From globally diverse legal perspectives, the current regulations affecting Bitcoin and blockchains are quite disparate, ranging on the spectrum from laissez-faire to outright prohibition, enforced with severe criminal penalties. The conundrum, however, lies with the fact that Bitcoin and blockchains are really an extension of the ever more ubiquitous Internet, albeit a radical extension, permitting digital value to be transmitted peer-to-peer, and diminishing the need for third-party intermediaries, who too often exploit their power and privilege. Given that access to the Internet is proclaimed as a fundamental human right by the UN , and that non-profit initiatives from high-profile tech giants such as Google, Facebook, and Microsoft are on a mission to bring the Internet to all corners of the globe within a decade , the Internet, and by extension, Bitcoin and blockchains are here to stay. These revolutionary platform innovations, built atop the Internet, appear destined to play a significant role in the transformation of online interactions, impacting societal norms, politics, business structures, legal systems, economics, and even our very concepts of money.
Resistant (But Not Immune) To Regulation
Bitcoin and its blockchain are decentralized, which makes these innovations at their core, resistant to government imposed regulation. (Permissioned blockchains being developed by private banking consortia, on the other hand, will be more amenable to conventional legal regulation because of their centralized architecture.) It could be argued, simplistically, that the transparency of the Bitcoin blockchain, eliminates information asymmetries, reducing the need for government intervention altogether. However, realistically, any technology involving the transmission of digital value and reducing the need for trusted third-party intermediaries will come under the scrutiny of government regulators. The question then becomes, what methods can be enlisted to influence these inevitable regulatory outcomes in a favorable direction? The answer may be surprising.
The Four Regulators
As Professor Lawrence Lessig so elegantly reminds us in his journal article, The Law of the Horse: What Cyberlaw Might Teach, there are four principal but interdependent modalities of regulation: law, social norms, markets, and architecture—architecture being determined by physical constraints in the “real” world, and by software and hardware code in cyberspace . Before delving deeper into the code aspect of regulation so relevant to cyberspace, let’s briefly examine the three other germane modalities: law, social norms, and markets.
Ideally, Light-Touch, Globally Coordinated Laws
In reality, technology moves much faster than the law, and Bitcoin and blockchain technologies are prime examples of this maxim. Given this inevitability, what is the best path forward for legislators and regulators? From my perspective, I whole-heartedly agree with the overarching “do no harm” regulatory model, promoted by many stakeholders in the field, and notably, CFTC Commissioner J. Christopher Giancarlo . Giancarlo points out that a similar approach was used in the early days of the Internet, which allowed the new technology to take hold, flourish, and grow into a globally significant phenomenon, positively affecting telecommunications, education, entertainment, commerce, and other important human endeavors. Bitcoin and blockchains portend as much, or even more, disruptive innovation, so should be treated like the emergent Internet of two decades ago with a “do no harm” regulatory approach.
In a best case scenario, because of the global reach of Bitcoin and blockchain technologies, governments around the world should optimally coordinate their approaches and stick to flexible and pragmatic legal principles, supportive of innovation, yet protective of consumer rights . The world may do well to emulate the UK government’s lead. About a year ago, they proclaimed their intention to “create a world-leading environment for the development of innovative payments and financial technology .” Since then, the UK’s Financial Conduct Authority has implemented Project Innovate, which has been very proactive, fast-tracking promising startups in the fintech sector, while ensuring compliant consumer protections are in place. The US is currently lagging behind the UK’s leadership. I agree with Jerry Brito of CoinCenter that in the US : “Serious action by federal banking regulators [is needed] to make it clear to banks that it’s perfectly fine—and even encouraged—to establish relationships with innovative fintech and digital currency firms.” In addition, the costly requirement to get licensed in every state should be waived for qualifying fintech startups, at least during an initial grace period. Otherwise, the barriers to entry are unreasonable and prohibitive, except for a few extremely well-funded ventures.
Social Norms Co-Evolving With Technology
Children today are born into a world where massive amounts of computing power and access to the Internet are readily available on mobile devices like smart phones and iPads. Younger generations and different cultures will clearly develop a different relationship with the Internet, whose vast powers are being further catalyzed by the advent of Bitcoin and blockchains. A young, tech-savvy friend of mine just told me he has no problem with Google tracking him online! He trusts Google, because as a business, he feels they are financially incentivized to be good stewards of information; his worry is, who else may be following his online digital tracks, and how will that information be used?
Isn’t the inherent trustability of any centralized entity, public or private, that attains too much power or influence worthy of scrutiny? My concern is that US Constitutional rights of privacy are being eroded in the Internet age, and social norms may passively accept this trend, as younger generations are acclimated to an online environment of surveillance. Also, the influence of corporate and public media can sway opinions in irrational ways. The recent Apple vs. FBI dispute reveals that public opinion is sharply polarized over this debate, as the pros and cons of privacy, security, and public safety are bandied about in a general atmosphere characterized by growing fears of terrorism . Unfortunately, such polarization makes it difficult to reach a fair and well-informed policy because social attitudes are so divergent.
Markets and Monetary Policy
Bitcoin is practically, if not yet legally, a new form of programmable money, free-floating in a sea of “foreign exchange,” where supply and demand market forces determine the price of BTC relative to fiat currencies. If confidence were suddenly lost in Bitcoin, e.g., a fatal flaw found in the code, then the price could collapse and billions of dollars in value vaporized. Owners of bitcoins and businesses dependent on the Bitcoin protocol would be wiped out without recourse—so should governments attempt to protect these stakeholders? How could they? There is no central entity to hold accountable in such an event, so regulation is impractical in this case. Fundamentally, any monetary regime is underpinned by confidence of a critical mass of people who use and accept the currency. Officially sanctioned fiat currencies can likewise collapse in value (and have throughout history) when confidence in the issuing government is undermined, perhaps in times of war, or when the irresponsible accumulation of unpayable debts is no longer deniable . Such events can lead to political instability.
An analysis of Bitcoin from a monetary policy perspective reveals a deflationary “currency” with an exponentially decreasing issuance rate, pre-programmed to reward miners approximately every ten minutes, halving the reward about every four years until a total of twenty-one million BTC have been mined. Many economists, perhaps rightly so, would make the argument that a currency, by design, ought not be deflationary because growth and mild inflation should be the goals of a healthy economy. However, the fixed and limited supply, pre-programmed in its codebase, certainly bolstered Bitcoin’s traction in the early days and likely contributed to its adoption as speculators accumulated a finite digital commodity. (Most highly inflationary altcoins have proven to be unsound “investments.”)
Potential New Regulations & Using The Code of Cyberspace 
I resonate mightily with the thought process and views of Professor Lawrence Lessig. His cautionary portrayal of the influence commercial interests wield on the Internet, and the potential threats to traditional values is a wake-up call, and shape how I hope code can be applied to better govern cyberspace, reigning in violations of privacy, granting people renewed means to contract online, all the while maintaining reasonable consumer protections. I believe that Bitcoin and its blockchain, being open source with the ability to disintermediate trust, should form an effective platform to mold future legislation towards a brighter, more financially inclusive, and equitable future. The full implications may take decades to realize, but there is no doubt a new wave is forming that will reshape human institutions for the better. In all walks of life, third-party middlemen of sometimes questionable integrity will be removed from the equation. Trust will no longer be a scarce commodity, and the Internet will form an honest bridge between anyone and everyone.
Following is an outline of new regulations that should be considered in my view, and where a legislative body is unwilling or unable to act, then perhaps the younger generation contributing to open source blockchain code will step up and oblige governments and regulatory bodies to “do no harm” by programming a better future for everyone and all.
Some of these suggestions use the blockchain to potentially improve systems that exist but have gradually degraded or become corrupted by bureaucratic or political processes. Other ideas listed will only manifest in the future if the law, social norms, markets, and cyber-code coalesce into a collective force, championing universal rights, mutual tolerance, cooperation, and trust under all conditions.
- Ideally, declare an international agreement to treat Bitcoin as the sovereign currency of the Internet, co-existing and freely exchangeable for national fiat currencies.
- Use blockchains to create cryptographically secure user identities, while protecting the privacy of sensitive information associated with individuals. Age and other personal metrics associated with identity can be used to control access to different parts of the Internet, without revealing the specific details to unauthorized parties.
- Use RegTech for real-time auditing of financial institutions, proving solvency, and thereby protecting consumers from defaults.
- Create the ability to contract once again online by implementing consumer-friendly smart contracts .
- Streamline and simplify the licensing and monitoring of Money Service Businesses using blockchain technology to verify the financial condition of a companies in real-time.
- Require the use of blockchain technology to settle trades, drastically reducing settlement times.
- Develop PR campaign to educate the public about digital currencies, their risks, uses, and potential rewards.
- Use blockchains to track public spending, promoting open and transparent government finances for everyone to see .
- Overhaul democratic voting systems using blockchain technology to prevent ballot box tampering and ensure transparent elections.
- Replace antiquated land title systems with blockchain registration, potentially unlocking dead capital, especially in developing countries that lack reliable property records .
May a critical mass of enterprising programming talent study and assimilate the importance of law, and thereby consciously steer and “regulate” our digital future, using enlightened code to shape the global Internet into a trustworthy, creative, and cooperative commons!
CFTC Commodity Futures Trading Commission
FBI Federal Bureau of Investigation
PR Public Regulations
RegTech Regulation Technology
UK United Kingdom
UN United Nations
US United States
- David Kravets. (2011, June 3). Wired. U.N. Report Declares Internet Access A Human Right. Retrieved from https://www.wired.com/2011/06/internet-a-human-right/
- Paul Jones. (2016, February 26). CryptoIQ. Financial Access and the Special Role of Internet Connectivity in the Developing World. Retrieved from http://bit.ly/1oFH3mF
- Lawrence Lessig. (1999, December 3). Harvard Law Review, Vol. 113:501. The Law of the Horse: What Cyberlaw Might Teach
- J. Christopher Giancarlo. (2016, April 12). Keynote Address of CFTC Commissioner Before the Cato Institute, Cryptocurrency: The Policy Challenges of a Decentralized Revolution. Retrieved from http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-14
- Jerry Brito. (2016, April 7). Coin Center. Is the US losing its global competitive edge in fintech? Retrieved from https://coincenter.org/2016/04/us-losing-global-competitive-edge-fintech/
- Nelson Granados. (2016, March 21). Forbes. The Apple-FBI Battle Is Dangerously Polarizing Public Opinion. Retrieved from http://www.forbes.com/sites/nelsongranados/2016/03/21/how-the-apple-vs-fbi-battle-is-dangerously-polarizing-public-opinion/#6c4d289e4bd8
- Arvin Narayanan, et al. (2015, May 8). Bitcoin and Cryptocurrency Technologies, Chapter 7. Retrieved from https://is.vsfs.cz/el/6410/zima2015/N_TK/um/chapter_7.pdf
- Peter G. Mehrling. (n.d.) Economics of Money and Banking, Coursera. Retrieved from https://www.coursera.org/course/money
- Paul Jones (2016, April 18). CryptoIQ. New Internet Technologies To Remedy The Unfairness of Clickwrap Contracts. Retrieved from http://bit.ly/1Vzdfqp
- The Guardian. (2016, April 26). UK looking at bitcoin technology for tracking taxpayer money, says minister. Retrieved from https://www.theguardian.com/technology/2016/apr/26/bitcoin-blockchain-tracking-taxpayer-money-minister
- De Soto, Hernando, (2000.) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.