Bitcoin Politics, Community and Regulation – Crypto Academy Lecture 7


CryptoSlo cryptocurrency news and
investing welcome to lecture seven in this lecture
we’ll talk about all the ways that the world of Bitcoin and the technology
touches the world of people will talk about the community will talk about
politics within Bitcoin and the way that Bitcoin interacts with politics and
we’ll talk about law enforcement and regulation issues in lecture 7.1 will
talk about consensus in Bitcoin the way that the operation of Bitcoin relies on
the formation of consensus among people now there are really three kinds of
consensus that have to operate for Bitcoin to be successful
the first kind is a consensus about the rules this is a consensus about things
like what is it that makes a transaction valid how can you tell a valid
transaction from an invalid one second what makes a block in the blockchain
valid which block should be accepted in which block should be rejected third how
the nodes in the p2p network should behave how they should interact with
each other and what kind of protocol they should use to discuss with each
other and more generally all the protocols and data formats that are
involved in making Bitcoin work you need to have a consensus about these things
so that all the different participants in the system can talk to each other and
agree on what’s happening and so the first form of consensus that goes into
Bitcoin is just a consensus about what these rules should be in order for the
system to go forward the second form of consensus in Bitcoin is consensus about
the history that is a consensus about what’s in the blockchain and what’s not
in the blockchain and therefore a consensus about which transactions have
occurred and once you have a consensus about which transactions have occurred
what follows from that is of course a consensus about which coins which
unspent outputs exist and who owns them and so this consensus obviously flows
from the processes that we’ve talked about in earlier lectures by which the
blockchain is built and by which a nodes come to consensus the processes that we
hope push Bitcoin toward a consensus about the contents of the blockchain so
that consensus about what’s in the blockchain and therefore what the
history is is the second important form of consensus that Bitcoin relies on the
third form of consensus that Bitcoin relies on you
just the consensus that coins are valuable that is the general agreement
that bitcoins are valuable that bitcoins are a good thing to have and in
particular the consensus that if somebody gives you a Bitcoin today the
tomorrow you’ll be able to redeem or trade that for something that is of
value any currency needs this whether it’s a fiat currency like the dollar or
a crypto currency like Bitcoin you need a consensus that the thing has value
that is you need people to generally accept that it’s exchangeable for
something of value now and in the future and and it’s so that’s the third kind of
thing that Bitcoin needs now this this form of consensus unlike the others can
be viewed as a little bit circular in other words the my belief that the
bitcoins I’m receiving today are of value depends on my expectation that
tomorrow other people will believe the same thing it so consensus on value
relies on believing that consensus on value will continue and this is
sometimes called the Tinkerbell effect by analogy to Peter Pan where it said
that Tinkerbell exists because you believe in her the same thing is kind of
true here that the consensus that bitcoins have value exists because of
the consensus that bitcoins have value so circular or not it’s a thing that
seems to exist and it’s important for Bitcoin to operate now what’s important
about all three forms of consensus is the way that they’re intertwined with
each other and this diagram shows a little bit about what I mean when I say
that first of all the consensus about the rules and the consensus about
history go together because it’s the rules that determine which kinds of
transactions can go into a block and which kinds of blocks can come into
existence if you agree on the rules that is which blocks are valid then it’s
possible to build a consensus about the blockchain in about history whereas
without a consensus about the rules then people are going to disagree about
what’s in the history and you won’t be able to come to consensus in that way so
consensus about rules and consensus about history are tied together in a
similar way consensus about history and a consensus that coins are valuable
is are also tied together consensus about history means that we agree on who
owns which coins and agreeing on who owns which coins is a necessary is a
necessary prerequisite for believing that the coins have value because if if
there’s not a consensus that I own a particular coin then I’m not going to
have any expectation that people will accept that coin form from me in payment
in the future so consensus about history is a prerequisite for consensus that
coins are valuable but in the same way the consensus that coins are valuable is
needed to make the consensus about history work and we heard about this in
the earlier lecture when we talked about the incentive arguments the ways in
which the block reward that is built into the mining process creates an
incentive for people to follow the the expectations about lining so the
consensus that coins are valuable at what is what creates the incentives that
allows us to get to a consensus about history and so we have all three forms
of consensus here which are tied together such that if any one of them
failed then the other ones would fall apart as well and in a sense the genius
of Bitcoin the genius in bitcoins original design was in recognizing that
it would be very difficult to get any one of these forms of consensus by
itself consensus about the rules in a worldwide decentralized environment
where there’s no strong notion of identity that’s just not the kind of
thing that’s likely to happen consensus about a history similarly that is a very
difficult distributed consensus data structure problem which is not likely to
be solvable on its own and a consensus that some kind of cryptocurrency has
value was also a very difficult thing to put together what the designer of
Bitcoin and what the continued operation of Bitcoin shows is that even if you
can’t build any one of these forms of consensus by itself you can somehow
stand up all three of them together and get them to operate in an interdependent
way and so when we talk about how things operate within the Bitcoin community we
have to bear in mind that Bitcoin relies on consensus it relies on agreement by
the participants and that that consensus is a fragile and interdependent thing in section 7.2 will talk about the
Bitcoin core software this is a piece of open-source software which is a focal
point for discussion of and debate about bitcoins rules the Bitcoin core software
is a body of open-source software it’s licensed under the MIT license which is
a very permissive open-source license it allows the software to be used for
almost any purpose as long as the source is attributed in the license the MIT
license is not stripped out the Bitcoin core software comprises the most widely
used Bitcoin software and even those who don’t use it tend to look to it to
define what the rules are that is people who are building alternate Bitcoin
software typically try to mimic the the rule defining parts of the of the
Bitcoin core software that is they look at the parts that check which
transactions are valid they look at the parts that check which blocks are valid
and they try to behave in the same way as the core software so this is the
focal point for talking about what the rules are in fact the Bitcoin core
defines the de-facto rulebook of Bitcoin if you want to know what’s valid in
Bitcoin if you want to know what the rules are this is the place to look this
or explanations of it another related piece of machinery is Bitcoin
improvement protocols or bits these are formal proposals for a change for a
change to Bitcoin and typically an improvement proposal will include a
technical specification for a proposed change as well as a rationale for it so
if you have an idea about how to improve Bitcoin by making some technical change
you’re encouraged to write up one of these documents you’re encouraged to
publish it as part of the Bitcoin improvement proposal series and that
will then kick off a discussion within the community about what to do they’re
published in a numbered series each one has a champion that is sort of an author
whose job it is to evangelize in favor of it to coordinate discussion and to
try to build a consensus within the community in favor of going forward with
or implementing ocular proposal now what I’ve talked
about so far are proposals to change the the technology there are also some VIPs
that are purely informational just to tell people about things that they might
not otherwise know or that are process-oriented that talk about how
things should be decided within the Bitcoin community but nevertheless if
you have an idea about how to improve Bitcoin typically you would make a
Bitcoin improvement proposal and that would be the process for discussion
going forward of proposed rule changes and so we have a rule book and we have a
process for proposing specifying and talking about rule changes now the other
group we need to talk about with respect to the Bitcoin core software are the
core developers we have these six people maybe arguably five Satoshi Nakamoto who
I’ll talk about a little bit later is not currently active but the other five
are currently involved as core developers of the Bitcoin core software
so these are the people who are leading the the effort to continue development
on the Bitcoin core and who are in charge of which code gets pushed into
new versions of the Bitcoin core so how powerful are these people well on the
one hand they’re very powerful in one sense in another sense they’re not all
that powerful at all on the one hand you could argue that they’re powerful
because the rule changes that is the changes to the code that get shipped in
the Bitcoin core will be followed by default these are the people who
actually hold the pen that writes that can write things into the de facto
rulebook of Bitcoin on the other hand because it’s open source software and
anybody can copy it and modify it anybody can fork the software at any
time and so if the lead developers start behaving in a way that the community
doesn’t like strongly rejects the community can go a different direction
so one way of thinking about this is to say that the lead developers are leading
the parade so they’re out in front of the parade marching and the parade will
generally follow them when they turn a corner but if but if but if they try to
lead the parade in the direction that’s disastrous well then the parade ma’am
the marching behind them might decide to go in a different direction they can
urge people on and as long as they seem to be behaving reasonably the group will
probably follow them but they don’t have formal power to force people to to
follow them if they take the system in a technical direction that the community
doesn’t like so it’s worth in this respect thinking about what you as a
user of a system can do if you don’t like the way the rules are going or the
way it’s being run and to compare a centralized currency like either a fiat
currency or a currency that’s issued by a central entity against something like
Bitcoin so in a centralized currency if you don’t like what’s going on you have
the right to exit you can leave the currency which means that you can stop
using it you can sell any currency you hold or try to sell it and then you can
just stop using it just like any business that you do business with
almost any business you have the ability to just stop dealing with them if you
don’t like what they’re doing on the other hand if it’s a currency and you’ve
got a lot of business you’ve got a lot of assets tied up in it it might be
expensive or difficult to actually exit but with the centralized currency that’s
really your only option with Bitcoin because it operates in an open-source
way you have the right to fork the rules that means you and perhaps some of your
friends or colleagues can decide that you’d rather live under a different rule
set and you can fork the rules and go a different direction from where the lead
developers have gone the right to fork like this is more empowering for users
than the right to exit you can exit if you want but you have the right to fork
and that actually gives you more power and therefore the community has more
power in a system like Bitcoin which is open source than it would have with the
purely centralized system so although the lead developers might look like a
centralized entity controlling everything in fact they don’t have the
power that a purely centralized manager or software owner would have let’s look
a little bit more at what happens if there’s a fork in the rules and I’m
talking here in a previous lecture we talked about the distinction between a
hard fork and a soft fork I’m talking about a hard fork here so what happens
is the following so here we have the blockchain which is coming along
bring up the history and at some point there will be a fork in the blockchain
if there’s a disagreement about the rules and you get two branches you get
one branch let’s say this one up here which is valid under rule set a but
invalid under rule set B and conversely you’ll have another branch down here
which is valid under rule set B and invalid under rule set a if there’s if
there’s a hard fork as to what the rule should be then there will be some
transactions that are valid on each side and not the other and this will
eventually happen and once these branches go apart they can’t come back
together because this branch is illegal under the B rules this branch is illegal
under the AAA rules there permanently separate so if if the currency that we
had over here on the left we can think of as being Bitcoin the big happy
Bitcoin that everyone agreed on after the fork it’s as if there are two new
currencies which you can think of as being a coin corresponding to rule set a
and we’ll call this one down here beacon corresponding to rule set B and it’s as
if at this moment where there was a fork everyone who owned one Bitcoin at the
moment of the fork will receive one a coin and one B coin at that time and
from that time on eight coins and B coins will operate separately as if they
were separate currencies and and they might operate independently the a group
and the B group might evolve their rules different in different ways and
certainly their block chains will continue to grow in ways that are
probably inconsistent across the two coins so when this happens we might say
that the currency fork that it’s not just the software the rules that forked
or the software implementing the rules that forked it’s the currency itself
that forked and that’s an interesting thing that can happen in a system like
Bitcoin that couldn’t happen in a traditional currency where the option of
forking is not available to users okay so what happens if a fork like this goes
on what act what do people actually do how do they respond well after a hard
fork like this there are really two cases the first case is where the fork
was really not intended as a disagreement about the rules but the
fork was designed as a way of starting an altcoin that is of starting a new
kind of cryptocurrency with different rules and if some
just wanted to start their own currency and they found it convenient to start
with a rule set that was very close to bitcoins they found it convenient maybe
even to start with bitcoins blockchain and to fork off as I as I Illustrated on
the previous slide then that’s not really a problem the alt coin goes its
separate way the branches coexist peacefully and some people prefer to use
bitcoins some prefer to use the alt coin the interesting case is what happens if
the fork actually reflected a fight between two groups about what the future
of bitcoins should be if that’s the case then the two branches are rivals and the
branches will fight for market share we after that after the fork there’s an a
coin and there’s a B coin and each branch will try to get more merchants to
accept it each branch will try to get more people to buy it the branches will
fight for market share though the branches will fight to be seen to be
perceived as being the real Bitcoin probably each branch says claims to be
the real Bitcoin and there’s a public relations fight between them which goes
along with the fight for market share each one wants to be seen as the real
thing and the other one to be seen as the weird splinter group probably
eventually one branch will win and the other one will melt away these sorts of
competitions tend to tip in one direction once one of the two gets seen
as more legitimate gets seen as having a bigger market share gets perceived more
broadly as being the real one the other one becomes kind of a niche currency and
eventually will fall away so this is the likely future if you had a fork that
reflected a fight over the future of Bitcoin and what this amounts to is a
kind of rebellion within the Bitcoin community where a subgroup decides to
break off and say we think we have a better idea about how this should be run
and you have a competition between the new and the old which eventually one of
them probably wins and become seen as the de facto new rule set amid a facto
new governance structure in section 7.3 we’ll talk about who are
the stakeholders in Bitcoin really the question is who’s in charge
we’ve talked about how Bitcoin relies on consensus and about how the rulebook of
Bitcoin is written in practice we’ve talked about the possibility of a fork
or a fight about what the rules should be so now I want to come to the question
of who actually has the power to determine who might win a fight like
that okay so who is the power well suppose there’s a negotiation about
rural setting there’s a discussion within the community there’s a
disagreement about which rule set should be used who actually controls the
outcome now if you think about it as with any negotiation one of the most
important factors in in understanding who has an advantage in the negotiation
is to look at what happens if the negotiation fails and it comes down to a
fight and generally speaking whoever has the best alternative to a negotiated
agreement is going to have the advantage in in negotiation in other words whoever
is likely to win a fight is likely to win the negotiation it’s the
long-standing rule that on the playground the biggest strongest person
is likely to get their way even if no blows are exchanged so let’s talk about
who actually has the power and who would be able to win if there were a fight
involving a fork in the rules and a struggle for power over what the future
of Bitcoin would be so we could make a bunch of claims on behalf of a bunch of
different stakeholders the first claim is that the Bitcoin core developers have
the power whoever it is that develops the core software they have the power
they write the rulebook they literally have their fingers on the keyboard and
have the ability to change the code that gets shipped since they write the
rulebook since almost everybody does use their code and does follow their rules
in practice you could argue that they have the power because they can actually
put a change out there that other people would at least by default accept so the
first stakeholder is the developers a second claim though that we might make
is that it’s the miners who have the power
why because miners are the ones who write the his
three the miners are the ones who make the blocks that record the transactions
that have happened and so if the miners decide to follow a certain set of rules
then arguably everybody else has to follow it we talked in previous lectures
about what happens if you have a majority of miners certainly if there’s
a disagreement among the miners and let’s say 80% of them want one rule set
20 percent want the other well the 80 percent group is going to be able to
build a bigger more impressive block chain and so they have some ability to
push push the rules in a particular direction now how much power they have
depends maybe on whether the fork is a hard fork or a soft fork this can get a
little bit technical into the details of the dynamics of Bitcoin but bottom line
is miners have some amount of power because they get to write the history
and the history is going to be consistent with whatever consensus rules
the miners end up following in the long run
so the second claim is that the miners have the power you might also claim
though that investors have the power why because investors are the ones who
buy a lot in hold a lot of the bitcoins and so it’s the investors who decide
whether Bitcoin has any value if the miners control the consensus about the
history and the developers control the consensus about the rules
it’s the investors who control the consensus that Bitcoin will have value
or at least that’s the way the argument goes so in the case of a hard fork the
investors if they all or mostly decide to put their money on one branch on the
a coin or the B coin then that one will have a lot of perceived legitimacy and
so the investors have a lot of power to decide which way things go if there is a
fork on the other hand we could claim that merchants and their customers are
the ones who have the power why because merchants and customers are
the ones who generate the primary demand for Bitcoin yes investors provide some
of the demand that supports the price of the currency but the primary demand that
drives the price of the currency as we saw in lecture 4 is is driven by a
desire to mediate transactions to use Bitcoin as as a transaction technology
and because merchants and their customers drive that demand they’re the
ones who drive the long term price of Bitcoin or so this argument goes the
investors according to this argument are just guessing where the primary
we’ll be in the future so investors are guessing where the merchants and
customers will go in the future and therefore it’s the merchants and their
customers who really have the power on the other hand we could argue that no
it’s the payment services that have the power they’re the ones that really
handle transactions a lot of merchants don’t care which currency they follow
they simply want to use a payment service which will give them dollars in
an ease of use and handle all of the risk and so to the extent that merchants
and customers have power and that those people rely on the payment services to
actually handle transactions well then maybe it’s the payment services that
have the power because they drive primary demand and Merchants customers
and investors will follow them okay now I’ve argued for a bunch of different
parties all of whom I’ve argued should have the power and there’s some merit to
all of those arguments but the fact is all of those entities have some power in
order to succeed remember a coin needs all these forms of consensus it needs a
stable rule book written by developers it needs investment
it needs mining power and it needs participation by merchants and customers
and the payment services that support them so all of these parties have some
power in controlling the outcome of a fight about the future of Bitcoin and
there’s no one that we can point to as being the definite winner it’s a big
ugly messy consensus building exercise there’s one more player that I want to
talk about when I talk about governance of Bitcoin and that’s the Bitcoin
foundation the Bitcoin foundation was founded in 2012 and it really does two
main things first of all it pays the core developers or at least some of the
core developers it pays them a salary out of the Foundation’s assets so that
they can work full-time on on continuing to develop the software the other thing
that the Bitcoin foundation does is it talks to government especially the US
government as the voice of Bitcoin people in the Bitcoin community said
that we have a problem that there’s no one to talk to
government on our behalf and so our case is not being made our arguments are not
being heard in government we need to have an entity
we’ll do that and the Bitcoin foundation is one of the things that was set up to
do that and so that’s the other function that the Bitcoin foundation was set up
to do now the Bitcoin foundation is not in charge of Bitcoin any more than any
of these other parties are it has membership from some members of the
community not from other members of the community and its success ultimately
like everything else in this kind of open source consensus based ecosystem
will be driven by how much support it can attract and retain from the
community over time and it’s worth discussing the points of controversy
that have happened with respect to the Bitcoin foundation there have been
controversies over the membership in the board where some members of the Bitcoin
foundation board have gotten into trouble they’ve gotten into criminal
trouble or they’ve gotten into financial trouble and and the foundation has had
to struggle with dealing with what to do about members of the board that are
become become liabilities and have to be replaced on short notice there’s been
some controversy from those people who believe that Bitcoin should operate
outside of and apart from traditional national governments that Bitcoin
shouldn’t be in the position of negotiating with the government Bitcoin
should be what it is the independent of government and simply operate across
borders not having to explain or justify itself to government at all people who
believe in that point of view don’t like the fact that there are people in suits
who hand out business cards saying Bitcoin on them and talk to government
as the voice of Bitcoin and finally there are people who there have been
controversies over the Bitcoin foundation and the question of who put
these people in charge there are members of the community who feel that the
foundation and the people who set up the foundation aren’t really true
representatives of the community and that they are anointing themselves as
leaders of something that they have no right to put themselves in charge of so
although the Bitcoin foundation is prominent there are still some questions
about what its role is going to be in the long run I think it’s fair to
conclude that the Bitcoin foundation in its dealings with government has done a
fair amount to smooth the road for understanding of an acceptance of
Bitcoin at least within the US government but still the foundation
continues to be a somewhat controversial organization and one that’s going to be
the topic of debate going forward so when we come down to the question of
who’s really in charge of Bitcoin who’s in control the answer is in one way
nobody that there is no one entity no one group that’s definitively in control
in another sense the answer is everybody because it’s really the existence of
these consensus about how the system will operate the three interlocking
forms of consensus on rules on history and on value that really is what governs
Bitcoin and any group any rule set any structure that can retain that consensus
will in a very real sense be in charge of Bitcoin in lecture 7.4 we’ll talk about the
roots of Bitcoin how it got started what were the precursors to it and we’ll talk
about the mysterious founder of Bitcoin there are really two precursors to
Bitcoin that that are worth talking about first Bitcoin arose out of the
cyberpunk movement this was a movement that brought together two trends or
arguments first was libertarianism and particularly the idea that society would
be better off with either no government or with a very minimal government with
government enforcing only the minimum rule set necessary to allow people to
coexist at all so together with that strong libertarian notion or perhaps
even anarchist notion we had the idea of strong cryptography and public key
cryptography which started in the late 1970s these two ideas came together in
the cyberpunk movement and this was a group of people who believed that with
strong online privacy and strong cryptography you could re architect the
way that people interacted with each other into a world in which people could
protect themselves and their interests more effectively and could do so with
much less activity action or as they would say interference from government
so that was the cyberpunk movement one of the challenges on the cyberpunk
movement was how you were going to deal with money in a future cyberpunk world
where people were interacting over the net and interacting via strong technical
and cryptographic measures and so a bunch of research came along led
especially by early digital cash work by David Chama and others that that was
designed to create new forms of value that functioned like money like cash in
the sense of being anonymous and easily exchangeable but also provided stronger
notions of anonymity or or privacy and so early work in that area and there’s a
whole interesting story about how that developed and why it didn’t sweep the
world early work in that area came together with the cyberpunk beliefs and
the desire to have a strong currency that would be
decentralized online and relatively private to create the world from which
bitcoin was born as well as the philosophy that many of the early
supporters of Bitcoin and and even many of the supporters today still follow
Bitcoin began in 2008 with the release of this white paper called Bitcoin a
peer-to-peer electronic cash system that was authored by Satoshi Nakamoto this
paper which you can still get online easily is is the initial description of
what bitcoin is basically how it works and what the philosophy behind its
design is and so this is still a good thing to read if you want to get a quick
idea of the of how the technical design of Bitcoin and how the initial
philosophy of its operation was specified so this was this was the
beginning this was released along with open source software to implement the
Bitcoin system back in 2008 and this is where everything started now this was
written by this person Satoshi Nakamoto and Satoshi is one of the central
mysteries of Bitcoin what do we know about Satoshi
well Satoshi is the author of this white paper in the original Bitcoin software
the name Satoshi Nakamoto was almost certainly a pseudonym that is a fake
name that some person or people have adopted for the purpose of doing doing
things related to Bitcoin the identity of Satoshi is associated with certain
public keys with certain accounts in certain systems so that there are
certain kinds of accounts or statements or certain kinds of digital signatures
that would convince the community that something was said by or issued by or
created by the real Satoshi so Satoshi while being a pseudonym is also a person
who can speak and who has spoken especially extensively in the early
history of Bitcoin what do we know about Satoshi well we know that Satoshi writes
fairly well in English Satoshi uses sometimes Americans sometimes British
Spelling’s there’s been a lot of attempts to look at the text to look at
the code and to try to figure out what is Satoshi she’s made of laying
where’s Satoshi from attempts to look at the hours and times and what type of
machine does Satoshi used in all these sorts of things try to figure out who is
this person or people and what are they doing Satoshi was fairly active in
working on Bitcoin on writing about Bitcoin and participating in online
forums until around 2010 and since that time Satoshi has said almost nothing
there’s one notable exception that I’ll mention in a minute Satoshi owns a lot
of bitcoins from early mining in the beginning Satoshi was perhaps the only
miner are one of the only few people mining bitcoins and those bitcoins that
were accumulated by Satoshi’s accounts early on now are extremely valuable and
yet those accounts are not being cashed out everybody can see which accounts
which Bitcoin addresses probably belong to Satoshi and so if those coins were to
be cashed in if they were to be sold and the proceeds transferred into any
particular bank account that would be a very notable event and would be an
important clue to Satoshi’s identity and so interestingly although Satoshi
created the the Bitcoin system and has on paper made a lot of profit from it
Satoshi is unable to cash in that profit without identifying him or herself
something that for whatever reasons that Hoshi doesn’t want to do the real
identity of Satoshi still unknown the question of who’s really Satoshi is a
favorite parlor game at Bitcoin oriented conferences it’s also something that a
lot of reporters have tried to do people have done all sorts of things they’ve
looked at text the text written by Satoshi try to compare it to other
things they’ve tried to look at other pieces of software to patent
applications they’ve looked at who is writing papers about things that seemed
like technical precursors to Bitcoin before Bitcoin came along etc etc in in
a well-known incident last year a reporter from Newsweek found a guy whose
birth name was literally Satoshi Nakamoto and fingered him as the as the
founder of Bitcoin as did the Bitcoin Satoshi that was almost certainly
incorrect as we’ve since figured out in fact one of the few
if any that Satoshi that the original real Satoshi has spoken since 2010 was
to issue a short statement saying nope I’m not that guy so as of today and
probably and probably or perhaps forever we don’t really know who Satoshi is and
in some sense it doesn’t matter because because of the notable feature of
Bitcoin that it is decentralized and with nobody in charge Satoshi is not in
charge to some extent it doesn’t really matter what Satoshi thinks anymore any
special influence that Satoshi has is only because of respect that Satoshi
would have within the Bitcoin community should Satoshi become active again so
it’s possible that we’ll never know who Satoshi is so Bitcoin was started in
2008 by Satoshi whoever he she or they are and has grown since then if we look
at a graph of the transaction volume the number of transactions per day this
starts on the left at the beginning of 2009 and goes up to the summer of 2014
now what you see is something roughly like an exponential growth and indeed
this is pretty much what you’d expect from something that’s spread by word of
mouth like the internet like other popular technologies Bitcoin has grown
in a roughly exponential way and when there are jumps they typically
correspond to bursts of publicity moments when Bitcoin became known in the
popular press for example or when there were newsworthy events transaction
volume has gone up over time the total value of Bitcoin also has gone up
perhaps in a similar way what you see is this looks like zero but in fact it’s
just very low and you see a relative arise starting here maybe beginning in
the middle of 2012 this is this looks roughly like an exponential growth but
with two spikes superimposed on it one here in roughly April of 2013 March or
April of 2013 it spiked up and then relaxed back down to the underlying
exponential curve and then arguably here around the beginning of 2014 it spiked
up to about this value and then relax back down again
to something near the exponential growth which has happened since then so
arguably Bitcoin has grown in a way that is relatively organic and at a
relatively constant exponential rate since it was born and those who believe
that Bitcoin has a bright future ahead of it believe that this exponential
growth will continue thus far in lecture seven we’ve talked
about the growth of Bitcoin we’ve talked about how Bitcoin operates who’s in
charge of it I want to spend the rest of lecture seven talking about government’s
government’s interaction with Bitcoin and government attempts to regulate
Bitcoin and we’ll start simply with the moment when governments noticed Bitcoin
when Bitcoin became big enough as a phenomenon that governments started to
worry about the impact it might have and governments started to talk about how to
react to it one reason why governments would notice a digital currency like
Bitcoin is that an untraceable digital cash if it exists can defeat capital
controls capital controls are rules or laws that a country has in place that
are designed to prevent the flow of a value of capital of wealth either in or
out of the country and by putting controls on banks and investments and so
on a country can try to prevent these flows bitcoin is a very easy way under
some circumstances to defeat capital controls because someone can simply buy
bitcoins with capital inside the country ship those bitcoins outside the country
by electronic means and then sell those bitcoins for capital or wealth outside
the country by doing that they could move capital or wealth from inside to
outside and similarly you could do the same thing to move it from outside to
inside because wealth in this electronic form can move so easily across borders
and can’t really be controlled a government that wants to enforce capital
controls in a world with Bitcoin has to try to disconnect the Bitcoin world from
the local fiat currency banking system so that it’s not possible for someone to
turn large amounts of local currency into Bitcoin or large amounts of Bitcoin
into local currency and so we see countries that are trying to beef up or
protect their capital controls do that in a notable example is China China has
has engaged in increasingly strong measures to try to disconnect bitcoins
from the chinese fiat currency banking system
another reason governments might worry about untraceable digital cash is that
it makes certain kinds of crimes easier in particular crimes like kidnapping
extortion that involved the payment of a ransom or some kind of a payoff those
crimes become easier when payment can be done at a distance and anonymously law
enforcement against kidnappers for example often has relied upon exploiting
the handoff of money from the victim or the victim’s family to the criminals
when that can be done by email and that can be done in the distance in an
anonymous way it becomes much harder for law enforcement to follow the money
similarly tax evasion becomes easier when it’s easier for people to move
money around when it’s easier to engage in transactions that are not easily tied
to a particular individual or identity and finally the sale of illegal items
becomes potentially easier when the transfer of funds can happen at a
distance and without needing to go through a regulated institution a good
example of that is Silk Road Silk Road was essentially the eBay for illegal
drugs you can see here a screenshot of Silk Roads website when it was operating
it calls itself an anonymous marketplace and you can see over on the left some
sorts of things that are for sale illegal drugs were the primary thing for
sale on Silk Road you can see examples of the sorts of things that were for
sale here Silk Road allowed sellers to – to advertise goods for sale
they allowed buyers to buy those goods the goods were delivered typically by
through the Mail’s or through through shipment services and payment was made
in in bitcoins so Silk Road operated as a tor hidden service something that was
discussed in an earlier lecture so by operating as a tor hidden service Silk
Road the Silk Road servers could be hidden from law enforcement so they were
difficult for law enforcement to reach because Silk Road used Bitcoin for
payment it was also difficult for law enforcement to follow the money and
figure out who the people participating in the market were Silk Road was the
largest online market for illegal drugs as I said it ran as a tor hidden service
and use payments in bitcoins the site held the bitcoins in escrow
while the goods were shipped there was an innovative escrow system which helped
to protect the buyers and sellers against cheating by by other parties the
bitcoins would be released once the the buyer a certified that the goods had
arrived Silk Road had an eBay like reputation system that allowed spires
and sellers to get reputations for following through on their deals and by
using that reputation system Silk Road was able to give the participants in the
market an incentive to play by the rules even though they would be very very
difficult to find otherwise so Silk Road was innovative among
criminal markets in finding ways of enforcing the rules of the criminal
market at a distance something that criminal markets have in the past had
difficulty doing Silk Road was run by a person who called himself Dread Pirate
Roberts and some of you may recognize that reference obviously a pseudonym it
operated from February 2011 until October 2013 Silk Road was shut down
after the arrests of this guy Ross Ulbricht who was the alleged operator of
Silk Road he was arrested in October 2013 and he’s currently awaiting trial
the government says that he was the operator of Silk Road and that he tried
to cover his tracks by operating using various anonymous accounts by using tor
anonymous remailers and those sorts of things but they said that they were able
to connect the dots and connect him to Silk Road activity to connect him to the
servers and to connect him to the bitcoins that belonged to the operator
of Silk Road they charged him with various crimes relating to operating
Silk Road they also charged him with attempted murder for hire it if the
allegations are true he more than once tried to pay to have people killed
fortunately he was bad at it and nobody actually got killed but nonetheless
there these are some pretty serious charges the government in the course of
taking down Silk Road seized about a hundred and seventy four thousand
bitcoins that’s quite a bit of value they then auctioned those off to the
public as with the proceeds of any crime under US law they could be seized by the
government and the government did seize them so mr. Albrecht is awaiting
trial will eventually perhaps find out the full evidence against him now there
are several lessons from Silk Road and from the encounter between law
enforcement on the one hand and Dread Pirate Roberts perhaps mr. Albrecht on
the other hand first of all one one lesson is that it’s actually pretty hard
to keep the real world and the virtual world separate the operator of Silk Road
believed that he could live his real life living in society and at the same
time have a secret identity in which he operated a fairly good-sized business
and technology infrastructure that apparently is harder than you would
think it’s difficult to keep these separate worlds completely apart and not
accidentally create some linkage between them it’s hard to stay anonymous for a
long time it’s hard to be very active and engage in a course of coordinated
conduct in which you’re working with other people over time while remaining
anonymous the reason being that although you can operate multiple identities if
there’s ever a connection between two of those identities if you ever slip up and
use the name of one while wearing the mask of another or if you ever slip up
and create a link between them that link can never be destroyed and over time the
different anonymous or identities or masks that someone is trying to use tend
to get connected and there’s a lesson there as well the third lesson here is
that the feds that the law enforcement can follow the money because even before
there was an arrest in the Silk Road case the government knew that certain
Bitcoin addresses were operated by the operator of Silk Road and they were
watching those addresses the result is that the operator of silk road while
wealthy in according to the blockchain was not actually able to benefit from
that wealth because any attempt to transfer those assets over into the
dollar world would have resulted in a traceable event and probably would have
would have resulted in rapid arrest and so although mr. Albrecht was allegedly
the owner of 174 thousand bitcoins the fact is he was not living like a king he
was living in a one-bedroom part in San Francisco apparently unable to
get to the wealth that he allegedly controlled the lessons here are that if
you intend to operate an underground criminal enterprise and I hope you as
our students are not but if you are that it’s a lot harder to do than you might
think that the technologies like Bitcoin and Tor are not panacea is for people
who want to do these things and that law enforcement actually has some pretty
significant tools that they can still use and so although there might have
been some panic in the world of law enforcement over the rise of Bitcoin law
enforcement is more and more realizing that they can still follow the money up
to a point and that they still do have a substantial ability to investigate
crimes and to make life difficult for people who want to engage in coordinated
criminal action in section 7.6 we’ll talk about anti
money laundering what is money laundering and what are
the rules that governments have imposed especially in the u.s. that effect
Bitcoin some Bitcoin related businesses so the goal of anti-money laundering
policy is to prevent large flows of money from crossing borders or moving
between the underground and legitimate economy without being detected I talked
earlier about capital controls where countries are just trying to prevent
money from crossing borders in some cases countries are just fine with money
crossing borders but they want to know who’s transferring what to whom and
where that money came from anti money laundering is aimed at trying to make
certain kinds of crime more difficult especially organized crime organized
crime groups often find themselves getting a lot of money coming in in one
place and wanting to ship it to somewhere else but not wanting to
explain where that money came from hence the desire to get money across
borders or they find their self making a lot of money in an underground economy
and wanting to get that money into the above-ground legitimate economy so that
they can spend it on on sports cars and big houses or whatever it is that the
the leaders of the group want to do anti money laundering is designed to make
that more difficult to either try to catch people trying to do those things
or else prevent them from doing it in order to detect certain kinds of crimes
or make organized crime more difficult one of the rules that goes with anti
money laundering is something called know your customers sometimes called kyc
and the details of this can be a little bit complicated depend on your locale
but the basic idea is this that know your customer rules require certain
kinds of businesses that handle money – first of all identify and authenticate
who their clients are – know who these people are and to get some kind of
authentication that they really are who they claim they are and that those
claimed identities correspond to some kind of identity in the real world so a
person just can’t can’t just walk in and say I’m John Smith from 1 to 3 Main
Street in any town USA they have to actually give an identity and have that
be checked in order to engage in certain kinds of business
second after identifying and authenticating the clients the the
business may be required to evaluate how risky it is what the risk is with
respect to a certain client engaging in underground activities and this will be
based on how the client behaves how how long-standing their business
relationship is with the company how well-known they are in the community and
various other kinds of factors but know your customer rules generally would
require some kind of risk analysis with respect to individual clients and would
respect and would require a company that’s covered by kyc to treat clients
whose activities seem riskier with more attention and then finally third
typically there’s a requirement to watch for anomalous behavior to watch for
behavior that seems to be indicative of criminal activity or of money laundering
or of other sorts of things tying that together with the with the risk
evaluation to understand what’s the level of risk with respect to a
particular customer and how to what to watch for with respect to a particular
customer kyc will often ask a company to cut off business with a client who looks
too dodgy or who’s unable to authenticate themselves or them their
activities sufficiently for the rule as I said this gets complicated but this is
the basic outline there are mandatory reporting requirements in the United
States that are worth talking about for example companies in a broad range
of sectors have to report currency transactions that are over ten thousand
dollars they have to file something called a currency transaction report to
say what is the transaction who is the who is the other party to the
transaction and there’s some requirement to authenticate who they are this has to
be reported to the government and that goes into databases and then might be
analyzed to look for patterns of behavior that are indicative of money
laundering companies are also required to watch for clients who are engaged in
what’s called structuring that is in structuring transactions to avoid
reporting for example if someone engages in a series of transactions that are
nine thousand dollars in value as a way to get around the ten thousand dollar
transaction reporting rule that amounts to structuring it looks like an attempt
to evade the reporting requirements and a company that sees structuring is
required to report it and they’re required to watch for it and so that
requires filing of a suspicious activity report again filing that with with the
US government and that again goes into a database might lead to investigation of
the client the requirements here differ by country I am by no means trying to
give you legal advice about whether you need this or what you have to do I just
want to give an idea of what kind of requirements are imposed by but by anti
money laundering rules but I do want everyone to note the
government the US government and other governments take anti money laundering
rules very very seriously this is not the kind of rule you can just blow off
and deal with it if you get a complaint from the government later Bitcoin
businesses have been shut down they’ve been shut down temporarily they’ve been
shut down permanently business people have been arrested people have gone to
jail for not following these rules this is one of those areas where government
will enforce the law vigorously and where if you’re interested in going into
any kind of a business that is handling certainly large transactions or for sure
currency or fiat currency value in in quantity you had better be talking to a
lawyer who understands these rules this is an area in which government
absolutely does regulate Bitcoin and has ever since they noticed that Bitcoin was
large enough to to pose a risk of money laundering in section 7.7 I want to talk about the
r-word regulation now regulation often gets a bad name and it especially has a
bad name among the kind of people who tend to like Bitcoin regulation is some
bureaucrat who doesn’t know my business or what I’m trying to do coming in and
messing things up it’s a burden it’s stupid it’s pointless etc now those
arguments often are correct but I want to talk in a little more detail in this
section about reasons why regulation might sometimes be justified the
argument against regulation is pretty common it’s pretty well understood I’m
not going to repeat it here and so you’ll hear me talking mostly about what
reasons why regulation might be a good idea because that argument is not as
well understood and I want to lay it out here a little bit but just to be clear
the fact that I’m spending most of this section talking about why regulation
might be good shouldn’t be read as a endorsement that of widespread
regulation or is a feeling that regulation is the greatest thing ever
it’s simply that I want to bring a little bit more balance to the
discussion in a community where regulation is often considered as always
bad or just stupid by nature all right so the bottom line argument in favor of
regulation is just this that when markets fail and produce outcomes that
are bad and often agreed to be bad by pretty much everyone in the market then
regulation can step in and try to address the failure so the argument for
regulation when there is an argument starts with the idea that markets don’t
always give you the result that that you’d like so let me give you an example
of a way in which the market can fail and this is a classic example called the
lemons market which originated in a discussion about used cars so well let’s
talk about a market in in concept a market for widgets some kind of good
that we want to sell and let’s say that widgets can be either low quality
widgets or high quality widgets a high quality widget costs a little bit more
to manufacture than a low quality widget but it’s much much better for the
consumer who buys it consumers like high quality widgets much
much better now an efficient market a market that’s operating well would
therefore deliver mostly high quality or I’ll right at HQ widgets to consumers
why because the price of the high quality widget will be just a little bit
higher but the widget will be so much better that almost everyone will buy the
high quality widgets and so this is what you would hope that a market would
provide and under certain assumptions a market will provide that but let’s
suppose that customers for some reason can’t tell a high quality widget apart
from a low quality widget what if they really can’t tell which widgets are good
and which widgets are not think of a used car from the classic example you’re
looking into used-car sitting on the lot well gee it looks pretty good but you
can’t really tell if it’s going to break down tomorrow or if it’s going to run
for a long time the dealer probably knows if it’s a lemon but you as the
customer can’t tell the difference so you can’t tell high quality from low
quality so if you think about what happens where incentives drive people in
this kind of lemons market you can see that as a consumer you’re not willing to
pay extra for a high-quality widget why because you can’t tell the difference
and so if the used-car dealer says sure this one is perfect it’s not a lemon at
all go ahead and buy it it’s only an extra hundred dollars well it might be
that you’d happily pay a hundred dollars for a higher quality car but you don’t
really know whether that car whether that widget really is high quality so if
you really can’t tell which widgets are high quality versus low quality then
you’re not willing to pay extra for for the high quality one and if consumers
are not willing to pay extra for a high quality one then producers can’t make
any extra money by selling a high quality widget in fact they lose money
by selling a high quality widget because they don’t get any price premium they’d
be better off buying the slightly cheaper low-quality widget and selling
it and so the result is if consumers really can’t tell with which widgets are
high quality in which are low quality the market gets stuck in an equilibrium
where only low quality widgets are produced and and consumers are
relatively unhappy with them now this outcome is worse for everybody then a
properly functioning market would be it’s worse for buyers because they have
to make do with low-quality widgets when in a more efficient market they could
have bought a widget that was much much better for only a little bit higher
price it’s also worse for producers because because the widgets that are on
the market are all lousy consumers don’t buy very many widgets the widget market
is relatively small and so there’s less money to be made selling widgets than
there would be in a healthy market and so both consumers and producers are
worse off you know in a world where consumers can’t tell the difference
between high quality and low quality widgets that’s a market failure it’s
called asymmetric information failure and the result is a market that
sometimes called the lemons market ok so how can we fix this well there are some
market-based approaches that try to fix a lemons market the first market-based
approach relies on the sellers reputation the idea is that if a seller
tells the truth to consumers about wist which widgets are high quality in which
are low quality then the seller might get a reputation for telling the truth
and once they have that reputation then maybe they can sell high quality widgets
for a higher price because consumers will believe them and therefore the
market can operate more efficiently the problem with this is yes this sometimes
works but sometimes it doesn’t depending on the precise assumptions you make
about the market but if you think about it this is not going to work as well as
a market where consumers can really tell the difference because for one thing it
takes a while for a producer to build up a good reputation in order to build up a
good reputation they have to sell high quality widgets at low prices for a
while until consumers learn that that seller is telling the truth and that
makes it harder for an honest seller to get into the market the other problem
that can occur is that that seller even if they’ve been honest up to now if for
one reason or another their sales are shrinking or they think they want to get
out of the market their incentive is to massively cheat people all at once and
then leave the market rather than continuing to be honest and then leave
the market and so in the beginning of a sellers presence in the market and at
the end of a sellers presence in the market reputation tends not to
this sort of reputation based approach also tends not to work in businesses
where where consumers don’t do repeat business with the same entity or where
the product category is very new and so there hasn’t been enough time for
sellers to build up a reputation like say in a high-tech market like say
Bitcoin exchanges the other market-based approaches warranties that’s the idea
that a seller could provide a warranty to a buyer that says that if this thing
turns out to be low quality if it doesn’t work well for you I’ll give you
a new one I’ll pay you I’ll pay you back or something like that and that can work
up to a point as well but there’s also a problem there that this warranty is just
another kind of product which could also come in high quality and low quality
versions a low quality warranty is one where the seller doesn’t really come
through when you come back with a broken product they don’t really replace it
they don’t really give you their your money they make you jump through all
kinds of Hoops and so this is not a panacea either so if you have a lemons
market which has developed and if these market based approaches don’t work for
the particular market that you’re dealing with then regulation might be
able to to help and there are three ways in which regulation might be able to
help address a lemons market first regulation could require disclosure they
could require say that all widgets be labeled as high quality or low quality
and then have penalties on the firm’s for lying that gives consumers the
information that they were missing a second approach to regulation is to have
quality standards is to require that no widget can be sold unless it meets some
standard of quality testing and have that standard set so that only high
quality widgets can pass the test that way you have a market that’s all one
kind of widget but at least its high quality widgets assuming that the
regulation works as intended or you could have required warranties so that
all sellers have to issue warranties and then require then enforce the the
operation of those warranties so that sellers are really held to the promises
that they make so all of these are forms of regulation which obviously could fail
which might not work as intended which might be Mis written or Mis
applied they might be burdensome on sellers and so on but there’s at least
the possibility that regulation of this type might help to address the market
failure due to a lemons market so this is one example of how regulation can be
an efficient thing to do if it’s done well when there’s a certain kind of
problem namely the ability the inability of consumers to tell the difference
between a high quality and a low quality product offering and so people who talk
about Bitcoin exchanges for example and argue for regulation of them sometimes
point to them as an example of lemons market another example of a market
failure or a place where the market doesn’t operate the way that that you
would like it to in order to serve in order to serve consumers is price fixing
price fixing simply is a case where different people are selling a product
in a market and they just agree with each other that we’re going to raise
prices or we’re not going to lower prices related to price fixing is an
agreement not to compete where companies that would otherwise go into competition
with each other agree not to compete with each other for example if there
were two bakeries in town they might agree that one of them will only sell
muffins and the other will only sell bagels and that way there’s less
competition between them than there would be if they both sold muffins and
bagels as a result of the reduced competition presumably prices go up and
the merchants are able to to foil the operation of the market because after
all the reason that the market protects consumers well in its normal operation
is through the vehicle of competition that sellers have to compete in order to
offer the best goods at the best price to consumers and if they don’t compete
in that way then they won’t get business so an agreement to fix prices or an
agreement not to compete circumvents that competition and prevents
competition for operating in the market so another way that the market can fail
is when people take steps that prevent competition these these kinds of
agreements either an agreement to raise prices or an agreement not to compete
these are illegal in most jurisdictions this is part of antitrust law or
competition law in general antitrust or competition law is aimed to prevent
cases where the market gets stuck in in a situation where there isn’t
enough competition to protect consumers or cases where somebody acts in a
deliberate way to try to prevent someone from competing with them acting in a way
other than simply offering good products at good prices antitrust law is very
complicated I’ve given you sort of a sketch of it
but this is another instance where we know that there are failures that can
occur and where the law will step in to prevent in the easy cases things like
price-fixing or agreement not to compete but in more difficult cases even some
attempts to reduce competition in the market through say mergers or other
kinds of activities another example where regulation might be helpful in Section 7.8 I want to talk about New
York State’s bitlicense proposal I’ve talked so far about regulation in
general I’ve talked about a few forms of regulation I’ve talked in general about
why regulation might be justified in some cases why it might make good
economic sense but now I want to talk about a specific effort by a specific
state to introduce specific regulation of Bitcoin well dig a little bit into
what the bitlicense proposal would do this is an issue that is current as of
the filming of this lecture that’ll be current as of the release of this
lecture and and it gives you a snapshot of the kinds of things that regulators
are doing okay so the bitlicense proposal was issued in
July of 2014 down at the bottom of the slide here there’s a URL where you can
go and read it if you like here’s the heading on it the New York State
Department of Financial Services that’s the part of the state of New York that
regulates the financial industry and of course the state of New York has the
world’s largest center of the financial industry in it and so it’s a part of the
New York state government that is is used to dealing with relatively large
institutions it’s a proposed set of codes rules and regulations that has to
do with virtual currencies so this is a new regulatory proposal from the state
of New York and this is there’s a lot of text here but let’s walk through it it’s
worth talking about what the regulation fundamentally says is that you would
need to get something called a bit license from the New York Department of
Financial Services if you wanted to do any of the things listed on this slide
if you wanted to engage in virtual currency business activity that means
any one of the following things if you’re dealing with New York or a New
York resident so if you’re doing any one of these five things and any of your
customers are in New York and perhaps consult your lawyer if you have business
partners or other aspects of your business in New York relating to this
you need a bit license the first thing is receiving virtual currency for
transmission or transmitting virtual currency second securing storing holding
or maintaining custody or control of virtual currency
behalf of others this might cover something like wallet services or other
sorts of things or perhaps exchanges buying and selling
virtual currency as a customer business you can apparently buy and sell it for
yourself but doing it as a customer business you need a bit licensed
performing retail conversion services including conversion or exchange of fiat
currency or other value into virtual currency conversion or exchange of
virtual currency into fiat currency or the conversion or exchange of one form
of virtual currency into another form of virtual currency so if you’re trading
virtual currency for fiat currency or virtual currency for virtual currency
and finally controlling administering or issuing a virtual currency if you’re
doing any one of those things in the state of New York or or operating with
the New York State resident then you need to get a bit license from the New
York Department of Financial Services if this regulation goes into effect you
would have to apply for a license to apply for a license there’s detailed
language in the proposed regulation which you can read but roughly speaking
you have to provide information on the ownership of your enterprise on your
finances and insurance on your business plan generally to allow the Department
of Financial Services to know who you are how well back – you are where your
money comes from and what you’re planning to do you have to pay an
application fee you would have to pay a licensee would have to do the following
things once you had a license you’d have to provide updated
information to the Department of Financial Services about the things I
talked about before ownership finances insurance and so on
you have to provide periodic financial statements so they can keep track of how
you’re doing financially you’d be required to maintain a financial reserve
the amount of that would be set by the division of Department of Financial
Services based on various factors about your business what’s the nature of your
business how well financed it is who it is how big it is et cetera etc the DFS
would be able to set rules about that there are detailed rules about things
like how do you would keep custody of consumer assets there anti-money
laundering rules which might or might not go beyond what’s already required
there are rules related to cybersecurity having a cybersecurity plan and
penetration testing and so on there rules about disaster
recovery you have to have a disaster recovery plan and that meets various
certain criteria there are rules about record-keeping you have to keep records
and make them available to the DFS on certain circumstances for some length of
time about certain kinds of activities you’d have to designate a compliance
officer someone within your company your organization who is in charge of
compliance and has responsibility and authority to make compliance happen you
have to have written policies about compliance and about certain kinds of
things that are satisfactory to the NY DFS and there’s a requirement that you
disclose risks to consumers so that consumers understand what are the risks
of doing business with you the exact rules on that are not exactly clear at
this point but you might imagine something like like these sort of
prospectus that comes along with a mutual fund or with or with a publicly
traded stock perhaps that’s what the DFS has in mind so these are fairly
substantial requirements for companies that that have a bit license and anyone
with a bit license would be required to do all this stuff the state of the
bitlicense proposal right now the situation that it’s in as of this
filming which is August 2014 is it has been proposed by the New York Department
of Financial Services it’s been formally proposed you can go read the document
the the proposal at the URL that was on the earlier slide the DFS has solicited
public comments they have asked members of the public to write in and give them
comments about the proposal do you like it do you not like it what’s good what’s
bad what do you propose changed and so on and lots and lots of entities are
gearing up to send comments to the NY DFS after all the comments are in in
accordance with the normal regulatory process the NY DFS will decide what to
do they’ll decide whether to withdraw the proposed regulation whether to issue
it in modified form whether to issue it in exactly the original form and along
with that decision they’ll issue some kind of a document that gives the
rationale for deciding what they decided to do now various parties have asked the
NY DFS to grant an extension on the original date for for
comments and NY DFS has signaled they haven’t definitively stated but it seems
pretty clear at this point that they’re going to grant an extension because of
that I don’t currently know the date I can’t tell you the date by which you
have to comment but you can go and look at the NY DFS website to get to get the
current status if you’re an interested party by it by all means I would
encourage you to comment I would encourage you to get together with
others and comment together and I would advise you to make comments which are
thoughtful and constructive and give the NY DFS reasoned arguments comments of
the sort of this is the coolest thing ever or you guys are total idiots you
don’t know what you’re doing might make you feel good but they’re not going to
affect what the NY DFS does my prediction at the end of the day is that
some kind of bit license is likely to be put in place by the NY DFS maybe maybe
it will be reduced from the scope or changed from what was originally
proposed but some kind of bit license that caught some kind of licensing
regime which calls itself bit license I predict will be put in place by the New
York Department of Financial Services if this happens or if New York doesn’t do
it and somebody else does something similar the result will be that if you
want to do business in any of the business sectors that we talked about in
the previous slide you would need a bit license from the state of New York in
order to operate and if this goes into effect this would really be an a major
step in the history of Bitcoin you would have a situation where not only NY DFS
but perhaps other jurisdictions would start to step in and regulate and you
start to see Bitcoin businesses get closer to the model of regulated
financial institutions that traditional financial institutions have been in this
would be a step that really is in some ways contrary to some of the initial
cypherpunk or cyber libertarian ideas about what bitcoin was supposed to be
and but in a very real sense I think it’s inevitable that as soon as Bitcoin
became really valuable that Bitcoin businesses became big businesses that
government got interested it was more or less inevitable that regulation would
ensue because Bitcoin businesses touch people because they they touch the fiat
currency economy because bitcoin is big enough to matter government is paying
attention and bitcoin is getting regulated this on the one hand
represents a retreat from what the original advocates of Bitcoin had in
mind in another way it represents the Bitcoin ecosystem growing up and
integrating into the into the the regular economy which is much more
regulated regardless of whether you like it or don’t like it this is a thing
that’s starting to happen and if you’re interested in starting a business in
this area you need to be paying attention to this trend will this be a
success will it be good or bad well I think there’s one barometer we can look
to to understand whether a regulation like the bitlicense
is actually successful from a public policy standpoint at improving the
quality of Bitcoin businesses and that’s this if something like bitlicense goes
into effect and if companies start advertising to customers outside New
York that we have a bit license therefore you can trust us and if that
argument that we’re regulated therefore you can trust us is convincing to
consumers if consumers see regulation as a positive in choosing a company then I
think the regulation will be working in the way that its advocates wanted it to
do whether that will happen and how this affects the future of Bitcoin is
something that we’ll have to wait and see you

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