Bitcoin

Bitcoin Remains a Tool for Freedom, Even While Going Mainstream

Economic and political realities may drive Bitcoin toward centralization and regulation, but the forces of decentralization are alive and well.

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AMSTERDAM—A year in Internet time is an eternity, and that goes for the Internet's native currency as well. At the Bitcoin 2014 conference here last week, the rapid evolution of the digital currency's ecosystem was in full display.

Like last year's conference in San Jose, over 1,000 enthusiasts, developers, entrepreneurs, venture capitalists, and lawyers came together for what is the definitive global Bitcoin summit of the year. But the vibe and the crowd seemed different this time. Fewer ideologues and more VCs roamed the show floor, the hallway talk was more of regulatory compliance and business models than cryptoanarchy. Yet this shouldn't be surprising.

In my dispatch from the conference last year, I noted three big take-aways: that Bitcoin had started to grow up as hobbyists gave way to professionals, that regulation was inevitable, and that Bitcoin is about more than payments. Those trends continue unabated.

Over the course of the past year, both the House and the Senate held multiple hearings on Bitcoin, state bank regulators began developing rules to govern the emerging digital currency industry, the Bitcoin-powered anonymous black market Silk Road was shut down by federal authorities, and Mt. Gox—the once top Bitcoin exchange and marquee sponsor of the 2013 conference—imploded and filed for bankruptcy. At the same time, over $100 million have been poured by venture capitalists into serious Bitcoin startups looking to build the next Visa. In a short year, Bitcoin matured and professionalized considerably, overcame one bad rap (it's only good for buying drugs), gained another (good luck not having your bitcoins stolen), and got a tentative, awkward embrace from politicians and regulators.

One symbol of this evolution is Circle, a new bitcoin bank unveiled at the conference, which aims to bring bitcoin payments to the mainstream by making Bitcoin look more like traditional financial products and even offering fully insured deposits. Its CEO, Jeremy Allaire, has ruffled many a libertarian feather by frequently making the case that Bitcoin will not see widespread consumer adoption without regulation, including regulations that target anonymity.

In some ways, Bitcoin is following the same pattern as the Internet itself. In the days that John Perry Barlow was writing "A Declaration of the Independence of Cyberspace," we connected to the Internet via dozens of local mom and pop ISPs, and the sites we visited were independently hosted labors of love. It was an unregulated—and seemingly unregulable—anarchic space. Today, however, we get online via Verizon or Comcast to access Facebook and Google, all of which are co-opted in some way by the NSA. The cold logic of economies of scale tend to lead to greater centralization, and thus more regulation, and this will likely happen to Bitcoin, too.

For example, Coinbase, one of the leading bitcoin wallets, is also one of the leading merchant payment processors. So, when a consumer with a Coinbase wallet sends money to a friend who also has a Coinbase wallet, or pays a merchant who takes Bitcoin payments via Coinbase, the transaction takes place "off-blockchain," or outside of the Bitcoin network, not much differently than PayPal. If Bitcoin gains mainstream acceptance, we could end up seeing most transactions happen internally within a small number of dominant service providers. The wider Bitcoin network could just be used for settlement, say between Circle and Coinbase.

Such increased centralization is anathema to Bitcoin's more ideological proponents. It could be seen as recreating the same regulated banking system we have today, albeit more efficiently, and that's not what they signed up for. But while we may see the Bitcoin ecosystem consolidate to a few dominant firms eager to satisfy regulators, this is no reason to despair. Unlike the legacy financial system, Bitcoin is an open network, which means anyone can connect to it directly. A new entrant doesn't need permission before he can compete with established players, and two parties running wallets on their own devices will always be able to transact directly without the possibility of prior restraint.

An open network also means permissionless innovation—the ability to build on top of and extend Bitcoin in new ways. As I said last year, Bitcoin is about much more than just payments, even though that's where all the VCs and startups are focused. This is why in my mind the most exciting announcement at the conference this year was Lighthouse, a new decentralized crowdfunding application.

The app essentially does the same thing as Kickstarter. You announce a project and a funding goal and solicit pledges from supporters that will only be collected if you meet your goal. The difference is that because Lighthouse is decentralized, there is no intermediary Kickstarter-like company managing the crowdfund. There are two important consequences of doing it this way. No company means no fees, like the 5 percent cut of any money raised that Kickstarter takes. And perhaps more important, no intermediary means no one to tell you what you can and can't raise money to do. Last year, Indigogo cancelled Cody Wilson's crowdfunding campaign to finance the design of a 3D printed gun.

Mike Hearn, a former Google engineer and a prominent Bitcoin developer, built the application to scratch an itch: the slow development of Bitcoin's advanced features. He says that we have long known about Bitcoin's cutting-edge capabilities, including decentralized crowdfunding, micropayments, peer-to-peer credit markets, smart property, and much more. But while the protocol supports these capabilities, no one has built the applications and infrastructure to take advantage of this support and make the potential features real.

"To make these features come alive takes work," Hearn says, "and because they're inherently about decentralized infrastructure it's often hard to find anyone who will pay for that work. With no way to own the infrastructure once built, many traditional funding models can't function."

The software that needs to be written and released are public goods, and Hearn hopes crowdfunding will incentivize developers to do that work. Chief among these his target audience is himself. Hearn has created a company, Vinumeris, through which he will make and release next-generation extensions to Bitcoin if he can successfully raise the funds to pay for his time. His first project? Lighthouse itself, which will not be fully released unless it is crowdfunded.

So this year's takeaway is that while economic and political realities may drive Bitcoin toward more centralization and more regulation, the forces of decentralization are alive and well and pushing in the opposite direction. While the rebel vibe may wane, the revolution that Bitcoin unleashed is still pulling the world toward freedom.

NEXT: Marco Rubio Stonewalls on His Pot Smoking—for the Children

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  1. Looking for input from the HnR rabble:

    What advice would you give to a small business owner evaluating Bitcoin for payments (acceptance and payables)?

    1. What kind of business? Would you make sales that you wouldn’t otherwise by taking bitcoin?

      1. Rentals and sales of equipment and tooling.

        Don’t know yet. However, my customer base tends to be independently minded and government averse. As I understand it, the transaction fee for Bitcoin to US currency conversion is less than typical credit card fees.

        1. Credit card transaction are between 1 and 2 percent. 2 is the standard, but heavy hitters like Amazon, can negotiate it down.

        2. If you were to decide to, there are companies that will convert the sale back into USD immediately, so you’re not exposed to volatility. I believe they’ll even keep a percent in BTC for you, if you want.

        3. I would like to rent a phased plasma rifle in the 40 watt range, do you take Bitcoin?

          1. At this point, we’re only accepting bottlecaps.

        4. The HOPE X conference in NYC is taking BtC for payment this year. They seem to be on a tight budget all of the time and have lots of non-BTC payments related to that conference too.

      2. Also evaluating it for overseas transactions that would normally involve wire transfers.

        1. BTC transaction fees are lower than credit card fees and the conversion fee is WAY lower than wire transfer fee.

    2. You’d raise a red flag to tax agents itching to find someone to audit.

      1. True. But unfortunately that’s nothing new for me.

        1. Maybe you could hide some of your income this way.

          1. Maybe, but since we don’t really do anything that doesn’t involve a legal contract, we have always gravitated towards tracking everything very accurately. Hiding transactions is fraught with peril for a number of reasons outside of just tax compliance.

        2. Maybe your client needs a financial manager with a lower IRS profile?

      2. Would he?

        He doesn’t have to say on his tax returns that he’s accepting bitcoin, especially if he just uses a processor like Bitpay or Coinbase who will deposit fiat into his account. Even if he keeps bitcoins as an investment, he just has to declare it on his return as a property gain/loss (whenever he cashes out or uses them).

    3. You can’t hedge Bitcoin. That is a major problem.

      Although to be fair Bitcoin has been very stable since early March with one serious dip down to $352.

      1. There are derivatives that allow just that.

        1. Puts/Calls? Tell me more.

          1. This is over a year old there’s been more since.

            http://qz.com/69630/how-to-sho…..ally-must/

    4. You could look at the Coinbase website, they have a whole section about bitcoin for merchants. It’s probably cheaper than paying the transaction fee on wire transfers, plus there are no chargebacks like there are with credit cards.

    5. Assuming you’re in the US: Use bitpay, they have a high chance of supporting whatever shopping cart system you already use, charge very low fees (1% for low volume, fixed monthly fee for high volume accounts), and let you decide how to split your funds (USD vs. BTC).

      1. How do they stack up against Coinbase?

        1. On the merchant side, they’re pretty much the same from what I hear.

          It comes down to which one supports your POS system and/or accounting software, how easy it is to manage your BTC wallet (if you choose to keep some bitcoins), etc., and of course cost.

          I’m not sure if Bitpay has a merchant wallet solution so if you want to keep bitcoins for investment, Coinbase could make that slightly easier for you.

  2. If my only information about Bitcoins came from the priests at Reason who also advocate food trucks, group-sourced taxis, medical hooch, and mass third-world immigration, just like the Pope and the Kochs, I’d go bearish on Bitcoins.

    1. The Kochs like food trucks, and the Pope likes Uber?

      WTF did you just say?

      All I know is = this article is at least 500%-deficient of Hot Redheaded Australian.

    2. The Kochs and the Pope are Roman Catholic.

      Roman Catholics (I was an alter boy) are nice folk and they believe in miracles.

      1. Alter-boy?

        so, the priests never beat ‘spelling’ into you?

    3. The Pope is a fucking socialist. Not sure where you got the idea anyone other than GKC likes him.

  3. The kids at Tested bought bitcoin but trading it back for cash was a little more difficult.

    1. You also can’t do Paypal to Bitcoin – which put the kabash on any Bitcoin for me. Sadly, I wanted to buy.

      1. Circle, mentioned in the article, is apparently taking credit cards for BTC. Not sure when they’re live.

        1. No thanks. That is like betting on football with a credit card.

          And I love betting football.

          1. …what?

            1. Hmmm, you buy a $1000 Bitcoin with a 2% fee back in November what do you have today?

              A $445 Bitcoin is all.

              1. back in November

                What if you bought Bitcoin at $350 last month?

            2. Anyone that transacts in Bitcoin will want a current value Dollar exchange.

              So basically, Bitcoin is a US Dollar proxy and nothing else.

    2. I watched the segment by ‘the kids at tested’. I don’t know what better results they would have expected, going into the project completely ignorant on the topic.

      It appears that their entire research into bitcoin was conducted in a drunken 20-minute session, when the inspiration to do the bit just flashed upon them due to the presence of a bitcoin ‘atm’.

      Noob mistake after noob mistake due to their ignorance. Most notably not including a transaction fee (typically about $0.05 USD) with their sell order. If they understood anything about bitcoin, they would have realized that this would have delayed their cashout process.

  4. Such increased centralization is anathema to Bitcoin’s more ideological proponents. It could be seen as recreating the same regulated banking system we have today, albeit more efficiently, and that’s not what they signed up for.

    (on off-blockchain transactions).

    As long as people still have individual access to the P2P network, from anywhere, it’s not really an issue.

    Visa and similar networks have security by controlling access. In the Bitcoin world, we’ve got security built into it, and don’t control access to the network. Anyone can make a transaction on it. As long as that stays, no huge worries.

    1. Exactly. Centralization is only bad when it prevents people from carrying out transactions.

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  6. The apparent centralization of BTC is at most irrelevant and perhaps just a mirage. There are a bevy of innovations that will keep it as it is and perhaps replace it. Dark Coin is built for privacy and only keeps the recipient and previous recipient in the record-less blockchain bloat and more privacy, like an e-cash. Dark Wallet is supposed to anonymize BTC but I don’t know if it will be better than Dark Coin. Zero Coin is supposed to do the same and Mina Coin is a crypto actually back by two 400 ounce gold bars. If I had to go all in, it would be on SafeCoin, the MaidSafe crypto.

    1. Worth pointing out that MaidSafe is way more (and way more ambitious) than just a crypto-currency — distributed, encrypted, internet. ie, globally-distributed storage, computing power, etc., that you can pay for (and be paid for providing) via crypto-currency.

      Dedicate storage to the network, get paid. Use storage? Pay for it with SafeCoin. Access those anywhere.

      I haven’t even looked that closely at it yet, but it’s very slick stuff.

      1. Yes I am very excited. SafeCoin is however revolutionary on its own because it is backed by something unseizable.

        1. I don’t know anything about MaidSafe. But I openly wonder how two 400-oz gold bars are somehow unseizable.

    2. Don’t talk to me about darkcoin.

      Me one month ago “hmm darkcoin looks cool. Gee it is so cheap also. maybe i should buy like 1000 of them…nah it will go down with the rest of the crypto market and i can buy it even cheaper then”

      Me today with darkcoin 10 times it value “FUUUUUUUUUUUUUUUUUUUUUUUUUU”

      1. Ha that’s exactly what I thought. Another junky AltCoin. I don’t feel bad because I’m not into the BTC purchasing yet, but I’m going to get into it. Very interestingly it continues to rise. I’m guessing Silk Road 2-which is highly successful-will be seeing lots of it.

  7. Slightly off topic…

    The typical Christian argument for paying taxes to an evil govt is Jesus’ quote, “Render unto Caesar what is Caesar’s”.

    But Bitcoin isn’t “Caesar’s”, it doesn’t have his inscription or portrait on it. So does that mean I don’t have to render it to “Caesar”?

    I don’t really know the answer to the question. My personal bias against govt (for obvious reasons) kind of clouds my judgement on this issue.

    1. Caesar was the ruler of occupying pagans in the holy land.

      Not sure “Render unto Caesar what is Caesar’s” works when you are a free Christian no longer occupied under the boot of Pagan legions.

  8. If banks and other financial institutions are allowed to create credit based on bitcoin, then it will have the same problems as fiat currencies, except one: there will be no bailouts. My guess is that it won’t take very long then for them to chill outl

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