Video - Bitcoin 101 - The Nightmare of Bitcoin Regulation - A Laundry List of Scenarios

If you are a federal regulator right now you are having bitcoin nightmares. Nothing has ever posed so many challenges to federal authority as bitcoin. We look at all the trouble spots and run you through a laundry list of federal regulation considerations. This is clearly a pressing issue for stores and merchants looking to accept bitcoin, but its also a topic on the back of everyone's mind.


Hello, this is James D'Angelo.  Welcome to the Bitcoin, 101 blackboard series.  Today we've got a big confusing laundry list to help you begin to understand all the issues involved with regulating Bitcoin.  And let me tell you this is a rat's nest, okay, so these ideas are going to be all over the place because that's the way Bitcoin is moving.  And I have the deepest sympathies for anyone who's in-charge of proposing regulation for their country.  Okay, so all the senators who are now trying to catch up on what Bitcoin means and what it could do really have no clue about all the things that will happen because no one does.
Bitcoin is a protocol much like HTTP and just like in 1994, no one could see all the ways, the web was going to be used, the internet was going to be used, we are faced now with the idea of trying to regulate Bitcoin with the idea that we will have no idea where all this is going.  So, let's run through this laundry list just to get a taste of everything that's going on, but one thing that needs to be cleared right now is if you're a regulator you're having Bitcoin nightmares.  This is a difficult pickle, okay.
So one of the reasons why it's so difficult is that Satoshi Nakamoto in 2008, was studying BitTorrents.  And BitTorrents were version 2.0 of Napster.  They were the improved, decentralized version of file sharing.  And file sharing, the U.S. really hates file sharing though they don't talk a lot about BitTorrents, right.  They hate the fact that you're sending videos for free, movies for free, music for free, books for free, information for free, right.  IP intellectual property is a major form of income for the United States, okay, and they really would love to stop BitTorrents, but because they can't and they have a pretty good idea that they know they can't you don't hear them screaming about how to stop it, you don't hear them bringing much attention to it at all.  But Bitcoin was designed with BitTorrents in mind to avoid a centralized system that could be shut down by regulators and because of that it's going to be very, very expensive to control.
So what's key to remember here is it's fairly easy to control a raging elephant, okay.  You can see it, they're big, they're centralized, you can shoot it, you can drug it, you can see it from a helicopter, you can control that sort of threaten, the old school sort of threat.  It's a whole different thing.  If you're trying to control bacteria or viruses, okay, and this new form of computing acts much that same way.  They don't put anything in one spot, they spread everything around to everybody's computers.  So if you shut down 10,000 computers over here you've done nothing.  So this could be a very, very expensive proposition trying to regulate Bitcoin.  And this is one of the big nightmares of our dear regulators.
So it's important to see that because of Satoshi Nakamoto's invention because he designed it in a different way it's going to be a watershed moment for regulators.  They are not going to be able to stick Bitcoin into one of their old boxes.  They're going to have to come up with all new regulation to deal with this thing that's not a currency, it's not a commodity, it's not a stock, it's everything wrapped up into one and it's more, it's a payment protocol, it's an ever evolving beast, okay.  And this watershed moment is going to involve trying to do things like regulating hurricanes or regulating bacteria which we've already talked about is pretty difficult to do.  But there's a big problem here, merchants need the regulation, okay.  So as other countries are starting to use Bitcoin in a much more massive scale, so you can go to a Bitcoin ATM in Vancouver and you can go and use your Bitcoins to buy things in Vancouver.  The same is true of Berlin in Germany.  These things are growing, right.  These are going to be competitive advantages for merchants.  And remember Bitcoin is designed for the online world, right.  There are a number of merchants who would love to have some regulation, some regulatory advice from the U.S. so that they know they can proceed to use Bitcoin because if you're a merchant and you're thinking about using Bitcoin, you don't want to spend the expense, right, just redesigning your website could cost you 10 grand adding a POS system into your store will cost you a 1,000, right, changing all your advertising it's very expensive, you're not going to go through this cost if you think next week the U.S. government's going to regulate it, stop it and then you've got to eat all that cost.  So merchants are waiting for regulation, waiting and they really would love some sort of yay, nay or pat on the back from the U.S. government.  And it hasn't happened yet, it's happening in other countries, it hasn't happened here, okay.
Now, most regulation when the U.S. gets involved in regulation, they have some way to back up what they say.  So if someone seems like they're starting to develop nuclear weapons the U.S. has a list of things that they can say and they can run through a regular list of things they do, they'll do in bargo, sanctions, all these things and then the U.S. could even follow it up with war.  The trouble is for the U.S. government putting regulation on Bitcoin doesn't seem to be backed up with anything, right.  There is really no good system for how you can regulate it yet.
So we go back to this idea of the watershed moment, they're going to have to come up with some new ideas but even in terms of trying to find people and punish them, okay, it's going to be very, very difficult.  So they're going to be reinventing regulation and if they're putting regulation out there they might only have carrots and no sticks and that's not always the best regulation.  So if you are a regulator you run into your biggest fear of all when you put on your suit, stand in front of the television cameras, the news reporters and you announce your regulation, okay, and there's no question.  If the U.S. announces some sort of strict regulation the price of Bitcoin will fall.  The only trouble is it might not stay down, okay.  So the biggest fear for the regulators is the price will go down when they regulate but then it might go jacking back up.  And that will be the big snub to regulation, that the regulators have to be afraid of, right, the U.S. government's going to be made to look really bad if they make this regulation a price drops and then it immediately starts decline.  And I will move our business to Canada, will move our business to China or Germany or somewhere in Europe or dozens of other countries, right, much more open to Bitcoin business and because it's on the internet it can be done pretty much from anywhere, okay.  So the price could go down and then it could climb right back up basically saying we don't care about U.S. regulation.  That is one distinct possibility and a major nightmare again for regulators, okay.
So now, let's take a look at the U.S. dollar and of course there's things to do with the dollar all the way down here, right.  Is Bitcoin a currency, can anyone issue a currency but we're going to just jump in and get the conversation a little started right here which is the issue of how much the dollar means to United States and as Bitcoin going to erode some of that value, okay.  Some economists have talked about a truly deflationary currency ending up being a black hole for all currencies and some have suggested that Bitcoins inherent ability to increase in value why all the other inflationary currencies, the quantitatively ease currencies are losing value will cause a massive, massive influx of currency into Bitcoin.
And its honestly has some nightmares effects, right, but it has a very big nightmares effect for regulators.  What are they going to do if this economic probability starts to manifest itself, okay, that everyone who owns dollars suddenly decides they want to move their money into this black hole of Bitcoin.  And it's not a black hole in the sense that you won't be able to use your Bitcoins, it's just a black hole in the sense that all surrounding currencies go phew and move towards the deflationary one.  You make the quick switch.  And so already you've heard a lot of people talking and suggesting that any purchase of a Bitcoin is a bet against the U.S. dollar.
Now, it's clearly not that way.  A lot of people are just looking at a speculation like any other speculation, right.  Can you invest in Facebook, Twitter, Google or something else and they're looking at Bitcoin as a form of investment, but the fact that it is a form of currency does mean that you are now moving your dollars into another form of currency.  So you are moving your currency into this Bitcoin which you find has certain advantages for you and that, yes, that is somewhat of a bet against the dollar and the regulators are going to have to deal with that issue.
Another big thing that comes up is because of its anonymity, the anonymity with which you can store value, you move value, launder value, just send money anywhere, right.  Bitcoin does offer some of those things and the U.S. government has to be very fearful, right, this is a big issue for them.  What are they going to do to prevent all the tax evasion that they've been fighting for years to eliminate all the tax shelters overseas and suddenly the tax shelters going to sprout up everywhere, every computer, every cell phone, every little piece of paper becomes a form of tax shelter.  You could even hold all your money in your brain and no one could have any evidence that you personally received it.  Bitcoin is a form of tax heaven and the regulators are going to have to deal with it and again you can see how this can get very, very expensive and very, very troublesome, okay.
And Bitcoins already proved to be fairly troublesome, right.  We've heard about the issues with Silk Road and they managed to shut Silk Road down but more recent news is that someone's put up Silk Road 2.0, basically snubbing the U.S. government and saying come on, you're going to shut me down too and if I go down someone else will come up and this is called the whack of mole policy, right.  It's a very bad policy because you spend millions and millions of dollars to shut down one website and as soon as you do another one pops up and as soon as you shut that one down maybe 10 more pop up.  So it's a very dangerous approach if you're shutting down the results of what happens with a Bitcoin Tor, you know, sort of dark website okay.
And there's already been a Ponzi scheme run in Bitcoin.  And as we've discussed before if someone's running a Ponzi scheme with your currency all it means is it's a good currency.  U.S. dollar is great for running Ponzi schemes, you know, Euro is great for it, Yen, okay.  So Ponzi schemes are going to happen no matter what you do.  You have to attack the source of the Ponzi scheme.  You can't blame the currency for it.  So any good currency can do lots of bad things.  U.S. dollars famous for being used in laundering, right, gold is famous for being used in laundering.  So a lot of times people will say, oh go get that guy Silk Road and you end up whacking that particular mole and creating more problems and it becomes very difficult, okay.
And here is a big issue and this has been talked about by a number of people is that if you do regulate Bitcoin in any way more extreme than other countries, you might end up sending innovation and business overseas or across the border.  And already some of this seems to be happening, right, the big exchanges of Bitcoin and there's a lot of money in exchange are setting up shop in Japan, Eastern Europe and other places.  So it's very dangerous to deal with this thing.  That's an amazing form of innovation, right, that's so bizarre that no one sees how much people are going to be able to do with it.  It's much like, you know, in 1995, there was some policy hearing, Senate hearings about controlling the internet and they decided not to, even though they had found cases where the internet was being used for child pornography and other things you have to be very careful of shutting down all innovation because if you shut down the internet because one guy in the U.S. is using it for child pornography, you end up eliminating all the income that the U.S. generates from its innovation of websites.  Think Google, think PayPal, think e-bay, right.  Had you shut down the internet, these businesses would certainly be elsewhere, okay.  So Europe, China, Canada, Mexico, Brazil, Argentina, anywhere, right they could start up anywhere.
So it's very, very dangerous to regulate a new technological innovation too much because it becomes an economic problem for your country.  You'll end up sending all these jobs and all this money elsewhere, overseas, okay.  So some of the people have been already pushed around by the U.S. government and we've already seen cases and we've already seen some seizures are the people who deal with transmitting money and exchanging money, okay.  So Mt. Gox, which is from Japan, had a relationship with a bank here in the U.S. and the money got seized because they were not obeying the laws concerning money transmission, okay.  And there are some laws, fairly young laws in 1980s and 1970s right, the Bank's Secrecy Act and the Money Laundering Control Act, something like that and these two laws are -- they're funny laws, okay, because they both put pressure on people who handle money to prevent crimes made by other people.  So if I'm a gangster and I make millions and millions of dollars dealing drugs or selling drugs or transporting drugs, the government actually will criminalize the people who allow me to launder the money.
So one of the big expenses for these companies is they have to do all the controls to make sure that you are not a gangster or laundering money.  That's a very difficult and very expensive for money transmitters and exchanges.  And traditionally, it hasn't been that big of problem but they have licensing set up in every state and if you're going to run an internet business, you're looking at a startup cost of millions of dollars just to set up the licensing in all 50 states so that you can conduct business, okay.  So this is a dangerous thing.  Again, you're pushing innovation, you're pushing technology, jobs and businesses overseas and we've seen a lot of that.  The exchanges again are not in the U.S., coin base is not a true exchange, right, they do not handle or control U.S. dollars.  They do bank transfers which prevents them from doing instant transfers and keeps them a little bit out of the competitive edge that a true exchange might have, okay.
Now, one thing that came up with an e-gold, KC gold is a previous form of Bitcoin that was centralized, e-gold was a gold based digital currency, okay, so they were holding gold whenever you bought e-gold and then you'd be able to pass it around really easily but the e-gold case eventually broke down because there was issues with money laundering, crime, who knows what else, right.  And so the guy who ran e-gold was arrested.  Now, he was ready to play ball and indeed did play ball by releasing some private information to the U.S. government.  And I know a lot of libertarians aren't going to like this but by being a little more friendly with your exchanges and by making sure that they do some identification, regulators could turn their biggest enemies, these exchangers into people that might provide some friendship, okay.  So this is one regulatory tool that certainly the U.S. government is going to be looking at with Bitcoin.  So if you can get people to put their palm print on the ATM or you can get a face to face, you know, sort of know your customer interaction, well then you end up getting more identities linked to more addresses and you start following the currency better and in the end that's what the government really wants to do.  They want to be able to follow the flow of money, they want to prevent you from sending all your money to start up terrorism overseas, they want to prevent gangsters from sending their money in a way that they can launder it, they want to prevent people from of evading taxes, right.  These are the big deals to the government, okay.
And we've talked about it a little bit before but one of the problems with regulation is there is no regulator set up directly for virtual currencies.  And because there isn't, there's a lot of scrambling right now because regulators are going to have to come from the commodities area, the stocks area, the currency area and from a number of other areas okay.  So they're going to need to do this watershed thing, they're going to have to come up with a whole new division, just set up for virtual currencies, right.  Virtual currencies are going to need a comprehensive and very expensive form of regulation, virtual currency regulation.  And this is likely going to happen but again federal government has to be very careful of any interim sort of regulations, they impose because if they hint at doing anything too severe businesses are going to pack up and innovation is going to happen elsewhere, okay.
So they're going to have to come up with a comprehensive system just for virtual currencies because right now virtual currencies do not fit in their box, right.  It's a currency, it's a commodity, it's a stock, it's a payment protocol, it's a million things.  They need special regulation just for anything short of that is going to lead to a lot of confusion and it's going to confuse merchants and it's confused businesses, okay.
So quickly one of the things that people often talk about is that is it legal to have a new currency in United States and the answer is yes.  The only people the constitution prevents from printing and making their own currency are the states, so independent people do and produce their own currency, right.  Amazon's got the new Amazon coins, you've got airline miles, you've got a number of currencies that have cropped up over the years.  They don't get use that often the dollar's been pretty good, but Bitcoins providing so many advantages that now it's becoming a real thing but that question constitutionally, yes, it's legal and we've really covered this last little bit sending innovation and exchanges and wealth to China et cetera.
Remember that because it's not just a currency and it's also a commodity that's been rising in value people holding Bitcoin are going to be people who feel comfortable holding Bitcoin, right.  If I know the U.S. government's going to try and catch me holding Bitcoin, it's going to be -- I'm going to be less likely to hold it.  Now, as wealth starts to pour in at this black hole effect, really takes place well then wealth will shift around the world.  And it's terrifying.  And it's beautiful and it's exciting, right, the whole idea of creative destruction comes into play here.  But we have to be very, very careful of what we do because wealth could leave the U.S. as well.
That's my big summary for regulation, it's a laundry list, it's scattered, it's insane, we'll do a whole bunch more about it later.  Please remember to like, subscribe, do whatever you want to do, comment, we'll catch you with the next video and we'll probably start to talk about some of these things in the individual videos.  Take care.
Written by James DeAngelo on November 13, 2013.