Bitcoin, intermediaries, and information control

by on April 20, 2011 · 36 comments

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?

  • http://twitter.com/binarybits Timothy Lee

    Jerry, this post feels a little bit like a guy responding to a critique of a perpetual motion machine by insisting that the critic just doesn’t understand how amazing it would be if the world had an infinite supply of free energy. You’re absolutely right that a fully-decentralized virtual currency would have important social implications. And of course I agree with you over Tom that it would, on net, be a good thing for the world. But I think Bitcoin’s apparent value reflects a speculative bubble that will pop on its own long before it gets large enough for governments to care about it. And if I’m right, then your argument with Tom would be kind of beside the point, right?

  • http://profiles.google.com/quanticle Rohit Patnaik

    Another criticism of Bitcoin is that it isn’t totally free of intermediaries. I can’t use Bitcoin to buy my groceries or pay my rent. In order to turn my Bitcoin into US Dollars (and back again), I’d have to go through an intermediary of some kind. These intermediaries can be blocked and regulated, substantially reducing the privacy advantages of Bitcoin.

  • Michael

    Can you predict the date of bubble pop? Will you bet on the date? :)

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  • http://jerrybrito.com Jerry Brito

    Hey Tim,

    The difference is that a perpetual motion machine doesn’t exist, and as far as I know, the laws of physics make one impossible. Bitcoin, on the other hand, exists. We have a fully-decentralized virtual currency with important social implications.

    Is there a bubble? Maybe. Are the technical critiques you postulate serious. Maybe again, although the commenters on your posts have pointed out why they may not be. But despite that, Bitcoin exists as proof of concept, and that’s what I’m excited about. Bitcoin might succeed or fail, but it seems to me that distributed digital cash as a concept is out of the bag. That’s why it’s important to me to start thinking through the arguments like Sydnor’s.

    How about a distributed DNS system? There are grumblings afoot around the concept. You can catalog the myriad ways how such a thing might never work if you want, but I’d rather think through how that could change the world. Call me an academic! ;o)

    Cheers,
    JB

  • http://jerrybrito.com Jerry Brito

    Hey Tim,

    The difference is that a perpetual motion machine doesn’t exist, and as far as I know, the laws of physics make one impossible. Bitcoin, on the other hand, exists. We have a fully-decentralized virtual currency with important social implications.

    Is there a bubble? Maybe. Are the technical critiques you postulate serious. Maybe again, although the commenters on your posts have pointed out why they may not be. But despite that, Bitcoin exists as proof of concept, and that’s what I’m excited about. Bitcoin might succeed or fail, but it seems to me that distributed digital cash as a concept is out of the bag. That’s why it’s important to me to start thinking through the arguments like Sydnor’s.

    How about a distributed DNS system? There are grumblings afoot around the concept. You can catalog the myriad ways how such a thing might never work if you want, but I’d rather think through how that could change the world. Call me an academic! ;o)

    Cheers,
    JB

  • http://jerrybrito.com Jerry Brito

    Rohit,

    Yes, you’re right, and that’s something that I’ve considered and plan to look at more closely. Off the cuff, though, I think the fact that you can create as many anonymous Bitcoin addresses as you want at virtually zero cost, and that exchanges will be scattered throughout the world, will do government little good to regulate such intermediaries–unless they universally ban the currency.

    JB

  • Ryan Radia

    Tom seems to overlook that many, if not most, illegal activities in the United States shouldn’t be unlawful in the first place. If Bitcoin takes off, it may well end up facilitating the commission of many crimes. However, we’d need information about the composition of those crimes before we could judge Bitcoin’s implications for social welfare.

    Even if we lived in a free society — say, if the United States had no income tax and the only criminal offenses on the books targeted acts involving the initiation of force (murder, assault, fraud, etc.) — I’d still be inclined to support a decentralized, anonymous currency system. As long such a system has substantial uses that don’t involve genuinely harmful acts, we should be wary of condemning it.

  • http://twitter.com/binarybits Timothy Lee

    Well, perpetual motion machines “exist” too. They just have a habit of stopping after a while.

    Similarly, my claims are (1) that the Bitcoin network is vulnerable to collusion, and (2) that it is unlikely to prove to be a stable store of value. Which is to say (1) it’s not very decentralized and (2) it’s not a very good currency.

    So Bitcoin is a proof of concept for a decentralized currency in precisely the same way that somebody’s zero-point energy device is a proof of concept for perpetual motion machines: it doesn’t actually perform a useful function, but that fact might not become obvious until you wait a while and let it run out of steam.

    I’m still thinking about this, but my sense is that these flaws are inherent to “distributed digital cash as a concept” rather than specific failings of the Bitcoin protocol. The fundamental issue is that there’s no such thing as a completely decentralized transaction clearing process because the whole network has to agree on which transactions “count.”. There’s always going to be a single, global ledger and a group of human beings who ultimately control it. And if Bitcoin succeeds, that control will become tremendously valuable. If Bitcoin succeeds, the people who control the system will face immense temptation to collude in order to appropriate that value for themselves.

  • http://profiles.google.com/the.real.plato The Real Plato

    Jerry – Nice article, keep it up!

    Everyone – I’m crossing the country spending only bitcoins. I’ve been on the road for about two weeks. More info here: http://www.reddit.com/r/IAmA/comments/gs9is/im_crossing_the_us_spending_no_dollars_only/

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  • http://jerrybrito.com Jerry Brito

    Then great! It looks like we have all angles of this issue covered.

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  • Jackie

    I wonder if things are so clear to you why you pick-and-choose the comments in your blog post you reply to. Every single one of your points were mercilessly debunked in a way that quite frankly made me cringe, and now even more so when I see you repeating the same ideas over and over again.

    Clear your ideas up first, have them stand the test of public scrutiny, and then hold them as your personal idealistic flag everywhere you go.

    And please, explain to us this collusion problem, when the bitorrent network hasn’t devolved into the oligarchy that you predict for the future of the bitcoin network.

  • Anonymous

    Obviously only those who possess large quantities of BTC can know price changes in advance, because they can dump prices just like a new investor can make them rise. There may be a fear-effect popping a bubble, but a single person with enough money on his hand can easily block a crash when he likes to bet on the system. Those people are likely to be present already. If the price suddenly does a massive fear-drop to half the value, I’ll place some bids — I don’t see failure chance doubling because of a single price crash. Unless there is a real reason for the drop, of course.

    At current prices, the psychology of the companies and organizations that might accept Bitcoin or write further software to use Bitcoin is everything. The speculation on mini-bubbles is just a game in my eyes. I intend to buy when I think the price is too low, and sell when I think it’s too high, from a long-term standpoint. The arbitrary price fluctuations we have now are hardly an indicator at the current market size, and so unpredictable that betting on them is equivalent to visiting a casino. Bitcoin will either be commercially used, then the price should be above 2 USD. Or it will remain a nerd game, then it should be below 0.2 USD. Guess the chances, and buy or sell accordingly.

  • Anonymous

    https://bitcoinbonus.com/bonus_category/197

    Go there. Buy food. Use google next time. Oh and bitcoin users are prepared to defend it. The minute it is banned in the US (where idealists aren’t limited to sitting behind a desk) we go nuts.

  • Anonymous

    This currency has 10 years of money, politics, and culture research behind it as a silent partner. We will provide those opportunities even at a loss. We are not playing games. The machine is about to lose big time (already lost a ton of battles).

  • Quantplus

    When currencies with floats the size of British Pound can be manipulated (see Soros)… manipulating BTC in the short to medium term is child’s play. There are many Forex Pros who play this game. Several parties with 2% of the float each (about $100,000) can pretty much move BTC to their advantage… up/down, up/down… and transfer wealth from the user base. This problem is lost on the engineers who rub the show. It will get worse as the currency grows and bigger, smarter crooks move in.

  • JamesAndersonMerritt

    The Bitcoin idea is intriguing. I wonder if, apart from its facilitation of anonymous, secure currency, the Bitcoin approach might be adapted to serve our need for a way to vote securely and anonymously online, in a way that allows anyone to verify the official count of an election, and confirm that his or her own ballot was received and counted properly. But that’s for later. For now, let’s just see how well Bitcoin serves its intended purpose. And with that in mind, I would like to make one comment right now, with others to come as I am able to formulate them:

    My understanding of inflation — or deflation, for that matter — is that there is an imbalance between the amount of money in circulation and the goods and services available for purchase in the economy. In inflation, too many dollars chase too few goods; in deflation, more goods and services become available in the face of either a stagnant or decreasing money supply: too few dollars chase too many goods. For the value of the dollar to remain stable, it is necessary for there to be precisely as many dollars in circulation as there is actual dollar-denominated value in the presently available goods and services. As more people participate in the economy, providing a greater number and a greater diversity of goods and services, the economy expands in value. Were the money supply to remain fixed, deflation would occur and the dollar would increase in value (i.e., buy more). This seems to be anticipated in the Bitcoin scheme by not only the effective cap on new coin generation, but also by the fine-grained divisibility of the Bitcoin unit. I wonder, however, if there might be some creation scheme other than “mining,” which would automatically adjust the amount of money in circulation so that it would more closely match the aggregate value of the “Bitcoin Economy.” Or is “mining” the best and safest approach for dealing with a dynamic economy, despite its shortcomings?

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  • somnia

    Bitcoin is a currency only in handfull of teabaggers pond shops, whose owners were only ones stupid enough to exchange their hard currency for this Mickey Mouse money.

    This thing will live as long as there are suckers pumping $US 7000/day into this, which isn’t too much when u look at it globally.

    More click adds $ were made in last month just of googling ‘bitcoin’ then it’s the net worth of whole market. Although this minimalism is also a good thing as it’s preventing the BC market to implode.

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  • http://www.facebook.com/profile.php?id=709397300 Anonymous

    Soros doesn’t make money by manipulating currencies. He makes money by predicting how their market price will change due to the underlying fundamentals. He made money on the British Pound because he knew the Bank of England wouldn’t be able to maintain its target price for the Pound vs other European currencies.

    It’s very risky to try to move a large market. The famous silver trader Bunker Hunt tried to do that in the 1980s and went bankrupt. In the mid-90s, Nick Leeson bankrupted London’s oldest bank, Barings Bank, when he tried to move the Nikkei.

    “Several parties with 2% of the float each (about $100,000) can pretty much move BTC to their advantage… “

    I’m not sure, but I wouldn’t be surprised if this kind of manipulation is possible in smaller markets. There is money to be made in seeing who is trying to manipulate it and front-running them, so it’s self-correcting to some degree though.

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  • Ashleyjohnston

     In a matter of time you could easily use bitcoins for these services. As for needing an intermediary to convert currency, do you need an intermediary to convert your bitcoins into alpaca socks?

  • http://ppettipiece.tumblr.com Ppettipiece

    “And please, explain to us this collusion problem, when the bitorrent network hasn’t devolved into the oligarchy that you predict for the future of the bitcoin network.”

    With “colluded” or tainted torrents, people can warn others to not use it and stop using it themselves. They’ve lost a bit of time, perhaps some virus checks, and potentially a few got information stolen. This torrent will, by and large, die out. The people using torrents are mainly those who are familiar enough with cracks, computers, and piracy to find what’s bad for them and avoid it (at least after a while).

    Banks and currency on the other hand are a significantly different beast. Bitcoin and BitTorrent (and all other bits) share protocols and implementation methods with various pros and cons but the motivations for pushing the math or power in your favor are very dissimilar. I believe one of Tim’s points is that with such niche support, there will be a few huge power players (which could be corporations or other buyers with huge amounts ready to be converted and questionable motives) who may bend the decentralized system to its will with little help. If I find out my digital money is tainted or not worth it’s full value or skewed in some other way, I’ll be pissed but have no idea how to fix it and significantly less ease in discontinuing use of it.

  • http://ppettipiece.tumblr.com Ppettipiece

    “And please, explain to us this collusion problem, when the bitorrent network hasn’t devolved into the oligarchy that you predict for the future of the bitcoin network.”

    With “colluded” or tainted torrents, people can warn others to not use it and stop using it themselves. They’ve lost a bit of time, perhaps some virus checks, and potentially a few got information stolen. This torrent will, by and large, die out. The people using torrents are mainly those who are familiar enough with cracks, computers, and piracy to find what’s bad for them and avoid it (at least after a while).

    Banks and currency on the other hand are a significantly different beast. Bitcoin and BitTorrent (and all other bits) share protocols and implementation methods with various pros and cons but the motivations for pushing the math or power in your favor are very dissimilar. I believe one of Tim’s points is that with such niche support, there will be a few huge power players (which could be corporations or other buyers with huge amounts ready to be converted and questionable motives) who may bend the decentralized system to its will with little help. If I find out my digital money is tainted or not worth it’s full value or skewed in some other way, I’ll be pissed but have no idea how to fix it and significantly less ease in discontinuing use of it.

  • Fanblade

    Jerry Brito says:
    “[Timothy Lee'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.”

    I’ve been following this public back-and-forth between Timothy Lee and Jerry Brito. (see http://timothyblee.com/2011/04/19/bitcoins-collusion-problem/) I don’t know either of you personally, and haven’t even made up my mind yet about which of you I agree with, but I can say one thing: Mr. Brito, I don’t believe you.

    Rather than sticking to the issues you have gotten sarcastic and attacked Lee instead of his points. For example, you wrote to Lee:
    “I’m sorry to hear you’re so busy. Surely that does it. You ‘win’ the
    argument, it’s just that you can’t prove it. Did I get that right?”

    This hardly sounds like a man’s response to an article he doesn’t find “especially interesting.” I’m pleasantly surprised Mr. Lee hasn’t responded in kind.

    If you’re going to argue a point, just stick to the facts. Thanks.

  • Fanblade

    Jerry Brito says:
    “[Timothy Lee'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.”

    I’ve been following this public back-and-forth between Timothy Lee and Jerry Brito. (see http://timothyblee.com/2011/04/19/bitcoins-collusion-problem/) I don’t know either of you personally, and haven’t even made up my mind yet about which of you I agree with, but I can say one thing: Mr. Brito, I don’t believe you.

    Rather than sticking to the issues you have gotten sarcastic and attacked Lee instead of his points. For example, you wrote to Lee:
    “I’m sorry to hear you’re so busy. Surely that does it. You ‘win’ the
    argument, it’s just that you can’t prove it. Did I get that right?”

    This hardly sounds like a man’s response to an article he doesn’t find “especially interesting.” I’m pleasantly surprised Mr. Lee hasn’t responded in kind.

    If you’re going to argue a point, just stick to the facts. Thanks.

  • Fanblade

    Correcting the formatting on my link above: http://timothyblee.com/2011/04/19/bitcoins-collusion-problem/

  • Fanblade

    Correcting the formatting on my link above: http://timothyblee.com/2011/04/19/bitcoins-collusion-problem/

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