FinCEN shook us all from our Monday afternoon stupor by dropping some provocative “guidance” for those involved in the
business and use of digital currencies and, in particular those of us
involved with the grand experiment that is Bitcoin.
You can and should read what FinCEN had to say for yourself here.
Upon an initial reading two things struck me:
FinCEN firmly believes that virtual currency in general, and bitcoin
in particular, does not fall under the prepaid access rules.
FinCEN seems intent on recreating and expanding the prepaid access
rules for virtual currency and bitcoin under the mantle of money
transmission.
I was happy to see FinCEN issue some clarity around the overly-broad
prepaid access rules and definitively state that they do not apply in
the context of bitcoin. This is quite interesting because in my
conversations with seasoned payments and digital currency lawyers,
prepaid access seemed to be the most likely trigger for FinCEN
regulation – closely followed, of course, by money transmission.
That’s about where my happiness ended as the clear guidance quickly devolved into something a little less comprehensible.
In particular, I’m a little disheartened that FinCEN appears to be
creating an entirely new regulatory scheme under the guise of
“guidance.” Of course, FinCEN cannot rely on this guidance in any
enforcement action, as they must readily acknowledge. Simply put, under
the Administrative Procedures Act (APA), FinCEN can’t promulgate new
rules without going through a notice and comment proceeding whereby the
public may have their voices heard. If FinCEN would like to expand its
statutory authority over “money transmitters” to include brand new
categories such as “administrators” and “exchangers” of digital currency
it must do so through proper rule making proceedings and not by fiat. I
welcome that conversation.
State Money Transmitter Issues
It should also be noted at the outset, in case there is any
confusion, that FinCEN’s rule-making and interpretations have no
practical effect on State money transmitter laws (although FinCEN or
Congress may preempt such State laws in the future). State MTB laws and
enforcement is something that should be discussed, and to some degree
worried about, but it’s a separate issue.
FinCEN Overreaches
Read closely FinCEN’s guidance implies that every person who has ever
had any virtual currency and has ever exchanged that virtual currency
for real currency may now be considered a money transmitter under the
Bank Secrecy Act. That is, of course, an untenable position.
FinCEN starts going off the tracks early on, as they carefully define
a “User” (not subject to MSB registration) as “a person that obtains
virtual currency to purchase goods or services” as opposed to an
“Exchanger” who is “a person engaged as a business in the exchange of
virtual currency for real currency, funds, or other virtual currency.”
Left unsaid are any specifics around the facts and circumstances that
would constitute “engaging as a business.”
What is crystal-clear is that once a person sells a single Satoshi
for real currency that person is no longer a “User” and therefore not
categorically exempted from MSB registration.
Later in the document as FinCEN turns its attention to discussing decentralized virtual currencies we get the money paragraph.
In a bizarre shot across the bow at miners, FinCEN states
unequivocally that “a person that creates units of convertible virtual
currency and sells those units to another person for real currency or
its equivalent is engaged in transmission to another location and is a
money transmitter.”
And then, for good measure, FinCEN completely muddies the waters by
stating: “In addition, a person is an exchanger and a money transmitter
if the person accepts such decentralized convertible virtual currency
from one person and transmits it to another person as part of the
acceptance and transfer of currency, funds, or other value that
substitutes for currency.”
FinCEN’s position as it relates to bitcoin can be summed up as follows:
A person may spend money to purchase bitcoin or mine bitcoin and
then exchange the currency for goods and/or services without having to
register with FinCEN as an MSB.
If a person receives real money in exchange for their bitcoin they MAY have to register with FinCEN.
If a miner exchanges their mined bitcoin for real money they MUST register with FinCEN.
Anyone transacting bitcoin on someone else’s behalf MUST register with FinCEN.
This framework would wildly expand the reach of FinCEN and the BSA,
and would be infeasible for many, if not most, members of the bitcoin
community to comply with. An individual or micro-business cannot be
expected to create a robust AML/KYC program anytime they sell 1 or 100
bitcoin on an exchange or in-person. The BSA was never intended to apply
this broadly and reach this far into people’s everyday lives. Perhaps a
little more guidance is needed.
Patrick Murck is general counsel at the Bitcoin Foundation. Reprinted with permission.
Much of the conversation about bitcoin adoption focuses on its use in goods and services transactions. Breaking bitcoin news, for instance, draws attention to the fact that the Internet Archive
will be giving employees the option to be paid in bitcoin. This focus
on brick & mortar transactions means that the role that bitcoin
financial instruments—stocks, bonds, and derivatives—have to play in
promoting bitcoin adoption often gets overshadowed.
I'm currently reading Barry Eichengreen's Exorbitant Privilege
which goes into the mechanics of what it takes to create a truly
international currency. Eichengreen points out that prior to World War I
the dollar played a negligible role relative to the pound sterling in
world markets, but by the mid 1920s it was the dominant unit for
invoicing payments and denominating bonds. Eichengreen's theory is that the US dollar became the world's go-to currency because of the emergence of a very specific financial instrument—the banker's acceptance.
An acceptance is much like a bill of exchange, a financial instrument I explained in my last post.
Say a merchant decides to pay for a shipment of goods with a personal
IOU, or bill. If a bank first "accepts" the bill i.e. if it agrees to
vouch for the IOU, then this gives the bill more credibility. It is now a
banker's acceptance.
According to Eichengreen, around 1908 or 1909, a concerted effort to
foster the growth of the US acceptance market began. Up till then, US
banks had been prohibited from dealing in acceptances and branching
abroad—both these limitations would be removed by new legislation. To
promote liquidity and backstop the acceptance market, the Federal
Reserve, established in 1914, was given authority to buy and sell
acceptances via open market operations. Furthermore, these acceptances
could legally "back", or collateralize, the Fed's note issue. This
feature was particularly helpful. Although the Fed was also legally
permitted to purchase government securities, government securities could
not "back" the note issue. Acceptances, therefore, became the more
flexible and preferred asset for Fed open market operations, at least
until 1932 when the limitations on government collateral were removed.
According to Eichengreen, the Fed was the largest investor in the
acceptance market and sometimes held the majority of outstanding issues
on its balance sheet.
By the mid-1920s foreign acceptances denominated in dollars exceeded
those denominated in sterling by a factor of 2:1 and more central banks
held US forex reserves than sterling. London was on the way out, and New
York on the way in. By 1929, the amount of outstanding foreign public
bonds denominated in dollars (excluding the Commonwealth) exceeded
sterling bonds. The lesson here is that a key step in the sequence of
internationalizing a currency is getting it to be used in financial
markets. This involves the development of deep, liquid, and accessible
markets in securities denominated in that currency.
What sort of financial deepening do we see in the bitcoin universe, and
how might we compare it to the dollar's emergence in the 1910s and 20s?
There are a number of healthy signs of financial deepening. I count five
competing bitcoin securities exchanges that provide a forum for trading
bitcoin-denominated stocks and bonds. These include Cryptostocks, BTCT, MPEx, Havelock, and Picostocks. A sixth, LTC-Global, provides a market in litecoin securities, a competing altchain.
Holders of bitcoin needn't cash out of the bitcoin universe in order to
get a better return. Instead, they can buy a bond or a stock listed on
any of these exchanges.
The largest publicly-traded company in the bitcoin universe is SatoshiDice, a bitcoin gambling website listed on MPEx.
With 100 million shares outstanding and a price of 0.006 BTC,
SatoshiDice's market cap is ~600,000 BTC which comes out to around $17
million. SatoshiDice IPOed
last year at 0.0032 BTC. With bitcoin only trading at $12 back then (it
is now worth $29), the entire company would have been worth $4 million.
Given today's $17 million valuation, SatoshiDice shareholders have seen
a nice return over a short amount of time—much of it provided by
bitcoin appreciation.
While SatoshiDice certainly provides some depth to bitcoin financial
markets it has the potential to shallow them out too. Because MPEx
charges large fees to trade on its exchange, a few of the competing
exchanges have created what are called SatoshiDice "passthroughs". Much
like an ETF, a passthrough holds an underlying asset—in this case
SatoshiDice shares on MPEx—and flows through all dividends earned to
passthrough owners. As a result, investors can get exposure to
SatoshiDice without having to pay MPEx's expensive fees. BTCT, for
instance, lists two different SatoshiDice passthroughs (GSDPT and S.DICE-PT) which together account for more trading volume than all other stocks and bonds listed on BTCT.
SatoshiDice's sheer size is to some extent problematic since Bitcoin
financial markets are not as deep as they might appear. Should something
ever happen to SatoshiDice, a big part of the bitcoin financial
universe's liquidity will be wiped out, and this would ripple out across
the entire field of bitcoin securities. The same might have happened to
banker's acceptances in their day, except for one difference—the Fed
was willing to back the acceptance market up. In the bitcoin universe,
there's no buyer of of last resort to provide liquidity support to
SatoshiDice shareholders.
Another impediment to deeper bitcoin markets is the hazy legality of the
bitcoin securities exchanges. The first major bitcoin securities
exchange, GLBSE, was closed in October 2012 with no prior warning. According to this
article, potential regulatory and tax liabilities convinced GLBSE's
founder to shut it down on his own behest. If any of the existing
bitcoin exchanges were to grow too noticeable, one could imagine the SEC
(or its equivalent) knocking on their door and forcing the
exchange-owner to pull the plug. This sort of regulatory uncertainty can
only dampen the liquidity and depth of bitcoin financial markets.
US authorities, on the other hand, didn't need to heed the rules when
they built the banker's acceptance market. They created the rules. If
financial deepening in the Bitcoin universe is to proceed it will happen
despite regulations and not because of them.
The last headwind to bitcoin financial deepening is bitcoin's
volatility. Eichengreen writes that the seesawing of the pound sterling
during the war period encouraged financial markets to search for a more
stable unit in which to express debts. The pound had always been
anchored to gold (or silver), but it was unpegged from its century's
long gold tether when the war broke out. Although it was repegged in
January 1916, this time to the dollar, this did not secure confidence in
the sterling's value since the peg was dependent on American support.
When this support was withdrawn at war's end, sterling fell by a third
within a year. Through all of this, the dollar continued to be defined
in terms of gold, a feature which no doubt attracted issuers.
Bitcoin, on the other hand, has more than doubled in just two months.
Back in June 2011, it fell by 50% in just two days. Like pound sterling
during the war, bitcoin's lack of stability will do little to promote
deeper financial markets.
Although I've stressed the difficulties that bitcoin markets face in
developing more depth, the sheer amount of financial innovation I'm
seeing from those involved in the various bitcoin securities exchanges
is impressive. I wish them the best. The more they build up bitcoin
securities markets, the better an alternative bitcoin presents to
competing currency units.
[Disclaimer: I am long SatoshiDice and several bitcoin mining stocks.]
The latest announcement
of a prominent economist joining the team of a gaming company sparked a
lot of questions for me. Why study and analyze the empirical data of a
virtual game economy? Isn't designing economies the same as central
planning? Doesn't regulating a virtual currency imply monetary
manipulation?
This is capitalism within capitalism. The most
successful virtual world game companies will be the ones that can
out-compete their peers in the quest for economic activity. And, that
means providing the most robust and open platform for virtual
economy/real economy integration.
After almost deleting the original email from Gabe Newell,
Yanis Varoufakis accepted the post as in-house economist for gaming
software powerhouse Valve Corporation. I like Yanis. He has been a
fellow guest on the Keiser Report with Max Keiser. He currently
contributes via the Valve Economics blog. Here are some of his observations related to Steam which is the trading house for Valve virtual games:
"In short, Steam
trades are not always pure exchanges happening in some moral-free zone
where social obligations are perceived to be non-existent. An
unspecified (and impossible to compute accurately) number of trades take
place at exchange rates that do not reflect the relative bargaining of
buyer and seller but, instead, are determined by other social and gaming
factors. In technical terms, this means that, while our arbitrage data
is not affected (since the volume of arbitrage opportunities is
independent of the reasons for which some items are sold cheaply and
resold expensively), our relative price estimates are. Ideally, we would
like to have some ‘gift exchange’ radar that alerts us to all instances
of Steam ‘trading’ where people are far from trying to get the
best possible ‘bargain’ for themselves. If we possessed such a radar,
we would use it to decide which trades to turn a blind eye to when
computing relative prices. Of course, that ‘radar’ is missing. So far we
are utilising crude methods of ‘visual’ inspection, leaving out of our
calculations those relative prices that seem, economically, silly.
Clearly, we need to work on coming up with such a radar. Any suggestions
from you will be most welcome."
Who cares? My
economic instinct tells me that I should be concerned here because I
don't separate out the exchange prices determined by social and other
gaming factors. The market price is the real price. As economic
actors, men possess different data and make different value judgments
reflected in pricing so the mere act of gifting may have immeasurable
value to one and not to another.
Allow me to fantasize. The job
description of an in-game economist should be the same as the job
description for a White House or Federal Reserve economist -- get out of
the way of the free market and "let it be." Support and protect
property rights and maintain an economic environment free from stifling
regulation and free from outcome prediction. Valve's job description reads more like an economist for the Politburo.
Of
course, virtual world game designers have a right to design socialist
economies just as much as free market economies. It is the gaming experience
that is the commodity here and certain games will survive and thrive
based on their attractiveness and value to end consumers. However,
whether or not their economies survive on their own will depend on their
adherence to laissez-faire principles.
As I outlined in Virtual Currencies and Roach Motels,
in-world economies are the perfect crucible for launching unrestricted
currency competition and that competition will enable further
opportunities for transporting virtual world earnings to real world
value.
"Many
economists believe that philosophising over the nature of exchanges is a
luxury they do not need in order to analyse and understand an economy.
They are wrong. The nature of exchanges, whether they are pure (i.e.
asocial) or impure (replete with social norms and part of intertemporal
social relations), makes a difference when it comes to predicting
economic activity. Thus, to understand the exchanges we observe on Steam,
it is crucial that we grasp the network of social relations within
which they are embedded. The prevalence of gifting and the fact that no
specific item has emerged as a form of money in trades of TF2 items
should alert us to the intriguing social conventions that are part and
parcel of our community’s trading decisions. How will these conventions
change or mutate when participants are given the capacity to buy and
sell, among one another, using real dollars? Would it make a difference
if any dollar profit made through such trades can be taken out of Steam (i.e. monetised)? I suspect the answer to these questions are in the affirmative. But we must wait and see."
Who
cares about predicting economic activity? We don't have to "wait and
see." Apologies to Yanis, but he is wrong to focus on the nature of pure
or impure exchanges and economic prediction. Economic activity should
not be predicted -- it should be protected. Establishing and protecting
the platform for competition, especially monetary competition, will
yield the most beneficial results. In a free market, the users will
determine what good to use as a barter currency and if a free market
payment platform is provided then the most ideal virtual currency will
emerge.
An open economy in the virtual
world with a freely-determined currency would eventually facilitate the
many other transactional features that are so important to users, but
maybe not to game publishers, such as unrestricted person-to-person
payments, user-defined anonymity and untraceability, near-immediate
bearer settlement, transaction irreversibility, reliable store of value,
multi-grid capable, and decentralized processing. These principles
don't have to exist only on the black or "grey" markets because there
shouldn't be a black market -- just one market environment for free
exchange.
I think where Yanis and I primarily disagree is on the
level of monetary freedom that is acceptable for sovereign individuals
(real or virtual). I believe in maximum monetary freedom and I see it as
the overriding liberty issue related to political economics. Within
monetary economics, the sub-discipline of cryptocurrencies rests on the
premise of public key cryptography in a decentralized nature being the
bulwark against encroaching State monetary interference.
My brief holiday foray into this subject was sparked by this titillating but impoverished article. Fortunately, I just learned about an exciting new company that provides two-way convertibility for your Diablo 3 gold.
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.
By Zachary Caceres
Radical Social Entrepreneurs
Tuesday,
Peter-Jan Celis
All around the world, people struggle with expensive legal fees and backlogged courts.
Judges are sometimes biased or corrupt. Political agendas tilt the
scales of justice. In many places in the developing world, courts are
used almost exclusively by elites.
But if 26-year old Peter-Jan Celis has his way, this is all bound to change. Celis founded Judge.me – a private, online small claims court based in Santiago as part of Start-up Chile.
While building Judge.me, he has come to see a paradigm shift in law
and legal services as the only realistic way to fix the problems of
today’s legal systems. Taking arbitration online and making it cheap and
user-friendly is the first step towards a much deeper vision.
Celis is an outspoken advocate of polycentric law,
a clunky phrase for a network of parallel legal systems, where
jurisdictions and legal firms compete with each other to ensure
high-quality and low price.
At its debut, Judge.me lay dormant for months. But recently, Celis
suddenly found himself trending on sites like HackerNews and Reddit, and
his website has roared to life.
Radical Social Entrepreneurs chatted with Celis about Judge.me, and his bold vision for the future of legal systems.
Celis: Judge.me is a small claims court for the
internet. We offer fast and convenient online arbitration that is
legally binding in 146 countries at just $299 total fixed price ($149.50
per party).
RSE: That’s surprisingly cheap. Some courts can charge that much just in paperwork fees. At RSE,
we’re always interested to hear people’s stories and how they arrived
upon their radical social entrepreneurship project. What’s yours? How
does a twenty-something end up in ‘start-up law’?
Celis: The divorce of my parents has been going on
for 7 years and still running. It became very obvious to me the court
system was failing around the same time I got interested in private law
as a “last frontier” for innovation.
In essence, any legal system is an attempt to manage negative
externalities, although incentives in centralized legal systems
unfortunately also go beyond that.
[Negative externalities are effects of private activity which spill over onto others. For instance, pollution or loud noise. –Ed.]
Imagining how private law might work as an alternative to today’s
monopoly legal systems was the last “hard nut to crack” for me. Trying
to find a pragmatic way in the current legal system was an even harder
exercise, but after studying arbitration at a CIArb course (Chartered
Institute of Arbitrators) I came up with the Judge.me system.
What I am most proud of is that I found a way to offer immediate
enforcement value to my customers leveraging current international
arbitration laws while hoping to build a more reputation based
enforcement mechanism as soon as possible. (Read: user profiles.)
RSE: Judge.me seems to have two main components. The
first is the arbitration service, which is why people pay you. The
second is your contract clause. With one click, people can literally
copy and paste a clause from your website into their contracts — making
any disputes that arise Judge.me cases. This could be used by all sorts
of people. How have both components been received? What’s the caseload
like? What does the market look like?
Celis: The service has been very well received.
There is, however, a lag between clause usage and dispute filing. As a
result, the number of disputes arbitrated can still be counted on one
hand. Also, I can’t track how many contracts use my clause yet.
When I launched my service on January 17th, I started with
business-to-consumer marketing, assuming case load would take off
organically. However, looking at my stats now, I see maybe 1 case filing
per 500 unique visitors and most of those don’t even end up in
arbitration hearings because either the filing is fake or the responder
refuses to agree to arbitration.
Post-dispute agreement on arbitration is indeed very unlikely as
often one of the parties knows they are likely to lose. Hence it is
really important for me to push my customers to add my arbitration
clause to all their contracts pre-dispute.
So looking at where I am now, I received a lot of media attention,
good and increasing traffic and great applications from arbitrators,
rails developers, and business developers. The only thing lagging is a
steady case load, which is why I decided to start focusing on
business-to-business partnerships with market places and escrow
companies.
If they send the disputes between their users to me for arbitration,
it lowers their support costs and users can settle in a low cost and
binding way.
I am not giving up on targeting consumers though. The great response I
get when I talk openly about the vision for Judge.me has convinced me I
should take a page from the 37Signals handbook and out-educate any
existing arbitration provider.
RSE: So how can other startups or individuals use your service?
Celis: Judge.me can be used for any type of
commercial and private dispute. Disputes that are not arbitrable include
crimes and all issues involving identity. To give you an idea, the
disputes that have been settled using Judge.me arbitration so far
included the parents of a quickly divorced couple disputing who has to
pay what share of the wedding, a freelance management consultant and his
client disputing project delivery and payment, and a dispute between a
student and a private tutor.
So in practice, I advise everybody to put the Judge.me arbitration
clause in all their contracts, to avoid costly and time consuming court
litigation. Businesses are well advised to put the clause in their terms
and conditions.
If anyone reading this interview runs or works for a market place or
escrow service, I’d like him or her to contact support on my website so
we can talk about a partnership.
RSE: Great. Let’s get back to your bigger vision.
How scalable are the services Judge.me provides? Having affordable
arbitration in the developing world, where so many people face such
terrible courts, would be a major achievement for humanity. But does
Judge.me rely so heavily on the effectiveness of state-provided courts
that it’s constrained to the developed world? If I live in a country
with ineffective courts, how binding is the judgment?
Celis: In its current version Judge.me indeed relies
on the existing framework for international arbitration and as a result
on the local courts for enforcement. Please note, however, that even
when doing business with less reputable jurisdictions, it is the
location of assets of the other party that matters for enforcement. In
other words, even if you do business with someone from the Central
African Republic you can always go after his assets in other countries
if possible.
Overall though, I agree that Judge.me will only be able to
revolutionize the rule of law in corrupt developing countries if a) we
are able to provide arbitration cheaper than $299 – e.g. evolve to 2% of
claim value if the depth of our arbitrator market increases – and b)
Judge.me becomes so well known as a brand that the reputation on your
future Judge.me/yourname profile becomes so important that being called
out if you don’t pay up is enough for people to comply.
RSE: We keep calling Judge.me a start-up. Are you in the ‘market for law‘?
What do you say to someone who says that law is necessarily the duty of
nation-states and their sub-units? Centralized provision of law seems
to work decently – though certainly not perfectly – in some places, and
extremely poorly in others, such as in the developing world. What are
the virtues of your ‘start up law’, polycentric approach?
Celis: I do consider Judge.me to be in the market
for law. Currently we are simply a service that applies equity
principles/contract law, but the next step is building a market place of
arbitrators with reputations and case law history. Eventually I want to
allow 3rd party providers to plug-in to my system as well, so Judge.me
becomes the platform for polycentric law.
As far as those who doubt, I’d rather just create the future and
people will use it if it benefits them. If you surveyed people 20 years
ago whether some TV broadcasting time should be randomly distributed to
everybody who wanted it, people would most likely have demanded special
checks to make sure criminals or those with extreme views could not
participate.
Today there is YouTube and everybody thinks it is the most common-sense thing in the world that everybody can upload a video.
Polycentric law, if universally adopted, would eliminate all the incentive problems in politics that public choice theory describes so well. Being principled as a politician would pay off.
Last but not least until we get to this polycentric ideal, having a
few extra private alternatives to government courts can only benefit
consumers.
RSE: Wow. So what is the future of law given
changing technology and start-ups like Judge.me? Are we ever going to be
able to challenge monopolies in the market for law?
Celis: The monopoly on law is basically a claim by
the government that they are best at managing negative externalities and
as a result, the reputation of individuals in the legal system. As
reputation becomes more important on the internet, and more advanced
dispute resolution systems arise to track reputation online, this claim
will become increasingly unsustainable.
In the future, I see law and as a result politics moving online, with
“being a famous politician” meaning, among other things like YouTube
views and Facebook followers, “having a lot of arbitrators in my
Judge.me group with a lot of users liking us.”
Another catalyst for this change will be major governments going into
bankruptcy and major currencies going into hyperinflation or extreme
currency controls. There will be a void for “government” services such
as justice, social security and education, and the free market will have
to fill it.
As the Bitcoinica brokerage saga metastasizes yet again with the shocking revelation that no recent database backups exist, earlier security warnings to the company's founder are being reviewed. One observer suggested that "as the potential payoff of a hacker approaches $1 million, the likelihood of being hacked approaches 90%." Over eight months ago, another reviewer posted:
"I've
worked on financial systems before. As others have stated, if you're
dealing with real money, then you have a big bulls-eye painted on your
forehead, and you need to make sure that your system is hardened. Make
sure you understand attack vectors and protect against them -- XSS, SQL
Injection, man-in-the-middle, etc. Make sure your passwords are salted
and hashed. Auditing. Can't emphasize this enough. Things will go wrong,
and when they do, you need to be able to tell when, where, and why. In
our case, we had shadow tables in our database where we logged changes,
and then consolidated and exported that data into an auditing system. We
could confirm that a user made X change at Y time from Z IP address."
Large
financial system websites are some of the most lucrative online targets
and bitcoin has the added dimension of a target-rich environment that
rarely results in prosecution. Not only is it difficult to prosecute the
individual or individuals responsible for the hack, it is difficult to
prosecute the financial site itself for negligence due to the many
disclaimers inherent in voluntary and unregulated service providers or
due to complicated offshore circumstances (although New Zealand does
offer a dispute resolution scheme
for Bitcoinica retail clients). Additionally, there is always the
possibility of an artificial hack staged by an insider. Therefore,
self-regulation is the order of the day and in the sometimes
jurisdiction-less environment of the Internet, bitcoin entities and
their customers currently operate under their own brand of lex mercatoria to enforce accountability.
Lex mercatoria wine merchants
Lex mercatoria
is Latin for "merchant law" and it is the body of commercial law used
by merchants throughout Europe during the medieval period emphasizing
contractual freedom and alienability of property. Like an air guitar,
bitcoin is arguably the ultimate form of intangible alienable property.
The difference being, of course, that air guitar transactions are not
publicly recorded on a distributed and enforced ledger.
Merchants relied on this legal system developed and administered by them while shunning legal technicalities and deciding cases ex aequo et bono.
We are actually in the midst of such a case right now as the leading
Bitcoinica parties attempt to sort out the claims process to the best of
their abilities with limited account records. There is no court. There
is no judge. Bitcoin is not defined as legal property. Deliberation
is currently focused on the most fair and just method of separating the
legitimate claims from the fake claims. But this is new ground for a
bitcoin-related settlement and undoubtedly it will set an early
benchmark for future cases. The prior hack involving Linode servers was settled in full via Bitcoinica customer reimbursements.
As
for the attacking hacker, it will most likely go unprosecuted since
fungible bitcoins possess many of the characteristics of physical cash
and even if the attacker had been sloppy, the amount involved does not
really justify expensive network traffic analysis that would potentially
link an IP or bitcoin address to a real-world identity.
The investment adviser for the transfer of Bitcoinica LP, Tihan Seale, posted
that "Bitcoin Consultancy was first retained to perform a comprehensive
security audit on March 27th and they became owners and operators of
Bitcoinica LP on April 24th." This latest security breach at Bitcoinica
occurred on May 11th. In a separate email, Seale reiterated, "I'm
responsible for deal selection and due diligence for the fund that
invested in Bitcoinica. I expect the Bitcoin Consultancy members will
continue to operate the business going forward. They have expressed
their commitment to seeing things through, and they have my respect for
this."
Whatever becomes of the Bitcoinica margin trading entity in
the future, it is clear that a sort of 'digital' lex mercatoria is
emerging -- one that recognizes the complete voluntarist nature of the bitcoin protocol in commerce. We don't have to imagine The Enterprise of Law: Justice Without the State because we are living through it now.
Self-regulation
may be the only available option as authorities are in a quandry.
Specifically regulating bitcoin imbues it with legally-recognized value
and that is something that the State will resist for as long as
possible. So, happily we continue to trade our air guitars.
To the bitcoin detractors, these various security breaches
are not a fault of the peer-reviewed bitcoin cryptographic protocol but
a lapse of security experience and poor judgment by the respective
administering companies. The beatings will continue until security
improves. Trust in the overall connected infrastructure may have been
fractured temporarily, but just as the guild structure flourished the
improved lex mercatoria that evolves as a result will strengthen bitcoin in the end.
According to Google's Eric Schmidt at the recent Mobile World Congress in Barcelona, the company once considered issuing its own digital currency for use and circulation across its expanding global platform. After reviewing various proposals for the proposed Google Bucks, the company decided not to proceed, citing 'legal concerns' which most likely implies the strict licensure and compliance regulations for quasi-financial institutions.
They probably realized that Google Bucks could end up like Facebook Credits and become a virtual currency roach motel where your money checks in, but it doesn't check out. Facebook does not provide two-way convertibility and person-to-person payments due to the potential for fraud and the emergence of a secondary market beyond Facebook's control. For the moment, that is good news for Facebook shareholders but it could quickly lose appeal for users and game developers that are locked into the self-serving paradigm. Although with money transmitter licenses in at least 15 states now, Facebook Credits is further along than previously thought in competing more directly with banks.
Google probably also realized that they could not improve upon the elegance and resiliency of bitcoin, a three-year-old decentralized P2P digital currency with an independent floating exchange rate of about $5.00 per bitcoin. In March 2011, Mike Hearn, a Google engineer, released an open source java client for bitcoin called BitcoinJ so obviously the protocol did not go unnoticed at Team Google. A true, and ideal, virtual currency will have the attributes of two-way convertibility, an independent floating exchange rate, and a nonpolitical unit of account. Consequently, it is those core features that stoke direct competition against national currencies and bitcoin possesses all three.
Renowned gamer and welfare economist Edward Castronova rejects bitcoin as the ideal virtual world gaming currency because, according to him, good game currencies should be based on controlled 'productive work', promote mild inflation, and rely upon a strong central authority for enforcement and repudiation. The freedom-loving, Libertarian gaming world of World of Warcraft and Eve Online was aghast. How could a PhD in economics think that a Keynesian currency system that has failed so badly in the real world be the desired path for currencies like WoW Gold and EVE Online ISK in the virtual world? Is the range-bound Linden Dollar of Second Life the future model of virtual currency and virtual monetary policy? Not only was Castronova rejecting bitcoin as a gaming currency, he was condemning the unregulated virtual world to a gray, inflationary future of State-sanctioned centrally-managed currency roach motels.
Castronova misses the point here and misses it badly. Bitcoin is the perfect virtual game currency precisely because it is not controlled by any State authority or virtual world company. It also facilitates the many other currency features that are so important to users, but not to governments, such as unrestricted person-to-person payments, user-defined anonymity and untraceability, near-immediate bearer settlement, transaction irreversibility, reliable store of value, multi-grid capable, and decentralized processing. You can think of bitcoin as the distributed digital representation of a real world physical casino chip also making it extremely suitable for online casinos and social betting. We are fast approaching a time when currencies will be serious differentiators and competitive wedges for companies simply because customers demand a particular payment type. The virtual gaming environments will be forced to adapt in order to survive.
Gamers and virtual world avatars don't want the corporations controlling their money anymore than they want central banks debasing the value of their real world money. Certainly, the regulations will be there for the digital currency exchanges that provide the conversion into and out of bitcoin; however, once the bitcoin is in the gaming and virtual world environment, it can function as gold coins and paper cash to stimulate and drive economic activity. No other virtual currency will even come close to that kind of vibrant liquidity and building walls to ring fence a virtual environment will turn out to be a counter-productive strategy. The bearer nature of these digital instruments like the cryptocurrency bitcoin will keep transaction costs low by eliminating third-party processors and counter-party risk. Electronic commerce will flourish.
Contrary to utopian social planning, free-market virtual economies will emerge spontaneously rather than through design and the ultimate victorious currency will be a market-based competitor that can move seamlessly across multiple grids. The virtual world is the perfect crucible for launching unrestricted currency competition and that competition will enable further opportunities for transporting virtual world earnings to real world value. This bridging of the two worlds could be the sought-after "killer app" for open-loop digital cash. Now, there will be three different mega-places for income and wealth generation -- the traditional taxable economy, the informal shadow economy, and the virtual world economy. However, with the virtual world bitcoin wealth being selectively anonymous and practically untaxable, it may just decide to stay there.
Note: The Virtual Policy Network has a podcast to accompany this article.
On the 31st of January 2012, the Supreme Court of the
Netherlands found that items in the online game RuneScape had been
stolen from a player. This is a ground-breaking case as it is the
highest national court in the West to rule that taking virtual objects
in this way is theft under national criminal law. This ruling may have
broad implications for the online games industry.
The case dates back to 2007 when two youths used violence and threats
of violence to force another player to log into the game of RuneScape.
After the victim logged in to the game one of the defendants
transferred virtual items and virtual currency from the victims account
to their own. The Supreme Court upheld the conviction for theft but
reduced the number of hours of community service to be served (taking
into account Juvenile detention served).
The appeal did not turn on the material facts, i.e. whether there
were threats were made or items were transferred. Rather, the appeal
centred on the question of whether what had occurred was ‘theft’ as
defined by the law of the Netherlands.
Key Arguments
The key arguments against the incident being defined as ‘theft’ considered by the court they were as follows:
Virtual items are not goods but an ‘illusion’ of goods made up of bits & bytes i.e. they are data
Virtual items are Information
The point of the game is to take objects from each other
The virtual items are and remain the property of the publisher of
the game not the victim or the defendant - hence they could not have
been stolen
The ‘Illusion’ argument
The court ruled that:
Virtual items have value in virtual of the effort and time invested in obtaining them
The value in Virtual items is recognised by those that play the game
(including the defendents who went to the trouble to take them)
The Virtual items were under the exclusive control of the player – who was relieved of this control
The court made reference to cases of electricity theft which is a
similar intangible good but certainly has properties of power and
control, and consequently can be stolen.
The ‘mere data’ argument
The court agreed that virtual items are data, but crucially added
that they are not just data. That is, the fact that virtual items have
data like properties does not mean that they don’t also have properties
that make them capable of being stolen. In particular the court noted
again that the virtual item had perceived value and were under the
exclusive control of a player.
The ‘I was playing a thief’ argument
The defence argued that one of the points of the game of RuneScape is
to take virtual items from other players. The court noted that this was
true but the way that the property was taken was outside the ‘context’
of the game.
The ‘not your property’ argument
The court agreed that under the RuneScape terms and conditions, the
virtual items in the game are owned by the publisher of RuneScape who
grant the players have a ‘right to use’. However it concluded that the
items in question were under the ‘exclusive dominion’ of the victim
until they were removed from them, hence the position of RuneScape being
owners of the items (from the perspective of intellectual property /
contract law) is ‘not relevant’ in the context of the criminal case
under consideration.Here the court made defence to money – which is the
property of the sate but can still be stolen.
In coming to these conclusions the court noted that it is down to the
discretion of the court to determine whether “due to the digitization
of society, a virtual reality has been created, all aspects of which
cannot be dismissed as mere illusion where the commission of criminal
acts are not be possible” [Google Translation with amendments by R Reynolds].
tVPN Commentary: Significance
This case is significant because it changes the relationship between
individuals and service providers in respect of digital objects. That
is, RuneScape’s contract clearly states that the players of the game do
not own the game or any of the digital objects within it, whether they
control them or not. This has long been a contentious matter as there is
a large trade in the sale of objects between players for hard currency,
so called Real Money Trading (RMT).
This ruling means that there is a degree of control that someone can
have over an object which is sufficient for that object to be stolen.
The question that has puzzled both the industry and academics for many
years is: if a digital object is capable of being stolen, does this mean
that other rights accrue to a player? For example, irrespective of what
the contract says, can a player:
sell an object?
claim rights if an object is deleted or changed by company?
claim compensation if a game is closed?
For the moment, this matter is restricted both to The Netherlands and
to the specific matter of theft. However in China and South Korea there
have been similar types of cases which have made it to the courts, in
these judges have displayed a general trend to grant more rights to
players than are stated in their contract and to see digital objects as
being akin to physical property in certain important respects. The fact
that a case in the EU has got to such a senior court and has ruled along
the same lines is likely to carry some weight with other cases that may
occur in the West.
For details of the Chinese, Korean and other cases see tVPN’s white
paper on Virtual Objects and Public Policy which examines both cases and
statute in detail.
The Public Interest Advocacy Centre (PIAC) today released a report
entitled “A Virtual Fortune: Consumer Protection for Banking and Consumer Fraud in Virtual Worlds”. The report studies virtual worlds,
which are sometimes described as “massively multiplayer online
role-playing games” (MMORPGs) that provide an immersive virtual
experience for many players that many players consider to be “real”.
Many virtual worlds have developed virtual economies based on a virtual
currency that may be exchanged for real-world currency. Players will
play the role of consumer and entrepreneur within virtual worlds.
As virtual economies grow, there have been instances of fraud in
these virtual worlds. PIAC’s report studies examples of economic fraud
conducted in virtual worlds such as Second Life, Entropia Universe, EVE
Online, and World of Warcraft. For example, there have been cases of
bank runs, securities fraud, and theft of virtual property. These
situations have resulted in a financial loss to consumers in virtual
worlds. Notably, virtual world operators in most cases stated that these
fraudulent schemes are “part of the game” while denying responsibility
and liability and refusing to compensate players who have lost money to
fraud in virtual worlds. Efforts to set up in-world justice systems have
not been successful.
“Where a consumer falls victim to fraudulent activity within a
virtual world, they are not likely to be successful in seeking redress
or compensation for their losses,” said Janet Lo, Legal Counsel at the
Public Interest Advocacy Centre and author of the report. “Virtual world
consumers must be aware of potential risks to their in-world assets and
property, such as in-world fraudulent schemes or unilateral actions by
virtual world operators dealing with user accounts.”
Given that individuals view their virtual world avatar as an
extension of themselves, the report explored whether real-world rights
should extend to the avatar and whether traditional notions of property
rights and consumer protection should apply to virtual avatars
participating in virtual economies. The report noted the use of End-User
License Agreements (EULA) or Terms of Service by virtual world
operators to limit their liability and stipulate certain mandatory forms
of dispute resolution. The enforceability of these terms in real world
courts have been questioned but real world case law has not yet
clarified the legal status and rights of virtual world users.
The report notes that real-world regulators around the world
continue to examine virtual world economies and contemplate whether
real-world regulation should be applied to financial transactions
conducted in-world. For example, securities and payment regulations
could be applied with a view to providing greater consumer protection to
virtual world users.
“As virtual world experiences blend into social networking websites
and other areas of commerce, regulators will need to consider how
consumer protection will operate and whether the application of
real-world regulations will be sufficient to protect consumers,” said
Lo.
Hartley Henderson has published a prospicient article at Off Shore Gaming Association, "Could Virtual Currency be the Future of Internet Betting?". The author has identified a man known as R.C. who emphatically endorses bitcoin as a means of payment for online gambling and casinos across almost all jurisdictions. This supports our thesis that bitcoin is the digital equivalent of a physical casino chip. Henderson summarizes his discussion:
'If I had any say, all transactions at our book would be done in
bitcoins,' the man said. 'They are untraceable and totally out of the
control of any government. And most importantly they are an investment
which someday I’m confident will rival silver prices.'
The author then asks R.C. specifically what makes bitcoins a better option than cash for online gambling:
"As you know, money transfer is vital to the sports betting,
casino, and online poker industries. Bitcoin is an amazing solution.
Through a combination of math and cryptography - it is a completely
decentralized currency/commodity. That means no entity is in control, it
is managed by all the nodes of the network, collectively. You can think
about it like bitTorrent, if you are familiar with the file sharing
protocol; purely peer to peer with no central management.
Through this cryptography and decentralized design, each node on
the network is a 'bookkeeper' of which bitcoin addresses own which
coins. You cannot fake or forge a transaction or create coins outside of
the system. Each node has a record and will not accept forgeries. So,
even though there is a public record of all bitcoin transactions, the
key is that nobody knows who owns a particular address and thus those
bitcoins. So on the one hand it is completely transparent - all coins
and transactions are public, but on the other hand nobody knows who owns
those coins/bitcoin addresses. You can see how it could be useful to
gamblers."
Peer-to-peer wagering, or social betting, is gaining quickly in popularity and Henderson makes the point that companies receiving a membership fee are distinctly different from companies that receive a commission on the winning bets:
"What R.C. didn’t mention is that in no country is
peer to peer wagering illegal. There is nothing in the law that stops
person A from wagering $20 with person B on the outcome of a game. What
makes the transaction illegal in some countries is when an intermediary
acts as the bookmaker. That is precisely why Betfair and Matchbook are
seen as technically illegal by the U.S. government. Both are peer to
peer wagering operations but they also take a commission on the winning
bets. BTCSportsBet.com doesn’t do so. They simply have paid members."
Henderson also makes the bold case that bitcoin as a payment mechanism
doesn't fall under the UIGEA because there is no money involved and there
is no way the Department of Justice can effectively intrude. Our man R.C. perhaps explained it
best:
"As far as UIGEA, there are no banks or processors involved.
Moving bitcoins around is just like moving an image file or other data
around. I would expect to see bitcoin-specific legislation before any
attempt to apply the UIGEA. But even with legislation, I expect the
future of bitcoin to be bright. There is no central authority to shut
down. There are laws against file sharing copyrighted works, but due to
the distributed nature of bitTorrent it cannot be effectively policed.
As far as pressure from the DOJ or other
entity (it’s not a viable concern). Bitcoin can be classified as a
commodity, or a currency, or nothing at all (it's just data). One can
argue that it is like Facebook credits or World of Warcraft Gold. The
government is not going after them. Also, the terms and conditions for
BTCSportsBet.com states that the player is responsible for determining
the legality of playing with bitcoins in his or her jurisdiction.
Sign-ups are anonymous and the site does not know the origin of the
players. No personal identification is requested; even an email address
is optional. A player can sign up, send bitcoins, wager, and withdraw
without the site ever knowing who he or she is. The properties of
bitcoin allow this to happen. There can be no fraud, identity theft, or
reversed transactions. All of those headaches are a massive cost to the
industry - so you can see why bitcoin may be a significant factor in the
future of online wagering."
Regarding the claims above, it remains to be seen if Facebook Credits will ever permit two-way exchange and, even if they did, that the U.S. regulatory authorities wouldn't move promptly to include them under the 'Prepaid Access Rule' for financial products. In the meantime, I agree that the resilient bitcoin is more suited to the monetary challenges ahead and it is another case of technology being ahead of the law.
Bitcoin, the digital version of a physical casino chip, is not discussed in the analysis. But since it currently falls into that legally unclassified area of 'not-real-money', it will undoubtedly start to appear in those gaming venues that inhabit the monetary space between real and virtual. Tyler York then asks, "given the tremendous revenue opportunity, why haven’t social game companies already offered real-money play?":
"No, not because Facebook doesn’t allow gambling.
While this was true in the past, Facebook may soon allow real-money gambling
on its platform. Even so, social games are on countless other
platforms where gambling is already permitted in legal jurisdictions,
including Android, iOS, and Google+. These companies didn’t pursue
real-money social games for any of these platforms.
The reason game companies haven’t implemented real-money play
is because gambling licenses are tremendously expensive and time
consuming to acquire.
While theoretically possible, the process is so painful that the vast
majority of game companies don’t even consider it. The time (≥18
months) and money (≥$1M including all associated costs) are an enormous
barrier to entry for most game studios. Even if a studio could afford
those costs, steps must be undertaken sequentially and spending more
money doesn’t shorten the period of time it takes to get a license.
There is also the added layer of complication arises from the necessary
corporate structuring and off-shoring that must take place to comply
with gambling regulations.
These time and money costs are simply too great for the vast
majority of small-to-medium sized game studios, and the compliance
issues become increasingly prohibitive as you look at large game
companies. These huge pains have prevented Zynga and other game
companies from offering real-money play to non-US players in spite of
the massive potential revenue opportunity.
Game companies have been better off investing their limited resources
into virtual currency revenue streams because they will monetize
immediately, although relatively poorly."
This article examines income characterization issues related to
taxation of virtual currency. Some social media companies offer digital
currency (so-called virtual currency) for online players to use in
virtual words, online games, and other applications. Players can use
virtual currency to purchase assets or services from other players
within these online worlds. Players selling such items can convert the
virtual currency to U.S. dollars or other currencies through online
auction sites or the social media company that issued the virtual
currency (Known as “real money trades”).
The authors discuss how the characterization of income derived in
connection with an offering of virtual currency is pivotal to assessing
the U.S. income tax consequences of that income from a cross-border
perspective and how understanding the characterization may facilitate
greater planning opportunities.
I highlight some of the more interesting findings below:
Page 3: "Because of the lack of U.S. guidance, social media companies engaging in cross-border transactions with consumers face uncertainty about U.S. federal income tax consequences."
Page 4: "Other social media companies' terms of service may permit virtual currency exchanges to be operated by third parties. Players may trade the virtual currency on these exchanges with other players for real currency, usually at their own risk without any guarantees from the social media company permitting the trade."
Page 9: "There is no comprehensive definition of currency under the IRC or Treasury regulations. For a CFC [Controlled Foreign Corporation], factors to consider in the typical transaction that may be relevant for this determination could include:
● whether the player can purchase anything with the virtual currency outside the opportunity to play the MMOG;
● the extent to which there are restrictions placed on what a player can buy and/or transfer to another player;
● the right of the social media company to terminate a player's virtual currency at its sole discretion or if certain conditions occur; and
● the ability of the player to exchange the virtual currency for true cash, whether through the MMOG or through third-party exchanges."
No one really sends or receives bitcoin. They merely transfer their ownership and specific control rights to the block chain on the giant public ledger in the cloud. It's like an air guitar. The bitcoin itself exists because we all say that it exists.
The same can be said of bitcoin's exchange value – it has value because we all say that it has value. That is both its weakness and its brilliance. Its intangibility prevents its confiscation. Where are your bitcoins Mr. Anarchist? Well sir, they are right over there stacked next to my new air guitar. What, you don't see them? I swear that they are there. I don't think governments will ever declare that they can see them too! Because if governments did see them, then bitcoin would be imputed with tremendous legal monetary value and they don't want to do that. Governments will want to diminish the credibility of bitcoin – not enhance it.
Now, to the exchanges. This is where the enforcement and regulations will hit first. Trading bitcoin in and out of national currencies is currently necessary because many transactions still have to be settled in that manner. Of course, this will adjust over time as more and more bitcoin value can remain in the bitcoin ecosystem for necessary daily transactions. But in the meantime, regulation is increasingly possible in this area due to exchanges requiring a certain degree of jurisdictional presence and centralization. As with buying and selling air guitars on eBay, regulators can exert influence because there is a centralized point of exchange. It matters not what is being exchanged.
Regulatory Bias With Some in the Bitcoin Community
"We are working with the government to make sure indeed the long arm of the government can reach Bitcoin."
--Jeff Garzik, Bitcoin Developer
"Regulation would allow the proper authorities to
find and charge those who use bitcoins for illegal activities." --Amir Taaki, Co-founder of Bitcoin Consultancy
"Norman is pushing to bring Bitcoin away from its roots and closer to a
traditional currency — he is reaching out to regulators, looking to get
legislation to oversee the system."
--CNBC on Donald Norman, Co-founder of Bitcoin Consultancy
These are the big three bitcoin regulatory proponents within the bitcoin community. There are certainly many more outside of the community. Now, let me see if I can summarize their rationale because these quotes are not isolated incidents and they are not taken out of context. I believe that the rationale is twofold: (1) a reaction to the anonymous online drug company Silk Road tainting the fledgling currency; and (2) a belief that bitcoin exchanges given a regulatory blessing will be in a position of strength for customers exchanging in and out of national currencies.
Both of these rationales are misguided, especially when bootstrapping a decentralized P2P cryptocurrency. Bitcoin was designed from the outset to route around centralized, authoritarian interference. Bitcoin's designer(s) anticipated regulatory termination and asset confiscation because bitcoin itself is a direct challenge to the privileged money monopoly of the sovereign. The issue is not whether bitcoin as a digital currency embodies libertarian political and economic beliefs – it was simply designed to survive. However, it is supremely naive and daft to think that a government will not soon erect laws and regulations to prevent anonymous and untraceable transactions. Additionally, government tends to tax that which it regulates and a sanctioned bitcoin will soon be transformed into an 'approved' and useless digital currency.
Bitcoin exchanges are constantly under attack in various parts around
the globe and even with partially-regulated exchanges, laws can always be modified to accomplish the aims of the State. The solution is to
create decentralized exchanges and to promote business models and
closed-loop paradigms that make fitting into the current institutional structure
irrelevant. It is a perpetually losing battle to seek minor legal
victories within the confines of an arbitrary, subjective court system.
In differentiating between the fear of punishing coders and the fear of punishing
the consumers and merchants that openly choose to transact in bitcoin, James Westlock summed it up nicely in his comment to the "Bitcoin and Agorism" article:
"Everyone here understands that a Bitcoin exchange is nothing to do
with Bitcoin clients and the source code that is compiled into them. The
imbeciles who run exchanges in police states like the USA will be
scrupulously avoided by anyone with a brain cell, and those who set up
exchanges in free(er) countries will reap the benefit. Anyone developing a Bitcoin client cannot be charged with conspiracy
with regard to the uses that the client is put to, in this case
exchanges. The client is neutral, just as browsers are neutral. You can
use a browser to commit a crime, but culpability for that criminal act
cannot be passed to the people who code the browser (Mozilla, Google,
Apple)."
To be sure, David Norman and Amir Taaki have many more pro-regulation references and citations available at their website. For instance, Taaki gives a radio interview with the Katherine Albrecht Show in the U.S. Then, reporting in the Independent, Stephen Foley quotes David Norman on the hackers that brought down the largest bitcoin exchange:
"In the UK, supporters of Bitcoin made an urgent appeal to the Financial
Services Authority to regulate the largest London-based exchange, so as
to reassure people that using Bitcoin is safe. 'Unregulated businesses
don't usual cry out for regulation,' said Donald Norman, co-founder of
the exchange Britcoin. 'But because we are unusual, and because we are
dealing with people's money, and because of all the scary stories around
Bitcoin, we would like nothing more than to have a government authority
looking into our accounts – especially now.'"
In order to gain legitimacy for a decentralized P2P cryptocurrency that comes with user-defined anonymity and user-defined traceability, the Statist apologists have gone out of their way to seek clear and concise guidelines from the government on what will and will not be permitted with respect to bitcoin activity. They may soon get their wish.
UK Financial Services Authority on Bitcoin Regulation
A response purporting to be from the FSA appeared recently in the Bitcoin Forum. In reading the well-referenced text, it appears obvious that bitcoin itself cannot be regulated as money but that exchangers would fall under the guidelines of FSA regulation because they are deposit takers and holding balances in national money before and after the bitcoin exchange takes place. A bitcoin service that simply provided a matching service, such as bitcoin-otc, where buyers and sellers settled on their own would not therefore fall under the regulation.
This is important because of various claims circulating that there is a coordinated effort on the part of EU-based financial institutions to freeze or impede bank accounts that are acting as agents for bitcoin exchanges or bank accounts of bitcoin exchanges themselves. In August 2011, the French bank CIC froze MtGox client funds and closed the bank account paving the way for a court case and final decision on October 18th, 2011. Then on October 21st, 2011, MtGox released this statement:
"While Bitcoin at a European level is so far not directly impacted by
this decision, the Bank de France (France's central bank) has confirmed
that because of European banking rules, monetary transfers (deposits and
withdrawals) through a single entity are subject to financial
regulation and therefore can only be performed by licensed financial
institutions such as banks or Payment Service companies (the European
Equivalent to a Money Service Business). This decision has forced us to
find other payment processing partners within Europe that will allow us
to quickly resume all EUR transactions for our European customers soon."
Seeking legal opinions and regulatory clarification will only result
in more disappointments. Therefore, in order to obtain the ruling that
the bitcoin regulation proponents seek, bitcoin exchanges and bitcoin merchant applications will have to be adapted to support the enforcement
of AML rules regarding money service businesses and identity
verification for prepaid access products, such as the recent FinCEN regulatory changes from the United States.
In the future, we are likely to see regulations and enforcement
against the bitcoin exchange infrastructure as well as restrictions on
bitcoin transactions at the large online and offline merchants subject
to establishment transactional reporting requirements. Both enforcement
avenues will be deployed in an effort to undermine the usefulness and
acceptance of bitcoin, because quite frankly that will be the only option
available to authorities.
Cryptocurrencies are Not Virtual Goods
Vili Lehdonvirta works as a researcher at the Network Society research programme at Helsinki Institute for Information Technology in Finland and he is Visiting Scholar at the Interfaculty Initiative for Information Studies at the University of Tokyo. His research examines the social and economic impact of new
information technologies, especially online games, social networks, virtual
currencies, and virtual taxation.
He believes that the bitcoin currency goes way too far in providing user-defined anonymity and user-defined transaction traceability. Although he doesn't mention how the transition to a digital cash society can justifiably deny the very same attributes enjoyed with physical paper cash today, he seems to promote his own "ideal" vision of how the future cashless society should be constructed. This is the most dangerous type of thinking when discussing a cashless society because we are at a critical nexus that will define our relationship with money in the cyberspace frontier. Either we respect individual financial privacy or we restrict it and pave the way for an even more frightening and suffocating vision of the future.
"I am fascinated by Bitcoin, and I also think I have something of value
to contribute to the Bitcoin community. The first is that as a
researcher, I have studied payment and digital currency design and user
adoption issues, and I think this is an area where the Bitcoin ecosystem
could do better. The second is that as a long-time member of Electronic
Frontier Finland, I have spent a lot of time thinking and publicly
debating about privacy and digital freedom issues. I am worried that
Bitcoin is a step too far as it leaves no possibility for even
democratic governments to enforce their laws. This is a topic I would
love to debate with the community and hear opposing views. I think the
end result could be a better understanding for me, but also a better
understanding for the Bitcoin community on how to live in harmony with
democratic authority."
"The law has commenced its long course to recognize digital goods as a form of property. One finds it in court decisions concerning the interpretation of criminal law and related damages. The behavior of gamers and other online users has, both in quantity and quality, exceeded the limits of contract law (Fairfield 2008). Other areas of law, including but not limited to those of criminal law, law of damages, defamation, and law of property, will slowly step into play. But the natural inertia of law can sometimes be a good thing in creating the rules that shape behavior (Bohannan 1965)."
For the most part, I respect Vili Lehdonvirta's academic work on virtual goods ownership, but he harbors confused thoughts on the broader acceptance of bitcoin through dilution of its most beneficial properties, because he mistakenly extends the notion of virtual goods legal recognition to virtual currency legal recognition. While this might be appropriate for a virtual currency that evolved out of a virtual commodity within a proprietary gaming environment, it is wholly inappropriate for a decentralized P2P cryptocurrency that does not depend upon physical property rights for its valuation.
Lawyers' Take On Bitcoin Regulation
Just as the economics profession, the legal profession is still struggling to catch up with bitcoin. I expect much more detailed legal research in the coming months. One of the lawyers in the forefront, John William Nelson, had this to say in his article, "Extending real-world laws to virtual worlds is a terrible idea":
"Government regulation, either directly or indirectly by forcing common law theory into a virtual world setting, will destroy the ability of virtual worlds to create these fundamental characteristics. The game conceit—the imaginative construct upon which the world is based—will, as Dr. Bartle says, 'evaporates upon contact with . . . reality.' The world will no longer be free to evolve—its evolution will be constrained by the laws injected into its sphere. The world’s support for the hero’s journey will be conditional upon the rules and regulations of laws from the outside—laws from the real world."
In a follow-up piece, "Bitcoin Isn't a Security", Nelson also concludes that bitcoin in-and-of-itself is not a security that can be regulated under U.S. federal securities law:
"But if currency can be a security, then Bitcoin is a security because it’s a type of currency, right?
Wrong. Bitcoin is not really a type of currency, at least not of the
type recognized as securities. No entity or assets back up Bitcoin
value. Bitcoin value is entirely virtual—a Bitcoin is only worth what
another person thinks its worth. This is different than currency issued
by countries.
A country’s currency is backed by that country’s government. This backing can either be by fiat (government regulation or law) or by commodity (such as the gold standard the U.S. used to use).
Some compare Bitcoin’s value to the value of fiat money, because like
fiat money it is not backed by a commodity, but this is where the
similarities between Bitcoin and fiat money end.
Bitcoin is backed by no entity, no commodity, no organization.
Bitcoin value is not based on government regulation or law mandating its
use in a country. Similarly, it is not backed by a whole bunch of gold
sitting in Fort Knox."
In answering the question of whether bitcoin investors should worry about securities regulations or laws, Nelson emphasizes that securities law is generally broad enough to capture any enterprise where investment for profit is
involved, because a common economic scheme exists where a profit is expected based on the efforts of a third party. In "Bitcoin Isn't a Security", Nelson states:
"Bitcoin investors should absolutely worry about securities laws. The
securities definitions outlined above might not apply to Bitcoins
themselves, but they are flexible enough to apply to Bitcoin exchanges
that convert a Bitcoin to real-world currencies. Securities law might
even apply to exchanges converting Bitcoin to other virtual currencies
such as Lindens."
Ultimately, laws erected to protect the State's coveted monopoly over the issuance of money will not be slayed through a minor technicality nor will bitcoin suddenly be blessed by a newly-converted regulatory regime. At Yale Law School, Reuben Grinberg writes in "Bitcoin: An Innovative Alternative Digital Currency":
"Most importantly, Bitcoin currently operates in a legal grey area. The federal government’s supposed monopoly on issuing currency is somewhat narrow and statutes that impose that monopoly do not seem to apply to Bitcoin due to its digital nature. However, a bitcoin may be a 'security' within the meaning of the federal securities laws, subjecting bitcoins to a vast regime of regulations, including general antifraud rules. Furthermore, other legal issues that have not been analyzed in this paper are probably significant, including tax evasion, banking without a charter, state escheat statutes, and money laundering."
The great promise of a nonpolitical bitcoin lies in what its decentralized nature immune to shutdown actually enables – the ability to maintain financial privacy and to transact with entities that may be despised by the government.
I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.
"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002
"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996
"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995
FinCEN shook us all from our Monday afternoon stupor by dropping some provocative “guidance” for those involved in the
business and use of digital currencies and, in particular those of us
involved with the grand experiment that is Bitcoin.
