Articles by Jerry Brito

Jerry is a senior research fellow at the Mercatus Center at George Mason University, and director of its Technology Policy Program. He also serves as adjunct professor of law at GMU. His web site is jerrybrito.com.


Today the New York Department of Financial Services released a proposed framework for licensing and regulating virtual currency businesses. Their “BitLicense” proposal [PDF] is the culmination of a yearlong process that included widely publicizes hearings.

My initial reaction to the rules is that they are a step in the right direction. Whether one likes it or not, states will want to license and regulate Bitcoin-related businesses, so it’s good to see that New York engaged in a thoughtful process, and that the rules they have proposed are not out of the ordinary.

That said, I’m glad DFS will be accepting comments on the proposed framework because there are a few things that can probably be improved or clarified. For example:

  1. Licensees would be required to maintain “the identity and physical addresses of the parties involved” in “all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency.” That seems a bit onerous and unworkable.

    Today, if you have a wallet account with Coinbase, the company collects and keeps your identity information. Under New York’s proposal, however, they would also be required to collect the identity information of anyone you send bitcoins to, and anyone that sends bitcoins to you (which might be technically impossible). That means identifying every food truck you visit, and every alpaca sock merchant you buy from online.

    The same would apply to merchant service companies like BitPay. Today they identify their merchant account holders–say a coffee shop–but under the proposed framework they would also have to identify all of their merchants’ customers–i.e. everyone who buys a cup of coffee. Not only is this potentially unworkable, but it also would undermine some of Bitcoin’s most important benefits. For example, the ability to trade across borders, especially with those in developing countries who don’t have access to electronic payment systems, is one of Bitcoin’s greatest advantages and it could be seriously hampered by such a requirement.

    The rationale for creating a new “BitLicense” specific to virtual currencies was to design something that took the special characteristics of virtual currencies into account (something existing money transmission rules didn’t do). I hope the rule can be modified so that it can come closer to that ideal.

  2. The definition of who is engaged in “virtual currency business activity,” and thus subject to the licensing requirement, is quite broad. It has the potential to swallow up online wallet services, like Blockchain, who are merely providing software to their customers rather than administering custodial accounts. It might potentially also include non-financial services like Proof of Existence, which provides a notary service on top of the Bitcoin block chain. Ditto for other services, perhaps like NameCoin, that use cryptocurrency tokens to track assets like domain names.

  3. The rules would also require a license of anyone “controlling, administering, or issuing a Virtual Currency.” While I take this to apply to centralized virtual currencies, some might interpret it to also mean that you must acquire a license before you can deploy a new decentralized altcoin. That should be clarified.

In order to grow and reach its full potential, the Bitcoin ecosystem needs regulatory certainty from dozens of states. New York is taking a leading role in developing that a regulatory structure and the path it chooses will likely influence other states. This is why we have to make sure that New York gets it right. They are on the right track and I look forward to engaging in the comment process to help them get all the way there.

In April I had the opportunity to testify before the House Small Business Committee on the costs and benefits of small business use of Bitcoin. It was a lively hearing, especially thanks to fellow witness Mark T. Williams, a professor of finance at Boston University. To say he was skeptical of Bitcoin would be an understatement.

Whenever people make the case that Bitcoin will inevitably collapse, I ask them to define collapse and name a date by which it will happen. I sometimes even offer to make a bet. As Alex Tabarrok has explained, bets are a tax on bullshit.

So one thing I really appreciate about Prof. Williams is that unlike any other critic, he has been willing to make a clear prediction about how soon he thought Bitcoin would implode. On December 10, he told Tim Lee in an interview that he expected Bitcoin’s price to fall to under $10 in the first half of 2014. A week later, on December 17, he clearly reiterated his prediction in an op-ed for Business Insider:

I predict that Bitcoin will trade for under $10 a share by the first half of 2014, single digit pricing reflecting its option value as a pure commodity play.

Well, you know where this is going. We’re now five months into the year. How is Bitcoin doing?

coindesk-bpi-chart

It’s in the middle of a rally, with the price crossing $600 for the first time in a couple of months. Yesterday Dish Networks announced it would begin accepting Bitcoin payments from customers, making it the largest company yet to do so.

None of this is to say that Bitcoin’s future is assured. It is a new and still experimental technology. But I think we can put to bed the idea that it will implode in the short term because it’s not like any currency or exchange system that came before, which was essentially William’s argument.

Adam Thierer, senior research fellow with the Technology Policy Program at the Mercatus Center at George Mason University, discusses his latest book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom. Thierer discusses which types of policies promote technological discoveries as well as those that stifle the freedom to innovate. He also takes a look at new technologies — such as driverless cars, drones, big data, smartphone apps, and Google Glass — and how the American public will adapt to them.

Download

Related Links

This article was written by Adam Thierer, Jerry Brito, and Eli Dourado.

For the three of us, like most others in the field today, covering “technology policy” in Washington has traditionally been synonymous with covering communications and information technology issues, even though “tech policy” has actually always included policy relevant to a much wider array of goods, services, professions, and industries.

That’s changing, however. Day by day, the world of “technology policy” is evolving and expanding to incorporate much, much more. The same forces that have powered the information age revolution are now transforming countless other fields and laying waste to older sectors, technologies, and business models in the process. As Marc Andreessen noted in a widely-read 2011 essay, “Why Software Is Eating The World”:

More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

Why is this happening now? Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.

More specifically, many of the underlying drivers of the digital revolution—massive increases in processing power, exploding storage capacity, steady miniaturization of computing, ubiquitous communications and networking capabilities, the digitization of all data, and increasing decentralization and disintermediation—are beginning to have a profound impact beyond the confines of cyberspace.

Continue reading →

Bell-3D-cover-webLast week, the Mercatus Center at George Mason University published the new book by Tom W. Bell, Intellectual Privilege: Copyright, Common Law, and the Common Good, which Eugene Volokh calls “A fascinating, highly readable, and original look at copyright[.]” Richard Epstein says that Bell’s book “makes a distinctive contribution to a field in which fundamental political theory too often takes a back seat to more overt utilitarian calculations.” Some key takeaways from the book:

  • If copyright were really property, like a house or cell phone, most Americans would belong in jail. That nobody seriously thinks infringement should be fully enforced demonstrates that copyright is not property and that copyright policy is broken.
  • Under the Founders’ Copyright, as set forth in the 1790 Copyright Act, works could be protected for a maximum of 28 years. Under present law, they can be extended to 120 years. The massive growth of intellectual privilege serves big corporate publishers to the detriment of individual authors and artist.
  • By discriminating against unoriginal speech, copyright sharply limits our freedoms of expression.
    We should return to the wisdom of the Founders and regard copyrights as special privileges narrowly crafted to serve the common good.

This week, on Wednesday, May 7, at noon, the Cato Institute will hold a book forum featuring Bell, and comments by Christopher Newman, Assistant Professor, George Mason University School of Law. It’s going to be a terrific event and you should come. Please make sure to RSVP.

Patrick Byrne, CEO of Overstock.com, discusses how Overstock.com became one of the first online retail stores to accept Bitcoin. Byrne provides insight into how Bitcoin lowers transaction costs, making it beneficial to both retailers and consumers, and how governments are attempting to limit access to Bitcoin. Byrne also discusses his project DeepCapture.com, which raises awareness for market manipulation and naked short selling, as well as his philanthropic work and support for education reform.

Download

Related Links

opengraphI’m thrilled to make available today a discussion draft of a new paper I’ve written with Houman Shadab and Andrea Castillo looking at what will likely be the next wave of Bitcoin regulation, which we think will be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. You can grab the draft paper from SSRN, and we very much hope you will give us your feedback and help us correct any errors. This is a complicated issue area and we welcome all the help we can get.

While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions. In the article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges.

We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

I look forward to your comments!

Later today I’ll be testifying at a hearing before the House Small Business Committee titled “Bitcoin: Examining the Benefits and Risks for Small Business.” It will be live streamed starting at 1 p.m. My testimony will be available on the Mercatus website at that time, but below is some of my work on Bitcoin in case you’re new to the issue.

Also, tonight I’ll be speaking at a great event hosted by the DC FinTech meetup on “Bitcoin & the Internet of Money.” I’ll be joined by Bitcoin core developer Jeff Garzik and we’ll be interviewed on stage by Joe Weisenthal of Business Insider. It’s open to the public, but you have to RSVP.

Finally, stay tuned because in the next couple of days my colleagues Houman Shadab, Andrea Castillo, and I will be posting a draft of our new law review article looking at Bitcoin derivatives, prediction markets, and gambling. Bitcoin is the most fascinating issue I’ve ever worked on.

Here’s Some Bitcoin Reading…

And here’s my interview with Reihan Salam discussing Bitcoin…

Shane Greenstein, Kellogg Chair in Information Technology at Northwestern’s Kellogg School of Management, discusses his recent paper, Collective Intelligence and Neutral Point of View: The Case of Wikipedia , coauthored by Harvard assistant professor Feng Zhu. Greenstein and Zhu’s paper takes a look at whether Linus’ Law applies to Wikipedia articles. Do Wikipedia articles have a slant or bias? If so, how can we measure it? And, do articles become less biased over time, as more contributors become involved? Greenstein explains his findings.

Download

Related Links

Ladar Levison on Lavabit

Post image for Ladar Levison on Lavabit

by on February 4, 2014 · 0 comments

Ladar Levison, founder of encrypted email service Lavabit, discusses recent government action that led him to shut down his firm. When it was suspected that NSA whistleblower Edward Snowden used Lavabit’s email service, the FBI issued a National Security Letter ordering Levison to hand over SSL keys, jeopardizing the privacy of Lavabit’s 410,000 users. Levison discusses his inspiration for founding Lavabit and why he chose to suspend the service; how Lavabit was different from email services like Gmail; developments in his case and how the Fourth Amendment has come into play; and his involvement with the recently-formed Dark Mail Technical Alliance.

Download

Related Links