Bitcoin is going mainstream. Here is why cypherpunks shouldn’t worry.

by on October 31, 2013 · 14 comments

Deep Web Time CoverToday is a bit of a banner day for Bitcoin. It was five years ago today that Bitcoin was first described in a paper by Satoshi Nakamoto. And today the New York Times has finally run a profile of the cryptocurrency in its “paper of record” pages. In addition, TIME’s cover story this week is about the “deep web” and how Tor and Bitcoin facilitate it.

The fact is that Bitcoin is inching its way into the mainstream. Indeed, the NYT’s headline is “Bitcoin Pursues the Mainstream,” and this month’s issue of WIRED includes an article titled, “Bitcoin’s Radical Days Are Over. Here’s How to Take It Mainstream.

The radicals, however, are not taking this sitting down. Also today, Cody Wilson and Unsystem have launched a crowdfunding campaign to build an anonymizing wallet. In their explanatory video, they criticize the Bitcoin Foundation as “helping the United States” regulate Bitcon, presumably to hasten its mainstream adoption. “Their mission is a performance to both agree with, and maintain an independence from, regulatory power,” Wilson says. “But you can’t have it both ways.”

This is an internecine battle that I’ve observed in the Bitcoin community for years. That of the cypherpunks who see Bitcoin as an escape hatch from state control versus the entrepreneurs who are more interested in the network’s disruptive (and thus profitable) potential. While it might be a fool’s errand, I’d like to make the case that not only is the work of the two groups not in conflict, they actually benefit from each other.

I’ve been following Bitcoin since early 2011, and in April of that year I penned the first (yes) mainstream article about Bitcoin. It was in, and it’s been credited with kicking off the first bubble. Since then my work has focused on the regulatory policy around Bitcoin and other crypto currencies, especially looking to educate policymakers about the workings and potential benefits of decentralized payments systems. Why am I so interested in this? My reasons are twofold and they track both the entrepreneurial and cypherpunk ideals, and yet I don’t think I’m bipolar.

First, I’m interested in Bitcoin because it is clearly a deeply disruptive technology that could result in profound economic and social benefits for the world, especially for the least fortunate. Yet as all new technologies that challenge existing interests and institutions, it is immediately targeted for precautionary and prophylactic regulation with little thought given to the costs of such regulation. Given that my entire career has been spent trying to keep the Internet free and unregulated, Bitcoin is a perfect fit for my attention. I am interested in helping policymakers get the cost-benefit analysis right, which I think is that the costs of regulating Bitcoin far outweigh the benefits.

This gets to the question of whether those of us engaged in educating policymakers are “helping the U.S. government” regulate Bitcoin, as Wilson claims. I guess that’s one way to see it, but let me offer another.

There are no doubt those like the Winklevoss twins who are seemingly inviting as much regulation as possible. (In Cameron Winklevoss’s words, “we love regulation.”) I certainly don’t share that view, and I doubt folks at the Foundation do, either. After all, the Foundation is headed by John Matonis, a man with bylines under such articles as “Don’t Let Bitcoin Morph into Govcoin” and “Money Laundering Is Financial Thoughtcrime”. To say Matonis is a handmaiden of the state is laughable.

Just because one communicates with regulators does not mean one is encouraging regulation. There is a distinction that needs to be made between those who are engaged with regulators in order to invite regulation, and those of us who are engaged in order to, as the tagline of this website reads, “keep politicians’ hands off the ’net.”

As I’ve said before, the choice before us is not whether we should want regulation, but what to do about it. Regulatory power is something that currently exists as a fact of the world whether one likes it or not. Given that regulatory bodies exist, and given that these bodies will decide what the state’s reaction to Bitcoin will be—from an attempt to ban it on one end of the spectrum, to “light-touch” or no regulation as we see in some countries on the other end—what is wrong with advocating for the latter end?

Now, you may not think engagement will ever work, and you may want to focus your efforts on “exit” rather than “voice.” I totally respect that approach, but the beauty of Bitcoin is that if some of us focus on “voice,” it does nothing to hamper those who want to work on “exit.” Indeed, I htink it will buy those folks some time. The genius of a decentralized design is that even if I fail to talk sense into regulators, and they issue draconian licensing, and identification, and reporting rules and the rest, there is nothing they can do to stop Wilson and Unsystem from developing Dark Wallet.

And that brings me to the second, more important reason that I care about Bitcoin: its censorship resistance. Today, the small handful of regulated payment processors that you can use to transact online can prevent you from spending your money as you see fit. Bitcoin explodes this state of affairs, making it impossible for government to exercise prior restraint of financial transactions. They may be able to punish you after the fact, but they can no longer prevent transactions from taking place.

The obvious illustration of why this is important is what happened to WIkiLeaks after it released the State Department cables. PayPal, Bank of American, MasterCard, and the rest prevented American citizens from making perfectly legal contributions to the group. Though the payments processors deny it, their actions were clearly the result of political pressure. Had WikiLeaks and all of its would-be contributors been using Bitcoin at the time, all of those contributions could not have been prevented.

That, in turn, brings me to why the work of even the most amoral and ideologically disinterested entrepreneurs is so important, and why it matters that they end up with as friendly a regulatory environment as possible. What the entrepreneurs are doing is building out Bitcoin’s public infrastructure, and they are making it more widely accepted and thus more widely used. In other words, they are making it mainstream, and that should be seen as a good thing even by the most radical. Here’s why.

Bitcoin is a network, and networks thrive on strong network effects. The more people use Bitcoin, even under a regulated system, the more stable the price becomes, the more merchants will accept bitcoins, the more processing power will be dedicated to the network (thus better securing it), and perhaps most importantly, the more mindshare Bitcoin will capture and the more politically difficult it will be to restrain it. Whatever their motivations, what these entrepreneurs are poised to do is grow the Bitcoin network, and that makes the network more valuable to everyone, including the radicals, whether the regulators like it or not.

Consider WikiLeaks again. In early 2010, when its PayPal account was frozen, WikiLeaks was not accepting bitcoins. Why not? And even if they had been accepting Bitcoins, it’s unlikely very many of the lay persons who wanted to contribute could have figured out how to acquire and send them. Why? The answer to both questions are network effects. The network effects were not there yet. Indeed they may not be there now. But imagine a world where Bitcoin is commonplace and (even if regulated) exchanges and wallets are second nature and so is paying for pizza or ordering a book online. In that world, WikiLeaks would not have even considered using PayPal, and a large network of people familiar and comfortable with cryptocurrency could not be prevented from making contributions.

And again, none of this would prevent those who want to rely on “exit” from doing so. In fact, a bigger and stronger network benefits those who choose to use something like Dark Wallet, even if that bigger network is built out by entrepreneurs complying with regulation, and even if it is populated mostly by mainstream users. Indeed, tools like Dark Wallet will remain essential to maintain Bitcoin’s censorship resistance. I can imagine that in a future WikiLeaks-style scenario, the government might put pressure on regulated exchanges and wallets not to process payments to certain addresses. In that case, if Bitcoin is sufficiently mainstream, people might then have the wherewithal to transfer some coins to a Dark Wallet before making a contribution. And if it’s sufficiently mainstream, it won’t just be a handful of cypherpunks who can do that.

As long as Bitcoin remains open and decentralized, cypherpunks and entrepreneurs are not working at cross purposes, no matter how suspicious they may be of each other. The real regulatory threats to Bitcoin are the bonkers bananas proposals to centralize Bitcoin like we saw in the recent WIRED article. Luckily, that article misses the point of not just Bitcoin, but of this moment in history. Decentralization is what makes Bitcoin genius, it’s what attracts both the radicals and the entrepreneurs, and it’s not going away.

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