Bitcoin: Can a Cryptocurrency Divided Against Itself Stand?

Vice's "Motherboard" section skylarks about the possibility of regulations destroying the fungibility of bitcoin by making it so there are "legal" bitcoin and "illegal" ones, for which it uses the culturally traditional but kinda weird locution of "white" and "black" bitcoin.

Here's why some people think so:

The white coins would be currency that's circulated through the regulated system; black coins would be coins still off the authorities' radar…

….New York's proposed "BitLicense," rules for how businesses should incorporate bitcoin, released last week, would ostensibly purge illicit bitcoin-driven activity and security problems to attract venture capitalists that were previously hesitant to invest in the volatile technology. A "sanitized" bitcoin could finally appeal to the masses, advocates claim.

But others argue that as it stands, the strict rules could wind up choking bitcoin startups throughout the state, and set a dangerous precedent. At issue is the existing "know your customer" (KYC) laws. Under these regulations, services must keep all customers' physical addresses and identifying information. Third-party bitcoin platforms like Coinbase and BitPay already comply with these requirements.

But BitLicense takes it one step further, requiring that companies also keep identity records of parties their customers sell bitcoins to, or buy bitcoins from. In other words, it would effectively mean customers can't do business with anyone unless the government knows who it is.

This raises a host of concerns, from the associated cost of compliance to financial surveillance. It's given rise to the fear that these stringent conditions would produce two classes of coins: those used by regulated institutions, adhering to de-anonymizing rules, and those that continue to operate in the crypto Wild West.

And once the currency is integrated into the regulated system, it would be difficult, if not impossible, to get out. White coins would be tied to institutions that require identifying information. Law enforcement could ask to know where the bitcoins are headed and where they come from. They'd bounce around inside these verified institutions, but would have no means of escape. ….

Black coins would be the remaining bitcoins that don't fall into this loop—the unregistered coins operating free outside the system. As the theory goes, these black coins would be harder to maintain and more versatile to use, and could grow more valuable than their traditional counterparts over time.

Like censorship and the Internet, one hopes that the blockchain will recognize licensing as damage, and route around it.

I wrote the other week about the proposed New York regulations that prompted these worries.

I wrote in April about how the cryptos and the legals would both likely find a usable future for themselves in the world of bitcoin, no matter what the Feds do.