Bitcoin, intermediaries, and information control

I’m gratified that my recent writing on the Bitcoin virtual currency project has stirred much conversation and I thought I’d take a moment to continue that conversation.

Tim Lee has written two posts critiquing the viability of Bitcoin from the supply and demand side. Dan Rothschild has responded in part. Tyler Cower also weighed in.

To address Tim I’ll simply say this: Do I think Bitcoin will replace the dollar? No. Might Bitcoin have certain systemic design flaws that might impede its success? Quite possibly. Will Bitcoin become the de facto, manipulation-proof currency of the internet? Who knows. Tim’s posts are a somewhat technical critique of Bitcoin’s long-term feasibility. It’s a great contribution, but since I’m neither a gold bug nor a Bitcoin booster per se, I don’t find it especially interesting.

That all said, what I do think is revolutionary about Bitcoin is that its developers have solved, without the use of a middleman, the double-spending problem faced by virtual currencies. That gives us license to realistically imagine a world without regulable financial intermediaries online.

While Tim overlooks what makes Bitcoin radical, Tom Sydnor groks it viscerally. Writing in a lengthy comment on my post, Tom expresses dismay at what Bitcoin represents and offers what I would, with apologies, characterize as the cyber-conservative response.

In his work looking at who should govern the internet and who should regulate activities on it, Milton Mueller has made the case for a system of “denationalized liberalism,” which “favors a universal right to receive and impart information regardless of frontiers, and sees freedom to communicate and exchange information as fundamental and primary elements of human choice and political and social activity.” For reasons I won’t go into here, I like the idea of denationalized liberalism. However, short of asking us to show up at ICANN meetings to fight back government encroachments, Milton has not really given us any practical paths to such a world. The reason is that it is very difficult. As Jack Goldsmith and Tim Wu have pointed out, governments ultimately have control over the persons (and servers) under their physical jurisdiction.

In “A History of Online Gatakeeping,” (PDF) Jonathan Zittrain catalogs how intermediaries serve as the obvious targets of regulation for governments seeking to control information. Think of Napster, PayPal, and DNS registrars. Ever improving peer-to-peer technologies, like Bitcoin, remove this layer of intermediation by avoiding centralized servers that can be regulated or shut down. Now here is a path to denationalized liberalism: decentralized the infrastructure so that it is less susceptible to bordered control. Bitcoin show us a way to decentralize money transfers, and others are working on P2P DNS systems. It’s this path I want to explore in my research.

Now, it isn’t a clear path. As Zittrain writes:

The loss of these natural points of control will cause those with challenged interests to foreground a new and less palatable set of intermediaries: software authors. These authors may be asked to write their software in such a way that it can be recalled or modified after it has been obtained by a user and then put to an undesirable purpose. They may even be asked to program their software to disable the installed software of others. Control over software — and the ability of PC users to run it — rather than control over the network, will be a future battleground for Internet regulation, a battleground primed by an independently-motivated movement by consumers away from open, generative PCs and toward more highly regulable endpoint platforms.

I’ll stay away from the question of “generative” vs. “sterile” devices for now and just say that he’s right that the battle will move to software. Tom Sydnor’s response to my comment highlights how those who oppose an unregulable internet for order and stability reasons will react.

First, Tom says that getting people to run the Bitcoin software (thus creating the Bitcoin P2P network) is fraud because consumers would not engage in what might be legally questionable behavior unless they were “tricked” into doing so. The problem with this logic is that it’s not clear who is doing the tricking or defrauding. There is no Bitcoin company inducing circumvention of financial regulations. That’s the point of decentralization.

Second, and more important, Tom says that the reason running Bitcoin is legally questionable is that an argument can be made that 1) the predominant use of the Bitcoin network is trafficking in illicit goods and services, and 2) running the software should therefore carry vicarious or contributory liability for those offenses. This is in effect an argument for regulation of software, and I suspect this is the type of argument that will be advanced in any efforts to ban software like Bitcoin.

I’ll skip the practical feasibility of banning software short of also banning “generative” PCs, much less doing so globally, and stick to addressing the legal questions. Are Bitcoin’s predominant uses illicit? Well Dude, we just don’t know. But there might certainly be “substantial non-infringing uses,” to borrow a phrase. You can imagine contributing to WikiLeaks and other unpopular organizations, buying banned content under repressive regimes, and preserving personal privacy, say if you’re buying something legal but potentially embarrassing.

More to the point, Bitcoin is less like Grokster, Inc., and more like BitTorrent the protocol. Again, there is no third party inducing bad behavior. Bitcoin is a tool that can be used for good or ill. (A lot like paper cash.) Hopefully governments will prosecute those who do ill, and not simply seek to ban the technology. If they do, that’s a battle we’ll have to be prepared to fight. As for vicarious or contributory liability from simply joining the Bitcoin P2P network, last I checked doing math was not yet a crime. When you run Skype on your computer, you help create the Skype P2P network over which no doubt illegal activities transpire all the time. Should Skype users be held vicariously liable?

I’m looking forward to discussing this further. What other pieces of the online infrastructure can be decentralized? How far can we decentralize? What will the reactions from governments be? What are the implications for crime and security? What are the implications for personal liberty?

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