My State of the Net panel on Bitcoin
How the blockchain is like the Internet, and why we need a light regulatory touch.
A couple weeks ago at State of the Net, I was on a panel on Bitcoin moderated by Coin Center’s Jerry Brito. The premise of the panel was that the state of Bitcoin is like the early Internet. Somehow we got policy right in the mid-1990s to allow the Internet to become the global force it is today. How can we reprise this success with Bitcoin today?
In my remarks, I recall making two basic points.
First, in my opening remarks, I argued that on a technical level, the comparison between Bitcoin and the Internet is apt.
What makes the Internet different from the telecommunications media that came before is the separation of an application layer from a transport layer. The transport layer (and the layers below it) does the work of getting bits to where they need to go. This frees anybody up to develop new applications on a permissionless basis, taking this transport capability basically for granted.
Earlier telecom systems did not function this way. The applications were jointly defined with the transport mechanism. Phone calls are defined in the guts of the network, not at the edges.
Like the Internet, Bitcoin separates out not a transport layer, but a fiduciary layer, from the application layer. The blockchain gives applications access to a fiduciary mechanism that they can take basically for granted.
No longer will fiduciary applications (payments, contracts, asset exchange, notary services, voting, etc.) and fiduciary mechanisms need to be developed jointly. Unwieldy fiduciary mechanisms (banks, legal systems, oversight) will be able to be replaced with computer code.
Second, in the panel’s back and forth, particularly with Chip Poncy, I argued that technological change may necessitate a rebalancing of our laws and regulations on financial crimes.
We have payment systems because they improve human welfare. We have laws against certain financial activities because those activities harm human welfare. Ideally, we would balance the gains against the losses to come up with the optimal, human-welfare-maximizing level of regulation.
However, when a new technology like the blockchain comes along, the gains from payment freedom increase. People in a permissionless environment will be able to accomplish more than before. This means that we have to redo our balancing calculus. Because the benefits of unimpeded payments are higher, we need to tolerate more harms from unsavory financial activities if our goal remains to maximize human welfare.
Thanks to my co-panelists for a great discussion.
Eli Dourado is a research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program. Follow @elidourado on Twitter.
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