Episode 24: Banning Bitcoin
The Long Arc of an Infinite Revolution
Encryption has long walked the line between weapon and tool. While the so-called “Crypto Wars” ended in the 1990’s, in 2013, Edward Snowden showed us why the fight was long from over. This week, we discuss the brink of another type of Crypto War, the one over cryptocurrencies.
Show notes and links for the episode 👇🏽 below
In the 1990’s, as mobile phones were first taking off, the NSA introduced a mandatory bit of technology to be integrated in them — the Clipper Chip. The Clipper Chip was part of the Clinton Administration program to “allow Federal, State, and local law enforcement officials the ability to decode intercepted voice and data transmissions.” In other words, this would give the government a back door.
This was just one battle waged in what has come to be termed the Crypto Wars… the fight between government and (often) individuals, technologists, and even corporations over how encryption technology should be treated.
A Brief History
Post-WWII, encryption was treated solely as a munitions export and was regulated as such. In the 1960’s this started to receive some pushback from financial institutions as they started to realize encryption was useful for a whole bunch of other things, including protecting sensitive information. And finally in the 1990’s as technologies like mobile phones and the internet started to take off… this all came to a head with the Clipper Chip.
We have seen companies like Apple take a stand and encrypt iPhone data in such a way that even the company itself would not be able to access it. We have seen T-shirts with Export-restricted RSA encryption source code printed on them, making the shirt an export-restricted munition.
We may have thought the Crypto Wars ended in the ‘90’s. Edward Snowden showed us otherwise… But now we may be on the brink of another type of Crypto War.
Washington has finally taken notice of this little thing called bitcoin.
Crypto Goes to Washington
July was a busy month for bitcoin, but let’s hone in on the one week that pushed bitcoin from fringe into mainstream.
- Thursday, July 11: Jerome Powell testimony
- Friday, July 12: Donald Trump tweet
- Monday, July 15: Mnuchin Monday’s press conference
- Tuesday, July 16: Senate Banking Committee Hearing with Facebook’s David Marcus
- Wednesday, July 17: House Financial Services Committee Hearing with David Marcus and Expert Panel
Now — tons of interest, but still fundamental misunderstanding about bitcoin and regulation!
The Status of Bitcoin
The US has a patchwork of agencies and regulations that oversee bitcoin, and the line between regulation (making rules) and enforcement (following the rules and punishment if you don’t) is an interesting one.
- SEC | The Securities and Exchange Commission (SEC), as its name implies, oversees securities issuance and exchange. According to the SEC, Bitcoin is not a security.
- CFTC | The Commodities Futures Trading Commision (CFTC) ensures the integrity of futures and swaps markets. . According the the CFTC, Bitcoin is a commodity. Any swaps and futures involving bitcoin are part of the CFTC mandate.
- IRS | According to the Internal Revenue Service (IRS) Bitcoin is property, taxed as property, like stocks or bonds, any gain or loss from the sale or exchange is taxed as a capital gain or loss.
- FinCEN | The Financial Crimes Enforcement Network (FinCEN) oversees financial crime as part of the Bank Secrecy Act or BSA.
- OFAC | The Office of Foreign Assets Control (OFAC) administers and enforces sanctions. Sanctions have been applied to bitcoin addresses.
And there are many more acronyms in the episode.
Let’s Ban Bitcoin
Banning bitcoin is an interesting idea. There’s a fundamental distinction between regulation and enforcement.
Protocol: Code is protected under free speech statutes, and the encryption bans of the 1980s and 1990s — which effectively weaponized software — resulted in encryption being allowed. However, Github (a Microsoft company) recently blocked Iranian and Syrian users, because Microsoft is a US company subject to sanctions.
Network: The physical implementation of the bitcoin protocol is where code meets meatspace. How would you stop people from running nodes? Well, the dependence on corporate ISPs and telcos, who have helped the government before and will do it again, means the network supporting bitcoin is fundamentally insecure (more on next week’s episode),
On and Off Ramps: This is where the enforcement rubber meets regulation road. See Operation Chokepoint, or how banks cut off high risk (read: bitcoin) companies. Anecdotally, helping find and open new bank accounts for bitcoin companies was basically my job from 2015–2017.
Even if you try to avoid banking, The Finland-based LocalBitcoins.com is now under pressure to do KYC / AML which defeats the purpose. In fact, in the US, local bitcoins brokers are being convicted of running illegal money transmission schemes.
Lastly, governments have no issue seizing bitcoin. The Silk Road auctions resulted in the DoJ auctioning 144,336 bitcoin for $48,238,116 or $334 per bitcoin (ppl put together syndicates to bid on the auctions, remember working on this). The Bulgarian government sitting on 213,519 of bitcoin, a little over 1% of total, fully mined bitcoin supply, which was worth nearly $3B at its peak in 2017 — although they say it’s been liquidated through open market activities over the last year or two. And Venezeula and Iran are going straight to the source and seizing bitcoin miners, not a bad way to shut it down.
Why it Matters
The challenge of enforcing bans on P2P networking and P2P file sharing are legendary. One glance at PirateBay hosting servers in drones in open water to escape jurisdiction, servers in Ascencion on a volcano, craziness! show that
- Jurisdiction is challenging to define in a fully digital world. Historically jurisdiction have been defined by physical boundaries. However, these are difficult to draw in a world that is already fully digital and concerned with privacy.
- Regulation is dependent on jurisdiction. If you don’t have a jurisdiction, how do you identify relevant regulation? Without harmonized global regulation, people will use jurisdiction as a tool to change the rules.
- Lastly, enforcement is what scares people into following regulation. Enforcement requires penalties, which is what makes people fear the consequences of *not* following the rules. Hence, enforcement will continue to be aggresssive.