Should Bitcoin Cooperate with Government Regulators?

The choice before Bitcoin users is not whether they should want regulation, but what to do about it.


As the digital currency Bitcoin continues to grow and evolve, regulators are taking notice. From anti-money-laundering rules issued by the Treasury Department in March, to reports that the Commodities Futures Trading Commission is "seriously" examining the currency, to a recent Government Accountability Office recommendation that the IRS issue guidance on Bitcoin-related income reporting, government seems to be getting serious. The question for the largely libertarian Bitcoin community is, should it engage those regulators or ignore them?

Ignoring the regulators, perhaps with middle fingers firmly extended, is an option, some argue, because Bitcoin is a decentralized peer-to-peer network with no centralized point of control. It exists outside of government or corporate control and can't be easily shut down or controlled. This is what attracts many to the currency, especially a large contingent of crypto-anarchists who made up Bitcoin's earliest adopters and boosters.

As Jon Matonis, the incoming executive director of the Bitcoin Foundation has put it, attempting to regulate Bitcoin would be like trying to regulate the specifications of air guitars. But he points out that while the protocol itself can't be touched, there are centralized points of control in the Bitcoin ecosystem susceptible to regulation: the exchanges that allow one to trade bitcoins in and out of national currencies. Indeed, they are the targets of the money-laundering rules that require firms to report on their customers.

This doesn't concern those who see Bitcoin as a way to completely opt out of state control, however. After all, if you're trying to escape the legacy banking system and government fiat currencies, interfacing with that system is more than a little beside the point. Even if exchanges were to be shut down in the U.S. for regulatory non-compliance, they could prosper in freer jurisdictions, and ultimately the goal for many is to be able to operate on bitcoins alone so that exchanging ceases to be a concern. So, many argue, there's no point in going along with regulation.

"The solution is to create decentralized exchanges and to promote business models and closed-loop paradigms that make fitting into the current institutional structure irrelevant," Matonis says. "It is a perpetually losing battle to seek minor legal victories within the confines of an arbitrary, subjective court system."

On the other end of the spectrum in the Bitcoin community are those who are inviting regulation as a way to legitimize virtual currencies. Not surprisingly, this camp is representative of entrepreneurs looking to get rich through what they rightly see as a disruptive technology. Ideology plays little part in that quest, and if playing ball with regulators is what it takes, so be it.

Cameron and Tyler Winklevoss, the Facebook twins who own about 1 percent of all bitcoins, earlier this month filed papers with the Securities and Exchange Commission seeking permission to launch a fund that would allow investors to easily get into bitcoins. They've been making a full court press for regulation.

"I don't think anyone wants a fight—I think everyone here wants to build Bitcoin, to work with regulators," Cameron Winklevoss told the crowd at May's Bitcoin 2013 conference. "Cooperation is really the way forward." Last month he turned it up a notch, telling the NExT conference that "in the bitcoin world, we love regulation."

And they are not alone. Peter Vessenes, a Bitcoin start-up founder and the outgoing executive director of the Bitcoin Foundation, told Wired recently: "I have so far welcomed [the regulations] we've got. The US has put some guidelines out for digital currency businesses and I'd be happy to go on the record and say: 'Yes, I would welcome regulation more.' Not everyone in Bitcoin feels that way, of course. But I think there's a pragmatic angle, which is that clearing up questions makes it easier for good guys to show that they're good guys. There's of course such thing as too much regulation for anything. But if it's just sensible regulation trying to bring new innovations into the world safely, then I'm all for it. I think that's great."

Needless to say, the more ideological wing of the Bitcoin community does not care for those who would have Bitcoin, as CNBC put it, "sacrifice its soul to survive." In fact, some are even planning an alternative Bitcoin conference this November in Vienna, featuring such uncompromising luminaries as Cody Wilson, Birgitta Jonsdottir, Richard Stallman, Jacob Appelbaum, and Peter Sunde.

I'd like to suggest, however, that there is a way to bridge the gap.

Whether the Bitcoin community should invite regulation or not is a moot question. The fact is that exchanges are being regulated, and it's not impossible to read Treasury's guidance as also covering "miners" and certain everyday uses of bitcoins such as remittances. Personally I don't have much sympathy for the rationales that justify anti-money-laundering and business licensing laws, but the fact is that they exist. The choice before us is not whether we should want regulation, but what to do about it.

Giving regulators the middle finger might be viscerally satisfying in the short run, but it doesn't accomplish much; the regulators will regulate anyway. Given their inevitability, what matters is how onerous the ultimate rules will be. Why should this matter to those who seek to opt out of the legacy system altogether? Because Bitcoin is a network and networks depend on network effects.

The more people use Bitcoin, the stronger it will grow, and the more difficult it will be to regulate in the long run. Does Bitcoin need millions of average American consumers (or Chinese for that matter) using it in order to succeed? No, but it would help. Eventually, more and more value will hopefully remain inside the Bitcoin economy, but that will take time. The more people are transacting with bitcoins and comfortable doing so, even under a regulated regime, the quicker its full potential can be realized.

While they can't kill Bitcoin, it would be naive to think that governments could not substantially raise the costs of using it and slow down its development. "The choice is not whether to have digital currencies," Jim Harper writes in the current issue of Cato Unbound. "The choice is between adopting digital currencies the hard way or the easy way." Right now U.S. regulators seem to be choosing a middle path.

At the moment the government is not interested in outlawing Bitcoin, especially since its $1 billion economy probably seems trivial. It is interested, however, in trying to make it fit within its existing bureaucratic buckets. As it does this, it has little incentive to do so with care. If engaging regulators can avoid at least some stupid mistakes simply by educating them about how Bitcoin works and its potential benefits, then the engagement is worth it, even if one doesn't relish it.

Given that regulation is inevitable, attempting to make it less onerous on the margin for those within the mainstream financial system is a worthy endeavor—especially since it does not affect those who wish to remain outside of the system. The goal is to eliminate as many hurdles as possible to widespread adoption. The stronger the network effects grow, the harder it will be for states to take more aggressive actions in the future. And in the future, Bitcoin won't always look so trivial.

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  1. Jerry Brito on Whether Bitcoin Should Cooperate with Government Regulators

    Since when was there a choice when it came to cooperating with a government regulator?

  2. The only difference cooperation will make is in how quickly they shut you down, and whether they bring an attorney or a SWAT team.

  3. Regulations from which country?

    While I understand the legitimacy a certain level of regulation provides, opening your arms wide to the regulators seems a bit crazy. Once that box is open, it will never be closed again. Digital currency offer a way to break free from the chains of fiat monies, naturally government doesn’t like its serfs being freed. Bitcoin may welcome regulations, but new types of digital currencies will appear to replace it if the regulations stop people from freely transacting.

    Like many of our societal ills, money laundering stems from the criminalization of vice. Let people choose which intoxicants they want, allow them to openly pay for sex and bet on the superbowl and we wouldn’t need to worry about laundering all of those illegal profits.

  4. IMHO, the best thing that Bitcoin supporters can do to ensure that it thrives despite regulation, is to make quality documentation and tutorials available in as many languages as possible. Even if one, two, or ten countries outlaw it, it will still be able to flourish in remaining countries.

    1. I don’t see any government embracing (or at least ignoring) BTC. That’s a pipe dream. The thirst for control is universal.

  5. “Should Bitcoin Cooperate with Government Regulators?”

    Hmm, no?

  6. Bitcoin was designed to decentralize control. Why would we want to hand over control of it to a centralized authority? More regulation = less liberty and ‘do as we say or we put you in jail and ruin your life’.

    Sadly, Bitcoin and others like it will be muddled, molested, and ruined by bureaucrats.

  7. They should cooperate with some, and not with others.

    The regulators who assume it is a currency and want to regulate speculation, etc., like in any other sovereign-issued currency, sure, why not. Just like someone who “speculates” in any currency by buying a stack of cash with dollars (or whatever) and then converting it back to dollars (or whatever).

    The regulators who want to track every transaction should be told to fuck off.

  8. Like any other market, the established ins want regulation to keep the newcomers out.

  9. My biggest concern is that the primary developer is a Bitcoin Foundation member. He’s easily targeted by special interests and that’s bad news for Bitcoin’s libertarian following.

    It would be good to fork the Bitcoin source code and lock Gavin Anderson and other Bitcoin Foundation influences out of that client’s development.

  10. I’ve said it before, but it’s worth repeating. Any value I used to see in BTC is gone. If the community allows regulation, it loses the elements that made it valuable. If the community resists, BTC will become illiquid, and will forever remain a novelty, and a reminder that you don’t challenge the state.

  11. bitcoin exists because of regulation. it was created by those and for those who believe regulation to be the downfall of the current economic models.

  12. Governments certainly can regulate conversion to/from Bitcoin, and they can require users of Bitcoin to declare their transactions, and there is really little anybody can do about it. If you don’t comply, there are strict penalties.

    I think a bigger question is whether Bitcoin is really an improvement over existing financial services at all. I see a risk that Bitcoin may actually end up being worse than cash in terms of tracking financial transactions; it remains to be seen whether it will turn out that way.

    However, regulated and tracked or not, Bitcoin at least has the potential to be much cheaper than equivalent transactions using banks and other such institutions, and that’s already a big plus.

  13. Who is “Jerry Brito”?

    We know he is based in Washington, in the USA. This is a very bad thing, because the people who write from there are infected with the disease of the White House and the tens of thousands of aparatchics that swarm there like flies.

    Someone writing from Washington cannot be thought of as neutral, unless he proves it, and Jerry has just proved, with this shabby article, that he is anything but neutral.

    Reason’s website does not allow discourse at length in its comments sections. I have had to put the rest of this thorough rebuttal on Pastebin for you to read:

    1. How ridiculous. So Jerry Brito is a shill for Bitcoin regulators?? And he’s writing articles for Reason to get people onboard?? You didn’t provide any evidence suggesting such things, and you certainly took his honest questions to be attacks on BTC. The DHS already shut down Dwolla, MTGOX has made account verification mandatory (shortly after Libery Reserve was shutdown), and probably 100 different government agencies are eyeing BTC to see how to get their cut. Are you really that naive to think that Jerry Brito is an evil mastermind trying to pull the strings to regulate BTC? BTC is going to be regulated one way or the other, like it or not. Yes, even in the UK and Canada. I imagine he mostly discussed the U.S. because Reason is based in the United States, as is most of it’s readership. Don’t get butthurt about it.

      1. BTW, preemptive self-regulation under threat of forthcoming state regulation, is hardly voluntary, though it may appear that way to you.

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