The Top 3 Things I Learned at the Bitcoin Conference

Regulation is coming.


This past weekend I attended the Bitcoin 2013 conference in San Jose, where over one thousand enthusiasts, developers, entrepreneurs, venture capitalists, and, yes, lawyers gathered to chart the future of the virtual currency. Here are the top three things I learned at the conference.

Bitcoin is about more than payments

Bitcoin is an even bigger deal than I thought. While the currency is best known as a censorship-resistant and somewhat-anonymous payments system, it has the potential to be so much more.

"Ultimately bitcoins are data, and you can use a data transit protocol to transit information other than just 'I'm sending you bitcoins.' It could be 'I'm sending you a stock,' or it could be 'I'm sending you a bet,'" says Jeff Garzik, one of the six Bitcoin core developers.

Thought of this way, the Bitcoin network is a platform on top of which other layers of functionality can run, much like the Web or e-mail are protocols that run on top of the Internet's foundational TCP/IP protocol. Bitcoin therefore has the potential to spawn any number of other services that are decentralized, and thus difficult to regulate or control.

One application for such an extension to Bitcoin would be decentralized electronic markets—whether for futures contracts, sports betting, or anything else.

J.R. Willett, author of a white paper proposing such a system, explains with a thought experiment: Suppose two parties, A and B, want to bet on the future price of Google stock, and there is a third party, C, that publishes the price on the network every few minutes. A thinks the price of Google will go up and publishes a message to that effect, while B thinks it will go down and publishes a message accepting the bet.

"Now, they're interacting on a protocol layer above bitcoin; they're using a currency that's on top of bitcoin that recognizes these kinds of messages," says Willett. "So they've actually both committed and there's an agreement that everybody in the world can see."

Others on the distributed network don't know the identities of who placed the bet, but they can see that A said it would go up, and that B said it would go down, and they can see C publish the price of Google in the future.

"If the price goes up, then the whole protocol recognizes that A won that bet; the whole protocol recognizes that A now owns B's coins," says Willett.

And voila, welcome to a world of decentralized electronic futures markets. The predictions market Intrade, a darling of academic economists and political scientists, recently ceased operations after it was sued by the CFTC. Yet such a predictions market built as a peer-to-peer network on top of Bitcoin could not be easily shut down, nor would there be an operator that could run away with user's funds, as it's also alleged of Intrade.

And it's not just markets. Treating Bitcoin as a protocol would allow for a vast number of other decentralized applications, including communications messaging and broadcasting, a decentralized domain name system, and much more.

The hobbyists give way to the pros

Bitcoin to date has been the domain of geeks, gold bugs, and cypherpunks, but sensing its disruptive (and profitable) potential, entrepreneurs and venture capitalists are pouring into the space.

Peter Thiel's Founders Fund last week made a $2 million investment in merchant services firm BitPay, Google Ventures recently backed bitcoin exchange Ripple, and Fred Wilson's Union Square Ventures has invested $5 million in the transactions platform Coinbase.

This transition from ideological enclave to professionalized financial network was on display at the conference's exhibit hall. Row after row was lined with the booths of professional venture-backed businesses, while nestled in between were those of the Seasteading Institute and

It's just like the late-90's rush to commercialize the Internet once entrepreneurs recognized its revolutionary potential. And just like the late '90s, the early adopters are not all fond of the gentrification.

"A year or more ago there was very much an 'Occupy' type feel to Bitcoin, where this is the anti-establishment currency, and now the establishment is getting interested in Bitcoin," says Garzik. "There is a tension and you definitely see the libertarian crypto-anarchist roots bang heads with the venture capital that's coming in right now."

One point of contention is mixing. As professional and regulated businesses enter, they are keen to tie real identities to transactions, and they are loath to touch bitcoins of unknown provenance. Many in the community rightly see this as a threat to Bitcoin's fungibility.

"If someone says, 'I will not accept these bitcoins over here because I think they are stolen funds,' then their value is different from these other bitcoins that are not necessarily stolen funds," explains Garzik. "And so some people of the crypto-anarchist, libertarian mindset feel it's very important to mix because that preserves the fungibility of Bitcoin."

Mixing is essentially laundering. It is combining bitcoins of different origins in a pool before handing them back to their owners in order to obfuscate who has which coin. Some even suggest that mixing should be built into the Bitcoin protocol itself. Businesses, to say the least, don't like the sound of that. Everyone, however, will have to accept that Bitcoin is an open source project, and it's ultimately consensus that will resolve the differences.

There's no escaping regulation

Just two days before the conference, the Department of Homeland Security seized accounts belonging to Mt. Gox, the largest Bitcoin exchange (and a major sponsor of the conference), in what looks like the beginning of a criminal enforcement. You'd think this would have put a pall on the festivities, but in a way it only served to underscore the growing professionalization of the Bitcoin ecosystem.

Mt. Gox seems to have been operating without the requisite money transmitter licenses, and DHS alleges it lied about its status as a money transmitter in bank documents. In contrast, the new Bitcoin businesses that are springing up are working with state and federal regulators to cross every T and dot every I. And panelist after panelist on the conference's "Legal and Regulatory" track explained to attendees how to comply with the law, as uncertain as it is. Dilettante time is over.

If the message wan't clear enough, the Bitcoin Foundation—which helps organize Bitcoin's development on the same model as the Linux Foundation—announced that it would be hiring a full time lawyer in Washington to represent the community's interests. The thinking is that Bitcoin businesses and users are going to be regulated even if the protocol itself can't be, so it's time to engage the regulators and policy makers before they make any hasty moves.

This willingness to lobby and work with regulators, however, was not well received by many of the old guard. As one exasperated Foundation member tweeted, "I got into Bitcoin to improve this miserable planet and ESCAPE the iron grip of privileged moneyed interests, not JOIN THEM!"

But the fact is that Bitcoin is growing up. Its revolutionary potential is greater than most have yet understood. Entrepreneurs and venture capitalists are seeking to professionalize and legitimizing the network, and to do that regulators will have to understand and accept it.

It's true that Bitcoin could continue to operate even if it was outlawed outright, but then it would only serve as an underworld currency, and its development would not doubt be hampered. The more subversive path may well be to let regulators create their rules for what at base is an uncontrollable system.

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  1. Bob Wenzel has a great take on Bitcoin after going to the Bitcoin Conference 2013 in Silicon Valley:

    Part 2

    Part 3

    (Couldn’t find part 1. Maybe Bob was labeling the parts of his report with the same labeling machine that George Lucas used once…)

    1. Samantha. true that Bradley`s blurb is shocking… on thursday I got a great Mazda after bringing in $5869 this – five weeks past and-in excess of, 10 grand this past month. with-out any question its the best job I have ever done. I started this 10-months ago and right away started making a cool more than $85, per/hr. I follow the details here…
      (Go to site and open “Home” for details)

      1. More spam.

  2. You know who else created an alternate currency?

    1. Counterfeiters?

    2. The Confederate States of America?

    3. Jesus?!?!?!

  3. A virtual currency run by hackers. What could go wrong?

    1. It’s open source, so it isn’t really run by anyone. The only thing that can go wrong are regulators.

      1. Or the very idea is flawed from conception. Being free of the Fed and Fiat currencies was supposed to be a panacea of economic stability and wealth ‘right-sizing’. Now, it looks like the hoarding and prospecting that fuels currency manipulation is coming to bitcoin as well. Just write the mortgage backed security layer over the bitcoin protocol and we’re back where we started. The problem with economic instability and wealth hoarding isn’t the currency any more than the problem with murder is knives and guns.

        1. Right.

          Bitcoin is not yet widely used as a currency. If and when it is, you will no more be able to “hoard” bitcoins than you would be able to “hoard” gold under a gold standard. That’s the nature of a widespread currency.

  4. The other thing that could go wrong is that it could turn out to be unstable and prone to bubbles, which will tend to make it less useful as a currency than a gambling outlet.

    1. True. But how is that any different than the dollar? Or were you making a funny?

    2. The bubble popped and now BC price is pretty stable.

      1. Just like last time.

  5. Bitcoin is about more than payments

    Bitcoin is just a special case of the general use of cryptography in a wireless world. The same design can be applied to any information that can be exchanged. I’ve been waiting for other uses to come out.

  6. Ripple is not a BC exchanger it’s a competing cryptocurrency like Litecoin.

  7. Full disclosure: I think BTC is awesome and would love to see it succeed. That said…

    Bitcoin is definitely at a crossroads. If it is shunned by regulators and politicians, it will likely be shutdown via a proxy war on payment processors and exchanges. If politicians and regulators accept it, the BTC economy infrastructure will be regulated and taxed. In the former, BTC will be even less liquid than it is now. In the latter case, BTC loses the attributes that made it valuable in the first place.

    1. Bitcoin is already taxed under U.S. law. Of course, people might or might not bother reporting taxable events, just as they don’t report when they sold a gun for more than they bought it for (e.g., during the recent “ZOMFG Obama gonna ban our guns!” panic), or when they sell their gold coins as during the recent bull market.

      Bitcoin is as anonymous as the Internet — which isn’t, particularly, due to IP addresses, MAC addresses, chokepoints in network infrastructure, government monitoring at those chokepoints, site logs. . . .

      1. Obviously BTC capital gains are supposed to be reported, but exchanges don’t report trading activity to the IRS (unlike a stock broker) so BTC is effectively not taxed at this point in terms of capital gains. Also, the U.S. Gov isn’t getting their perceived slice of the pie from some overseas exchanges and processors. That will change in time no doubt.

        Anonymity is relative, and not all interactions over the internet are equal. BTC is much more anonymous than using a credit card, paypal, or bank wire, hence the value ascribed to it for that and other attributes.

  8. Man I had no idea bitcoins were so cool!

  9. Remember that Bitcoin is a world entity, and that the Tor browser enables people to anonymously access the world internet and anonymously conduct transactions there. “Bitcoin is growing up,” but Africa, India, Mexico, Latin America, Russia, China and the rest of Asia may not be in a big hurry to imitate their older brother. And don’t forget the illegal-drug and illegal-gambling economies. So it looks like a large and unregulated Bitcoin universe will be with us for a long time to come. “It’s true that Bitcoin could continue to operate even if it was outlawed outright [by whom, and how?], but then it would only serve as an underworld currency [merely drugs and gambling], and its development would no doubt be hampered.” No doubt? Bitcoin itself came from the offshore underworld of unknown sources and funding. If anything, the full regulation of Bitcoin and its assimilation into the grip of US tax authorities would hamper further development. To put it another way, if we had to rely on the US gov’t and US corporate/academic research foundations, how long would we still have to wait for an implemented Bitcoin, or even an official preliminary White Paper on the subject? To put it yet another way, if we had had to rely on Microsoft for a better search engine, how long would we have had to wait for a search engine called Bing ? never mind one called Google?

    Bitcoin won’t be co-opted by corporate/governmental suits and suites anytime soon. US is not the world.

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