November 2016 Journal
WORDS is a monthly journal of Bitcoin commentary. This issue collects the November 2016 writing in the WORDS archive. For the uninitiated, getting up to speed on Bitcoin can seem daunting. Content is scattered across the internet, in some cases behind paywalls, and content has been lost forever. That’s why we made this journal, to preserve and further the understanding of Bitcoin.
Software is the Weirding Way.
By Beautyon
Posted November 14, 2016
Thanks to Samson Mow, who takes pleasure in TRIGGERING ME, I’ve seen a copy of a document entitled, “A Statement from Members of the Bitcoin Community”. As usual with these pieces, it doesn’t matter who wrote this curious proposal, who supports it or other contexts which can all be put aside for the sake of argument; the only thing that matters is what is true and what is false, and what is logical and what is illogical.
First of all, this document claims to come from “members of the Bitcoin community”. There is no such thing as “the Bitcoin community”, and even if there was, it would not be true in this instance. This is a letter from a small group of people, or one person, who is or are desperate to gain access to the centre of Bitcoin protocol decision making. Bitcoin (and all software) does not run on community or emotion or democracy. It runs on software. The only thing that matters in Bitcoin is software. And for the record, the most effective management structure of complex software projects appears to be Benevolent Dictator For Life (BDFL).
The men who manage the Bitcoin reference implementation and who are doing the unimaginably risky, astonishingly complex and difficult work of extending Bitcoin’s capabilities are completely open to suggestion. They are all contactable, and are not in hiding. There is no way, given their total dedication to Bitcoin, that they would reject anything that can help Bitcoin. The problem is that what helps Bitcoin is not letters, public announcements, forming foundations, writing white papers or posts on a forum. What helps Bitcoin is software. Without software, you can have no meaningful contribution to the development of the underpinning gears of Bitcoin. Of course, this doesn’t prevent you from using Bitcoin or developing services on top of it; that work is welcome and needed, but you can’t have any effect on the way the system works at its root or core.
In this letter there is an offer of a $1,000,000 grant for “Bitcoin protocol development”. This is a very odd offer, for several reasons. There are over 30 signatories to this letter, all of them involved with Bitcoin. Who are these people? Between them they have many world class, top flight developers managing systems that are under bank level attacks from the most clever attackers on the net. They’ve solved some very difficult problems on their own platforms, designed tools from nothing that are unique and powerful, and run systems with excellent uptime and customer service. These are not babies, amateurs or noobs; they are very brave, talented men at the cutting edge of a new, complex field in computing.
Despite all of that, they can’t find anyone to add meaningful innovation to the Bitcoin protocol. Bitcoin is a solution to an old and very hard problem that took a quarter of a century to solve; indeed, there were people (and still are) that don’t believe there was a problem in the first place. Bitcoin is a once in a lifetime breakthrough, perhaps even once in a century. Its checks and balances and nature were created to produce a single outcome. Changing parts of it (like increasing the block size) destroys its fundamental proposition. But I digress; if these 30 had any ideas, they would have written an extension or addition to Bitcoin and published it. It could then be accepted or rejected by Bitcoin Core, and then we would be talking about that proposal specifically. Instead, what do they offer? A bounty.
We can infer from this that they have no software to offer. Furthermore the probability that a $1,000,000 bounty will produce any software is indistinguishable from zero. Bitcoin has finally seized the imagination of people all over the world, and no one except Bitcoin Core has come up with any meaningful improvements to it. The people who contracted Bitcoin fever have only been able to fork Bitcoin and then dismantle it in an attempt to neuter it and tame it by removing references to the word “Bitcoin”. They’ve all failed to deliver innovation, and all their promises are empty. If a consortium of banks (R3CEV) with billions to waste on trying to kill Bitcoin can’t come up with a single piece of software, there is no way on Earth that this $1,000,000 prize is going to produce a single piece of software. If it were easy, it would have been done already.
The fact of the matter is that the world’s most qualified people are already working on Bitcoin as part of Bitcoin Core. There are no more developers anywhere on Earth that are capable of contributing to Bitcoin in a meaningful way. There are people who want to try and add features (especially unethical ones, like identity management) but these have nothing to do with the operation of Bitcoin itself, and are just worthless extensions. All the best people are already working on Bitcoin. Thankfully, they’re also philosophically in agreement with what Bitcoin is actually for, meaning that they won’t do anything to destroy it.
Part of the problem people have with addressing how software works is a lack of good English. Phrases like “Diversity of Innovation” are completely meaningless. It is a contamination from Social Justice Warrior culture; that somehow, everyone’s opinion matters, every snowflake gets a prize, and there are no winners and losers. Thankfully in the real world there are winners and losers, and software, especially Bitcoin, makes this law of nature a thing in action. There are bad ideas, all ideas are not equal and bad ideas must be rejected if you want to win. And no, not everyone can win, and everyone doesn’t count.
In the real world, everyone has a place. If you are a Bitcoin user, your place is running the software that’s given to you, making changes to the public ledger with your private key by sending messages and vice versa. If you are a Bitcoin trader, your place is to make a profit buying and selling spaces on the ledger. Exchanges have a place facilitating trading for those who need that service. Merchant software developers, have a place making it easy for sellers to accept Bitcoin for their goods. The Core developers manage the protocol. Their place is keeping the root of the system running and reliable. And they have done a spectacularly good job at it.
It is false to claim that Bitcoin users don’t have freedom of choice. Bitcoin users already have freedom of choice. They can choose to use Bitcoin or not. They have many alt-Coins they can freely select. They can even create their own Bitcoin by downloading the source, compiling and branding it, or using a simple form that does all the work for you. The only principle that matters is that no one is forcing you to use Bitcoin. Certainly, if all the Bitcoin companies on earth who want big blocks decided to move to an alt-coin of their own making, they could have the exact Bitcoin that they want, with all the consequences of that decision. But they will not do this, and curiously, will not explain why they won’t do it. “I was an early investor in Bitcoin” does not give you a say, or special privilege in how Bitcoin runs, nor does it conver any authority to you.
There is an official Bitcoin. There will always be an official Bitcoin, just as there is an official Linux Kernel, or release of any software. The people who author it are the originators of it. Saying that there’s no official Bitcoin is very curious, to say the least, and is not in line with reality. This is not Monopoly or a school yard lunch break fortress game, where what things are changes from minute to minute. Bitcoin is moving forward, very quickly and safely, and the common ground is the protocol. That is all there is, there is nothing more than that. And that is enough. On one hand, the author of this letter wants “Diversity” (more SJW language) “of Bitcoin protocol implementation” with a variety of development teams, but on the other, can’t find any developers amongst 30 companies (and their social networks) staffed with crack teams of experts to do it. What is wrong with that picture? First of all, citing “protocol implementations” sounds very smart, but it could be put better. There is a protocol that all clients must follow or their transactions will be rejected by the network. You can write whatever client you like, but it must adhere to the protocol specification absolutely. There is one protoccol, and it is under the capable management of Core. There can only be one protocol. And even if it were possible or desirable to have more than one, the author of this letter can’t find a single developer to write a line of C to add to Bitcoin. That is a fact.
“Diversity of innovation” is yet more SJW inspired twaddle. There are many Bitcoin companies all connecting to The Bitcoin Network for their own purposes with different software they’ve written. They all agree to the same standard; the protocol, and inside those restrictions, have platforms that provide useful services. Two examples are BitGo and BitPay. Both of these companies are doing useful work with their own software that connects to the Bitcoin network. BitGo has a beautiful set of Multisig innovations they offer, and BitPay has a very clever, fast and seamless software tool to allow merchants to accept Bitcoin. Those two companies are examples of real innovation and how to approach Bitcoin. As Segregated Witness comes on stream, you can expect both of these companies to shock the public with what they are building in secret. Note how they don’t rely on anything other than software and provision of service to make a statement. Saying “BitPay” and “BitGO” are bywords for the correct approach by their actions.
When Bitcoin faces problems, there is no “we” that faces them. Bitcoin is not a communist collective, and neither is it leaderless. Its like saying, “The internet is leaderless”. There are people who are in charge of protocols and standards, all of which are voluntary except for TCP/IP protocol which you must accept in order to be on the internet. That is what Bitcoin is; it is the low level protocol that everyone agrees to work with. And as everyone has just seen with Ethereum (E.T.H.E.R.E.U.M.), reckless changes to how the protocol works is now proven to be absolutely disastrous and should not be tolerated. You should note also that the same class of person that wanted Etherium to change to bail out a group of unfortunate users is also pushing to detonate Bitcoin.
When someone is making an argument, and they don’t use English correctly, you can take this as a sign that their argument is probably false, or that they are lying. I’m talking specifically about the misuse of the word “censorship”. Censorship is what happens when the State forbids people or publications from publishing facts in full. For example, in the UK, information about the Zircon Satellite was removed from newspapers by order of the State. That is censorship.
When an owner of a newspaper by his own choice declines to publish an article, that is not censorship, that is an editorial decision or editorial policy. Similarly, when the owner of a forum or publishing platform that’s open to the public decides that certain views or images may not be disseminated by his platform, that isn’t censorship, that is editorial policy.
Censorship is the violent suppression of speech by the State. It is a hot button topic, and people deliberately misuse the word it to get an emotional reaction from their constituency. You can’t respect people’s property rights (especially if you claim to be a Libertarian) and also say that property owners are engaging in censorship. You have no right to access other people’s property and publish what they do not want to see disseminated on their platform, and no, just because its open to the public, no rights are converred to you.
There is a claim that there is a rift in “The Bitcoin Community”. If there was such a community, the only way a rift can be mended between men at war is if the party that is wrong admits they are wrong and stops attacking the other side. Everyone already has common ground in Bitcoin; the protocol, and that is enough to build services if you have the imagination and skill to do so. Its up to you to hire developers (if you can find them) to build your ideas (if you have any) and to participate and profit using the same protocol everyone else uses. FaceBook and YouTube are both built on the same software, and use the same TCP/IP protocol to serve their products. They’re busy writing software, and not complaining about, “the limitations of TCP/IP”.
Now that Segregated Witness is quickly propagating to all nodes on the network, and it continues to be the case that no one but Bitcoin Core and is delivering new ideas or software we can safely say that this sort of meaningless, propaganda-like and toothless (software-less) call to action will change nothing. Meanwhile there is a large amount of work to be done to take advantage of Segregated Witness, and once client libraries for different languages are written to make accessing the new functions simple, you can expect to see a few exiting ideas and business models emerge. These ideas and business models will not come from anywhere other than the minds of software developers, who, being rational, understand there is far more gain to be had by writing tools on top of Bitcoin, rather than trying to join the rocket science class of elites in their thankless tasks, steeped in a toxic bath of debilitating radioactive stress, all the while being asked by everyone to pull a rabbit out of a hat.
If you didn’t like this post, blame Samson Mow…ITS HIS FAULT!
Grilled Rabbit, root vegetables, pinot noir ↴
What Are We Going to Do About Bitcoin?
By Beautyon
Posted November 19, 2016
This piece was originally written for the magazine Foreign Affairs.
Math has learned a new trick
Bitcoin is deeply confusing. It takes on the aspect of a beautiful Fata Morgana to all observers of the technology horizon, with the exception of elite software developers. It simultaneously appears to be money, a permanent tamper proof general database, a way to register Copyrights, a means of paying for your morning Starbucks, or a tool to do to banking what Amazon did to book stores. Everyone has a different image of Bitcoin depending on their background, but the true nature of what Bitcoin is is in fact quite straightforward. Bitcoin is a solution to one of the most interesting problems in computer science: The Double Spending Problem. Utilizing a tour de force concoction of old and arcane software techniques, it is the precise nature of this innovation that needs to be untangled and put in context.
Journalists normally concentrate only on the sensational uses of this new tool, none of which are unique to Bitcoin. Academics tend to either make a circumstantial case against Bitcoin, not being able to address it on a technical level, or if they try to use economics as the attack vector the Austrianism vs Keynesianism approach is used, which is broadly the Appeal to Tradition Fallacy. These attempts to define and contextualize Bitcoin fail because they don’t take into account the history of software. They also fail to address the economic principles that underpin Bitcoin, which would provide key insights into how this phenomenon needs to be addressed across all parts of civil society.
There have been several attempts in the 20th Century to create a system like Bitcoin, both through software and in the physical world through money tokens — The Totnes and Brixton Pounds, Mondex, DigiCash, and more recently as an answer to Bitcoin, the Royal Bank of Canada’s “Mint Chip” — and the United States and Great Britain both have long histories of private monies like the Birmingham Button maker’s private coinage in the mid 18th Century. Some of these attempts were and are very successful. All of them were borne out of a market need. Academics and journalists attempting to get to grips with what Bitcoin is, try and circumscribe the scope of Bitcoin, but they often fail to address it objectively, because they are ignorant of the history and current state of private monies and software.
Dismissing Edge Use CasesIn order to take a correct — and more importantly, objective — position on Bitcoin, it is crucial to have a grounded, clear and complete understanding of its nature and basic principles. First, edge use cases must be dismissed as irrelevant. By edge use cases — and there are potentially an infinite number of these because there are an infinite number of economic activities where money is the mediator, plus all the ancillary uses that any database, tool or data structure can be put to — we mean every use case touching illegal activity, no matter what it is. Second, we must address Bitcoin by its nature with a pure description of its utility: “Bitcoin is a single shared database where entries can be made by its users but not changed after they are made. The purpose of this database is to simulate money by infallibly storing who has exchanged and controls which entries.” At first glance this sounds simple, but it is in fact a profound and world-changing achievement that is the culmination of a quarter century of work by some of the greatest software developers and mathematicians, with an extraordinary mastery of economic, mathematic and software principles that took everyone by surprise, so much so, that many people who first heard of Bitcoin could not believe that it had been successfully done.
State actors should be minded to take a rational approach to Bitcoin, and the lesson of Copyright violation and attempts to stem it are directly analogous, and direct comparison appropriate. Setting aside the ethics of Copyright, all attempts to stop the distribution of Copyrighted materials have been a complete failure since the rise of the popularity of the Internet. Many billions of files containing Copyrighted material have been shared, without restriction, the majority on a voluntary basis. Police actions and show trials have been completely ineffective as a deterrent, and all public awareness initiatives have utterly failed to inhibit the torrent of files spreading across the network. Now replace Copyrighted materials with user controlled money that has become immaterial. The incentives, drives and human need for money to transact with — and this time on a global basis — are larger by orders of magnitude than the desire to consume films without paying. When Bitcoin is on every phone, it will be literally impossible to stop or control. The only rational position to take for State actors is to embrace this sea change, and benefit from it by joining the network as peers. The power of kings is empty and worthless in the face of math, and taking a King Cnut posture will not hold back the tide of this change.
Because Bitcoin had solved a long-standing and very hard problem in computer science — The Double Spending Problem — people familiar with software were sceptical. Economists reading about the 21,000,000 coin limit were sceptical for that reason alone; devotees of Keynesianism — the idea that the supply of money should increase with the size of the economy — believe that Bitcoin can never work. Socialists and Democracy advocates alike were dismissive because in Bitcoin, the State is told explicitly that it cannot be responsible for the form, management and manufacture of money, and Bitcoin is designed to not be “accountable” to Democratic authority. All of these groups are absolutely wrong about Bitcoin, and their incorrect conclusions are borne out of a profound misunderstanding of what Bitcoin is. Furthermore, they accept all the tools used to create Bitcoin in other contexts, but rail against Bitcoin because it uses these same tools in an unfamiliar one.
Monetary Theory as DistractionThe most popular theory of money in force today comes from the mind of a single man; the economist John Maynard Keynes. His monetary theory requires that the state be in charge of the form and supply of money, and that the money supply should not be fixed, but should instead, keep growing over time, because subsequent generations will not be able to hold previous generations directly accountable, “In the end, we are all dead anyway” was his reasoning. Increasing the supply of money over time is defined as inflation and anyone who saves in a Keynesian money system is impacted by it. The official target rate of inflation in the UK for example, is arbitrarily set at 2%. A person storing their wealth in the fiat currency inflating at that rate is guaranteed to lose 2% of their spending power per year, by design.
Bitcoin’s designer, as do members of the Austrian School of Economics, correctly classify inflation as a form of theft. It is perfectly reasonable to assume that if you put a four legged chair into storage, that when you take it out after ten years, it will have four legs. The Keynesian claims that it is perfectly normal for your chair to have three legs after having been stored. Gold, being a naturally occurring element of a fixed supply for all intents and purposes, cannot be inflated at the whim of any man. It is an ethical money that when you store it, does not change its nature over time. The price of gold fluctuates against fiat, but that has nothing to do with the nature of gold, and has everything to do with a broken market and the form of money that is required by legal tender laws. Bitcoin in the context of money is “more gold than gold”. Its supply can never increase. It has no physical properties; it is a purely abstract system constructed exclusively in math. This is part of the staggering breakthrough of Bitcoin, created by someone with the nom de plume “Satoshi Nakamoto”, who found a way to cause data to behave as if it has the physical properties of matter. Data — which simply means information, like the name of this publication — is by its nature unlimited. The title of this publication can be repeated an infinite number of times in any context — spoken, written, semaphore or Morse Code — without any loss or incurring of cost. It is by the unlimited nature of data that the information revolution has taken place. Bitcoin breaks this law of nature by creating a new class of information that cannot be copied infinitely without detection inside a single context. In Bitcoin, man can own data.
The reason why Bitcoin was created is important, but more important than the animating inspiration is the broad scope of the inevitable changes the solution to “The Double Spending Problem” will bring to society, and how people will accommodate those irrevocable changes. Bitcoin, because it is so new, has created a unique set of new problems, mostly of perception and its relationship to the law. Bitcoin is entirely novel, yet made of — at least in internet timescales — ancient technology. There is strong legal precedent in democratic societies for the protection of public access to tools like it, and it is unambiguously a form of protected speech covered by the First Amendment of the Constitution of the United States of America. The question being asked in many quarters given the protections Bitcoin affords to its users due to its nature is, “What are we going to do about Bitcoin?”
The Correct Legal InterpretationThe correct position to take on Bitcoin, in terms of ethics, the law, economics, and national interest, whether it is being used privately or in business that interacts with the public, is to treat it exactly as Microsoft Excel is treated. Bitcoin is a database programme in the same way that Excel is, only with a different set of rules and form of storage. No one would dare suggest that all copies of Microsoft Excel should require a license to operate, and that companies running it on behalf of others to provide services to them be licensed and bonded, and yet this is exactly what New York’s insidious “BitLicense” requires. Worse than that, people who develop software that uses code that connects them to The Bitcoin Network are, under BitLicense, required to submit their fingerprints and other egregious, anti-American regulations that no one would dream of applying to any other software. When pushed to explain why this software in particular should be subject to regulation but other software that protects billions in e-commerce is not, the advocates of BitLicense have no answer. For example, the implementation of Secure Sockets Layer Certificates — “SSL” the software that provides the little green lock in your browser telling you your connection is secure from eavesdropping when you make a credit card transaction — is not subject to any regulation of any kind. The software is not audited by a special department of the State, the people who write the SSL software are not subject to government audit, positive identification, security clearance or financial or criminal vetting. No one knows who they are, and every website operator is left alone to implement this crucial software as they see fit, without any oversight. The question is why? Why is this software that is exposed to hundreds of millions of people and billions of dollars in transactions not regulated, but Bitcoin, which has a market cap that is tiny in size compared to all credit card transactions online, subject to intrusive and irrational regulation?
The answer is there is no rational reason for this position, and every rationale given for the current treatment of Bitcoin is a pretext. Bitcoin is software, just like any other software, and it does not need regulation to keep people safe. There are already sufficient statutes to effectively deal with any sort of fraud perpetrated by companies offering services, but in New York it seems, these facts have been missed. Bitcoin was misrepresented to the regulators as something that they should be responsible for, rather than just another type of software. Other jurisdictions, either because they had more time to consider the matter or were more insightful, have taken the correct approach. Hong Kong has explicitly said that it will not seek to regulate Bitcoin at all. This is the enlightened, rational approach and conclusion that all logical and ethical people arrive at when the truth of Bitcoin is placed before them; Bitcoin is software like any other, and it should not receive nor does it require any special treatment under the law.
Slowly, the American legal system is catching up. In the case of The State of Florida v Michell Abner Espinoza, Miami-Dade Circuit Judge Teresa Mary Pooler found — correctly — that Bitcoin is not money, and that therefore, Mr. Espinoza, who was set up in a sting operation by government agents masquerading as honest men who simply wanted to buy Bitcoin, was not guilty of any crime. This correct judgement has profound implications for Bitcoin in the United States. First of all, it nullifies all Bitcoin rules drafted on the assumption that Bitcoin is a commodity or money. Those definitions of Bitcoin are figments of the imaginations of lobbyists trying to build a Bitcoin Regulation Industry for themselves, with their offices as the gatehouses. Indeed, the author of the BitLicense is now offering consultancy services navigating the regulation he drafted, following the example of the author of the RICO statutes, G. Robert Blakey. These regulations, having been struck down in court, will unleash the potential of Bitcoin in the United States, which should as a matter of policy have the explicit aim of becoming the beginning and end point of all Bitcoin transactions, just as all the global social media giants based in Silicon Valley are. Imagine the consequences of Twitter, Facebook and WhatsApp all being run somewhere other than the United States, and then multiply that scenario by the power of money. It is impossible that any patriot of any country would want such a powerful force to be run in a foreign land, and in fact China has its own home grown and very large social media networks — Sina Weibo, Qzone, RenRen, PengYou, Diandian, Jiepang with 579,980,000 users, making it the world’s largest social media landscape — for precisely this reason. These critical communication tools cannot be left in the hands of a single nation, and the power to block what are in effect bank accounts, puts Bitcoin in the national critical infrastructure class along with the Internet.
The Importance of the History of SoftwareThe prospect of companies eschewing New York or California for other capitals is very real. Not only are entrepreneurs faced with the threat of arbitrary, unethical and un-American profit sapping legislation like New York’s BitLicense, but they are also faced with the threat of Software Patents — that do not exist in the European Union, US Software Patents being completely unenforceable — and the possibility of being obliterated by lawsuits. Advocating for the end of Software Patents is beyond the scope of this essay, but we can say categorically that any law or regulation drafted specially for Bitcoin will cause companies to incorporate in other jurisdictions, making those places the beginning and end points of Bitcoin transactions, where the taxes will be levied. American companies may be able to boast that they are in many jurisdictions, but that has nothing to do with their profitability, and they are often unwilling to repatriate profits due to swingeing taxes. Other companies that are more agile and with lower running costs will easily outflank the current crop of Bitcoin companies, many of whose business models are fundamentally flawed and who are following regulations that are not even on the statutes. There are no Bitcoin regulations on the statutes that anyone can follow, save the BitLicense and some half hearted, ripe for challenge, unconstitutional, US only agency guidance put in place at the prompting of misguided American lawyers and lobbyists. Other jurisdictions that are explicitly pro innovation have global internet access indistinguishable from American internet access. Bitcoin can flow to and from these countries just as it can from anywhere on Earth; this is all invisible to users of Bitcoin, who see only a number on their devices that corresponds to how much Bitcoin they are permitted by the network to move or transmit.
America has a well established culture of software development. Many world class software products from Twitter to WhatsApp were developed there. It is rational to expect a Bitcoin company with the perfect business model to emerge from Silicon Valley. This cannot happen under the current climate of hysteria, fostered by lawyers and lobbyists trying to cut out a niche for themselves. Working on the assumption that other countries are run by rational actors, there is no reason to conclude that the judgement in the State of Florida v Michell Abner Espinoza case will not be repeated in the courts of those countries with free speech protections, where they even arise to go to court in the first place. Those countries that don’t have free speech protections, will be motivated to come to similar findings simply to prevent Bitcoin settling in enemy territories from where they will be dominated.
Critical to all of this is the understanding that there can only be one Bitcoin, just as there can only be one Internet. All countries on Earth are connected to the same global Internet, operating on and obeying the same basic rules — its protocols. Bitcoin is similar, but with an important twist; Bitcoin’s size is important. Without diving into the details, the bigger the Bitcoin network becomes, the more secure it is as an impenetrable computer network, making successful attacks on its record of transactions impossible. It is also a vitally important fact that multiple Bitcoin networks are not interoperable. If a country opts to have its own private Bitcoin clone network as an adjunct to its national currency, that “Sovereign Bitcoin” cannot be exchanged on The Bitcoin Network, because their databases are separate, incompatible transaction records. We can safely predict, given the history of the Internet and what we know about “first mover advantage”, that there will only be one Bitcoin. It will be global in reach, with everyone everywhere connecting to it. Just as users connect to the Internet through Internet Service Providers to send email, people connect to the Bitcoin network through either a service provider or software they can run themselves. Once again, no one in a democratic society would dare suggest that providers of email services should be registered and their fingerprints taken; that is the preserve of totalitarian states like North Korea, but this is exactly what the BitLicense does, in of all places, New York.
What the Bitcoin Future Could Look LikeWhat would a pro Bitcoin jurisdiction look like after the inevitable global adoption of the The Bitcoin Network? We can speculate that it would have large benefits to the jurisdiction that earns the moniker, “The Silicon Valley of Bitcoin”. It would go something like this…
“After a massive, historic and unprecedented influx of money and brains — due entirely to the Bitcoin revolution — the Bitcoin friendly jurisdiction would become one of the most wealthy in the entire world, in the same way that Switzerland and Lichtenstein are after providing ethical banking for generations.
Rather than taking generations, this change would happen almost overnight — in “internet time”. The Bitcoin friendly jurisdiction would become known as a global centre of commerce, just as the City of London or Wall Street are centres of the old financial system. Being synonymous with Bitcoin, all companies would have a presence there so they could be in the middle of the action, and have access to the pool of world class software developers needed to extend and secure their complex systems.
Since all Bitcoin transactions flow thorough this jurisdiction, the taxes raised by the local government are substantial even at low tax rates. The amount taxed is sourced from commerce taking place globally, and not just locally. Fractions of pennies are levied on each transaction in real-time, and this is possible because each Bitcoin is divisible into a million pieces. Bitcoin circulates like The Water Cycle in nature; the same amount of Bitcoin is used over and over again in a frictionless system where nothing is ever wasted. This is why the astronomical estimates of the true value of Bitcoin are so high; when you take into account its permanently limited supply, its frictionless data nature and its near infinite utility, the current prices on exchanges are absurdly low. Either the speed at which Bitcoin is exchanged must speed up to accommodate the amount of goods transacting on the market, or the price must increase, since the supply is fixed by mathematics. The speed at which Bitcoin circulates has an upper limit, and therefore the price must increase.
The use of government money for all goods and services is now optional. It is unthinkable to enforce legal tender laws, and forbidding Bitcoin is also completely out of the question. The State is receiving billions in taxation from Bitcoin companies both directly and by all the myriad ancillary activities related to it. The State has resorted to accepting Bitcoin in payment of taxes. This act — by itself — attracts companies that are not directly involved in Bitcoin but who use it as money because it is efficient, secure and inexpensive, incorporating and paying taxes in the jurisdiction for the savings they will make. This is a reinforcing feedback loop that brings great prosperity to this forward looking country, whilst draining human and capital resources from other jurisdictions. It is too late to set up copycat environments in other capitals and to repeal bad law like the BitLicense. The first mover advantage that has entrenched the Internet is working to keep all Bitcoin businesses in one place, and that place isn’t New York. No other country can ever catch up, just as they can’t ever hope to compete with Silicon Valley.
The game is over.”
This sketch of how a Bitcoin friendly state might emerge is not unrealistic. There have been many examples of the aggregation of an industry in a single place on different scales; cities have diamond districts, clothing districts, meat districts. It is a commonly seen phenomenon, and Bitcoin will be no different, pushed by the same economic laws that are a part of nature.
The Dystopian AlternativeThe alternative to the scenario outlined above is the backward country that has its agenda set by computer illiterate Luddites and legal professionals. They are not interested in the big picture, or the national interest, and are instead, only motivated to carve out a space for themselves where industry needs them to navigate regulation. This market toxic activity is called “Compliance” which is the muscle of the black heart of Crony Capitalism. Companies use the State to enforce regulations that make it nigh on impossible for new entrants to penetrate the market, keeping prices artificially high and stifling innovation. Software has never had to suffer attacks like this — except in the form of software patents, which are explicitly used to attack market entrants and suppress competition — entrepreneurs and software developers have always been free to write programmes and release them for free. That is exactly how the incredibly successful GNU Plus Linux started in the bedroom of Linus Torvalds and offices of Richard Stallman at Carnegie-Mellon University. There are many stories similar to GNU Plus Linux — companies succeeding from literally nothing but an idea typed out by a single man, Instagram being one of the most recent. There cannot be an “Instagram of Bitcoin” coming out of New York, because its BitLicense makes it literally illegal to write and release software there.
Hong Kong on the other hand, being without a Chinese version of BitLicense, has developers who can write whatever software they want for release into the global market, where it will live or die on its merits. This will happen many times over, as people seek the perfect mix of features that will make up Bitcoin’s “Killer App”. Even if this crucial experimentation is done in New York, the New Yorker who does the work will relocate to Hong Kong where he has a chance to succeed; staying in New York means $2,000,000 in compliance costs before you have your first customer. No one will put up with it, and why should they?
BitLicence and the toxic, innovation killing climate of “Compliance” are guarantees that America will lose in the international competition to be Bitcoin’s natural home. America has lost before in a scenario just like this with the adoption of GSM as the global cellphone network standard. Today we have a picture of this happening again with Internet Poker, which is illegal in the United States, while thriving online without American businessman owning the companies or making the profits. There are enough people online to keep these services very profitable, and of course, the potential scope of Bitcoin is exponentially larger, because it is used for all conceivable transactions and not just gambling. Even if it replaces 20% of cross border currency exchange business, it will represent an enormous market, and of course, it will be much bigger than that, especially with the breakthrough of the Lightning Protocol, which increases Bitcoin’s throughput to hundreds of thousands of transactions per second. Abundant and instant microtransactions are soon to become the new normal in Bitcoin, and the web, replacing advertising as publisher’s main source of income.
The Horse and Buggy LobbyLawyers and legislators must not be permitted to set the rules for something they don’t have the capacity to understand. Furthermore, since the end uses to which Bitcoin can be put are still being discovered, it is impossible for anyone to know exactly what Bitcoin will be used for in the future with any certainty. Only seven years ago, a system like Bitcoin was widely believed to be impossible. Now not only is Bitcoin here and stronger than ever, but people are actively searching for different ways — most of which are unsuccessful flights of fancy of the sort seen in the first Dot Com Bubble — to leverage its core concepts in almost every industry. This work will be carried out in the jurisdiction where most of the activity — software development — is taking place. Naturally this would be Silicon Valley, but since arbitrary and irrational regulations that treat this software differently to all other software are being proposed, Silicon Valley will be impossible to work in, due to the astronomical, debilitating, anti-capitalist burden of “Compliance”.
The right to develop software — which is just writing — is indivisible; it cannot be split into two parts, depending on the use the writing is put to. It is akin to making a claim that Foreign Affairs must be subject to regulation, but Newsweek should not. There is no construction, no rationalization, no form of logic that can be made to argue that publications that feature only writing should be treated differently to each other, and an understanding of the nature of software is crucial to making this connection.
Clearly, at this nascent stage of Bitcoin’s development, the nation state’s priority must be to capture all Bitcoin businesses, entrepreneurs and software developers so that the inevitable robust ecosystem that is going to develop is in your jurisdiction. Anything that prevents this should be at the very least temporarily set aside. A market obeying condition is important for all entrepreneurs, who need leeway as they take on risk, experimenting with business models, security systems and infrastructure, iterating over and perfecting them. Recent events in the cryptocurrency world shine a light on what this means in practice.
Out of the EtherThe cryptocurrency and Bitcoin competitor Ethereum was launched entirely without permission from Zug, Switzerland. It radically extends Bitcoin’s capabilities in a new separate database, and was seen for a short time as the inevitable market winner over Bitcoin. One of the largest Bitcoin exchanges, Coinbase even took the risk of offering its native token “Ethers” to their customers. One of the capabilities Ethereum enables is the ability to create Smart Contracts; agreements based entirely in software that execute rules — loosely speaking its clauses — entirely in code. Smart contracts are an extra-legal way of parties agreeing on how business is conducted and matters settled. It is radical, extremely exiting, and the biggest Smart Contract ever, The DAO the first “Decentralized Autonomous Organization” attracted over $140,000,000 in investment from people around the globe.
And then it was hacked.
But it wasn’t really hacked. An attacker found a fundamental flaw in the DAO’s software contract clauses, and contractually drained $59,000,000 worth of Ether from it, into another contract beneath it. “Ethers” are the equivalent of Bitcoin in the Ethereum public database and software ecosystem. In response to this attack, Ethereum, which is the skeleton that the DAO was built on, had its permanent record reversed by the developers who control it, to reimburse investors who lost Ether in the DAO. This is anathema to people in the crypto currency space, causing a group to “fork” Ethereum at the point in the transaction record at which the DAO contract hack took place. Forking means the new developers made a complete copy of the Ethereum transaction record, and started recording their own, separate records of transactions on to the end of it. There are now two diverging Ethereae — one called “Ethereum” and the other, “Ethereum Classic”. Both of the database records of these systems are identical up to the DAO event, their native tokens float freely on exchanges, and as of this writing, both have essentially collapsed to the same price of almost nothing.
By any metric, it is a fiasco.
Rather than seeing this as a perfect example of why what are now called Cryptocurrencies require regulation, the DAO is in fact a perfect example of why Bitcoin and software should not be regulated. This DAO hack has cost a statistically insignificant amount of money to teach a powerful lesson to all market participants, including companies like Coinbase. Without an expensive lesson like this, markets would be less efficient and more vulnerable due to the speed of iteration being slower. Bear in mind these experiments would be taking place in other jurisdictions, and some of them are guaranteed to succeed, like the Segregated Witness extension to Bitcoin. If the addition of Segregated Witness was subject to regulation, the pace of Bitcoin improvement would slow to a crawl. An example of this innovation stifling in the medical industry are the over 4,000 medicines awaiting FDA approval in the United States. This backlog is directly analogous to new Bitcoin business models — software — being blocked from release to the public. This is exactly why no Bitcoin regulation or legislation must be passed, or even considered openly, as it will signal to entrepreneurs that they are better off in another jurisdiction, just as people travel to free countries to try experimental treatments when all FDA approved medicines have failed to cure their disease. The risk of Bitcoin is spread evenly to the people who voluntarily choose to work with it. Trying to control Bitcoin pushes a far greater risk of a generational national loss on all citizens, that can never be recovered from once the centre of Bitcoin is captured and rooted in place.
In order to foster innovation and to allay any fears of a possible explosion of legislation that will make turning a profit in Bitcoin impossible, the jurisdiction that wants to win the battle for Bitcoin businesses should enact a single law; a 150 year moratorium on any legislation that touches Bitcoin.
The rate at which Bitcoin is released into the market by the miners is halving regularly by design. The last Bitcoin will be generated in approximately the year 2140. By that time, Bitcoin will be everywhere, or nowhere, and the world centre of Bitcoin will be well established, or Bitcoin will be a part of the history of computing. No one can say definitively, but what we can say for sure is that the same thinking behind the 150 year long laissez faire lease that made Hong Kong into one of the top five most prosperous states on Earth, if applied to Bitcoin, will result in a bejewelled prize collected by the State that nurtured and grew it.
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