Today my colleague Eli Dourado and I have filed a public interest comment with the New York Department of Financial Services on their proposed “BitLicense” regulatory framework for digital currencies. You can read it here. As we say in the comment, NYDFS is on the right track, but ultimately misses the mark:

State financial regulators around the country have been working to apply their existing money transmission licensing statutes and regulations to new virtual currency businesses. In many cases, existing rules do not take into account the unique properties of recent innovations like cryptocurrencies. With this in mind, the department sought to develop rules that were “tailored specifically to the unique characteristics of virtual currencies.” As Superintendent Benjamin Lawsky has stated, the aim of this project is “to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation.” This is the right goal and one we applaud. It is a very difficult balance to strike, however, and we believe that the BitLicense regulatory framework as presently proposed misses the mark, for two main reasons. First, while doing much to take into account the unique properties of virtual currencies and virtual currency businesses, the proposal nevertheless fails to accommodate some of the most important attributes of software-based innovation. To the extent that one of its chief goals is to preserve and encourage innovation, the BitLicense proposal should be modified with these considerations in mind—and this can be done without sacrificing the protections that the rules will afford consumers. Taking into account the “unique characteristics” of virtual cur-rencies is the key consideration that will foster innovation, and it is the reason why the department is creating a new BitLicense. The department should, therefore, make sure that it is indeed taking these features into account. Second, the purpose of a BitLicense should be to take the place of a money transmission license for virtual currency businesses. That is to say, but for the creation of a new BitLicense, virtual currency businesses would be subject to money transmission licensing. Therefore, to the extent that the goal behind the new BitLicense is to protect consumers while fostering innovation, the obligations faced by BitLicensees should not be any more burdensome than those faced by traditional money transmitters. Otherwise, the new regulatory framework will have the opposite effect of the one intended. If it is more costly and difficult to acquire a BitLicense than a money transmission license, we should expect less innovation. Additional regulatory burdens would put BitLicensees at a relative disadvantage, and in several instances the proposed regulatory framework is more onerous than traditional money transmitter licensing. As Superintendent Lawsky has rightly stated, New York should avoid virtual currency rules that are “so burdensome or unwieldy that the technology can’t develop.” The proposed BitLicense framework, while close, does not strike the right balance between consumer protection and innovation. For example, its approach to consumer protection through disclosures rather than prescriptive precautionary regulation is the right approach for giving entrepreneurs flexibility to innovate while ensuring that consumers have the information they need to make informed choices. Yet there is much that can be improved in the framework to reach the goal of balancing innovation and protection. Below we outline where the framework is missing the mark and recommend some modifications that will take into account the unique properties of virtual currencies and virtual currency businesses.

We hope this comment will be helpful to the department as it further develops its proposed framework, and we hope that it will publish a revised draft of the framework and solicit a second round of comments so that we can make sure we all get it right. And it’s important that we get it right.

Other jurisdictions, such as London, are looking to become the “global centre of financial innovation,” as Chancellor George Osborne put it in a recent speech about Bitcoin. If New York drops the ball, London may just pick it up. As Garrick Hileman, economic historian at the London School of Economics, told CNet last week:

The chancellor is no doubt aware that very little of the $250 million of venture capital which has been invested in Bitcoin startups to date has gone to British-based companies. Many people believe Bitcoin will be as big as the Internet. Today’s announcement from the chancellor has the potential to be a big win for the UK economy. The bottom line on today’s announcement is that Osborne thinks he’s spotted an opportunity for the City and Silicon Roundabout to siphon investment and jobs away from the US and other markets which are taking a more aggressive Bitcoin regulatory posture.

Let’s get it right.

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?

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

• Biography, Thierer
• Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, Thierer
• Video: Permissionless Innovation: The Continuing Case for Technological Freedom, Thierer

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.

The pace of this disruptive change is only going to accelerate and come to touch more and more industries. As it does, the public policy battles will also evolve and expand, and so, too, will our understanding of what “tech policy” includes.

That’s why the Mercatus Center Technology Policy Program continues to expand its issue coverage to include more scholarship on a wide array of emerging technologies and sectors. What we’re finding is that everything old is new again. The very same policy debates over privacy, safety, security, and IP that have dominated information policy are expanding to new frontiers. For example, when we started our program five years ago, we never thought we would be filing public interest comments on privacy issues with the Federal Aviation Administration, but that’s where we found ourselves last year as we advocated for permissionless innovation in the emerging domestic drone space. We now expect that we will soon find ourselves making a similar case at the Food and Drug Administration, the Department of Transportation, and many other regulatory bodies in the near future.

In many ways, we’re still just talking about information policy, it’s just that increasing number of devices and sensors are being connected to the Internet. In other ways, however, it is in fact about more than simply an expanded conception of information policy. It’s about bringing the benefits of a permissionless innovation paradigm, which has worked so well in the Internet space, to sectors now controlled by prescriptive and precautionary regulation. As software continues to eat the world, innovation is increasingly butting up against outmoded and protectionist barriers to entry. Most will agree that the Internet has been the success it is because to launch a new product or service, you don’t have to ask anyone’s permission; we only need contract and tort law, and smart guard rails like safe harbors, to protect our rights. Yet if you want to offer a software-driven car service, you have to get permission from government first. If you want to offer genome sequencing and interpretation, you have to get permission first.

Maybe it’s time for a change. As Wall Street Journal columnist L. Gordon Crovitz argues, “The regulation the digital economy needs most now is for permissionless innovation to become the default law of the land, not the exception.” As a result, we’ll see this debate between “permissionless innovation” and the “precautionary principle” play out for a wide variety of new innovations such as the so-called “Internet of Things” and “wearable technologies,” but also with smart car technology, commercial drones, robotics, 3D printing, and many other new devices and services that are just now emerging. A recent New York Times survey, “A Vision of the Future From Those Likely to Invent It,” highlights additional innovation opportunities where this tension will exist.

The evolution of our work is also driven by the accelerating trend of decentralization and disintermediation, which could potentially make precautionary regulation too costly to undertake. When governments want to control information, they invariably head for the choke points, like payment processors or ISP-run DNS servers. This fact has created a demand for technologies that bypass such intermediaries. As mediated systems are increasingly replaced by decentralized peer-to-peer alternatives, there will be fewer points for control for governments to leverage. The result may be that any enforcement may have to target end users directly, which would not only increases the direct costs of enforcement, but also the political ones.

So in the coming months, you can expect to see Mercatus produce research on the economics of intellectual property, broadband investment, and spectrum policy, but also research on autonomous vehicles, wearable technologies, cryptocurrencies, and barriers to medical innovation. The future is looking brighter than ever, and we are excited to make permissionless innovation the default in that future.

Further Reading:

• Adam Thierer, Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, (Arlington, VA: Mercatus Center at George Mason University, 2014).
• Adam Thierer, Why Permissionless Innovation Matters, Medium, April 24, 2014.
• Eli Dourado, ‘Permissionless Innovation’ Offline as Well as On,” The Umlaut, February 6, 2013.
• Jerry Brito, Escape from Political Control, Reason, January 13, 2014
• Jerry Brito, Regulating Drones Is as Bad an Idea as Regulating 3D Printing, The Umlaut, May 2, 2013

Last 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

• For Overstock CEO, Bitcoin Isn’t Just A Publicity Stunt, Forbes
• Meet Patrick Byrne: Bitcoin Messiah, CEO of Overstock, Scourge of Wall Street, Wired
• UBS, in Theory, a Conspiracy to Naked Short “Tens of Millions” of Shares, Deepcapture

I’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…

• Bitcoin: A Primer for Policymakers (with Andrea Castillo)
• Regulators Need to Take It Easy on Bitcoin Startups, WIRED, March 6, 2014.
• Bitcoin: More than Money, Reason, December 2013.
• US regulations are hampering Bitcoin’s growth, The Guardian, November 18, 2013.
• Why Regulators Should Embrace Bitcoin, American Banker, August 21, 2013.
• And here are all the posts about Bitcoin on Tech Liberation from myself, Jim Harper, and Eli Dourado

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

• Is Wikipedia Biased?, Greenstein, Zhu
• Harvard Business School Biography, Greenstein
• Harvard Business School Biography, Zhu
• The Irony of Public Funding, The Virulent World of Mouse

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

• Lavabit, Levison
• Dark Mail, Zimmerman, Callas, Janke, Levison
• Lawyers raise civil liberty concerns in Lavabit case, Salon
• Lawyers for Lavabit founder: judges may dismiss civil liberties concerns, The Guardian

Jack Schinasi discusses his recent working paper, Practicing Privacy Online: Examining Data Protection Regulations Through Google’s Global Expansion published in the Columbia Journal of Transnational Law. Schinasi takes an in-depth look at how online privacy laws differ across the world’s biggest Internet markets — specifically the United States, the European Union and China. Schinasi discusses how we exchange data for services and whether users are aware they’re making this exchange. And, if not, should intermediaries like Google be mandated to make its data tracking more apparent? Or should we better educate Internet users about data sharing and privacy? Schinasi also covers whether privacy laws currently in place in the US and EU are effective, what types of privacy concerns necessitate regulation in these markets, and whether we’ll see China take online privacy more seriously in the future.

Download

Related Links

• Practicing Privacy Online: Examining Data Protection Regulations Through Google’s Global Expansion, SSRN
• Journal of Transnational Law, Columbia University

If you’re looking to pursue an econ graduate degree, you should know that the Mercatus Center offers several amazing fellowships for both masters and PhD students. And while they’re mostly for econ students, the Adam Smith fellowship is open to students in other fields as well. In addition to money and a great education, you could get the chance to work with me, Adam, Eli, and Brent. Application deadlines are in March, so get going…

The PhD Fellowship is a three-year, competitive, full-time fellowship program for students who are pursuing a doctoral degree in economics at George Mason University. It includes full tuition support, a stipend, and experience as a research assistant working closely with Mercatus-affiliated Mason faculty. It is a total award of up to $120,000 over three years. The application deadline is February 1, 2014.

The MA Fellowship is a two-year, competitive, full-time fellowship program for students pursuing a master’s degree in economics at George Mason University who are interested in gaining advanced training in applied economics in preparation for a career in public policy. It includes full tuition support, a stipend, and practical experience as a research assistant working with Mercatus scholars. It is a total award of up to $80,000 over two years. The application deadline is March 1, 2014.

The Adam Smith Fellowship is a one-year, competitive fellowship for graduate students attending PhD programs at any university, in a variety of fields, including economics, philosophy, political science, and sociology. Smith Fellows receive a stipend and attend workshops and seminars on the Austrian, Virginia, and Bloomington schools of political economy. It is a total award of up to $10,000 for the year. The application deadline is March 15, 2014.

James Barrat, author of Our Final Invention: Artificial Intelligence and the End of the Human Era, discusses the future of Artificial Intelligence (AI). Barrat takes a look at how to create friendly AI with human characteristics, which other countries are developing AI, and what we could expect with the arrival of the Singularity. He also touches on the evolution of AI and how companies like Google and IBM and government entities like DARPA and the NSA are developing artificial general intelligence devices right now.

Download

Related Links

• Our Final Invention: Artificial Intelligence and the End of the Human Era, Amazon
• About the Author, Barrat
• The Definitive Tech Books of 2013, Huffington Post

Over a month ago I testified at the Senate Homeland Security and Governmental Affairs Committee hearing on Bitcoin. I’ve been asked by the committee to submit answers to additional questions, and I thought I’d try to tap into the Bitcoin community’s wisdom by posting here the questions and my draft answers and inviting you to post in the comments any suggestions you might have. I’d especially appreciate examples of innovative uses of Bitcoin or interesting potential business cases. Thanks for your help!

Post-Hearing Questions for the Record Submitted to Jerry Brito From Senator Thomas R. Carper

“Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies” November 18, 2013

1. Overall, how would you assess the federal government’s activities thus far regarding virtual currencies and in what areas do you believe more work needs to be done?

The federal government’s approach to virtual currencies thus far has been understandably cautious.

On the anti-money-laundering and terrorist-financing front, FinCEN has issued guidance that adequately addresses virtual currencies, and it is heartening to see recent reports that the agency is clarifying for entrepreneur and consumers how they plan to apply that guidance. Additionally, with the tools already at their disposal, law enforcement has also successfully taken down the Silk Road online black market, as well as Liberty Reserve, a centralized digital currency favored by online criminals and responsible for laundering billions of dollars.

On the consumer protection front, state financial regulators are currently developing guidelines for the licensing of money transmitters, which are meant to ensure that such businesses are well-run and adequately capitalized. As noted in a question below, however, virtual currencies like Bitcoin are still not in use by very many consumers, and those who do use them likely understand the risks involved, giving regulators the luxury of seeing how the market develops and whether any problems arise before intervening.

One area where more guidance may be necessary is tax compliance. The IRS has indicated that it is working on guidance related to virtual currencies. Clear and simple rules for the tax treatment of virtual currency capital gains and other tax questions would be welcome.

2. Do you believe virtual currencies, including Bitcoin, fit into our current legal and regulatory framework? Do you see any gaps in our statutes and regulations regarding virtual currencies? Which agencies do you believe need to be at the forefront of the federal government’s work on virtual currencies?

To date we have seen that regulators have been able to apply existing law to virtual currencies. In the future, there may be situations in which existing law may not be able to fully account for virtual currencies. For example, to the extent we may some day see a Bitcoin futures market, the Commodities Future Trading Commission may want to exercise its authority over “foreign-exchange forwards” or “foreign-exchange swaps.” However, it would be difficult to justify that virtual currencies are “foreign” currency, which Congress did not define in Commodity Exchange Act presumably because the meaning was obvious at the time. That said, the CFTC would have no problem treating bitcoins as commodities, since “commodity” is defined very broadly by the Act. What this suggests is that rather than attempt to predict how current law may not become incompatible with virtual currency use, a better approach may be to wait for actual “cases and controversies” to arise and to intervene only if regulators cannot apply existing law. To do otherwise may invite unintended consequences or simply waste time and resources.

3. As I understand things, currently there is still a relatively very small group of people that use Bitcoin. That being the case, the full scope of the ramifications of the use of Bitcoin remains to be seen.

a. Can you share with us some examples of uses that might have a positive impact for consumers or the broader economy? What are some of the promises of this new technology, as you see them?

b. What kinds of businesses and opportunities might emerge around Bitcoin if the currency continues to grow?

I would refer you to pages 10 – 20 of Bitcoin: A Primer for Policymakers in which my colleague Andrea Castillo and I detail the ways Bitcoin may positively affect the economy, as well as the business opportunities it presents.

4. Since its introduction in 2008, Bitcoin has experienced a number of significant price swings. For example, in 2013, the price per Bitcoin fell from $266 in early April to $50 in late April, but today is hovering around $1000.

a. What factors have contributed to this volatility?

There are at least three reasons that the price of Bitcoin fluctuates so wildly. First, the total value of all outstanding bitcoins is still relatively low. This means that even a small absolute increase in interest in Bitcoin can send prices soaring.

Second, a large fraction of the existing stock of bitcoins seem, for now, to be held as a long-term investment. This means that the market is not very liquid.

Finally, when there is a change in the demand for Bitcoin, the supply of Bitcoin cannot adjust to accommodate it, so all of the adjustment has to happen in the price, rather than in the quantity. This effect may be somewhat offset for now by the fact that many bitcoins are held as investments, but it means that Bitcoin is likely to be relatively volatile even if people stop holding bitcoins as investments.

b. For those companies who are trying to build businesses around this technology, doesn’t this volatility concern you? What can be done so the price is not so volatile?

Merchants that accept payment in bitcoins and companies trying to build businesses around the protocol no doubt already take the volatility into consideration. For example, merchants that accept bitcoins often use a payment services like BitPay, which deposit dollars into merchant accounts on a daily basis, and companies like BitPay hedge against currency volatility. That said, as more and more consumers begin to use Bitcoin, the market will become more liquid and volatility should subside. Additionally, the development of a bitcoin futures market may also help stabilize the currency. Regulators can help combat volatility by allowing such a market to develop.

5. Most of the recent research and media coverage on virtual currencies has focused on Bitcoin. Are there other virtual currencies that we should be paying attention to?

It is important to keep in mind the difference between centralized and decentralized digital currencies. Centralized currencies like the defunct Liberty Reserve are of greater concern to law enforcement, as Special Agent Edward Lowery explained at the hearing. As for decentralized digital currencies, it is not surprising that Bitcoin has earned the lion’s share of attention since it is the first ever decentralized currency as well as the largest. Indeed, the economy of the next largest decentralized digital currency—Litecoin—is less than one-tenth that of Bitcoin. Competing decentralized currencies are very important, especially as they develop technical innovations, but the regulatory and law enforcement issues they raise are essentially the same as Bitcoin.

6. The point has been made to me that the way to see Bitcoin and virtual currencies today is a bit like we saw email or the internet itself 20 years ago. At the time, we thought email might replace mail but it was sort of complicated and difficult to work unless you were more technically minded. Obviously as the technology matured it became easier to use and more widely adopted and it’s changed the way we communicate in fundamental ways. With that said, if you could hazard a guess, what do you see for Bitcoin 20 years from now?

Email is a good analogy, but a better one might be the World Wide Web. As Mike Hearn, an engineer at Google who serves as one of Bitcoin’s core developers, says, “The Web started out as scientists simply showing documents to each other. You could link documents and embed images, but the true potential of the Web really came when these pages became interactive and started gaining more and more features allowing people to build things like Facebook or online shops. Those things are not documents, and now probably half the time people use the Web they aren’t really interacting with documents; they are actually using applications.”

Unlike email, the Web is a platform, which means that it can be programmed to be just about anything. Bitcoin is similarly a platform that can be programmed. As a result, it’s difficult to predict what developers and entrepreneurs allowed to freely innovate may come up with. However, some innovations that Bitcoin may make possible include micropayments, smart property, decentralized assurance contracts, and competitive arbitration services.

7. What can we as policymakers and legislators be doing to encourage innovation by good actors interested in being involved in the virtual currency space?

As I said in my testimony, policymakers’ first imperative should be to do no harm. Bitcoin and other decentralized digital currencies are an experiment, just as the wider Internet once was. The Internet has become the amazing engine of innovation and economic prosperity because it has largely been left alone by regulators. This was a deliberate policy articulated by President Clinton’s chief policy counsel Ira Magaziner, who was in charge of crafting the administration’s Framework for Global Electronic Commerce in July 1997. Its recommendations read in part:

1. The private sector should lead. The Internet should develop as a market driven arena not a regulated industry. Even where collective action is necessary, governments should encourage industry self-regulation and private sector leadership where possible.

2. Governments should avoid undue restrictions on electronic commerce. In general, parties should be able to enter into legitimate agreements to buy and sell products and services across the Internet with minimal government involvement or intervention. Governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures or new taxes and tariffs on commercial activities that take place via the Internet.

3. Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce. Where government intervention is necessary, its role should be to ensure competition, protect intellectual property and privacy, prevent fraud, foster transparency, and facilitate dispute resolution, not to regulate.

4. Governments should recognize the unique qualities of the Internet. The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. Accordingly, the regulatory frameworks established over the past 60 years for telecommunication, radio and television may not fit the Internet. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.

5. Electronic commerce on the Internet should be facilitated on a global basis. The Internet is a global marketplace. The legal framework supporting commercial transactions should be consistent and predictable regardless of the jurisdiction in which a particular buyer and seller reside.

The same principles should apply to Bitcoin today. If there is one thing policymakers could do today to encourage innovation by good actors in the Bitcoin space it is to signal to the traditional financial sector—especially in banking—that while Bitcoin presents some challenges, it is nothing to be feared, and they will not be penalized by regulators for servicing, working with, and even investing in Bitcoin-related businesses.

Robert Scoble, Startup Liaison Officer at Rackspace discusses his recent book, Age of Context: Mobile, Sensors, Data and the Future of Privacy, co-authored by Shel Israel. Scoble believes that over the next five years we’ll see a tremendous rise in wearable computers, building on interest we’ve already seen in devices like Google Glass. Much like the desktop, laptop, and smartphone before it, Scoble predicts wearable computers represent the next wave in groundbreaking innovation. Scoble answers questions such as: How will wearable computers help us live our lives? Will they become as common as the cellphone is today? Will we have to sacrifice privacy for these devices to better understand our preferences? How will sensors in everyday products help companies improve the customer experience?

Download

Related Links

• Age of Context: Mobile, Sensors, Data and the Future of Privacy , Amazon
• Naked Conversations: How Blogs are Changing the Way Businesses Talk with Customers, Amazon
• The Rackspace Blog & Newsroom, Scoble

Sens. Lamar Alexander and Dianne Feinstein introduced a bill that would ban cellphone calls on planes today, just before the FCC votes on the issue. Alexander, a small government conservative, had this to say in a statement:

Keeping phone conversations private on commercial flights may not be enshrined in the Constitution, but it is certainly enshrined in common sense. This legislation is about avoiding something nobody wants: nearly 2 million passengers a day, hurtling through space, trapped in 17-inch-wide seats, yapping their innermost thoughts.

As I pointed out in Reason last week, the fear that if airlines are given the option of allowing cellphones in-flight then we’ll have millions of “yapping” passengers is contrary to all evidence. First of all, not all airlines will allow in-flight phone use, giving folks who fear “yapping” a choice.

If [demand for phone-free flights] is there, as it certainly seems to be, airlines will respond with private rules and bans on cellphone use without government’s help. And private rules have the advantage of being much more varied and flexible than the difficult-to-change, one-size-fits-all rules we can get from government. We can see this at work in Europe and Asia, which already allow cellphone use in-flight. According to the New York Times, “Virgin Atlantic allows unlimited data connections, but it lets only six people talk on a cellphone at once. Some Lufthansa flights allow data connections through a cellphone, but no phone calls.”

By introducing this legislation, Alexander is essentially saying that he doesn’t trust markets to meet consumer demand, and that a government edict is the better course. More to the point:

Even on flights that do allow cell phone use, it won’t be “chaos” as Rep. DeFazio predicts. Humans have a pretty good history of eliciting good behavior from each other through the development of norms without the need for codified rules–public or private. According to the FAA, civil authorities in countries were in-flight cellphone use is permitted reported no “cases of air rage or flight attendant interference related to passengers using cell phones on aircraft equipped with on-board cellular telephone base stations.”

Having the government tell airlines what services they can and can’t offer their customers is not “commons sense” as Alexander puts it; it’s big-government paternalism. Perhaps I have a higher opinion of my fellow Americans, including travelers from Tennessee, but I really doubt that if an airline allows cellphone use, then we will necessarily see endless mindless “yapping.” Americans would probably behave like the Europeans and Asians who already have this choice, being judicious about using their phone and courteous when they do.

A common question among smart Bitcoin skeptics is, “Why would one use Bitcoin when you can use dollars or euros, which are more common and more widely accepted?” It’s a fair question, and one I’ve tried to answer by pointing out that if Bitcoin were just a currency (except new and untested), then yes, there would be little reason why one should prefer it to dollars. The fact, however, is that Bitcoin is more than money, as I recently explained in Reason. Bitcoin is better thought of as a payments system, or as a distributed ledger, that (for technical reasons) happens to use a new currency called the bitcoin as the unit of account. As Tim Lee has pointed out, Bitcoin is therefore a platform for innovation, and it is this potential that makes it so valuable.

Eric Posner is one of these smart skeptics. Writing in Slate in April he rejected Bitcoin as a “fantasy” because he felt it didn’t make sense as a currency. Since then it’s been pointed out to him that Bitcoin is more than a currency, and today at the New Republic he asks the question, “Why would you use Bitcoin when you can use PayPal or Visa, which are more common and widely accepted?”

He answers his own question, in part, by acknowledging that Bitcoin is censorship-resistant. As he puts it, “If you live in a country with capital controls, you can avoid those[.]” So right there, it seems to me, is one good reason why one might want to use Bitcoin instead of PayPal or Visa. Another smart skeptic, Tyler Cowen, acknowledges this as well, even if only to suggest that the price of bitcoins will fall “if/when China fully liberalizes capital flows[.]”

Another reason why one would use Bitcoin instead of PayPal or Visa is that it’s cheaper. Posner disputes this, arguing that Bitcoin’s historic volatility makes it risky to hold Bitcoins, necessitating hedging, and therefore making it no less costly than traditional payments systems. (Cowen was one of the first to make this argument.) But this is not true.

First of all, I would argue that there’s nothing inherent in Bitcoin that makes it necessarily as volatile as it has been; its volatility to date comes largely from the fact that it’s thinly traded. If its adoption continues apace, and its infrastructure continues to be developed, there’s no reason to think it will forever be as volatile as it has been to date. But that’s conjecture. More to the point is the proof that’s in the pudding: There are tens of thousands of merchants accepting bitcoins for payment today (and growing), and the number of transactions accepted by those merchants has been exploding as well, setting a record on Black Friday. Can it be that even with the necessary hedging, Bitcoin is cheaper?

At least for some types of transactions I think the answer is unquestionably yes. Take international remittances, which is a $500 billion industry. Sending money to Kenya using Western Union MoneyGram or some other traditional money transmitter costs around five to ten percent of the amount being sent, and can take days for the deposit to take place. A new startup, BitPesa, is looking to charge only three percent, and to carry out transfers virtually instantaneously. So hedging costs would have to be more than five to ten percent to make this not worthwhile. It’s an empirical question, but it seems to me the fact that so many are jumping in helps give us a hint as to the answer. Perhaps we can look to Bitpay’s 1% fee as a market estimate of the cost of hedging.

Well then, so far I count two things that Bitcoin can do that traditional payments systems cannot: it is censorship resistant and it is cheaper. Oh, wait. I actually mentioned another one: it’s faster. Traditional wire transfers can take days or even weeks to clear, while Bitcoin takes minutes. And yet there’s more.

As Eli Dourado just pointed out in a previous post, built into Bitcoin is a facility for decentralized arbitration. Essentially, Bitcoin allows for transactions that require two out of three signatures to verify a transaction, thus allowing payer and payee to turn to an arbitrator if there is a dispute about whether the payment should go through. Paypal and credit card companies essentially provide this service today, but as Eli points out, decentralized arbitration would likely be cheaper and would certainly enjoy much more competition. That’s four things Bitcoin can do that traditional payments networks cannot, but let me quickly add a fifth. There’s no reason that the arbitrator must be a human; using Bitcoin’s scripting language the arbitrator can be a trusted automated source of information that on a regular basis broadcasts facts such as the price of gold, or price of stocks, or sports scores. Make that data stream your arbitrator and, voila, you have a decentralized predictions market. (Ed Felten at Princeton is working on executing the concept.)

One more before I sign off and go drink with the rest of the Tech Liberation gang at our 15th Alcohol Liberation Front this evening, to which you’re all invited. Bitcoin allows for microtransactions in a way that’s never before been possible. First of all, because bitcoin transactions can be cheap, you can send incredibly small amounts (say five cents or half a cent) that would be cost-prohibitive using traditional payments systems. There’s a start-up called BitWall that essentially allows publishers to easily charge tiny amounts for their content. Now, believe me, I know all the arguments for and against micropayments for content. My only point is that Bitcoin has the potential to further reduce the friction of such payments. But that’s not the exciting part. More interesting are really, really small microtransactions.

Bitcoin transactions are cheap, but you wouldn’t think they’re cheap enough that you could conduct hundreds per second. But the thing is, you can, using the micropayments channels feature of the Bitcoin protocol. It’s not yet been widely exploited, but it’s there in the spec waiting to be. I won’t go into the technical details in this post, but essentially you transmit one large transaction to the network (you can think of this like a deposit, say of $10), then you conduct as many tiny transactions between payer and payee not broadcast to the network (therefore ‘free’), and finally you broadcast how much of the initial amount remains with each party. What this means is that you can now offer metered services based on microtransactions.

One good example of how this would be useful is Wi-Fi access, which Mike Hearn explains in this video. Today we are surrounded by wi-fi hotspots, but we can’t use them because they are password protected, in part because there’s no good way to charge for their use. When you can pay to use a wi-fi hotspot, it usually entails creating an account with the provider and then purchasing a block of time, perhaps more than you need. Now imagine if you could connect to any open hotspot, without first creating any kind of account, and paying your way by the second or the kilobyte. That’s possible today with Bitcoin, it’s just going to take some time to be implemented. And think of all the other as-yet unimagined ways that this ability to meter could be put to use!

That’s six ways to answer the question, “Why would you use Bitcoin when you can use PayPal or Visa.” There are more. Hearn discusses a bunch in the video. These are all very real in the sense that they are all technically possible today, but certainly speculative in that there remain regulatory and market hurdles ahead. I can certainly understand why some would be skeptical of Bitcoin’s long-term success (I for one am not certain of it), but I really hope we can get to the point were that skepticism is based on more than misunderstandings about what Bitcoin is or what it can and cannot do.

Alice Marwick, assistant professor of communication and media studies at Fordham University, discusses her newly-released book, Status Update: Celebrity, Publicity, and Branding in the Social Media Age. Marwick reflects on her interviews with Silicon Valley entrepreneurs, technology journalists, and venture capitalists to show how social media affects social dynamics and digital culture. Marwick answers questions such as: Does “status conscious” take on a new meaning in the age of social media? Is the public using social media the way the platforms’ creators intended? How do you quantify the value of online social interactions? Are social media users becoming more self-censoring or more transparent about what they share? What’s the difference between self-branding and becoming a micro-celebrity? She also shares her advice for how to make Twitter, Tumblr, Instagram and other platforms more beneficial for you.

Download

Related Links

• Status Update: Celebrity, Publicity, and Branding in the Social Media Age, Marwick
• Engineered Performances Alice E. Marwick’s ‘Status Update’, The New York Times
• Biography, Marwick

It’s been way too long since the Tech Liberation Front hosted an IRL meetup, more than a year in fact, so we’re looking to make amends next week. You’re invited to the 15th Alcohol Liberation Front happy hour, which we’ll hold at Churchkey on 14th Street at 6 p.m. on Wednesday, December 4th.

Lots of us from the TLF gang will be there, including quite a few of our out-of-town contributors. So please come by and have a beer with us, and bring a friend!

In my Reason column this week I took inspiration from the fact that I will soon be sporting a Narrative Clip life-logging camera, and I wrote about our coming sousveillance future when everyone will be recording everyone else with wearable cameras. Lo and behold, looks like our good friend Fred Smith of CEI last night lived that future.

That’s a video posted by a biker who apparently wears a camera on his helmet and records his rides. He was calling the police to report a car blocking the bike lane when Fred and his wife Fran asked him not to. One thing I find fascinating is that being recorded, their instinct was to record back with the cameras on their phones.

As wearables become mainstream we’re going to begin to see many more videos like this, and I leave it to the reader to decide whether that’s a good thing. Sousveillance, whether we like it or not, will be a giant accountability machine. Obviously, recording the behavior of police and other government agents will help keep them accountable, but we’ll also be recording each other. Indeed, this biker wears a camera in part, I’m sure, to hold others accountable should anything happen to him on the road. What’s interesting is that what we will be held accountable for will be not just traffic accidents, but also sidewalk interactions that until now would have remained private and anonymous. Do check out my column in which I go into much more detail about the coming mainstreaming of sousveillance.

“Selfie” was selected today as the word of the year by the Oxford English Dictionary’s editors, beating both “twerking” and “bitcoin.” Bitcoin’s company in that word list makes me appreciate the fact that others may be as sick of hearing about Bitcoin as I am about twerking. Nevertheless, it’s a pretty important week for Bitcoin, an I wanted to highlight some of the work I’ve been doing.

Yesterday the Senate Homeland Security and Governmental Affairs Committee held a hearing on the promises and challenges that virtual currencies hold for consumers and law enforcement respectively. I testified at that hearing and video of my testimony is below. You can also check out the written testimony, which is an updated version of the Bitcoin primer for policymakers I wrote with Andrea Castillo earlier this year. And ahead of the hearing I published an op-ed in The Guardian arguing that if the U.S. doesn’t foster a sane regulatory environment for Bitcoin, entrepreneurs will go to other jurisdictions that do.

All in all the hearing was hearteningly positive. The federal regulators and law enforcement representatives all agreed that Bitcoin is a lawful and legitimate payments system and that it holds great promise. They also agreed that plain old cash and centralized virtual currencies (contra Bitcoin’s decentralized design) are much greater magnets for money laundering, and that they needed no new laws or authority to deal with illegal uses of Bitcoin. I discuss the hearing and its implications on today’s Cato Daily Podcast with Caleb Brown.

Finally, I think there are lots of folks, especially in the wonkosphere, who think they know what Bitcoin is, but really don’t, and so the opinions they offer about its viability or significance are based on misunderstanding. For example, Neil Irwin at Wonkblog today wrote a 700-word post to suggest that what Bitcoin needs is a central bank. Now, if he’s trolling, kudos to him. But I really think he’s innocently ignorant of the fact that Bitcoin’s seminal design feature is that it is a decentralized payments system, and that the moment you add a central banker (which would in any case be impossible) you would no longer have Bitcoin, but Facebook Credits or Microsoft Points or airline miles.

So, if you think you have an inkling about what Bitcoin is, but you’re not too sure, or you don’t know why it’s so significant, please check out my cover story in the December issue of Reason, which was just made available online. Apart from explaining the basics, I go into detail about the little understood fact that Bitcoin is much more than just money. Value transmission is just the most obvious use case for Bitcoin, and thus the one that’s being built out first, but the Bitcoin platform is essentially a decentralized ledger, so it is also able to support property registrations, decentralized futures markets, and much more.

And truly finally, if you want to keep up with all the happenings in Bitcoin, including the Senate Banking Committee hearing later today, check out MostlyBitcoin.com, a site a built for myself but that I hope is useful to others that tracks Bitcoin stories in the mainstream media.

Anupam Chander, Director of the California International Law Center and Martin Luther King, Jr. Hall Research Scholar at the UC Davis School of Law, discusses his recent paper with co-author Uyen P. Lee titled The Free Speech Foundations of Cyberlaw. Chander addresses how the first amendment promotes innovation on the Internet; how limitations to free speech vary between the US and Europe; the role of online intermediaries in promoting and protecting the first amendment; the Communications Decency Act; technology, piracy, and copyright protection; and the tension between privacy and free speech.

Download

Related Links

• The Free Speech Foundations of CyberLaw, Chander, Lee
• The Electronic Silk Road: How the Web Binds the World Together in Commerce, Amazon
• Rules of the Digital Age: PW Talks with Anupam Chander, Publishers Weekly
• Securing Privacy in the Internet Age, Amazon

Today 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 TIME.com, 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.

Ryan Radia is one of the few people in the world with whom it is a true pleasure to discuss copyright issues. We see eye to eye on almost everything, but there is enough difference in our perspectives to make things interesting. More importantly, Ryan’s only religious fealty is to logic and the economic way of thinking, which makes for reasoned and respectful conversations. So I am delighted that he took the time to conduct one of his patented Radianalysis reviews of the issues raised by PiracyData.org. As is very often the case, I agree from top to bottom with what Ryan has laid out, and it has prompted some thoughts that I’d like to share.

What Ryan is addressing in his piece is the question of whether shortening or eliminating release windows would reduce piracy. He concludes that yes, “Hollywood probably could make a dent in piracy if it put every new movie on iTunes, Vudu, Google Play, Amazon, and Netflix the day of release. Were these lawful options available from the get-go, they’d likely attract some people who would otherwise pirate a hit new film by grabbing a torrent on The Pirate Bay.” That said, Ryan points out quite rightly that “even if Hollywood could better compete with piracy by vastly expanding online options for viewing new release films, this might not be a sound money-making strategy. Each major film studio is owned by a publicly-held corporation that operates for the benefit of its shareholders. In other words, the studios are in the business of earning profits, not maximizing their audiences.” I couldn’t have said it better myself.

One thing that caught me off guard when we launched PiracyData.org (but that in retrospect should not have), is that many people interpreted our attempt to create a dataset as a statement that Hollywood is to blame for its own piracy problem. As I’ve explained, I think it’s dumb to blame Hollywood for piracy, and doing so was not what motivated the project. What motivated the project was Hollywood’s claim that private third parties, such as search engines, have an obligation to do everything in their power to reduce piracy, and that companies like Google are not doing “enough” today.

As Ryan points out, the studios could probably curb piracy by changing their business model, but doing so might very well mean taking a cut in revenue. And as he also points out, the studios are not audience maximizers; they are profit maximizers. This is why they are not about to drastically change their business model anytime soon, which is their prerogative and one I understand. But then the question is, how many resources should we expect taxpayers and private third parties to spend to ensure that the studios can maximize their profits?

In thinking about how to answer that question, I would remind myself of the constitutional purpose of copyright, which is “to promote the progress of science.” The purpose of copyright is about audience maximization, not profit maximization. Returns to creators are a means, not an end.

At this point, let me take a moment to head off any misinterpretations of that last paragraph and repeat, yet again, that piracy is wrong and illegal and inexcusable. I am not saying that piracy is a justifiable way to accomplish the constitutional purpose of copyright. What I am saying is that in deciding how many taxpayer dollars we want to expend on enforcement, and how many encumbrances we want to place on the property and liberty of third parties, we should ask ourselves: Will this further the progress of science? Or is it merely a subsidy to a particular industry?

As long as Hollywood has moves to make that could curb piracy, I don’t see how they can say to the rest of us that we’re not doing “enough.” Yes, the moves that Hollywood could make to curb piracy might reduce its profits (although there’s lots of experimentation going on and it’s yet to be seen what the ultimate equilibrium will be), but that fact tell us nothing about what obligations the rest of us have to prop up a particular business model.

The studios are in the terrible position of having to compete with piracy in a digital world, and I truly empathize with their plight. (I thank Ryan for noting that I, by pointing out this fact, am not celebrating it.) But given the fact of piracy, the question is, who should pay to address it? I don’t think it’s self-evident that it should be search engines or taxpayers.

As a final note, let me acknowledge that if Hollywood’s profits were to diminish, then we may end up with a different mix of films than we have today. We might get fewer big-budget action flicks like Avatar and more indie comedies like It’s a Disaster, which premiered online before its theatrical run. Again, it’s not self-evident that such an outcome would be good or bad. We’d have to ask ourselves whether such a new mix adequately promotes the progress of science or not. On that, for what it’s worth, here are some thoughts from Kevin Spacey.

Christopher Wolf, director of the law firm Hogan Lovells’ Privacy and Information Management group, addresses his new book with co-author Abraham Foxman, Viral Hate: Containing Its Spread on the Internet. To what extent do hateful or mean-spirited Internet users hide behind anonymity? How do we balance the protection of the First Amendment online while addressing the spread of hate speech? Wolf discusses how to define hate speech on the Internet; whether online hate speech leads to real-world violence; how news sites like the Huffington Post and New York Times have dealt with anonymity; lessons we should impart on the next generation of Internet users to discourage hate speech; and cases where anonymity has proved particularly beneficial or valuable.

Download

Related Links

• Viral Hate: Containing its Spread on the Internet, Amazon
• About Christopher Wolf, Future of Privacy
• Christopher Wolf Biography, Huffington Post

Adam, Eli, and I are very happy to announce that Brent Skorup joined us this week as a research fellow at Mercatus. He will focus on telecommunications, radio spectrum, and media issues, which will help round out our existing portfolio of work on privacy, cybersecurity, intellectual property, Internet governance, and innovation policy.

Brent has written Mercatus research papers on federal spectrum policy, cronyism in the technology sector, and antitrust standards in the tech economy. Brent also has a forthcoming paper co-authored with Thomas Hazlett on the lessons of LightSquared. His work has appeared in several law reviews, The Hill, US News & World Report, The Washington Post, Bloomberg Businessweek, and San Francisco Chronicle. He also blogs here at Tech Liberation.

With the ongoing debate at the federal level over how to efficiently use radio spectrum, Brent has proposed establishing a congressional commission to determine spectrum allocation for federal users and put up newly available spectrum for auction. He has also called for having an agency similar to the General Services Administration take ownership of federal spectrum and “rent” it to agencies at a fair market value.

Brent previously served as director of operations and research for the Information Economy Project at the George Mason University School of Law, applying law and economics to telecommunications policy. He has a BA in economics from Wheaton College and received his JD at Mason.

The launch of our new site PiracyData.org has predictably stirred up a good debate and I thought I’d chime in with a couple of thoughts. First I’d like to address the assertion by some, including Jeff Eisenach and Daniel Castro, that the point we’re trying to make with our site is that piracy is justified when content is not available legally. Here is Eisenach:

The Mercatus site is headlined by the following question: “Do people turn to piracy when the movies they want to watch are not available legally?” The implication is that piracy of movies that aren’t being offered legally is OK, or at least less bad, than piracy of movies that are currently available.

In both my post announcing the site and the Washington Post article Eisenach links to, as well as other articles about the site, I make it clear that there is no excuse for piracy. Piracy is illegal and wrong and copyright holders should be able to exercise their exclusive rights as they see fit during the term of copyright. I don’t know how much more explicit I can be. That said, although piracy is illegal and wrong, it may still be the case that the legal availability of content has an effect on piracy rates. That is a possibility that we are pointing out, not celebrating.

Second, I’d like to address the assertions by Eisenach and Castro that I am advocating that the movie industry should change its business model to collapse the theatrical release window, and that I think doing this will solve the piracy problem. Here again is Eisenach:

If you believe copyright holders have an obligation to make all content available to everyone all the time (as PiracyData.org seems to suggest), at what price would you require them to offer it?

In my post announcing the site I wrote that “their business model is their prerogative, and it’s none of my business to tell them how to operate,” and that’s something I repeated in other articles where I was quoted. So to be clear, I don’t think movie studios have any obligation to do anything. And I certainly don’t think that shortening their release windows would “eliminate piracy,” as Castro said.

Having addressed what I didn’t say, let me reiterate what I did say. The context for the creation of PiracyData.org was the MPAA report arguing that search engines were not taking sufficient voluntary measures to combat piracy. That study was released on the same day that the House held a hearing on “the role of voluntary agreements in U.S. intellectual property system” at which it was also argued that search engines, and Google in particular, have not done enough to combat piracy. The message from the content industry was, to echo Eisenach, that Google has an obligation to take all possible steps to end piracy. It is the nature of this notional obligation that we wanted to probe with PiracyData.org.

Hopefully I’ve been sufficiently clear that we all think that piracy is illegal and wrong and a problem that the content industry is rightfully up in arms about. So the question that we’re really debating is not whether piracy is right or wrong, but how to enforce copyright. How many resources should be expended, and by whom? That’s what this debate it really about.

Over a year ago, Google changed its algorithm to demote sites in its search results based on the number of copyright complaints those sites have received. An algorithmic change is as deep a change in a search engine’s business as one can expect. The message coming from the MPAA report and the House hearing, however, was that Google’s efforts were not enough, and that they should take further voluntary steps to not only remove infringing links from their search results, but also promote to the top legal sources.

PiracyData.org is never going to show all the ways that availability can affect piracy rates, and I’ve been clear about that both in my launch post and in interviews I’ve given, but I think that simply looking at the availability of the most-pirated movies will help shed some light on the simple question of whether people might turn to piracy when there is no legal version available. As the MPAA report noted, the majority of consumers who found themselves at infringing links “did not display an intention of viewing content illegally.” So the question is, why did these consumers who had no illegal intent end up at infringing sites? If they turned to piracy because they could not find a legal version, that would not justify piracy, but I hope we can all agree that it would be good to know whether it might be happening.

So it seems to me that we have identified two contentions of how piracy might be addressed. One is to have search engines voluntarily take more and more steps to change how they present the Web to users in order to address piracy. The other is that movie studios could shrink the theatrical release window. These are not mutually exclusive, and I think we see both happening. Google, as I mentioned, has already changed its algorithm and taken other measures, and as the MPAA has pointed out, the movie studios are working hard to make their movies available when and where consumers want. The question, therefore, is whether these efforts are enough or not, and what is the best way to enforce copyright.

Without a massive investment in enforcement, the sad reality is that piracy rates will never be zero. So what we should debate is whether additional enforcement efforts are worth the cost. As much as we might not want it to be the case, at some point there are diminishing marginal returns to more enforcement. If we determine that more could be done, then then the question is who should make that investment. Should it be search engines or the movies studios who should consider further changing how they do business?

Now, let me say that I am absolutely sympathetic to content owners who are put in incredibly unfair position of having to compete with piracy. As I said before, under the law they have the exclusive right to determine how they will distribute their works, and it is galling that they might feel forced by pirates to adopt a business model against their wishes. That is not fair to content owners. That said, the fact that they are facing this competition from piracy, as unfair and reprehensible as it is, is a fact that can’t be ignored.

In sum, these are the tough questions we should be discussing, not distractions about whether anyone is condoning piracy or whether anyone is blaming the victim, etc. We were hoping that PiracyData.org would spark that discussion, and boy have we had a big return on our investment! Now we need to make sure that we keep this debate on the serious and nuanced questions, and this is often hard to do over tweets and quotes in articles. So we are thinking of holding an event here at George Mason with all points of view represented to discuss these real questions. Stay tuned for details.

Today, we launched PiracyData.org, a site that takes the top ten most pirated movies of the week and mashes them up with data on legal online availability. Our hope is to build an extensive time-series dataset that can help shed light on the relationship between piracy and viewing options.

As might be expected with a new site, we’ve experienced some launch day glitches with the accuracy of our data and our visitors have thankfully pointed these out. We are of course committed to getting it right, so in the spirit of full transparency, we want to explain exactly what has gone wrong and how we plan on fixing it.

First, let me explain in detail how our site works and the exact data sources that we are using. Every hour, PiracyData.org polls the RSS feed for TorrentFreak’s most pirated movies posts. If the new week’s data is not yet in our database, we add it and fetch each movie’s availability from CanIStream.It.

CanIStream.It is a great site, but it is a little difficult for a computer to read. You can’t look up a movie by IMDB ID, which is pretty much the universal identifier for movies. What you can do, however, is pull up a CanIStream.It widget using IMDB ID.

The widget separates availability into four categories: streaming, rental, purchase, and physical DVDs. Given that this is a discussion of online piracy, we are really only interested in the first three categories, but we preserve all four. We scrape the page for movie availability on all of the services that the widget lists.

Making our site this way has presented us with four distinct issues that we only discovered once we started getting user feedback on the site:

1. Movie availability may change throughout the week

This is actually not a problem with our data, but with how it’s interpreted. Because the TorrentFreak data is backward-looking, reporting the most pirated movies in the previous week, we only want to report the online availability of movies as it appeared on Monday. That is, we are intentionally taking a snapshot of Monday availability. If movies become available for rental on Tuesday, we will continue to report throughout the remainder of the week that they were not available to rent on Monday, because that is most likely to reflect the state of the world during the preceding week when the piracy was happening.

A number of people have noted that Pacific Rim is now available for rental. We haven’t been able to confirm for sure, but we believe that it was added for rental at some point after we checked, and therefore this does not appear to be an error on our part. We’d appreciate it if anyone can confirm this because we want to make sure we are getting the right results.

2. Some services are available on CanIStream.It that are not listed in the widget, only on the main site

In particular, The Lone Ranger is available for rental only from a Sony service, but that service is absent in the CanIStream.It widget for not only The Lone Ranger but for all movies. Originally today, our site reported what the CanIStream.It widget reported, that the movie is not available for rental. However, when it was pointed out to us that CanIStream.It’s main site reports that The Lone Ranger is available on Sony, we updated our data to take account of that. We are going to find a way in the future to ensure that all services are automatically included in our dataset, but this means we may have to find another data source or resort to manual entry.

3. In at least one instance, CanIStream.It returned to us data for the wrong movie.

Here’s how the CanIStream.It widgets work: you go to the base url “http://www.canistream.it/external/imdb/” and add the IMDB ID for the movie you are querying. For example, since Pacific Rim’s ID is tt1663662, you can see the widget for the movie at http://www.canistream.it/external/imdb/tt1663662 .

This works perfectly most times, but bizarrely, it doesn’t work for This Is the End, whose IMDB is tt1245492. When you visit http://www.canistream.it/external/imdb/tt1245492 you get the CanIStream.It widget for Jay and Seth Vs. the Apocalypse, not This Is the End. As an outlier, this caught us totally by surprise, and we updated the data on our site to reflect the accurate data from This Is the End. Again, this is the kind of bug we could only have caught once we had lots of eyes on the site and we’re grateful for the feedback.

4. The site is built using the best available data.

TorrentFreak and CanIStream.It offer extremely useful data to the public. While we’ve had some issues incorporating the CanIStream.It data, we are grateful for the data they provide. CanIStream.It’s data is typically seen even among industry insiders as reliable. For instance, MPAA’s site wheretowatch.org directs their users to CanIStream.It as a source.

That said, if we want to build the canonical dataset on this issue, we have to do better. We need to make sure that there are no glitches. We would like to work with anyone with access to availability data to make sure that we can compile the most accurate data possible.

We’re not exactly sure what this entails yet. We may have to get availability data directly from the services themselves. If we can secure the cooperation of the services—for example if they would be willing to supply data on the date that each movie by IMDB number became available on their service—we could even compute availability data historically. TorrentFreak has data on pirated movies going back to 2006.

One thing is for certain: the dataset that we are proposing to build is important. We have provoked quite a reaction from people on both sides of this issue. We acknowledge that it has been a bumpy launch for our site, but we are committed to getting it right. We ask for everybody’s patience and good-faith assistance as we try to get there.

Today, Eli Dourado, Matt Sherman, and I launched PiracyData.org, a very simple site that tries to help answer the question, are the most-pirated movies each week available for legal streaming, digital rental, or digital purchase? We do this by mashing TorrentFreak’s weekly top-ten list of the most pirated movies on BitTorrent with Can I Stream It’s database of movie availability. The result if a single-page website that visualizes the results, as well as a downloadable dataset that will grow each week.

The idea for the site came to me last month when RIAA president Cary Sherman was testifying before Congress at a hearing on what further voluntary steps search engines could take to combat piracy. That same day, the MPAA had released a study that found that users who found themselves at URLs for infringing content had been “influenced” by search engines. This was reported in the press as “search engines lead to piracy.” The gist from the study and Sherman’s testimony was that search engines, and in particular Google, were not doing enough to address the fact that for some searches the top results include links to infringing content, and the implication, of course, is that if Google didn’t take voluntary action, perhaps Congress should require it to.

At the time I blogged an analysis of the MPAA study and noted that, according to the report, 58% of all visits to infringing URLs that were “influenced” by a search engine came from queries for either generic or title-based terms, not from the more-clearly suspicious “domain” terms. As the report remarked, this “indicat[es] that these consumers did not display an intention of viewing content illegally.” As I wrote at the time:

So the question is, why did these consumers who had no illegal intent end up at infringing sites? Could it be that they did not have a legal alternative to accessing the content they were seeking? That would not excuse their behavior, and it’s the movie industry’s prerogative whether and when to make their content available. Indeed release windows are part of its business model, although a business model seemingly in tension with consumer demand as evidenced by the shrinking theatrical release window. That all said, it’s not clear to me why search engines should be in the business of ensuring other industries’s business models remain unchanged.

After I wrote that it occurred to me that we could begin to collect data to answer that question, and so I asked Eli and Matt if they wanted to help me build the site. The initial answer the site is generating seems to be that very few are available legally.

To be clear, we only have three weeks of data so far, and we’ll get a better picture in the months ahead as the dataset grows. Additionally, proving the adage that given enough eyeballs all bugs are shallow, we’ve been alerted to the fact that a couple of the movies we were listing as unavailable this week are in fact available. Looking at the problem we found that although we were querying the correct IMDB ID for the movies, Can I Stream It was giving us back the wrong data. We’ve fixed the problem and updated the results. This is all to say that the site will prove its value a year from now when we have a substantial dataset.

That said, one implication of the early results may be that when movies are unavailable, illegal sources are the most relevant search results, so search engines like Google are just telling it like it is. That is their job, after all.

Also, while there is no way to draw causality between the fact that these movies are not available legally and that they are the most pirated, it does highlight that while the MPAA is asking Google to take voluntary action to change search results, it may well be within the movie studio’s power to change those results by taking voluntary action themselves. That is, they could make more movies available online and sooner, perhaps by collapsing the theatrical release window. Now, their business model is their prerogative, and it’s none of my business to tell them how to operate, but by the same token I I don’t see how they can expect search engines and Congress to bend over backwards to protect the business model they choose.

As we continue to debate what are the responsibilities of different actors in the Internet ecosystem related to piracy, we hope PiracyData.org will provide useful context.