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Understanding

Bitcoin

This is a private briefing document on the subject of Bitcoin. The aim of this document is to help dispel the many myths surrounding this new technology, and sketch a true picture of its nature and potential in the mind of the reader. This document should be read in conjunction with first hand experience of using Bitcoin. If you have an iPhone, you should download the free Blockchain.info app from the Apple App Store as your first experience. After you have tried Bitcoin for yourself, you will have a good idea of the mechanics involved in sending and receiving it on your device. Without this experience, it will be difficult for the reader to grasp the concepts from a first hand and personal point of view. Bitcoin represents a revolutionary way to conduct business internationally. It is a method of accounting and also a way to enforce contracts. It is crucial that during the early development period of this new technology, entrepreneurs and software developers are free to experiment with different business models without interference. If a mistaken first impression of what this unprecedented technology can do is used as a basis of poorly thought out legislation, unintended negative consequences are sure to result for the country that chooses to legislate. What this means is laid out plainly in the briefing document. Several jurisdictions have already determined that Bitcoin is not money, and that it therefore should not be regulated. I urge you to carefully read this briefing and to familiarize yourself with what Bitcoin actually is, rather than rely on reports in the press, and indeed, to use it yourself on an experimental basis between you and your colleagues before coming to a conclusion. It is never wise to react to a new technology out of fear. The only sensible approach is to fully understand a technology before concluding whether or not it is harmful, and in the vast majority of cases, new technology is of a benefit to society.

Alexander Fernandez irdial@irdial.com

Bitcoin is Not a Threat, it is a Boon
by Alexander Fernandez The Financial Times has published an astonishingly blinkered and short-sighted article, where Bitcoin is mischaracterised as a threat, instead of the greatest business opportunity of the century. The fact of the matter is that the country that puts a 150 year moratorium on all Bitcoin regulation and ‘supervision’ will reap all the Bitcoin entrepreneurs in the world, who will run to incorporate, headquarter and operate in that territory. This event will spark a Hong Kong style boom without precedent in size, and of course, all the businesses located in that territory will be paying corporation tax on the profits gleaned by providing services to Bitcoin users world-wide. It seems however, that the socialists and Keynesians at the FT are squarely anti entrepreneur, anti progress and computer illiterate to boot. Lets take this article to pieces, starting with the sensationalist and irrational title: Taxmen, police and spies look at bitcoin threat By Jane Wild This is an entirely misleading title. Unless you believe that profit and human progress are threats. The advantages Bitcoin will bring to commerce world-wide are easy for even a child to see. Mobile phones are everywhere. MPESA is absolutely huge in Kenya. It doesn’t take much to understand that Bitcoin is MPESA for the entire world, only orders of magnitude bigger and better because it can never be gamed or corrupted. The country that ends up being the “Home of Bitcoin” will have trillions of dollars worth of transactions flowing through it, and will skim taxes off of the top of the activity. Anything that hinders this is going to cause the entrepreneurs 1 building these fledgling systems to go to other jurisdictions. Switzerland, the UK, Canda and all free countries must shun the voices that call for regulation and exchanges as the legalized model, because exchanges are not the only possible business model and regulation will drive entrepreneurs away. Bitcoin has come onto the radar of the UK government, with officials gathering in London on Monday to discuss the security threats and tax concerns posed by the digital currency. This is a very bad sign. It is a bad sign because no one really knows what Bitcoin is or what its potential is. No one knows the perfect Bitcoin business model; this is still being actively discovered. No one can even define Bitcoin; people are still arguing over its true nature. It is therefore highly unlikely that anyone is able to predict the future of what Bitcoin bushinesses will look like. Its too early to legislate, if legislation is needed at all, and of course, we hold that it is not. About 50 civil servants from HM Revenue and Customs, the Serious Organised Crime Agency, Home Office and GCHQ – the intelligence listening service – held a one-day conference which examined how bitcoin works and how criminals might seek to exploit the electronic cash system, which is currently unregulated by any financial authority. Its interesting that the only thing that is being considered is how to disrupt entrepreneurs; that is of course, the implication of these sorts of people gathering to discuss Bitcoin. They were not there to discuss what they are not going to do, after all.

Imagine such a meeting taking place in 1995, before the internet and the web exploded and increased the flow of goods and knowledge beyond anyone’s imagination. Imagine that these same people met and decided that an unregulated internet was “not acceptable” and that legislation needed to be tabled to regulate who could publish on the internet, who could be an email provider, etc etc. It would have killed the internet in whatever country that was foolish enough to do it, causing an unimaginable amount of permanent damage. This is what will happen to the emerging Bitcoin economy if anything resembling regulation touches Bitcoin. The businesses trying to start in any jurisdiction, that can incorporate and operate anywhere in the world, will simply do so in a place other than the countries that enact short-sighted regulation on Bitcoin. The Bitcoin will flow around this damage, and the those countries will not profit, as the money and talent flees to a free jurisdiction. This is undesirable. The meeting, entitled The Future of Money, focused on the implications that widespread adoption of the currency might have. As bitcoin users are anonymous, authorities worry that it could be used for purposes such as money laundering, and that transactions between individuals fall outside boundaries of tax collection. Rather than focus on the majority use case that is inevitable with Bitcoin, these ill-informed and well meaning people are being entirely mislead. Once Bitcoin is flowing between devices, it will be impossible to track, and moving very quickly. Bitcoin will suck up fiat currency world-wide. The jurisdiction that allows exit and entry points to operate in it will make massive amounts of revenue, and the Bitcoin will simply flow through the countries where it is either impossible or unfavourable to operate. It is important to understand what Bitcoin is, not in the monetary sense, but in the data sense. Bitcoin is data. It can flow wherever it is pushed and pulled. It cannot be stopped, any more than Bittorrent can be stopped. Its users will be everywhere, all at once, all the time, 2

always on. Will it be used for unethical purposes? Yes of course; but these will be very rare edge cases, as all crime is an edge case. The difference here is that we are talking about pure information, that is very fluid; as fluid as liquid helium near absolute zero. It flows without friction, up the sides of the container it sits in, against gravity. It cannot be stopped; but it can be tapped for revenue. Understanding data and how the world has changed will prevent forward thinking countries from being totally sidelined. No amount of building projects (“Silicon Roundabout” in the UK for example) or smooth talk will convince entrepreneurs to build their companies in a jurisdiction. Anyone thinking about incorporating in the UK (or Switzerland now that they appear to be looking at Bitcoin from the completely wrong angle) to start a Bitcoin service now has cold feet. If the government decides to act with its Luddite hat on, there will be little point in starting anything in countries where the legislature wants to regulate Bitcoin, and those that have, will simply run a shell script to move their businesses to servers in free countries. It will take less than an hour to move operations to any jurisdiction anywhere in the world, and we need only look to The Pirate Bay to see how quickly a high traffic website can move from one place to another. The Pirate bay is an operation under extraordinarily heavy attack; its operators are scattered or in gaol, its servers constantly being shut down. They do not make a profit and pay no corporation tax; a website that is not doing any infringing or harm, and that is making a profit and paying corporation tax in large amounts, like MTGOX, should and will be very welcome in many jurisdictions, who will make special rules to accommodate them. Britain and Switzerland must not go down the road of the Luddite and the anti-technology fanatic. There is nothing to gain from doing it. The business will go elsewhere and the populations in every country will still be using Bitcoin by the hundreds of millions. The Revenue said that its attendance at the conference had

been to further its understanding of “current tax-related issues” and that it was monitoring the development of the bitcoin market. “The tax system already deals with transactions in currencies other than sterling,” the department said. “Any such transaction will be potentially taxable.” Any company incorporated in a jurisdiction is subject to tax on its profits. A Bitcoin company operating in the UK, Switzerland or Canada will be making a profit and submitting tax returns every year. This is not an issue different to the operation of any business that currently operates in a democracy, and Bitcoin should not be the focus of any kind of scrutiny, since it is just another kind of business, like selling soft ice cream. Also under consideration was the idea of creating a regulated exchange, which would be the world’s first. Such an entity would go some way to addressing concerns about criminality by requiring users to provide proof of identity. An unregulated exchange was set up in London in 2011 but closed a year later after its bank account was shut down. This just demonstrates the near horizon thinking of the people who attended this conference. Bitcoin exchanges are not the only business model that can be built on this new technology. For example, there is a new business, Bitspend (not operating from the EU) that allows you to buy anything in the world with Bitcoin. You select what goods you want, inform the website of your choice, pay them Bitcoin to the amount of the purchase, plus their fee, and they purchase the goods for you and have them dispatched to you directly from the seller. They don’t even have to handle the goods; all they are doing is making purchases on other people’s behalf. This business has nothing to do with Bitcoin Exchanges. It is a pure service that uses Bitcoin as a money transport. 3

A business like Bitspend could operate in any jurisdiction, since it is buying goods over the internet. They are based in the USA, and as they grow, their software will become more robust and reliable, and their customer base will grow. New business ideas and opportunities will come to them first. Anyone anywhere can use this service transparently over the World Wide Web; it is a perfect example of Bitcoin flowing through a jurisdiction without ever touching an incorporated entity in it. The question then is obvious; why should this business leave the USA and incorporate in the UK or Switzerland? What advantage is there for them to do so? What inducements can be put on the table to cause Bitspend to move to London or Geneva so that its profits are taxable in those countries? These are the correct questions that should be asked; Bitcoin should not be mischaracterised as a threat, but as an unprecedented opportunity, and something that should be used to attract entrepreneurs and visionaries. Many more Bitcoin companies are being planned and developed right now in a myriad number of different models and forms. Conferences are being held in Romania and California. States that make the wrong noises about potential regulation and their misunderstanding of what Bitcoin is are going to be left out of this important revolution if the wrong noises are made and disseminated. The web was born in the mind of a man from the UK and developed in Switzerland. The centre of the web’s entrepreneurial activity is all in California. A question immediately springs to mind, “Why is this the case?” Why is it that the British invent all the great things and other people in other countries capitalize on them? Why is Facebook everywhere in the world, and Bebo, early star in social networking, filing for bankruptcy protection? Britain has the brains, it has the talent. Its young people have the entrepreneurial spark. Bitcoin is going to be the biggest thing since the internet itself. If Britain drives entrepreneurs in this sector away, it will not get a second chance. The Swiss have a long history of secure banking; it would be a tragedy if this

convergence of technologies, the internet, cryptography and banking should be missed by that great country. The Future of Money conference, which included presentations on how the cryptocurrency works, was organised by the government’s Foresight Horizon Scanning Centre, an arm of the Department for Business, Innovation and Skills which develops innovative, longterm policy. Although unofficial meetings have been held previously, this was the first official meeting of civil servants held to discuss bitcoin. No government ministers were present. Bitcoin and its growing ecosystem was created by developers. It did not need the State to help it, design it or get it going. Like the internet, it will grow at its own amazing pace if left to do so. Anything that touches it will distort its natural geometric growth. What must be understood here is that the threats presented by Bitcoin are absolutely minuscule, molecular even, when compared to the planetary scale big picture; it is exactly the same as the internet itself. The vast majority of internet usage is absolutely harmless, ethical, beneficial and normal, and the same will be true of Bitcoin. Policy, if any is to be made at all, and it should not, must be driven only by the facts and economics. If not, Bitcoin will see it as damage and will route around it. The Bitcoin will flow through and out of the states that try and regulate it, rather than coming in and terminating in them; and that is what, surely, every government must want – for Bitcoin to begin and end in their territory, so that the businesses that provide the services can benefit their economies. And what an aid that will be. Trillions of dollars and Pounds in Bitcoin on a weekly basis, flowing through local nodes that are all as trusted as eBay and built to the highest standards, just like Facebook, but without any regulation, just like Facebook.

This is the ideal situation; The Facebook of Bitcoin incorporated in in a free country showing the world that your capital is the centre of the emergent Bitcoin economy. “If you want to be where the Bitcoin action is, we are your Go To destination”. This is what we want to read! Michael Parsons, a banking management consultant and chartered accountant who presented at the event, said: “There were a lot of questions. Everyone was very receptive and keen to learn more.” GCHQ confirmed that it had sent staff to the conference in the interests of its role in helping to deliver cyber security. Bitcoin is not a “cyber security issue.” Its very important to characterise these technologies correctly. At the beginning of the Internet, I am sure that there are people alive now, who would characterise ISPs as “cyber security threats”. Of course, acting on any such mischaracterization would have fatally crippled the nascent ISP and web industry, and caused the country regulating to be an also ran in the internet stakes. As it happened, despite the telephone monopoly of BT in the UK, the ISP business in the Britain thrived and produced many wonderful spin-offs in terms of new businesses and skilled developers, many being of world importance. This should be the aim with Bitcoin also. Free countries should seek to nurture, by keeping an arms length from it, all Bitcoin related entrepreneurial activity. As we have seen with Hong Kong, once all the work is done, there will be a glistening jewel of activity to collect at the end of the exercise. Only a hands off policy can create such jewels, and in the case of software businesses, the jewel is quicksilver, that can flow very rapidly to the place where regulation is lowest. Business is mercury that always seeks its most efficient level. And let us remember; Bitcoin is hardly being used for anything at all at the moment. What everybody thinks it is and what it could be used for is pure speculation. A cautious, future 4

centric position is the best one to be taken, because either way, the Bitcoin is going to flow, and that flow cannot be stopped without stopping entire internet. Some people might say that websites can be blocked, which will stop people in the UK from getting Bitcoin from other jurisdictions They will cite the blocks on The Pirate Bay and Kickass Torrents as successful examples. This view is entirely incorrect. A small browser extension called Stealthy makes all ISP blocks moot. It is currently installed by 277,794 users, and it is sure to grow in its user base. This is but one of the very easy ways to completely circumvent ISP blocks on websites, and of course, once you get your Bitcoin on your mobile phone or laptop, it is a pure peer-to-peer system, that cannot be blocked at the ISP level. With the Stealthy plugin, all ISP blocks are completely defeated. That means it will be impossible to block any website in any jurisdiction selling Bitcoin. The normal reaction process of problem, reaction solution will not work in the twentyfirst century. A new model must be designed and implemented that utilizes these new tools so that everyone benefits. Bitcoin and the internet itself are entirely beneficial and should not be regulated, but should instead, be harnessed and their utility leveraged. Rather than having a meeting or hearings to discuss fallacious ideas and imaginary threats, discussion should take place to see how Bitcoin can reduce the cost of government. Imagine the following applications for Bitcoin. 1. Paying parking fees and fines. 2. Collecting taxes. In micro amounts. 3. Paying usage fees for all government
services. In micro amounts. 4. Reducing all money related fees on flows into and out of government, saving billions. 5. Disbursing benefits at a fraction of the current cost.

This is an opportunity for increased efficiency, transparency, speed and effectiveness in the way government collects and disburses money. This is the sort of thinking that should be on the table, not Luddite dreams of wrecking the internet. Civil servants will now prepare two reports for ministers on their conclusions: one public and one private. These reports, both the public and the private, cannot possibly present a complete picture. The Bitcoin business models are still being developed and iterated through. No one knows what the final, profitable and viral shape of Bitcoin businesses will be; the only thing that can be predicted is that there will be a final shape, and that the company that hits on it will be incorporated in some jurisdiction, and that it is in that jurisdiction that the money will flow. The question here is whether or not that country will be Britain, or Switzerland or Canada or some other free country. Articles like this, and any move by Her Majesty’s Government in the UK or the Swiss Conseil fédéral to control Bitcoin will cause Bitcoin to bloom elsewhere. Only a guaranteed, decades long moratorium on any interference in Bitcoin activity will attract entrepreneurs and investment in this once in a lifetime event. The FSA letter on Bitcoin sent to Intersango was an encouraging sign that Bitcoin was to be left to flourish in the UK. I will leave it to you to imagine the next MTGOX starting in your jurisdiction; there is simply no reason why such a company should not start in in a free country and grow to a size greater than MTGOX, as second and third generation Bitcoin business models begin to emerge. The question is will the business conditions exist to facilitate this emergence, or not?

These are just some the sorts of things that should be discussed at the government level, not how this baby should be killed before it is born.

5

Bitcoins are Baseball Cards
by Alexander Fernandez The responses to Bitcoin from different camps that encounter it have been fascinating to read. Bitcoin, like the Internet, is a mirror reflecting the philosophy of the person who is talking about it. One of the many interesting sets of thoughts swirling around Bitcoin is the idea that somehow, the State must be involved in Bitcoin, and there are people out there who are keen to try and shoehorn any legislation or rule that is out there to fit the Bitcoin case. Take a look at this: FinCEN Brings KYC Requirements To Bitcoin? The U.S. Department of the Treasury (“FinCEN”) issued a Final Rule making non-bank providers of pre-paid financial instruments subject to comprehensive Bank Secrecy Act (BSA) regulations similar to depository institutions. Why this particular rule, and not the first amendment of the constitution? Cryptography, it has been argued, correctly, is a form of speech that falls under the first amendment protections guaranteeing your right to write whatever you want. Bitcoin is made up of cryptographic signatures that can be printed out as text. This means that they are clearly protected speech and not financial instruments. Why should FinCEN have anything to do with Bitcoin at all? If FinCEN applies to Bitcoin, should it also not apply to Baseball cards? Baseball cards or comics or YuGiOh cards could be used as money because someone somewhere values them. They could be stored in a vault and then certificates issues against them that could be traded automatically at online exchanges. Does that mean that these certificates are money? Does that mean that FinCEN rules should apply to them? Of course it doesn’t. Applying FinCEN rules to Bitcoin, quite apart from the immorality of these regulations, is improper and ridiculous. The regulations affecting “stored value” now use the term “prepaid access” which is more broad and technology-neutral. Though FinCEN has not formally asserted that Bitcoin would fall under prepaid access regulations, earlier contact with the agency referred to bitcoins as a form of stored-value. If correct, then Bitcoin sales to U.S. customers would likely be a regulated activity per this Final Rule. The new regulations become effective on September 27, 2011, 60 days after its July 29, 2011 date of publication in the Federal Register. This is absurd. Who made contact with FinCEN, and where is the written record of this contact? Who did the contactor represent, and whoever she was, she did not represent ‘Bitcoin’ or any of its users, but was acting on her own. The details of that contact are something that would be interesting to read. To comply with the Final Rule, providers of prepaid access must register with FinCEN. Because bitcoins are decentralized, it is uncertain who a provider would be. Might every exchanger be considered a provider, for instance? This is all springing from a false assumption, that Bitcoin is a store of value that FinCEN has jurisdiction over. It is not. 6

Also under the Final Rule, sellers of prepaid access must collect personal information from customers, maintain transaction records, file suspicious activity reports and comply with other requirements of money service businesses (MSB). Last month FinCEN issued a ruling that was intended to clarify the definition of an MSB and includes the possibility that even businesses outside the U.S. conducting money transfer over the Internet could still be classified as U.S. MSBs. Additionally, the definition no longer requires that an MSB be a business — any individual who receives funds in exchange for a stored value might be considered an MSB. This is of course, absolutely absurd. Even if you concede that FinCEN has jurisdiction over U.S. companies and persons that deal in Bitcoin, to assert that people and companies outside the USA would need to register with FinCEN betrays a complete lack of understanding of the concept of jurisdiction. Its like those very sad webmasters in the UK who put up DMCA takedown notification pages on their sites. The DMCA does not apply anywhere in the world other than in the United States of America, and no webmaster, publisher, company or person is required to obey its strictures who is not based in or who does not have servers in the USA. If FinCEN actually tries to attack Bitcoin, and then tried to demand that entities outside the USA register with it, they should be met with this type of response. Though the ruling has exemptions to not impact the typical prepaid debit card found at grocery stores, for example, the exemptions would likely not apply to Bitcoin. These exemptions give a pass to providers and sellers when the following conditions are met: • The funds cannot be 7

transmitted internationally. • Funds cannot be transferred from one user to another. • No additional funds can be loaded except from a depository source (e.g., from a bank). There is no way to limit where bitcoins can be spent and the value is easily transferred from one person to another so Bitcoin will not likely be considered exempt from the AML regulations. Bitcoin, being a form of speech, should not be regulated by anyone. In the same way that you have protections against fraud (someone misrepresenting some reproduction Baseball cards to you as genuine, or someone stealing your YuGiOh cards) you have those same protections with Bitcoin. If someone defrauds you or breaches a contract they have with you, take them to court or arbitration. The state is not needed to control Bitcoin, police it, regulate it or have anything whatsoever to do with it. It has, like the internet, grown in popularity all by itself, will grow in utility just like the internet has by virtue of people adopting it and using it, and any interference in it is illegitimate on its face. Following these regulations will be a serious burden to sellers. For instance, compliance requirements as specified in an article by Perkins Coie LLP include: Identifying information includes the customer’s name, date of birth, address and identification number. Sellers must retain this information for five years from the date of sale. The records must be easily accessible and retrievable upon request from FinCEN, law enforcement or judicial order. The bigger impact of following AML may not necessarily be the cost of compliance but instead will be the

likely result — to effectively deanonymize Bitcoin. Following these regulations is unthinkable. Even if you accepted that these regulations were in some mysterious way beneficial, it would not and could not stop people from trading Bitcoins client to client, without identifying themselves to a parasitic third party. When Bitcoin usage reaches critical mass, there will be trillions of transactions happening on a daily basis. The people who serve as enter and exit points for it would be recording meaningless details that would serve no use whatsoever after the first purchase of Bitcoins. Bitcoin is not anonymous, despite what people think. There are services out there however, that can make it completely anonymous, and these will be improved and will multiply in number as the precise nature and level of anonymity in bitcoin becomes well understood by everyone. In the same way that The Anonymizer, Hide My Ass and the many proxy services that have come into being to cater for those who want anonymity, its a safe bet that the same entrepreneurs will apply their knowledge to the problem of making Bitcoin completely untraceable. As for the cost of compliance, only US companies will be forced to pass the expense of these ridiculous regulations on to their customers. It will mean that customers, who see high prices due to regulation as damage and route around it, will choose exchanges outside the USA, simply because it is cheaper. This will create another tier of middle man in America; businesses that will take your money and then interface with foreign exchanges for you, rather like the Dorian Grey services we have written about. Ironically, these new regulations may drive even faster Bitcoin adoption. These restrictions may cause many retailers to discontinue offering the prepaid cards that can be used at ATMs internationally. Since global redemption of stored value is a service that is legal to offer, is in huge demand and is something that Bitcoin does well — using digital currency might become 8

the more popular alternative. Unintended consequences! And of course, as Bitcoin passes critical mass, it will become absolutely impossible to clamp down on the international flow of ‘money’, since Bitcoin is a peer to peer system. When the global economy becomes dependent on Bitcoin, as it does now on SSL, no politician will dare raise a finger to control (damage) it, just as it is now completely unthinkable to regulate the cryptography behind SSL, as the French tried to do and which Dominic StraussKhan put pay to. A more immediate consequence will likely be the employment of lawyers to specifically consider how this Final Rule affects Bitcoin. http://www.bitcoinmoney.com/post/8 412471372/fincen-prepaid-accessfinal-rule Maybe so. Certainly there are people out there who are desperate to interface with the State when it comes to Bitcoin. One way or another, the State is not going to control Bitcoin. Either because it is not in their financial interest to do so because it is a worldwide phenomenon, or because they cannot possibly stop the hundreds of millions of people who are going to be using it. There are 2,095,006,005 people on the internet. That is 30.2% of all the people on earth and an increase of 480.4% in ten years. If only ten percent of all people use Bitcoin. No. Lets say five percent. That is 104,750,300 future users of Bitcoin. There is no reason why this number cannot not be achieved, and of course we are working only with today’s assumptions; there is no knowing what new innovations related to the block chain that are around the corner. Or innovations in the shape of client that people will be using. Imagine new versions of Google Chrome or Firefox that are not only browsers, but Bitcoin clients. Every browser, doubles as a Bitcoin client. Think about that for a moment. An HTML5 Bitcoin client, with an interface designed by

Google or Mozilla. Easy to use and absolutely everywhere; on every computer in the world, by default. One thing is for sure, there is no going back. People have complained that ‘the next Google’ could not come out of Britain, because Britain is toxic to business. If Bitcoin is going to be the biggest revolution since the internet itself, and the British establishment are desperate to entice companies to set up here and take root, then any regulation on Bitcoin (or for that matter, Internet Business which is serious business) is, to put it lightly, not a good idea. In fact, the smart thing to do would be to draw an arbitrary area on the map in London, and declare that area an Internet Free Trade Zone, where there are no restrictions, taxes or regulations, for a period of 150 years. This would instantly attract every Internet business on the planet to the UK. There would be an unprecedented inflow of brains and money into London, making it the ‘Internet Capital of the World’. Or, you could regulate Bitcoin, and be an alsoran gaggle of losers, while Hong Kong, Dubai and other jurisdictions suck up all the brains, money, skills and entrepreneurs. To sum up, Bitcoin is to money as PDFs are to hardback books. Bitcoins are speech, not financial instruments. The State has no business interfering in Bitcoin in any way, and US regulations and laws do not apply to people and companies outside of the continental USA. The US Dollar, the first pure fiat world reserve currency, has lost almost all of its value against gold, falling from $1 to around $1680 per ounce. It’s now looking increasingly likely that the record-high price of $1680 on June 8 represented the peak of a financial fraud that is now slowly unravelling. The interesting question is: where will the price decline stop? Most assets have a “fundamental” value: the value that reflects the practical use to which that asset can be put. You can always live in a house regardless of what happens to the real estate market, so we can be confident that house prices won’t fall to zero. Similarly, if the price of gold 9

fell too much, people could always use it to make jewelry, so gold is a relatively safe investment. The puzzling thing about the US Dollar, is that the currency doesn’t seem to have any fundamental value at all. True, you can currently purchase many goods and services with Dollars. But despite the volume of Dollar-denominated commerce being high, Dollar-denominated prices seem to be driven up by the current rounds of quantitative easing (money printing). The US Dollar is different from traditional currencies. The fact that there are 300 million Americans who use dollars for their day-to-day transactions creates a floor for the value of dollars. Most of us don’t pay much attention to the exchange rate between dollars and other currencies, because we’re used to thinking of dollars as our fundamental unit of value. And even if we wanted to stop using dollars, it would be hard to do since most of the people around us won’t take anything else. So, despite a major screw-up by the Federal Reserve, we can still count on the value of dollars not falling very much. This logic of course, will also apply to the new pure digital currency ‘Bitcoin’. In contrast, there’s no significant community of people who conduct commerce exclusively (or even primarily) in Gold. And you can’t eat, live in, or make a fire out of Gold. And this means there’s no logical stopping point to Gold’s price increase. So far Gold enthusiasts have been buying Gold as the price increases, convinced that the price will go up eventually. But as the hoped-for Dollar rally has failed to materialize, more have gotten discouraged or bored and cash out the Dollar, pushing the price of Gold up further. This process has been going on for a couple of months, and now it appears to be accelerating. I suspect the Dollar is terminal. http://blogs.forbes.com/timothylee/2011/08/07/t he-bitcoin-crash/

Thinking Correctly About Bitcoin
by Alexander Fernandez An essential feature of the standard attack against Bitcoin is to point to the price charts generated by a single Bitcoin exchange and then use that as definitive proof of Bitcoin’s unsuitability for any purpose. The attack uses these single source charts to ‘prove’ that Bitcoin is a mania, like the Dutch Tulip mania or Bollengekte of 1637, or that Bitcoin is ‘insecure’ or any other fundamental flaw, technical, financial, philosophical or psychological you care to mention. Let us be perfectly clear; these Bitcoin detractors are ignorant of what Bitcoin is. They are near horizon thinkers, dullards, luddites, and the sweetest irony of it all is they are peddling their flawed ideas on a medium that directly disproves their theories. I have already debunked and quashed many of the fallacies that are routinely trotted out whenever Bitcoin is discussed by the ignorant on our blog; now I want to clear up a different fundamental mistake that all the current detractors of Bitcoin are routinely making, which is perfectly exemplified by the recent MarketWatch video item, which unintelligently parrots all the anti-Bitcoin nonsense as if it were being read from a centrally provided script or press release. The fundamental mistake these ignorant people are making is this; Bitcoin is not an investment, it is a container and payment method. When you think about Bitcoin in these terms, it becomes instantly clear that Bitcoin itself should not be treated like stocks or commodities. If you think of Bitcoin as only a container you use to shuttle payments to people for things on and offline, you immediately understand that looking at stock market style charts of its value from a single exchange as a way of gauging its future potential is completely ridiculous. Bitcoin’s potential lies in its power to facilitate peer to peer purchases; it is not a commodity or a stock or a company, it is a method, a 10 container, a protocol that people use to make purchases between themselves. Think about it this way; if, in 1997 you were told about a thing called ‘the Internet’, that would replace sending letters, utility bills and postcards through the mail to people all over the world at no cost, via a system that would not be run by any central authority and which was sure to utterly change the world and make people millions of dollars, you would be interested in it as an investment. Someone could (having fundamentally misunderstood what the Internet actually is) buy many domain names and then issue certificates against them, put these certificates into an exchange, and then start to sell them to investors. Charts would have been generated, and as a land rush began as the potential of the Internet became apparent to everybody, you would have seen a massive spike in the quoted prices of domain name certificates. Unique names like ‘sex.com’ could have been bought into by syndicates, who issued shares in it so that the cost of investing in ‘rare’ domain names could be spread out. You could buy shares in that domain name syndicate, and see their value rocket up. Are you beginning to get the picture? Domain names are nothing more than a method to instruct client programmes on computers to connect to a numeric address that refers to a server computer on the internet. They have no value in and of themselves; the value in a domain name rests solely in the work that programmers put into expressing the ideas of entrepreneurs who run the websites the domain points to. A three letter domain name like ‘sex.com’ is no guarantee of success on the web in and of itself; the same is true of Bitcoin. No one would have paid a billion dollars for the domain name ‘google.com’ before Google put millions of man hours and genius into their software.

If you want to ‘invest in the Internet’, you need to invest in a company that uses the internet to provide value to people. You cannot invest directly in the Internet, which is nothing more than a series of protocols defining containers for information that have been agreed upon by individuals. When you think about Bitcoin in these terms, you start to understand why all these foolish pundits sound so ridiculous. They literally have no idea what they are talking about. Bitcoin is a way to convey value from one person to another without a third party. Email is to postal services as Bitcoin is to money. It has no monetary value in and of itself; it has a very high utility, not intrinsic value. This is why looking at a single chart from MTGox and inferring anything about Bitcoin in general, or its future, or its utility and true nature is completely absurd. This is why attempting to apply Austrian monetary theory to Bitcoin is a fool’s errand. Bitcoin is not money, any more than a leather wallet is money or an email is a letter written on your personal stationary; you would not define a wallet as money, or a domain name as money or a piece of paper with ink on it simply because someone buys and sells them as goods. The real issue is not whether Bitcoin will ever be so widely adopted that it, “acts like a real, stable currency”. The only issue is wether or not it is widely adopted, and when the disruptive effects it will have on the current crop of online payment systems that are in thrall to the State, begin to emerge. And Bitcoin is a very very disruptive technology. Think about Bitcoin in comparison to PayPal. PayPal is essentially a centralized brick-less bank, that keeps a ledger of user’s accounts and transfers, and which charges per transaction fees. It strictly controls how much of your own money you can withdraw from them to your own bank account, how much of your own money you can spend at any one time, and PayPal are notorious for their freezing of user’s accounts, service problems and lust for compliance with the regulations of the State. For example, users of PayPal unfortunate enough to live under the yoke of the government of India have recently been 11

informed that they will not be allowed to receive payments that exceed $500 per transaction and that they will not be able to keep any of their money in their PayPal accounts longer than one week; all money received into PayPal must be transferred to their Indian bank account within 7 days. I will take for granted your outrage at these antihuman and arbitrary restrictions. Now consider Bitcoin. Bitcoin turns every user into an operator of their own fully functional, trans continental, free of State control PayPal service. They can accept money and then transfer Bitcoins from their computer to anywhere in the world instantly, without interference from anyone. They can accept Bitcoins on their computer in exchange for goods or services in a similar manner. The key insight that mainstream thinking people are missing is that Bitcoin can be exchanged for anything, not just money. Its accounts are essentially disposable and not tied to you permanently. You do not have to identify yourself to any third party in order to use it. If you adopt Bitcoin you are at liberty to use it in any way you like, with as much of your money as you like. When you think about Bitcoin correctly, you can begin to see that its potential is as big as the advent of the internet itself, since money is half of all transactions. In the same way that email disrupted the postal service, Bitcoin will disrupt the making and receiving of payments. If you want to send a post card, you do not have to use a postman or government mail. You simply send an email. From your mobile phone. This is taken for granted, now, but it represents a tectonic shift in the way people communicate. Think about how the internet and FraunhoferGesellshaft’s Perceptual Audio Coding software (that powers the MP3 file format) has changed the way music is distributed and consumed. No more buying Cassettes, Vinyl records and CDs in stores; no more middle men between the musicians and the music lovers. This is what Bitcoin is going to do in the realm of money transfer. And of course, the circle will be completed when music lovers pay tributes to their favourite musicians with Bitcoins. Very small payments will now become possible

and plentiful…anyone can develop their own money transfer and content monetizing service on top of Bitcoin without having to interface with one of the main payment processing companies. This represents a massive shift and unprecedented opportunity on a global scale. There are so many possible uses of Bitcoin you could spend all day imagining its potential uses, and you might still completely miss its killer application. None of the people trying to pour cold water on Bitcoin ever mention Namecoin, which is a DNS alternative based on Bitcoin. This is probably because they are ignorant of what Bitcoin actually is, and are simply regurgitating what others have written and said about Bitcoin, rather than doing their own thinking about it. DNS, as I say above, is the system of marrying words with the numeric addresses of computers on the internet. It is how people connect to sites on the net with their browsers, allowing them to type in a name instead of a number. The DNS system is being attacked by the State as a way of taking publishers off-line. Google “ICE domain seizures” to find out what I am talking about. Namecoin has the potential to decentralise the DNS system, making it impossible for the State to seize domain names and attack publishers. This is only one possible future use of Bitcoin, and as we have seen with the appalling totalitarian police state scandals surrounding government sabotage and poisoning of the centralised DNS system, Namecoin could remove the power of the State to control this critical part of the Internet infrastructure. The potential of Bitcoin is obvious to those that are intelligent, that understand computers and software, who have some knowledge of the present state of and recent history of the internet and the problems of money transfer online. Anyone who knows what this really means is awestruck, gobsmacked at how everything is about to fundamentally change. To conclude, whenever you hear anyone attack Bitcoin, your first response should be to be skeptical of the intelligence and depth of understanding of the attacker. They will cite any or all of the following to try and dissuade you from adopting Bitcoin:

1. Bitcoin has no backing 2. The exchange rate is volatile (with obligatory MTGox chart) 3. Bitcoin is a Speculative Bubble 4. Bitcoin is used for buying drugs 5. Bitcoin is run by amateurs ‘The MyBitcoin Fiasco’ 6. Bitcoin is only for “techies”, not for the average person All of these reasons for avoiding Bitcoin are straw men, trotted out by the unintelligent who cannot think for themselves, have weak powers of insight, are very probably computer illiterate, or who are philosophically predisposed to disliking Bitcoin because they have mistaken it for money due to other people having claimed that it is money. The first and last straw men are particularly galling. The dollar is backed by nothing, and these same people insist that it is money simply because other people accept it as money, but by magic, this logic cannot simultaneously apply to Bitcoin. The Internet was once ‘only for techies’ and now everyone uses it, and the people who do not are the exception, the ‘disadvantaged’ who must be helped to get onto it. If it were not so tragic, you would think these pretexts for rejecting Bitcoin were funny. I predict that the same will be true of the mass adoption of Bitcoin as it was for the mass adoption of the Internet. In the very near future, the people who do not use Bitcoin for sending and receiving payments will be the exceptions, and the disadvantaged. I will leave it to you to extrapolate from that, what the true value of Bitcoin is.

12

The ECB report on Bitcoin: A Critique
by Alexander Fernandez The European Central Bank is one of the most destructive entities ever unleashed upon the peoples of Europe. Its Keynesian fiat currency is backed by nothing, is defrauding millions, is by design stealing value from the people who are forced to use it under threat of violence, and is doomed to fail and collapse like all other fiat currencies before it. In the history of the world, there has not been a single fiat currency that has not collapsed, and the Euro will be no different. The average lifespan of fiat currencies has been 16 years, and the only exceptions to this are the currencies that have extra momentum for political reasons. The so called ‘bailouts’ in the Eurozone crisis are nothing more than the theft of value from millions of people to prop up mathematically unsustainable socialist economies. Greece defaulting and the other bankrupt states that are sure to follow, are just the beginning of this process. Even now, central banks world-wide are repatriating their gold in the knowledge that gold is money, and an unprecedented collapse is about to unfold with all paper currencies going to hyperinflation. For an insight into this, I direct you to read, “The Case for a 100% Gold Dollar” by Murray Rothbard and “What Has Government Done to Our Money?”, also by Murray Rothbard. There you will find the history of the world wide emergence of worthless fiat paper currency pyramided on the unconstitutional, gold-free, privately printed U.S. Dollar. You should also look at the last speech by Margaret Thatcher given in the House of Commons as Prime Minister, where she explains to the collectivist dullards why Britain should not join the ‘ECU’. Of course, decades later, as the Euro implodes, this position is absolutely vindicated. Now, with that background in hand, it is with a delicious feeling of schadenfreude that we read a PDF report released by the ECB on Bitcoin and the notional game money “Linden Dollars”. 13 The fact that this report lumps together these two things demonstrates a fundamental misunderstanding of what Bitcoin is. If you replace the phrase ‘Linden Dollars’ with ‘Monopoly Money’, the logic remains intact. Bitcoin on the other hand, is something new; it is revolutionary, decentralised, uncontrollable, money like and almost uncategorizable if you take into account the differing opinions on its true nature. Linden Dollars are none of those things. More on that later. We will now cherry pick the parts of this report that jump off of the screen. For sure, this report is one of the most serious ever written coming from a high level government entity. For certain, the penny has dropped in the circles of power about what Bitcoin means to the future of money and its potential threat. Without a doubt, they are thinking carefully about how to stop it. They must know that if they attack it, this will attract attention to it, and it could go viral and outflank them. They must have made the connection between Bittorrent powered pirated movies and Bitcoin, and the absolutely futile and useless struggle the Copyright lobbyists have been mounting against it. They know that the best they can do is put off mass adoption and try to inveigle their way into a position of intermediating transactions or vampirizing the in and out points as a way of remaining relevant. In the light of this, it should be absolutely clear that implementing anything that retards the flow of Bitcoin or the exchanging of fiat currency into it is insane, because it gives Leviathan more time to wake out of its ignorant stupor and mount a withering attack. And now, on to the report. A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the

members of a specific virtual community. This is not correct. Virtual currencies are tightly regulated, by the market, and the software that orders those markets. This is the only regulation that matters. A more accurate description would be that they are extralegal, since there is no law governing Bitcoin or systems like it. Bitcoin is usable not by a ‘specific virtual community’ but by everyone everywhere. This might seem like nitpicking on the surface, but it is not. The definitions used to give meaning to things in the real world shape the perception of them and the ability of men to control other men. By calling Bitcoin a ‘virtual currency’ or ‘money’ you immediately set up the pretext that they should be regulated by the State. Even in absentia of actual laws controlling this new phenomena, the default position of some in the Bitcoin community is that regulations, that do not exist, must be obeyed. This idea is completely false, and the mentality is a result only of the language used to describe Bitcoin, not the nature of Bitcoin itself, which is elusive. There are no laws anywhere governing the use of Bitcoin, and so there are no laws or even regulations to obey when you deal with it or trade in it. Depending on their interaction with traditional, “real” money and the real economy, virtual currency schemes can be classified into three types: Type 1, which is used to refer to closed virtual currency schemes, basically used in an online game; Type 2 virtual currency schemes have a unidirectional flow (usually an inflow), i.e. there is a conversion rate for purchasing the virtual currency, which can subsequently be used to buy virtual goods and services, but exceptionally also to buy real goods and services; and Type 3 virtual currency schemes have bidirectional flows, i.e. the virtual currency in this respect acts like any other convertible currency, with two exchange rates (buy and sell), which can subsequently be 14

used to buy virtual goods and services, but also to purchase real goods and services. This is an error. The true classifications and important distinction between virtual currencies has to do with who controls them, how they are distributed and the software used to interact with them. This is why you cannot lump Linden Dollars in with Bitcoin. The two are incompatible and very different in architecture. Bitcoin is unique, both in terms of how it works through distributed peer to peer clients and its Austrian School inspired money supply limit. These are the only things that really matter, not what you can or cannot do with them. Linden Dollars are a threat to no one. Once Linden Labs is shut down and its owners get the Bernard von NotHaus treatment the problem of Linden Dollars goes away. Locking up the developers of Bitcoin will, on the other hand, not stop Bitcoin any more than locking away movie pirates has made a single dent in the level of Bittorrent traffic on the internet. Virtual currency schemes differ from electronic money schemes insofar as the currency being used as the unit of account has no physical counterpart with legal tender status. Not quite. The differences between virtual currencies and electronic money are as follows. Virtual currencies (like Linden Dollars) are made up of entries in a centrally controlled database saying who has a certain amount accounted to their user name. Electronic money is cash-like in that it is made up of digitally signed certificates that can be transferred between individuals without reference to or permission from a central authority. It is also worth bearing in mind when thinking about electronic money schemes versus virtual currency in the terms set down in this paper, that the State has sanctioned one and not the other. Electronic money schemes allow you to move fiat currency between points, that is itself, backed by nothing. The means of doing this is by shifting accounting entries in ledgers. The fact that electronic fiat currency is backed by nothing is absolutely identical to the true nature of both Bitcoin and Linden Dollars. The Euro is

not backed by gold or anything else; the main difference between the money of Linden Labs and the Euro is that Linden Labs does not use force to make people trade with its ‘money’, whereas the ECB does. The issuer of the currency and scheme owner is usually a nonfinancial private company. This implies that typical financial sector regulation and supervision arrangements are not applicable. This is hilarious. It is the financial sector regulation and supervision arrangements that have brought Europe to its knees, that has the Greeks out in the street throwing molotov cocktails and the Italians with a bank appointed apparatchick at the helm. If anything, private supervision of currencies or even better as in the case of Bitcoin, computer supervision, is infinitely superior to ECB regulation and supervision. At least then either the profit motive or an unalterable mathematical rule will be the sole arbiter; force is not a part of the equation, and everyone can choose what currency they want to accept on a level playing field. The ECB is against this, obviously, and will eventually advocate the use violence to stop free people transacting in private with Bitcoin. They have admitted as much in this report. They are going to have a very hard time shutting down Bitcoin however, if it scales to the size of Bittorrent. Once again, anything, any business practice or business model that prevents this scaling or which slows rapid adoption or increases friction should be shunned. the link between virtual currency and traditional currency (i.e. currency with a legal tender status) is not regulated by law, which might be problematic or costly when redeeming funds, if this is even permitted. These people, surely, must be aware of eBay’s dispute regulation system. This system allows participants in eBay’s service to resolve disputes without having to resort to the law. This has worked spectacularly well, and there is no doubt that a self regulating reputation based system will emerge to reduce Bitcoin fraud to a tiny 15

fraction. No one needs the ECB or the State to protect them or regulate the market. This is a demonstrated fact. What the writers of this report are doing here is making an appeal to fear. “If Bitcoin is not regulated, people will die”. Lastly, the fact that the currency is denominated differently (i.e. not euro, US dollar, etc.) means that complete control of the virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will. Not true of Bitcoin, obviously, and in any case, the ECB and the Federal Reserve have complete control over the currencies they force people to use, and look at the disasters and mass theft these entities have engineered. The supply of money should not be in the hands of a violent monopoly. Bitcoin and Linden Dollars do not suffer from this flaw. The above quotes were from the introduction. Now we get to the first part of the report proper, that deals specifically with Bitcoin. They trot out the usual untruths and misconceptions about Bitcoin, probably because they do not have the expertise or insight to understand it fully, though this seems unlikely, since the report is well researched, and reads as if it was written by of extremely capable and knowledgeable authors. Bitcoin is astonishing and controversial without ever having to mention the edge case uses it is put to today. People who mention these fringe uses in serious contemplation of Bitcoin do not understand what it is and how revolutionary its design is, and they discredit themselves by doing so. FUD (Fear Uncertainty and Doubt) is a crutch for the weak minded and computer illiterate, and completely out of place in this document. The problem with the U.S. Dollar is not that it is used by criminals. The true problem with the US Dollar is that there are too many of them, and there is no natural control over their supply. When the U.S. Dollar was a bearer certificate promise to a quantity of gold, there was a natural check on the money supply; now that that is gone, it is literally worthless, and is only accepted because the State uses force to mandate its use for payment of taxes and as a

unit of account. It is identical to the tally stick in its essential nature, and differs only in that it will not last as long as the King’s wood did. The assessment covers the stability of prices, of the financial system and of the payment system, looking also at the regulatory perspective. It also addresses reputational risk concerns. It can be concluded that, in the current situation, virtual currency schemes: − do not pose a risk to price stability, provided that money creation continues to stay at a low level; They might not now, but they have a huge potential to, especially currencies based on Bitcoin. If Bitcoin is used only as a way to move money, and not as money itself, it poses no threat to any money system. If however, people start to use it as money, it will eat away the importance of State issued fiat currencies and the actors who regulate them. − tend to be inherently unstable, but cannot jeopardise financial stability, owing to their limited connection with the real economy, their low volume traded and a lack of wide user acceptance; This doesn’t make any sense. You cannot say that Bitcoin tends to be inherently unstable, because it is not old enough for a sufficient record to be examined, and its nature is not even well understood. In any case, a man looking at a chart of the value of the dollar could assert that it is not good money, and that it is unstable. And these are the people who cast doubt on Bitcoin? − are currently not regulated and not closely supervised or overseen by any public authority, even though participation in these schemes exposes users to credit, liquidity, operational and legal risks; The fact that they are not regulated is a benefit, not a risk. How the ECB regulates (or more correctly, mismanages) the Euro is the best demonstration of why they should not be in 16

charge of money. The risk people choose to expose themselves to is not a matter for the ECB or the State. Legal risks are a side effect of the State, and can be avoided by private dispute resolution, as we have seen with eBay. − could represent a challenge for public authorities, given the legal uncertainty surrounding these schemes, as they can be used by criminals, fraudsters and money launderers to perform their illegal activities; It is a challenge on several levels. First, it is a challenge to the supremacy of Keynesian State issued fiat currency. Once people are made to think about what money is and where it comes from, and how it should work in a perfect world, the Emperor’s New Clothes Effect is sure to kick in and then a societal rejection of government issued fiat currency is sure to follow, accompanied by howls of derisive laughter. There is no such thing as money laundering: “Money laundering is a euphemism for transactions out of view of State surveillance. Any transaction that takes place outside of State control is essentially ‘Money Laundering’ according to the State.” - Blogdial. Libertarians consider fiat currency to be criminal fraud, on a massive scale, and we are absolutely correct in this assessment. Bitcoin is like any other thing that can be used for more than one purpose. Anyone citing criminal activity as a pretext for regulation, activity which is always a minority case, is not thinking clearly, or is deliberately trying to hype up a pretext for regulation. − could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly; A negative impact on the reputations of central banks would be very beneficial to the

population at large, and this is an extraordinarily frank admission. If this paper were private and sent only to ECB insiders we could expect language like this, but to have it published in the open is either a mistake or an act of hubris. They don’t think anyone is paying attention…. absolutely shocking. The central banks have an unearned reputation, which they have bought with violence and surreptitious theft through inflation. The ignorant public trusts them and holds them in high regard only because they have been tricked and brainwashed and have never had an alternative placed before them. The adoption of local currencies like the Totnes Pound demonstrates that people are adaptable and are willing to put at least some of their money into local currencies when the case is made to them. This means that if Bitcoin starts to be used by a large number of people and businesses, it is inevitable that it will eat a large proportion of the transactions made in the central bank mediated system’s fiat currency. This will be done because it is private, easy, regulation free and you can send the money literally anywhere in the world to any device for nothing. − do indeed fall within central banks’ responsibility as a result of characteristics shared with payment systems, which give rise to the need for at least an examination of developments and the provision of an initial assessment. This is a pipe dream. Bitcoin will not be regulated any more than Bittorrent is. The State might eventually regulate the few sycophant run entry points, but after that, it will be impossible for them to regulate the peer to peer transactions that happen between individuals and the pure entrepreneurs that serve them. If Bitcoin becomes big enough to warrant regulation, it will already be too late. The best they will be able to do is tax the conversion of their fiat currency as it enters the gravity well of the black hole of Bitcoin, where money goes in but never comes out. Once all the money has disappeared into Bitcoin, a new economy will emerge that is beyond the reach of the State, which will have to resort to fleecing the 17

computer illiterate, the compliant and the dealers in real goods via a vicious financial policing system that monitors the movement of all goods and money. That is undesirable. This report is a first attempt to provide the basis for a discussion on virtual currency schemes. Although these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives to consumers, it is clear that they also entail risks. Owing to the small size of virtual currency schemes, these risks do not affect anyone other than users of the schemes. This report is an alert, transmitted to all Globalists, Statists and central bankers, worldwide. Bitcoin is serious business. It is not a fad, it has not been ‘hacked’ and has not crashed, as the ignorant Statist mouthpieces have tried to claim whenever a vendor has had a problem. Bitcoin represents a real systemic threat to the world fiat currency system, not only because it cannot be easily regulated or shut down, but because it calls into question the very nature of money and jurisdiction. It questions the need for the ECB and its fraudulent ‘Euro’, the Federal Reserve and its “Dollar”. The risks of Bitcoin are only to the ECB and the Fed. The risk to the individual users and States that embrace it is comparatively small. If a few users get hacked or lose a few tens of Bitcoins, who does this affect? Bitcoin goes on, as will the trillions of transactions made in it. Every hack event makes the Bitcoin client software ecosystem stronger and less vulnerable. As Bitcoin get stronger, confidence in it will increase, as will reliance upon it to move money from A to B. It is interesting that they say the risks do not affect anyone other than the users of the schemes. If this is true now, why will it not be true if Bitcoin takes up a third of all transactions world-wide? Why is it not important at a small scale, but important at a large scale? Is this report really asserting that if a few people get hurt, “it doesn’t really matter”? This gives you a peek into the ethics of these people, “as long as it cannot displace us, we do not care about

who gets wiped out by Bitcoin”. This makes any comment the ECB has to offer on Bitcoin with regards to “harming society” absolutely hollow. As a consequence, this report largely relies on information and data gathered from material published on the internet (see the Annex for references and further reading), whose reliability, however, cannot be fully guaranteed. This places serious limitations on the present study. This is an absolutely ridiculous disclaimer. In preparation for writing this report, these people should have used Bitcoin themselves, and then applied their economic theories to it, after examining it and the services that are on offer. That is all you need to understand it fully, and its implications. The reliability of sources on the internet is irrelevant; Bitcoin is not theoretical, it is live and running right now. It is run on software that can be examined in fine detail. I am going to forgo picking out all of the mistakes in this paper, such as this one: Virtual currencies resemble money and necessarily come with their own dedicated retail payment systems; these two aspects are covered by the term “virtual currency scheme”. I assume that as an educated reader you know what money is, and therefore know that a virtual currency is not and does not resemble money. I will now leave out the petty glaring errors and the sections that the report gets right, because these are not of interest to us. It is interesting however, to note this section: Modern economies are typically based on “fiat” money, which is similar to commodity-backed money in its appearance, but radically different in concept, as it can no longer be redeemed for a commodity. Fiat money is any legal tender designated and issued by a central authority. People are willing to accept it in exchange for goods and services simply because they trust this central authority. Trust is therefore a crucial element of any 18

fiat money system. What they are saying here is that money is money today, simply because people say it is. Anyone paying attention closely will be flabbergasted by this admission. The ECB is admitting that the money it issues is worthless, and it is used only because people have faith in the issuers of it. I will leave it to you to ponder whether this makes the ECB a sort of church, with the Euro its holy sacrament. Needless to say, this makes Bitcoin deeply sacrilegious. Also, they say that money is money because, “People are willing to accept it”, yet we know that it is money by force because it is fiat currency, “fiat” meaning arbitrary decree. People who try and conduct all of their business in gold, for example, get into hot water, even if it is gold issued by the country in which they live. By this admission, the following line is a lie, where the report says that the Euro is a: Store of value: money can be saved and retrieved in the future. when clearly it is not. Not only is the Euro not money, but it is not a good store of value because the supply of it is not fixed. It is inflated by design, meaning that it is a very poor store of value. Money is not a “social institution”, as the report claims. The ECB is a social institution. Money is the property of individuals; it does not depend on any institution for it to come into being or have its value (Bitcoin being the latest example of this, if indeed it is money; the FSA in the UK says it is not) and the best form of money is gold. Gold in your hands is separate from any issuer, has a value in and of itself, “inherent value” and is not a part of ‘Society’ or a ‘social institution’. Money has not been affected by technological innovations; it remains exactly the same in nature, just as man’s nature has not changed because he can make a phone call. This is a fundamental, though not surprising, error of the authors of this work. “a virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its

developers, and used and accepted among the members of a specific virtual community”. This definition may need to be adapted in future if fundamental characteristics change. In other words, they have no good definition of Bitcoin. This is true not only of the ECB, but of everyone who is talking and writing about it and considering legislation of it. Is Bitcoin money or is it not? Is it a distributed ledger, or is it ‘digital gold’? One thing about Bitcoin is true and everyone can agree on this, it is hard to get Bitcoins, no matter what you think they are. This is being addressed. We suspect that the same forces that cause some people to believe that Bitcoin is money are going to come into play when the ECB decides to try and design policy concerning it. Bitcoin to them, is a threat. It is a money, and it should be either killed or regulated so that it has no teeth. This of course, does not change the nature of Bitcoin; Bitcoin is like a mirror that reflects the ideology of the looker. An Aparatchick will see something that needs to be regulated. A Statist will see something that requires compliance. Entrepreneurs see an exiting business opportunity. A Libertarian will see another neutral tool for her toolbox, to go along with her hammer and coping saw. Until the big idea of Bitcoin is unleashed, what people think Bitcoin is will remain in flux. All we can say about it that is true is related to the clients, the network software and the statistics to do with network processing power and other plain facts. Trying to pin down Bitcoin to one definition is like trying to say what the internet is. It is a series of tubes. A way to send mail. A way to make phone calls, and so many other things, but it is really whatever you want to do with it, and there is always another protocol that can be developed and used on it. The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation. 19

For certain, this is the most delicious part of this document. It will have the Bitcoin hating Austrians blowing smoke from their ears, as the dastardly ECB puts the blame for Bitcoin’s creation and design upon its creator’s correct conclusions about the true nature of money gleaned from a careful study of the Austrian School. The bigger Bitcoin grows, the more it confirms that the Austrians were right. Or will it confirm that they are wrong? I suppose it depends on who you ask! Note how the authors detach themselves from Austrianism by using the phrase, “in their view”. They are saying here that the Austrian School is not correct, and that it is just a ‘view’. This doesn’t make any sense. Economics cannot be two things at once, and as we have seen, the wrong ideas of the Statist “paper moneyists” and Keynesians have destroyed every paper currency that has ever been created. The Austrians are correct, because history demonstrates it. It is not opinion or theory, but fact. It is a great pity that the major voices in the Austrian School have not picked up on and championed Bitcoin. Its almost as if they have worked diligently and brilliantly for decades determining exactly what money is, but now that the 21st century has crept up on us all, they cannot look outside of this definitive study at the world as it profoundly changes around them, and apply their insights to this truly new and wonderful innovation. Perhaps now that the ECB has made this connection, they will be forced to either ramp up the irrational attacks on Bitcoin, siding with the ECB, or they will concede that Bitcoin is extremely interesting and serious, and perhaps even a form of money. Either way, none of this has any effect on the adoption of Bitcoin, and is more of a form of entertainment, as this insightful commenter describes. Bitcoin, like the moon landings, will succeed no matter what the pronouncements of the people who say it is impossible are. However, the system has been accused of leading to a deflationary spiral. The total supply of Bitcoins is expected to grow geometrically until it reaches a finite limit of 21 million. If, however, the number of

Bitcoin users starts growing exponentially for any reason, and assuming that the velocity of money does not increase proportionally, a long-term appreciation of the currency can be expected or, in other words, a depreciation of the prices of the goods and services quoted in Bitcoins. The only people who level the accusation that Bitcoin is deflationary are the Keynesians that believe the supply of money must increase over time, and that this doesn’t matter, even though it penalises savers because, “In the end we are all dead anyway”. A fixed money supply is in fact, a good thing. It means that you can save money and rest assured that when you use your savings, the money will have the same purchasing power as when it was stored. Naturally occurring money like gold has, for all intents and purposes, a fixed supply. That is why the price of goods denominated in gold when displayed on a graph against time is a flat line, over decades, and the only fluctuations are to do with natural disasters like locusts destroying crops, and other natural supply altering events that change the amount of goods on the market. People would have a great incentive to hold Bitcoins and delay their consumption, thereby exacerbating the deflationary spiral. This is another Keynesian fallacy; see Rothbard for a refutation of the imaginary “Hoarding Problem”. Secondly, Bitcoin is not the currency of a country or currency area and is therefore not directly linked to the goods and services produced in a specific economy, but linked to the goods and services provided by merchants who accept Bitcoins. These merchants may also accept another currency (e.g. US dollars) and therefore, the fact that deflation is anticipated could give rise to a situation where merchants adapt the prices of their goods and services in Bitcoins. 20

This is interesting. Because Bitcoin is not linked to the currency of any country or currency area it is not directly linked to the goods and services produced in a specific economy? Why is gold linked but Bitcoin not linked? Gold is acceptable everywhere on earth, and so is Bitcoin… this is a very odd argument; is there a currency that is linked to anything, anywhere? Surely this is only a matter of what people will accept in payment, and there are no actual links to anything between currencies and goods. The only exception to this is compulsory taxation, where the State will only accept its own currency in payment of taxes. Furthermore, if Bitcoin is thought of only as a way to transfer money and not as money in and of itself, this problem goes away. Merchants would set the price of their goods in Bitcoins dynamically by real-time API calls to the exchanges, and when the payments via Bitcoin are made, exchange their received Bitcoins into gold or fiat currency directly upon receipt. There is no reason why a merchant should want to hold on to Bitcoins; they are of no use to the merchant, and she exposes herself to risk of theft, Bitcoin price fluctuation and attacks from the ECB. It also means that in her business processes, she can account only for the fiat money of the State in her annual returns and tax forms and not for the ill understood Bitcoin she has received. If Bitcoin is not treated as money, all the imaginary problems associated with it, “compliance”, “Know Your Customer”, “Anti Money Laundering” regulations and all of that other utter nonsense goes away. It becomes nothing more than another protocol layer on top of the internet, that does not need regulation or interference to do its job; moving money from A to B. When you think about it for a second, it is clear that the idea of regulating Bitcoin is as stupid as the idea of regulating email. However, it is also true that the system demonstrates a clear case of information asymmetry. It is complex and therefore not easy for all potential users to understand. I laughed out loud at this. Its clear that the ECB does not understand what money is, and yet they claim that Bitcoin is complex? Is it really more

complex though? How many people in the street understand how GSM works, and does this affect their ability to use mobile phones and make calls to anywhere on the globe? People don’t even need to remember telephone numbers anymore thanks to the design of the phone’s address book (which is not actually a real book); why should it not be as easy to send money between mobile phones as it is to send a text message to an address book entry? The same can be said of every technology in use today; you do not need to understand catalytic cracking to be able to drive a car, and you do not need to know about Public Key Cryptography to understand what the green lock in your browser means. No one in the middle ages would have been able to use a mobile phone, yet today there is no one alive that cannot be made to understand it in a few minutes. The same is true of Bitcoin. When the breakthrough service arrives that simplifies Bitcoin to the level of a mobile phone’s ease of use, this argument against it will be moot. It is only a matter of time and development and funding. The paper then goes on to roll out some ill considered fallacies, of the kind we have read before, “because we do not know who wrote Bitcoin, it cannot be trusted”. This is utter nonsense. Bitcoin is software that can be examined by any competent person. Just because the authors of this paper are incompetent software illiterates, does not give them license to assert that Bitcoin, “works like a pyramid or Ponzi scheme”. They should have hired a software developer to assess the source code for them so that they could speak from a position of authority on this matter, instead of relying on hearsay from the internet. Very shabby, and quite unprofessional. As for the ‘problem’ of getting out of the Bitcoin system should it collapse, this is not a problem if Bitcoin is treated as a money transmission protocol and not money. It is up to entrepreneurs to develop business models and services that treat Bitcoin according to its true nature to make this problem go away. If no one is holding Bitcoins and the system collapses no one gets hurt, except for the small number of people with Bitcoin in transit at the precise moment it collapses. Everyone else, the billions 21

of people who used it to move trillions from A to B will have lost nothing whatsoever. Further action from other authorities can reasonably be expected in the near future. The ECB will not be able to stop Bitcoin, any more than they or anyone else can stop Bittorrent and pirated software which have been around for decades, since the days of the BBS. Trillions of files have been copied, billions of song files, billions of movie files, hundreds of millions of PDF files of books. There is nothing anyone can do to stop it, and it will never cease. Bitcoin is going to spread like wildfire, once people start to use it and intuitively place it somewhere between cash and text messages. It will spread to every web browser and every mobile phone and tablet. And there is nothing anyone can do about it. • Attacking the exchanges will not work • Arresting individual Bitcoin users will not work • Threatening people with propaganda will not work Just ask the MPAA / RIAA how well their anti ‘piracy’ campaigns have been going over the decades they have been trying to stop people from copying files. Every few years there are software improvements that strengthen the ecosystem; from Napster to Gnutella to Bittorrent to Bittorrent Magnet Links to Tracker-less Bittorrent to Bittorrent in the Cloud, every year there are new innovations making the Bittorrent ecosystem more resilient and widespread. The same will be true of Bitcoin. All the show trials, harsh gaol sentences and million dollar fines of 70 year old grandmothers have not stopped Bittorrent, and these techniques will fail with Bitcoin also. The world is changing. Thanks to the internet, people are not only learning and sharing information as never before, but they are also using the same network to build tools that have never and could never exist before the internet. Adapt or die is the catchphrase that applies to both the ECB and the MPAA / RIAA. Everyne must accept the new reality. It is not going

away, and there is nothing anyone can do about this without destroying everything that is now dependent on the internet.

22

Bitcoin Regulation: Doomed to Fail
by Alexander Fernandez Columnist Jon Matonis has another great article up at Forbes which replies to Fred Wilson the venture capitalist and principal of Union Square Ventures question about Bitcoin. Below is the text of our comment on this post, spurred on by a man asking people to essentially “sit down and shut up with the Anarchism jive”. Before I begin, something interesting related to this has just happened. Australian-based trading firm @SpendBitcoins has decided to pull out of the U.S. market, citing “regulatory obstacles”: https://spendbitcoins.zendesk.com/entries/21806 042-spend-bitcoins-out-of-the-us-market Just what those obstacles are are not specified; in fact, there are no regulations or laws covering Bitcoin buying selling or transferring anywhere in the world. Bitcoin is unregulated, free of legal constraints and its up to the people who use it to do what they want with it on whatever terms they see fit. That being said, if there were regulations controlling Bitcoin, we can see by this abandonment of the U.S. market exactly what the effect of regulation would be. Entrepreneurs would not be able to enter the market and compete, thanks to artificial barriers to entry. This is great for early entrants, who also happen to be the advocates for regulation. This is called ‘Crony Capitalism‘; where businessmen use the violence of the State to keep competition out and entrench their positions so that they are unassailable. Bitcoin is going to be a different case when it comes to the Crony Capitalists and their plans to dominate the market by the force of the State. Because it lives on the internet, and is essentially a new hybrid between pure information, money and a certificate of ownership, the dynamics of the internet and telecoms, specifically Warez (MP3 music files and Torrents), Instant Messaging, SMS and email are going to come into play. 23 When we look at all of these unregulated services, it is clear that Bitcoin will be absolutely unstoppable, and the Crony Capitalists will not be able to dominate because each computer and mobile phone on Earth will act as an input and output point, circumnavigating them. They will be as Apple’s iTunes are to the pirate music scene; large, but dwarfed by the total amount of transacting going on world-wide. For certain, this alone is a goal of such massive proportions that any business man would kill to be in such a position. What I am saying is that it is not ethical to use the State to dominate the market in this way. Bitcoin will see regulation as damage and it will route around it. In the end, only the inured 5% will move their Bitcoin in systems that are expensive and regulated, whilst the rest of the world will live and profit in a Bitcoin ecosystem that is prohuman, unregulated, open and free. Bear in mind, that is the scenario where the proregulation camp ‘wins’. And now, on to the reply: ******* First of all, Bitcoin is not money. If you receive it in exchange for goods and services, it is more like an intangible barter instrument rather than money. Since it is intangible, you can argue successfully that you have received nothing in exchange for your work. It is therefore not possible to be taxed on income when you have taken Bitcoin (nothing) in exchange for your work, any more than you can be taxed for receiving the telling of a story or a concert of music, or a soft whisper in your ear in exchange for your labour. This is obviously different to receiving physical precious metals issued by the State in exchange for your work, and yet, we can look to a recent case that went to court on this very act for insights in to how Bitcoin might be treated if

people were to be paid in it. In the United States vs Kahre case, a company paid its workers in U.S. Government issued gold and silver coins. Since the face value of these coins is one thousand times less than the Federal Reserve Note value (in the case of gold), all the wages of the workers at that company fell beneath the reporting and taxation thresholds. They were taken to court by the State on multiple counts of tax evasion and other ‘financial crimes’, and won: http://portland.indymedia.org/en/2007/10/36628 7.shtml In the light of this, it would be hard to argue that wages paid in Bitcoin were more taxable than silver and gold Dollars issued by the United States Mint, when the State does not even recognise Bitcoin as money in the first place. While we are at it, it might be possible to bring a case for tax evasion on gold and silver coins paid as wages by valuing them at the spot price on the day the wages were paid, but this is not how Federal money works; the face value of the money paid in wages is the value for reporting. That is why they won. Then there is the matter of who owns Bitcoin as a system and the perception of it. The developers of services that run on Bitcoin do not own the Bitcoin system and are not responsible for what other people say about it or do with it. There is no pecking order that puts developers and their opinions above the opinions of the users of Bitcoin. Some people believe in tight integration with the state, through licensing, registration, ‘compliance’ and other forms of destructive, irrational and anti-human regulation. Others believe that Bitcoin users and service owners would be better served by the ecosystem growing as the internet did; organically and exponentially, without regulation or interference from the computer illiterate Luddites of the State poking their noses into other people’s private business. To say that linking Bitcoin with tax evasion is, “not helpful”, implies that there is a central aim to Bitcoin that everyone must be on board with. Helpful to whom exactly? If someone’s aim in developing Bitcoin and promoting it is to 24

defund the State, then promoting Bitcoin as a way to prevent having your money stolen by the State is an extremely helpful thing. Everyone should promote Bitcoin to their constituencies and not concern themselves with what other people are thinking or are doing. Of course, the flaw in this logic is abundantly clear when you consider that the State will not let people who do not conform to its ideas live in peace. Bitcoin changes everything. All of your assumptions about money, how it is moved, what it is and is not are blown to pieces by it. Rather than trying to squeeze Bitcoin into a Procrustean Bed, it is better to embrace it on its own terms and build services that work on those terms, and not on the assumptions and qualities of physical money or the demands of the State. Its analogous to designing a surf board to surf waves, or an aircraft to fly. What you would prefer these things to look like is of secondary importance to aero and hydrodynamics. The aim of a surfboard is to allow you to shoot the tube at Teahupoo and live. The aim of Concorde is to get you to London from New York in three hours instead of six. Accepting Bitcoin for what it is, on its terms, will enable you to build better, revolutionary and disruptive services that better serve people. You will be able to identify these services by how close they bring you to the core of the service. The most innovative services will balance and blur the distance to the ‘raw network’ and the user experience. This is the sort of Bitcoin entrepreneurialism that we are going to eventually see, and it will not come from people who are trying to build a new kind of Bank.

FinCEN Sounds the Death Knell For U.S. Based Bitcoin Businesses
by Alexander Fernandez exercise of their first amendment It seems that FinCEN has finally decided to opine rights. currency, funds, or other value on Bitcoin, without naming it specifically. This that substitutes for currency. U.S. pronouncement spells death to all “compliant” U.S. Bitcoin companies that choose to remain based in the U.S.A. The first thing you will notice about this is that if you are a Bitcoin miner, FinCEN says that what There is one thing you absolutely must bear in mind; nothing that FinCEN unilaterally declares you are doing does not fall under their has any force outside of the U.S.A. If you do not jurisdiction. This means you can be a Bitcoin base your business there, their bespoke rulings, miner, with the biggest mining rig in the world, “guidance”, that is not even law in the U.S., has and then take your mined BTC and buy whatever you want without the threat of any interference no effect on you or your business. This is a from them. Even though you must transmit your problem for Americans only, and no one else. mined Bitcoin to make a purchase, you are not a Here is the relevant passage: “money transmitter”. Its crazy talk. De-Centralized Virtual Currencies If however you pay someone to mine for you, and A final type of convertible virtual then receive the Bitcoin, all of a sudden, the currency activity involves a desituation is somehow different, and you are centralized convertible virtual committing an act that they are claiming they currency (1) that has no central have jurisdiction over. Its utter nonsense of repository and no single course; Bitcoin is no different to Monopoly administrator, and (2) that persons money, which presumably FinCEN does not think may obtain by their own computing is worthy of their attention. If the purpose of or manufacturing effort. FinCEN is to stop people “misusing money” whatever that means, surely if the Bitcoin is A person that creates units of this mined or paid for is completely irrelevant. It is convertible virtual currency and uses pure illogic on stilts. it to purchase real or virtual goods You will note also that FinCEN does not name and services is a user of the Bitcoin specifically, but instead generates an convertible virtual currency and not arbitrary ruling on an entire class of software subject to regulation as a money technology. This means that you will not, if you transmitter. By contrast, a person that are an American, be able to claim that Litecoin is creates units of convertible virtual different to Bitcoin, “because FinCEN doesn’t currency and sells those units to mention Litecoin”. another person for real currency or This unconstitutional and arbitrary ruling has its equivalent is engaged in transmission to another location and grave implications not only for Bitcoin, but for the First Amendment of the Constitution of the is a money transmitter. In addition, a United States. person is an exchanger and a money transmitter if the person accepts such Bitcoin, if it is read out or printed onto paper, is de-centralized convertible virtual protected speech under the Constitution. currency from one person and Americans had this debate many years ago, where transmits it to another person as part people tattooed code on their bodies and read it of the acceptance and transfer of in out in public

25

The military grade encryption software 'Pretty Good Privacy' was exported out of America, legally, when its source was printed on paper (First Amendment protected act) and then read back in by Optical Character Recognition software in the free world. All of this precedent applies to Bitcoin, but now, instead of a single book of source code, you will have millions of people printing out Bitcoin and transferring it everywhere, storing it, exporting it, and there is nothing that anyone can do about this. As more and more money disappears into Bitcoin we are going to see an escalation in the reach, scope, fines and penalties meted out to Bitcoin users and businesses who in the future will no longer be distinguished from each other, once (for example) services like Local Bitcoins comes into the radar of FinCEN. Bitcoin is going to be the new Internet Poker, which funnily enough, has started to accept Bitcoin as an alternative to money because Bitcoin is not money. Clearly, a Supreme Court challenge is in the future over this, and I suspect a coalition of Poker companies, real Americans and sensible people are going to join forces to stop the insanity. What we can also expect is an attack from the Crony Capitalists who want Bitcoin regulation, arbitrary licenses and fees levied by the state and policed by FinCEN to stifle competition and keep out agile upstarts. It will not work. Like Supernova, MiniNova, the Pirate Bay, Kickass Torrents and finally MEGA, it will be impossible for America based, FinCEN crippled Crony Capitalists to stop a huge, popular easy to use Bitcoin business from sucking up all the U.S. Bitcoin business and eventually bankrupting them. This is what these Crony Capitalists have asked for; a noose around their necks to end their own lives. Finally it must be repeated; this document is guidance only. It is not new law, and as a matter of fact, you are free to ignore their guidance and do what ever you want, if you are an American of that vanishing breed. Guidance is not Law, it is guidance; a suggestion of 26

practices, and nothing more. We are still a long way from a true legal attack on Bitcoin, but you can be sure that it is coming, and you can be just as sure that its effect will be precisely a short term slowdown of Bitcoin adoption and disruption at best, just as it has been with Bittorrent recently and Warez (pirated software) for decades. The best they can do is make an example of the high visibility, high earning Bitcoin businesses, but for the billions and billions of transactions taking place daily between iPhones, iPads, Droids and desktops FinCEN will be absolutely powerless and impotent. Warehouse banking Hawala, and all the other private, person to person money transacting services are going to become more powerful and efficient by many orders of magnitude, thanks to Bitcoin and its frictionless, massless ability to move money anywhere in the world in the blink of an eye. Finally, this is a great opportunity for a country to cause Bitcoin startups to congregate in their territory. A 150 year moratorium on any law that touches anything to do with Bitcoin / Blockchain technology would create a new Hong Kong island of super prosperity, as it becomes the world’s hub for all Bitcoin business, and the trillions of dollars in Bitcoin flowing through it, leaving the pitiful democracies in the dust.

Bitcoin and the State: Asking Permission to be Free
by Alexander Fernandez Should people who want to see the widespread and rapid adoption of Bitcoin seek tight regulation and integration with the State, or should they rely only on their skills as developers, marketers and entrepreneurs to create the rock solid, reliable and trustworthy products that people will use in their millions, like the other well known internet companies that have changed the way we do things? ***** A Bitcoin innovator has just applied for and received a registry entry from the US Federal Government’s Financial Crimes Enforcement Network: http://www.fincen.gov/financial_institutions/ms b/msbstateselector.html on that linked page you can read the following statement clarifying FinCEN’s position on each entry they list: “The inclusion of a business on the MSB Registration Web site is not a recommendation, certification of legitimacy, or endorsement of the business by any government agency.” This disclaimer appears on the certificate as the first paragraph, in large letters. The certificate also says that, “FinCEN does not verify information submitted by the MSB. Information provided on this site reflects only what was provided directly to FinCEN”. It appears that anyone, can register as an MSB, and the department does no thorough checking into the business, its capitalization, the backgrounds of the directors, who funds it, where those funds originate, the security of the software that powers the service or anything else about it. Registrants are not required to be insured, or make a deposit of money as a guarantee to their customers should something go wrong. Applicants simply fill out a form, and then are entered on the FinCEN database unscrutinized. If registration with FinCEN is being done by anyone in the vain hope of securing some sort of government legitimacy or seal of approval, it really does not pass muster by any stretch of the imagination. Showing that you are registered with FinCEN cannot act as a guarantee of any kind 27 whatsoever, and FinCEN explicitly warns consumers not to rely upon a company’s appearance on their register as proof of suitability, solvency or fitness for any purpose of any kind. On the other hand, registration with FinCEN should serve as a warning to anyone thinking about using a business that is registered with them, and who also wants to maintain their privacy. A company listed with FinCEN has explicitly entered into a legally binding agreement with them to spy on its customers and partners and has a duty to report ‘large and suspicious’ transactions to the State. This means that in order to be compliant, you as a customer of a FinCEN registered business must be authentically identified and contactable by the registrant so that they can interrogate you should you move ‘too many’ of your own Bitcoins through their service. For the record, there is no case law, no legal requirement, no legal precedent, and no legal opinion on the status Bitcoin of any kind. As is the case with almost all of the software that connects to the internet, what you think Bitcoin is, and what you choose to do with it is entirely your business, and that is how it should be. You are responsible for who you get into bed with, and it is not the place of the State to hold your hand and bottle feed you. The real problem behind this FinCEN registration is the thinking driving those entrepreneurs who so desperately seek a stamp of legitimacy from the State. Rather than build secure services that are sticky, viral, disruptive and useful, it appears that these well meaning people are trying to get a psychological boost by receiving the blessings of the State.

This simply will not work to catapult their businesses into widespread acceptance and profitability. And it will not help to gain them users; on the contrary, in the long term, it may make it imposable for them to even operate at all. We have been here before. Other very fine, insightful people have initiated contact with ‘the financial authorities’ in the hope that they can integrate their businesses with the State to gain credibility, thankfully, only to find themselves rebuffed with the retort, “Bitcoin is not money”. Entrepreneurs breathed a sigh of relief and a little surprise on reading this correct conclusion from the State, for it means that there will be a significant amount of time before they reverse their position and weigh in to crush Bitcoin businesses, if they ever bother to do so at all. If they do, it will mean going back on their previous lengthy categorical statement that Bitcoin is not within their purview. The bottom line question is this; do the advocates and entrepreneurs who pine for the mass adoption of Bitcoin want this worldchanging event to be stillborn or not? If they want it to succeed, and become rich and famous in the process, it is logical to refrain from doing anything that will prevent a miscarriage from happening, and any sort of registration other than that which provides operators with limited liability protection is surely a grave error. Recent history has demonstrated amply that the State is not needed to make the magic of the market happen. The evidence for this is all over the internet and is represented by the internet itself. Bitcoin is a threat to traditional banking and the State, just as the internet is a threat to censorship, telecoms businesses, companies like Kodak, Penguin, EMI and many others. Anyone who has even a slight grasp of history understands that Bitcoin is dangerous to the status quo in a very real, and absolutely lethal sense. Why then would you even think of asking for permission to operate from the very people who stand to be wiped out by the success of the innovation you are working on? Not only that, but if other companies eschew registration and avoid all the inevitable fees and restrictions that are to come, they will be able to out compete you in terms of price and ability to pivot, putting you out of business. Trying to force 28

Bitcoin to behave like money from a legal standpoint doesn’t make any sense either in terms of the definition of money, or the entrepreneur’s requirement of a frictionless market space. The FinCEN registration in question lists the company’s MSB Activities: as ‘Money transmitter’, with the Number of Branches equalling 1. Clearly the language of this certificate is meant to refer to physically located bricks and mortar money services with branches on the street, not a network based Bitcoin business. More importantly are the facts of how this business actually works. The company accepts money and then provides its clients with Bitcoins, and it accepts Bitcoins from its clients and remits money to them in return. It does not at any stage, transmit money directly from one client to another. Quite how this business has been construed as a money transmitter is baffling; it is no different to Amazon, in its role as a second hand book trade intermediary, because all Bitcoins are second hand goods, if they are goods at all. As I have said before, Bitcoin is not money. I say this both because it is not money, and because it is money. If Bitcoin is money, it will either be regulated to death or hampered into a crippled, non disruptive form, or taken over by the State. On the other hand, if Bitcoin is not money, it can flourish on the strength of its features just like SSL has, protecting everyone’s transactions and communications world-wide. If no regulation touches it, what you believe Bitcoin is, and how you choose to characterize it will ultimately not affect its utility; only the software built on it will define its nature. Building services based around Bitcoin is what counts, not registering with the State. Registering with the State will not cause users to adopt Bitcoin; only a compelling service will do this. You need only look at the newest companies with tens of millions of users like Pinterest, Tumblr and Tinychat to understand what a compelling service looks like, and of course, none of those companies sought the registration of the State before gaining many users. What we are seeing now is a myriad of experimental Bitcoin services emerging, as

developers try and discover the correct balance of features that will make up the killer Bitcoin service. You will know what this service is when the number of people using it is increasing exponentially. No registration with the State, no banking license or other poisonous anointing will cause users to flock to your service. But what if Bitcoin really is money? If Bitcoin is declared money by fiat, then this will kill it as a platform for small software developing entrants to write and launch services. Hysteria over money (which is actually the unquenchable thirst of the State for tax) has erected very large barriers to entry for anyone who wants to set up a disruptive financial service. In the USA, entrepreneurs have the Federal Government and then the State Governments to contend with. See Facebook’s recent adventures in approval, licensing and certification, as they went from State to State paying exorbitant and ridiculous license fees and submitting applications. Facebook has the money and manpower to do this, so for them it is as simple as making a decision, allocating staff and sitting back and waiting. For the starving entrepreneur however, registering as a money service in every state of the Union is an impossibility. Bitcoin as it stands now, has no such artificial and offensive barriers, and you can operate at will across the entire USA, without having to expend capital on anything other than the bones of the service itself and Ramen to keep you alive. If Bitcoin is not money, everything changes. Essentially, it means that the world of money transfers is subjected to the same network effects that caused the internet to explode over the last twenty years, with benefits to all mankind of a similar if not greater extent. It is hard to imagine the scale of the cascade of the prosperity that will flow from Bitcoin becoming ‘the money of the internet’. The imaginations of millions of people will be focussed on creating new and exiting services built around it and fuelled by it, in the same way that there are new websites and services popping up that no one could have imagined in the time before the internet. Bitcoin in the hands of millions of innovators who are free to experiment and fail with it without any cost or regulation will change everything for the better, just as the internet has. 29

What the people who seek the baptism of the State for Bitcoin are saying is analogous to saying in 1997 that anyone who wants to run a website should be forced to obtain a license from government before she puts it online. The internet that has so changed the world for the better simply would not exist in its current form if all entrants were forced to register with the State and pay for a licence. The net would have ended up as a MiniTel 2.0. Go Google MiniTel. I find the thinking behind the idea that Bitcoin services should be registered to be perplexing and fascinating. No one would dare suggest that a man wanting to publish a magazine, newspaper or book should be required to register with the State, but when it comes to money, or something that is money-like, that people are not even sure what its true nature is like Bitcoin, a different set of rules springs into being. It is well understood and accepted that, despite being an incorrect use of the word ‘right’, the power to publish is a right that all free men have. Why do people not understand that this right extends to publishing anything, not just words on a page? Extending this line of thought, if Bitcoin services need to be registered by default, why then should not booksellers be registered? Why is there no ‘PubCEN’ for book publishers, or any other type of seller, and why do the people who advocate registration of Bitcoin businesses not advocate the registration of book publishers? There is a long history of book banning in the west, but publishers in free countries have never been required to register before they enter the business of book printing and distribution, and books are always banned after publication, not before publication and passing through a censorship board. There are people who assert that financial regulations and registration are needed because money can be put to bad use. If you accept this premiss, you must also accept that plain information is as dangerous as money. The Dutch government works from this position, and does not allow scientific papers to be published without the permission of the State. Yes, that is correct; scientists need to obtain export licenses to publish academic papers; sheets of A4 with type on them. This is because the information in scientific papers “could be put to bad uses”.

Correctly thinking people are scandalized by the idea of having to obtain a license to publish a scientific paper, but for some reason, when it comes to money or something that is moneylike, like Bitcoin, the ‘thinking’ changes and all of a sudden, not only is registration seen as correct, desirable and beneficial but it is actively sought out, before the applicants even have a client base. Why does the registration fetish not apply to every good that can be sold or transferred between two people? In the USA the parasites from the State have asked this question and answered, “Why not?!”. This is the reason sellers of Raw Milk and organic vegetables have found themselves raided and placed in handcuffs as armed thugs point automatic weapons at their heads. It is why people who sell their old possessions in ‘garage sales’ are being harassed by the State. People who are thinking properly understand that these examples of State interference in publishing and exchange are unacceptable on principle; the question that I have not had a good, fallacy free answer to however is this, “Why is a money business a special case for registration by the State?”. Bitcoin, living on the internet as it does, can be sent and received from anywhere and on any device. If the Americans developing Bitcoin services cripple themselves with a self inflicted wound of onerous regulations, the Bitcoins will see this as damage and flow around those services. The only answer to this effect is a world-wide harmonized Bitcoin law, so that there is no jurisdiction to escape to. This is not going to happen any time soon, as we have seen with ACTA. The various states of the world reflexively imitating the American way of doing things is coming to an end, and there are markets out there that are bigger than the USA, whose government and its malignant influence has been disproportionately large. Take for example, the fallacious idea of copyright and its term of the life of the author plus 70 years. China has just passed a law essentially limiting copyright exclusivity to three months: http://www.techdirt.com/articles/20120409/0938 1318430/chinese-copyright-proposal-wouldallow-compulsory-licensing-music-after-threemonths.shtml 30

If Bitcoin becomes popular in any jurisdiction other than the USA, any American FinCEN regulations will become meaningless. American companies will simply be balkanized, marginalized and excluded from the action. Note that only companies will be affected by this; individuals on the internet spending Bitcoins in China or anywhere else will not be affected at all. Anyone who has had the experience of buying exceptionally well made and inexpensive hand made clothes from Hong Kong knows what this will mean. Thanks to the resilient nature of the internet, a balkanized Bitcoin at the user level is not possible. There is no way that Bitcoin transfers can be stopped as they cross borders, just as it is not possible to prevent people from pirating Warez or downloading copies of films and TV shows. What the State can do however, is prevent entrepreneurs from building a large central hub service built on top of Bitcoin. They can make it impossible to build a business based on Bitcoin or that overtly accepts it as a payment option. As long as some countries take no action against businesses accepting Bitcoin, there will be a vibrant market on the internet running with it. If that country is China, or Indonesia, or India or Brazil or any combination of countries with large populations, there will be a huge market operating on Bitcoin. The question then becomes how can people from the repressed western economies get a piece of the action? True entrepreneurs will smell the coffee (more likely, green tea) and simply flee the evil, crony capitalist jurisdictions for freer shores. Whatever solution is found by the creative people, the public that could use and benefit from the services is the ultimate loser, as they are reduced to using buggy, buggy whip, legacy surveillance systems from the twentieth century to make purchases online. That’s credit cards over the internet by the way. If you want to have a glimpse of what the repression of a service provider that is a central hub for Bitcoin might look like, you need look no further than the recent Hollywood sponsored armed raid and shut down of the file locker service Megaupload. People are still sharing files by the billion, but this business has been shut down and has had its assets seized.

Rapidshare and several other file locker services have unilaterally capitulated and neutered their services so as not to attract the vicious attentions of the State. The Megaupload raid demonstrates the lengths parasites will go to to violently attack entrepreneurs. Fundamentally this is a problem in morality and ethics. There is a difference between creating a piece of software and keeping its source code proprietary and secret, like Adobe’s Photoshop, and using the State to kill competition. One is selfish and evil, and the other is a legitimate form of business practice arising out of the technology. In crony capitalist countries, businessmen have the ability to use the State to kill and restrict competition. They do this because they do not have the will or the ability to survive in a free market; its easier to kill the competition than to be creative. People who try and gain advantage through the leverage of the State are evil in my opinion; through no one’s fault but theirs, they are not able to compete on a level playing field, and so they use violent tactics to keep competitors from entering. Its rather like mobsters setting fire to businesses that try to emerge in their territory that compete with existing firms that they ‘tax’. It is immoral, unethical, criminal and short sighted, and ultimately will fail, because the world is not suffering under a single mob’s jurisdiction. Now that computing in hand held devices has permeated every corner of the globe, we are beginning to see beneficial services emerge that are changing everything. MPESA is a good example, where in a country with a population that is mostly unbanked, mobile phones have served as the platform for prolific money transfers. Superimpose the features of Bitcoin on the MPESA success and then scale it to the entire world and you begin to see just what sort of revolution we are on the cusp of. People talk of Bitcoin in terms of revolution. I agree with this sentiment, however a revolution, by definition, cannot happen by command or sanction of the State. The State is the carbon rod for your back that prevents critical mass. The State destroys revolutions in the field of business especially when those businesses 31

constitute an attack upon it and its ability to control. Bitcoin cannot become a revolutionary service if it is regulated by the State. If you want this revolution to happen therefore, asking the State to authorize, shackle and penalize you doesn’t make any sense. Bitcoin businesses will need to survive on very low margins. In order for them to spread into every transaction on the internet, the cost of getting them has to be very low. More market players will drive the cost of getting them down, and cause entrepreneurs to innovate. Artificially high barriers to entry will winnow out the small, agile entrants, and allow the remaining large players to charge a higher percentage for transactions. This will function as a form of friction when you enter or exit the Bitcoin ecosystem, slowing down the adoption and rates of transfer of money to and from Bitcoin. This is why no interference from the State of any kind is desirable. From a purely business point of view, regulations, license fees, guarantees, KYC reporting requirements, secured deposits and all arbitrary rules are very damaging to Bitcoin business models because the customer ultimately pays for them. Useful services will be crippled, delayed and even prevented from emerging by the State. What is needed is a plethora of different businesses and outlets, not a small number of State protected and sanctioned monopoly players. This is best for the consumer as well as the entrepreneur. There is nothing anyone can do to stop a determined Statist from trying to shut out competitors by running to the State for protection. I guarantee you however, that someone is going to go to court to challenge the idea that Bitcoin is money, and that arbitrary licenses, fees, guarantees, registrations and everything else that comes from the State are applicable to Bitcoin businesses. Someone is going to make this challenge, perhaps on a purely philosophical basis, and the facts are going to be on their side. When this happens, the court is going to either have to declare that Bitcoin is money, or that it is not money. Both of these outcomes have significant repercussions. If the court decides that Bitcoin is money, it means that anyone downloading the source and starting their own Block Chain has de-facto started their own

currency. The last person who tried to start their own currency, Bernard von NotHaus, faces 15 years imprisonment and a fine of not more than $250,000 after being found guilty of counterfeiting by a jury. This will be the penalty for running an unlicensed Bitcoin Block Chain in the USA, should the Statists get their way and have the court rule that Bitcoin is money; anyone trying to set up a Block Chain will be branded a counterfeiter. The next logical outcome is that the Bitcoin client will be regulated and re-engineered by the State or its agents so that it works (or doesn’t work) in ways that they stipulate. The lead developers of Bitcoin will either be coopeted by the State or replaced. If Bitcoin is money, the State will demand that it has absolute control over the network, since it is a part of the national infrastructure. This is exactly what they are doing now with the internet, threatening everyone with their vile ‘kill switches’, Domain Name seizures and bogus legislation. Money is like plutonium to the State. They know its true power, and are obsessed with controlling it because they understand that by controlling the supply and nature of money and its flow, they control everything and everyone. To imagine that they will allow Bitcoin to be regulated with a ‘light touch’ is naïve in the extreme. The State will do anything they can to strangle Bitcoin if they cannot control it absolutely, and as the move to all digital money gathers steam (see MintChip http://onforb.es/IKPO5T and the fact that Denmark is openly and seriously considering going cashless: http://bit.ly/JeRgj9) the threat of Bitcoin will become absolutely clear even to the lowest and most stupid apparatchik. This is entirely separate from the threat that the established money businesses will wake up to when Bitcoin takes off. These established businesses will work overtime to kill Bitcoin from both sides, the legislature and the service, to destroy Bitcoin businesses. They will lobby hard for equal regulation turning Bitcoin businesses into banks, while at the same time, denying service to any Bitcoin business, cutting off their ability to remit monies to their clients. Just ask those Bitcoin businesses that have had their bank accounts summarily terminated in a coordinated attack what this is like. 32

Bitcoin is a threat to the State, and in an all electronic money world, it is an existential threat. There is no possibility that the State will allow Bitcoin to supplant or even co exist with their centralized electronic fiat currency; the only way Bitcoin can win is if it becomes too big to destroy without dealing a fatal blow to the economy. I assure you that if SSL did not exist, it would not be adopted now because of ‘fears over terrorists hiding their communications’. At the very least all SSL communications would require a back door in the form of the secret key being deposited with the State. This was actually legislated in France with PGP key pairs. It follows from all of this that what is required is the building of the world-changing Bitcoin services that are needed, without running to the State for prior approval or licensing, so that they become a de facto standard service that if it is tampered with in any way, will kill society. Running to the State does not confer legitimacy. Amazon, Ebay and Underwriter’s Laboratories didn’t need the state to confer trust or ensure reliability; they built consumer powered systems to protect their users and have grown very large and very trustworthy. Building trust takes time, and the people running to the State for its stamp of approval as a substitute for building trust over time and the related mechanisms that manage it are not thinking long term and are not willing to do the hard work of entrepreneurs. If people think that a registration entry with the State will help them raise capital, they are mistaken. The evil talisman of the State will not convince any venture capitalist that an idea is sound; voo-doo signs and badges are not what VCs are looking for. Venture capitalists are looking for the killer idea, and the team that can execute it. The idea does not have to be particularly new or innovative, as we can see with TransferWise, which is as dull and disruptive as dishwater, and registered to the hilt. What is needed with Bitcoin is a single compelling idea, an irresistible concept and solution to a problem that only Bitcoin can solve. We know that Bitcoin is revolutionary and extraordinary and that it is as disruptive as the internet itself. What is missing from the disruption equation is a consumer friendly set of features and capabilities that will cause its

adoption to go viral. Integrating with the State is not one of these features. No user out there cares that you have jumped through some arbitrary hoops for approval by the State. You need look no further than Skype to see what a proper approach to innovation looks like. No Skype user cares whether or not Skype has a license to operate as a telephone service; all they care about is that they can download the software and make perfect calls world-wide for nothing straight out of the box. The same is true for Bitcoin. All people want is to be able to download it, use it, buy what they need and transfer money to their friends and family as easily as possible. In order to make that happen, software expressing the correct small feature footprint and business model needs to be designed and developed, which has nothing to do with licences from the State. This registration of a Bitcoin business with FinCEN is a mistake, but it is not a big deal. FinCEN registration is not compulsory for Bitcoin businesses and they can painlessly deregister. What is wrong here is the signal that is being sent and the thinking driving the voluntary registrants to submit themselves to this, and it is this thinking that needs to be addressed. As Bitcoin grows, this precedent of reflexively registering Bitcoin services as money services will be used to compel other entrepreneurs to register their businesses, and eventually they will all be made to pay fees and obtain arbitrarily crafted licenses, and that is an entirely bad thing. For anyone that wants to run a Bitcoin business in the United States of America that is. Banks in Switzerland are shunning Americans, closing the accounts of all U.S. citizens precisely because the U.S. regulations are completely over the top. The sensible, rational people of the world are simply not willing to put up with this mania. There is no money in it and it is immoral. Finally let me be make my position on Bitcoin developers and entrepreneurs clear. Bitcoin is a tool and business for heroes. It is an unprecedented and unique invention, that straddles the abundance world of digital information and the world of scarce physical money. Bitcoin has the potential to transform 33

the world. The people who involve themselves with it at any level are the forward thinkers, the brave and the innovative. They are the true entrepreneurs and pioneers, the risk takers and leaders. They are the sorts of people who make the world a better place to live in. I support them and their efforts. The urge to succeed and to be a part of this revolution is very strong for entrepreneurs, and the desire to cover every possible eventuality to avoid pitfalls is just as powerful. In trying to reassure a sceptical public, some people make the critical mistake of believing that obtaining the stamp of approval of the State will help them reach their goals. This is a fundamental error, but it does not mean that they are bad people, in fact quite the contrary. These entrepreneurs are willing to fully expose themselves to the State and its humiliating scrutiny as a sacrificial demonstration of their clean purposes, good will and intention to offer a useful and trustworthy service. In the world of software however, there is absolutely no need for the State to certify people for any particular purpose. The risk of involving the State in the early stages of Bitcoin’s development is high. It could at the very least, retard the progress of Bitcoin and at worst, prevent the mass adoption of this new idea. And that would be a tragedy as great as if the internet had ended up as a world-wide AOL.