Can Bitcoin outrun the regulators?
Bitcoin is a digital currency, the first decentralized digital currency, through a public ledger that provides some level of anonymity for users. Bitcoins are “mined” or released to people whose computers crack complex math problems. There are currently 12 million bitcoins in circulation. There will eventually be a total of 21 million bitcoins when they are fully mined. The smallest current unit is known as “satoshi” in honor of the creator of Bitcoin, and is 100 millionths of a bitcoin.
Digital currencies are disruptive and make powerful enemies. Paul Krugman recently quoted Charlie Stross, who said that these digital currencies look like they were “designed as a weapon intended to damage central banking and money-issuing banks.” Perhaps. But maybe that’s a feature and not a bug.
To be clear, Bitcoin is not the first digital currency, not even close. We have Digicash, ecash, Yodelbank, E-bullion, ePassport, Liberty Reserve, Liberty Dollar and E-Gold among others. E-Gold and Liberty Dollar were essentially shut down by the government.
Liberty Dollar was created by Bernard Von NotHause, who was convicted in 2011 of “making, possessing and selling his own currency.” His currency was silver backed. Anne Tompkins, a prosecuting attorney during his trial in North Carolina, described the Liberty Dollar as a “unique form of domestic terrorism” trying “to undermine the legitimate currency of this country.” E-Gold was backed by gold and was shut down for money laundering. Money laundering and similar statutes are easier to violate than you may imagine.
Here’s what makes Bitcoin more durable. E-Gold eventually reached a user base of more than 5 million. While it used a sophisticated encryption technique for handling transactions, it was a centralized currency. When the U.S. government accused E-Gold and its founder of money laundering and other crimes, E-Gold was soon finished. But unlike E-Gold, Bitcoin is decentralized. There is no one person to arrest. It is a concept, an idea, not a person, and “there is nothing more powerful than an idea whose time has come.”
Because it’s a digital currency, it’s in many ways completely detached from the traditional state-based monetary instrument system; and this is precisely why it is so feared. Sen. Joe Manchin, D-W.Va., has called for Bitcoin to be banned:
The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary [sic] of its use…Before the [United States] gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly,and prohibit this dangerous currency from harming hard-working Americans.
There have been hearings on Bitcoin in Congress. In New York, there is a zealous prosecutor going after Bitcoin operators. Other countries like China, Thailand, and Russia have already essentially banned Bitcoin. These developments have further emboldened Manchin, who said he is “most concerned that as Bitcoin is inevitably banned in other countries, Americans will be left holding the bag on a valueless currency.”
It is interesting that a U.S. senator wants us to follow the lead of Russia and China on questions of what should be regulated.
Rep. Jared Polis, D-Colo., an internet entrepreneur and one of the most tech-savvy members of Congress, has a witty and satirical response to the Bitcoin naysayers. Their arguments actually mean that we should ban the U.S. dollar, Polis writes:
A physical dollar bill is a printed version of a dollar note issued by the Federal Reserve and backed by the ephemeral “full faith and credit” of the United States. Dollar bills have gained notoriety in relation to illegal transactions; suitcases full of dollars used for illegal transactions were recently featured in popular movies such as American Hustle and Dallas Buyers Club, as well as the gangster classic, Scarface, among others. Dollar bills are present in nearly all major drug busts in the United States and many abroad. According to the U.S. Department of Justice study, “Crime in the United States,” more than $1 billion in cash was stolen in 2012, of which less than 3 percent was recovered. The United States’ dollar was present by the truck load in Saddam Hussein’s compound, by the carload when Noriega was arrested for drug trafficking and by the suitcase full in the Watergate case.
Unlike digital currencies — which are carbon neutral, allowing us to breathe cleaner air — each dollar bill is manufactured from virgin materials like cotton and linen, which go through extensive treatment and processing. Last year, the Federal Reserve had to destroy $3 billion worth of $100 bills after a “printing error.” Certainly, this cannot be the greenest currency.
Printed pieces of paper can fit in a person’s pocket and can be given to another person without any government oversight. Dollar bills are not only a store of value, but also a method for transferring that value. This also means that dollar bills allow for anonymous and irreversible transactions.
From a historical perspective, the operative question may be whether Bitcoin can receive broad-scale adoption before regulators, politicians or courts try to ban its existence.
In 1975, the Sony Betamax went on sale domestically at a cost of $6,093 in today’s dollars. Almost immediately, in 1977, Japanese-based Sony was sued by the content industry, seeking an injunction on the basis of copyright infringement (allowing consumers to record live television). At the same time, the MPAA tried to lobby Congress to ban the VCR through legislation, and almost succeeded.
This is a quotation from then-MPAA President Jack Valenti who testified before Congress:
We are going to bleed and hemorrhage, unless this Congress at least protects [our industry against the VCR]…I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman alone.
Sony, meanwhile, lost their case at the 9th Circuit, and the VCR was to be banned across the country. Sony then received certiorari and went to the Supreme Court. The justices met internally after oral arguments, and decided among themselves to uphold the 9th Circuit ruling. The VCR was to be banned. Then, at the last minute, the Supreme Court decided to allow a re-argument of the case, during which time one critical justice flipped their vote, and the VCR was upheld by one vote at the Supreme Court.
Given the Supreme Court action, Congress was waiting to act. But by the time Sony had won in 1984, the VCR had become inevitable. The extremely narrow ruling got widespread support, and Sony sold 2.3 million units worldwide. With this level of popularity even one of the most powerful of special interest groups, the MPAA, couldn’t ban it.
But ultimately, everyone came out better as a result. Just two years after the Supreme Court ruling, the movie studios made more money from VCR video sales than they did from movie theaters. There is a lot to be learned from the Betamax example that can be applied to disruptive new technologies like Bitcoin.
Bitcoin is very novel to a lot of people. To some, it seems like a complete game-changer. Roger Ver, an angel investor, claimed that “Bitcoin is the most important invention in the history of the world since the Internet.” To others, like Paul Krugman and Alan Greenspan, it seems ridiculous and silly. Krugman even called Bitcoin “evil.” The truth is probably somewhere in the middle.
Bitcoin is a very new innovation and we have yet to see its full potential. Most of the scare talk surrounding it is either incorrect, or based upon current technology, rather than what is actually possible in the future. Broad-scale adoption is the best insurance against regulators killing Bitcoin off before we find out what this incredible technology, and future iterations of decentralized currencies, can do.