that stop the movement of goods and people. Money while it is being transferred is now completely beyond the reach of any government.
London, being the centre of all Bitcoin business has a unique position of being the leader in software and skills. There has been an unprecedented economic boom in Britain, which has decided that interfering in other people’s affairs is unprofitable.
As it is in Switzerland, unemployment is a fraction of a percent. Prosperity touches every part of British society. The old concerns about sanctions and tiresome international affairs are now left to the countries that did not embrace Bitcoin and reap the benefit of investment in time and skill that has paid off very well for Britain.
Sanctions don’t matter any more, any more than drug prohibition matters since the global decriminalization and legalization took place.
The date is 2021.
This is exactly how the government should be thinking; not about the narrow-window events of today, but of the quickly arriving future, where it should be planning to be “destination number one” for all Blockchain entrepreneurs. The Bitcoin Blockchain mediated future is going to happen. This is inevitable. The only question is what is Britain’s position going to be in it, once it is in full swing.
What risks do digital currencies pose to monetary and financial stability? How significant are these risks?
None. Bitcoin is not money, it is a means of moving money from A to B. Only the government has the power to levy tax and declare what is legal tender and what is acceptable for the payment of taxes. This means that there will always be a demand for Sterling, no matter what happens.
The Tally Stick (14) is a good example of this, and is in fact a close analogue of Bitcoin. The Tally Stick, an ordinary stick of wood approximately three feet long and an inch square in profile, had a zigzag cut made along its length, creating two unique halves that fit perfectly together. One half was “spent” out into the economy, the other retained by the King’s treasury. This is directly analogous to the public and private keys in modern cryptography, invented by the British, seven hundred years before the advent of the computer (15).
The treasury only accepted pieces of the Tally Stick as payment for taxes. The half of the Tally Stick released into the economy therefore, was extremely valuable, and it was itself split along its length and sold for gold. The Tally Stick is the longest running example of a single form of government money in the world.
Now, in the 21st century, the same ideas that powered the Tally Stick are at the root of the design of Bitcoin; the split keys that power the public key cryptography that secures the Blockchain. The difference today, is that the government, instead of issuing Tally Sticks, issues Sterling, and only accepts Sterling in payment of taxes. It therefore has a very deep and powerful mechanism of control over the economy, and it doesn’t matter what people choose to use as money; they must ultimately acquire Sterling to pay taxes.
With that powerful compulsion in place, Sterling’s value will remain very stable, just as the Tally Stick remained stable and useful for over seven hundred years. Sterling is not going anywhere, unless the Bank of England decides otherwise. There is therefore no risk to financial stability with Bitcoin. The real risk is trying to control Bitcoin, and Britain losing pole position, with the Bitcoin flowing through, out of and away from the UK.
The future is going to look very different from today, to the same extent that the pre printing press world looked different to the post printing press world. Many corporations will be virtual, with shares issued on the Blockchain, and contracts enforced by cryptographic protocols. Fairness and completeness of contracts will supervised by the function of the Blockchain.
Banking as we have known it will be a thing of the past; dis-intermediated, peer to peer money transfers will be the norm. Despite all of this, people will still need somewhere physical to live. They will need services. How these services are paid for and who provides them is the question. It is hard to know what the answer to that question is, but for certain, there will be a transitional period where the previous system is transformed into the new one.
The banks, as storage houses for money are in a prime position to reinvent themselves in the Blockchain era. They have the infrastructure to service the population and this should not be thrown away on a whim.
If the services described in part here become a reality, and Bitcoin finds a home in another territory, you can be certain that the banks here will still be completely eliminated, with no vestige left behind. Think of the tea rooms that used to be a feature of every high street in Britain, that no longer exist. The same will happen to the high street bank, and the companies that own them, and the city of London as a major financial centre, should the locus of global Bitcoin activity settle in another jurisdiction.
Whatever shape the future takes, we want it to take root and flourish in Britain, and the formula to make that happen is well understood by the British who know their history. A 150 year moratorium on the regulation of Bitcoin and the Blockchain will achieve this desirable end. There will be a strong temptation to try and control and shape what is beginning to emerge with Bitcoin and the Blockchain. You must resist this temptation and allow the Bitcoin to flow in Britain.
The effects that I describe here are already beginning to take hold. As I mentioned earlier, Australia has just learned (16) the hard way that what I am saying is true; CoinJar, an Australian Bitcoin Wallet start-up has just decided to move to London from Melbourne. This is a direct result of the Australian government mischaracterising Bitcoin as money, and forcing the charging of VAT (in Australia, “GST”) at a rate of 10% on all purchases of it. In addition, Australian Credit Card holders have been circumventing this tax by going online and registering with the American CoinBase to purchase Bitcoin, completely cutting out Australian business and the Australian government.
Had the Australian government taken a rational hands off approach, CoinJar would never have left Melbourne, Australians would have a local company to deal with, would have shunned CoinBase, and the government would be taxing CoinJar’s profits. Now the Australian government will get nothing, and the Australian consumer continues to use Bitcoin globally oblivious of any irrational local law.
Regulation only works in a space where it is practical to enforce. In Bitcoin and the Blockchain, it is impractical to enforce regulation which in any case, is an arrow being shot at an impossibly fast, invisible target, by a blindfolded archer that can only ultimately shoot himself should he hit his target.
The British government must now either try to understand and fully grasp the un-knowable future implications of Bitcoin and the Blockchain, with the comprehension of a software developer, the insight a technology futurist, a soothsayer with a crystal ball and the intent of an entrepreneur, or it must step back and make an easy leap of faith that software entrepreneurialism is the ultimate engine of progress and prosperity in the 21st century.
Anything less than this will result in Britain missing the first great technology breakthrough and opportunity of the 21st century, a breakthrough similar in magnitude to the invention of the printing press or the commodity home computer. This breakthrough is the emergence of a world-transforming new technology, shifting all registration and transfers of property, money, things and processes we cannot imagine, to a neutral, infallible, incorruptible, “Silent Automated Guardian of Transactions”, the ultimate impartial witness. The Blockchain.
1 Examples of large scale sites using online pseudo monies:
Cartoon Doll Emporium “Cartoon Dollars” http://www.cartoondollemporium.com/prepaidcard-finder.html
DD Tank “Coins” http://ddtank.game321.com/guides/interface/shop/505.html
Gaia Online “Gaia Cash” http://www.gaiaonline.com/payments
3 The ghosts of Skype past: How Estonia’s biggest tech export is still powering its startup scene today http://www.zdnet.com/the-ghosts-of-skype-past-how-estonias-biggest-tech-export-is-still-powering-its-startup-scene-today-7000026845/
4 What are multi-signature transactions? http://bitcoin.stackexchange.com/questions/3718/what-are-multi-signature-transactions
5 Blockchain — Bitcoin Wallet: https://itunes.apple.com/us/app/blockchain-bitcoin-wallet/id493253309?mt=8
9 Missed Alarms and 40 Million Stolen Credit Card Numbers: How Target Blew It: http://www.businessweek.com/articles/2014-03-13/target-missed-alarms-in-epic-hack-of-credit-card-data
10 PlayStation Network hackers access data of 77 million users: http://www.theguardian.com/technology/2011/apr/26/playstation-network-hackers-data
11 OPSWAT Anti-Virus Market Share Report: https://www.opswat.com/about/media/reports/antivirus-january-2014
14 Split Tally Stick in England: http://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_England
15 Documentary “The Money Masters”: https://www.youtube.com/watch?v=iDtBSiI13fE&feature=youtu.be&t=18m36s
16 CoinJar Relocate From Australia To UK, No Longer Charging GST http://qntra.net/2014/12/coinjar-relocate-from-australia-to-uk-no-longer-charging-gst/