Senate Bill S.1241: A Threat to America

Ned Ludd: The Mythical Man Behind the Luddite Movement.

In the United States, Senate Bill S.1241: “Modernizing AML Laws to Combat Money Laundering and Terrorist Financing” is tabled for debate. This is an exceptionally bad, un-American bill, very probably drafted in part by incumbents who fear being disrupted by Bitcoin. This bill has been tabled because anti-Bitcoin agents have been working overtime, spreading the mistaken idea that Bitcoin is money or an asset. It is neither. I will explain exactly why Bitcoin is not an asset or money, and why this absurd bill is unconstitutional and bad for America.

Some say that Bitcoin is money. They are wrong. Bitcoin is not money. It is not an asset either. It is a completely reliable computer database, that has entries in it that are scarce.

Bitcoin is a database maintained by a network of software peers running on individual’s computers. Those computers regulate which database entries are allocated to what Bitcoin database user. This is done entirely by transmitting messages that are text, between the computers running the Bitcoin software or “nodes” in the network, where cryptographic procedures are executed on these messages in text to verify the authenticity of the message and its position in the public ledger. The messages sent between nodes in the Bitcoin network are human readable, and printable. There is no point in any Bitcoin transaction that Bitcoin ceases to be text. It is all text, all the time.

Bitcoin can be printed out onto sheets of paper. These print-outs can can contain different symbols, like machine readable QR Codes, or the letters A to Z, a to z and 0 to 9. This means they can be read by a human being, just like “Huckleberry Finn”.

This is a Bitcoin private key printed onto a piece of wood. This is not “money”, or “holdings” or an asset. It is a piece of wood with letters burned into it.

At the time of the creation of the United States of America, the Founding Fathers in their deep wisdom and distaste for tyranny, haunted by the memory of the absence of a free press in the countries from which they fled, wrote into the basic law, The Constitution, an explicit and unambiguous freedom, the “Freedom of the Press”. This amendment was first because it is of central importance to a free society. The First Amendment guarantees that all Americans have the power to exercise their right to publish and distribute anything they like, without restriction or prior restraint:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

This single line, forever precludes any law that restricts Bitcoin in any way. I will now show you why.

Pretty Good Privacy
In 1995, the US Government had on the statute books, laws that restrict the export of encryption software products from America without a license. These products were classified as “munitions”. The first versions of the breakthrough Public Key Encryption software “Pretty Good Privacy” or “PGP”, written by Philip Zimmerman had already escaped the USA via Bulletin Board Systems and USENET from the moment it was first distributed, but all copies of PGP outside of the United States were deemed “illegal”. In order to fix the problem of all copies of PGP outside of America being encumbered by this perception, an ingenious plan was put into motion, using the first Amendment as the means of making its dissemination happen legally.

The source code for PGP was printed out.

The original print out of the PGP source code.

It was as simple as that. Once the source code for PGP was printed in book form, it instantly and more importantly, unambiguously, fell under the protection of the First Amendment. As a computer programme or “binary”, the US government wrongly tried to assert that immaterial software is a device, and not text (in case you didn't know, software is text that runs on devices). Clearly the idea that software is a device is patently absurd, but rather than waste money arguing this point in a court, printing out PGP removed all doubt that a First Amendment act was taking place.

The printed source code was shipped to another country, and then transferred to a machine by OCR, resulting in a PGP executable binary (a programme or “app”) that was 100% legally exported from the United States.

The direct analogy to Bitcoin should be absolutely clear to you now. PGP and Bitcoin are both:

  1. Pieces of software that can be rendered as printed text on paper
  2. Software that generates unique blocks of human readable text
  3. Designed to generate text that is 100% covered by the First Amendment

The purpose of PGP is to absolutely verify the identity of the sender of a message and ensure that the text message was not read or changed in transit. The purpose of Bitcoin is to absolutely verify the ownership of a piece of text that is a ledger entry in the global Bitcoin database.

A PGP message that is no different in form or Constitutional protection to any letter or message written by an American.

Both of these pieces of software are messaging systems and services that absolutely fall under the First Amendment in every aspect, from the source code used to generate the apps and clients to the text the compiled software clients generate, send, receive and process.

Bitcoin is text. Bitcoin is speech. It can’t be regulated in a free country like the USA where the people have guaranteed protection of their inalienable rights.

Bitcoin and PGP generate text messages that are initiated by their users. Each of the messages that are generated by these two pieces of software are unique. The only bodies of law that could possibly be invoked regarding their output and source code are Copyright and Patent law respectively. The Bitcoin source is not copyrighted and the core idea of it is not Patented, and in any case, none of this has anything to do with the nature of Bitcoin messages.

Copyright gives the generator of these texts privileges under the law imposing fines on someone copying your message without your permission, but that law has nothing to do with exporting or imposing a tax on the messages themselves, and of course, forbidding the copying of your Bitcoin payment message rather negates the purpose of using Bitcoin.

Taking all of this into account, if any legislator, regulator, three or six letter US agency tries to regulate Bitcoin, they must fail because the law explicitly forbids such regulation. A legal challenge will be mounted, and will have to be mounted, because if the State can legislate against a single piece of software that generates messages, a legal precedent will be created allowing the US government to regulate all software no matter what it does. Since all software is text and works exclusively by text.

Bitcoin’s operation is fundamentally no different to what all email, messaging and internet connected software does; relay messages. The only difference is in the software that tracks how the messages of the sender and recipient relate to each other and are displayed.

Email is no different to Bitcoin, save for the fact that a record of the sender and recipient and content of your email is not stored in a public ledger one against the other. We know its stored in a private database, but that’s another story.

Allowing legislation to touch Bitcoin means that any software of any kind will suddenly be liable to arbitrary and a clear violation of your Fourth Amendment rights:

The Fourth Amendment to the United States Constitution
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

This bad bill will set a precedent that will be highly damaging to all software development and software business in the USA.

Twitter for example, could find itself being regulated; it transmits messages that are no different in nature to the messages that Bitcoin transmits; the only difference being the publicly maintained ledger and context and application of the messages. In fact, Twitter could turn itself into a Bitcoin company quite easily by adding a few fields to its message JSON schema to include a Bitcoin address for each of its users, adding a page to its client and running its own Bitcoin server pool. Would that extra text suddenly transform Twitter into a different company? Would that suddenly change the nature of each Tweet that is sent on their network? How is having a Bitcoin address integrated into your Twitter account different to making a promise by hand on Twitter to your followers or in a direct message?

One of the things Bitcoin allows you to do is make contracts with people without knowing them or signing paper; the network and software takes care of identifying and fulfilling the promise, all with cryptographically signed pieces of text. What the people calling for “BitLicenses” and the misguided and manipulated Senators behind S.1241 are asserting, is that because Bitcoin right now has a particular use, it should be exempted from the basic law of the United States of America. That is completely insane, and will have unintended consequences that would be absolutely disastrous for the American economy since almost everything today is mediated by or touches software and databases.

On the other hand, if Bitcoin is left to flourish and the market allowed to define the services and means of setting the value and resolving disputes, Bitcoin as an ecosystem will be extremely robust, widespread, and beneficial to Americans, just like the internet itself is today, after having grown for twenty years without any regulation or oversight from the Senate.

Furthermore, as I have said previously, the country that does not enact Bitcoin legislation will become the starting and endpoints of all Bitcoin transactions globally by first mover advantage. All other jurisdictions will see Bitcoin passing through them untaxed, and there will be nothing they can do about it, as Bitcoin is an unassailable peer to peer network.

We've seen a similar phenomenon with the legal position of encryption in France. SSL was regulated in France until Dominique Strauss-Khan removed the restrictions. They knew that “French e-commerce” would take place inside “le pays Roosbeef” if it were not possible to secure French websites with SSL on demand without friction. American Bitcoin businesses (since the endpoints will be in their jurisdiction) will be taxed on their profits, and this will be a percentage of the trillions of global transactions made on the network for every conceivable and inconceivable purpose.

The same is true for any other country. The United States looks set to cripple itself by enacting “BitLicenses” and declaring by fiat that Bitcoin is a currency, or a commodity or legal tender. As I describe above, Bitcoin is none of those things by nature, and the myriad number of applications it can be put to is only just being discovered. Our project Azteco is but one of them, with the potential to reach the 2.2 billion unbanked people in the world, and provide them with an easy way to access internet e-commerce, world-wide, with a system that makes payment fraud impossible. The potential benefit to the unbanked and the American websites that sell goods on-line is without precedent. Only a fool would do something that could harm the advent of this transformation.

No legislature will be able to keep up with the advances in software that are taking place; there are too many developers and efficient tools in the wild all over the world, all with equal access to the market. The best America can possibly hope for is to tax new businesses that use the new tools as they emerge, and encourage entrepreneurs to incorporate in their jurisdiction.

If America wants to drive away Bitcoin developers, new exchanges and new businesses, this is the way to do it. By all means, do so and take the consequences. There are many other places in the world where fast internet pipes have been laid and where the government is not so backward. Skype was founded in Estonia, not Silicon Valley, and this is for a reason. All the big Bitcoin exchanges are outside of the USA. There is a reason for that. No one wanting to start a Bitcoin business is planning to move to New York from anywhere, because they know that their business models will immediately be subject to million dollar set up fees thanks to the notorious and un-American “BitLicense”.

For those of you who are frightened of a free market in Bitcoin, rest assured, all the laws that currently exist to do with fraud, theft, misrepresentation and everything else, continue apply to all people and corporations who use Bitcoin. Bitcoin does not make laws or your personal or corporate obligations moot. When you deal with a company, you retain access to the law and recourse to it.

When someone makes a promise to sell you goods with Bitcoin, that promise is not nullified because you are paying with Bitcoin. Good Bitcoin businesses will build dispute resolution systems the way that eBay and Amazon have, so that you never have to go to court to obtain justice if there is a problem. Online, reputation is everything, and bad reputations can destroy your credibility and customer base over night. This is a far more powerful incentive to do right, which most people do by default in any case, rather than some arbitrary and absurd “BitLicense”.

All the “BitLicenses” in the world could not stop MTGOX from having a software problem, and no law can bring back the money lost either directly or through the disruption the event caused by the software error. Once again, entrepreneurs powered by the internet make life easier and better, not laws and regulations. Regulation does not make software correct; developers do.

I have one recommendation for the anonymous authors of S.1241. Don’t waste everyone’s time and money and resources forcing us to knock down this stupid idea. The EFF has better things to do with their time than teach the PGP “Munitions Case” lesson all over again. If it goes to court, your side will lose, and as a consequence, America will lose its head start as all Bitcoin entrepreneurs flee the USA for environments that will allow them to innovate, grow and prosper. Already Bitcoin businesses outside America are banning US Citizens. This is not a good thing.

What these S.1241 advocates actually want and believe they will get is a guaranteed market advantage. They want to prevent the “Golden BB” entrepreneur that might destroy their business, they want to slow down and stifle innovation, so that they can become the entrenched and unassailable gatekeepers. They want to bar new entrants to the market. It simply will not work. And it is un-American.

We Are Going to Win
We are getting a glimpse of how the courts are going to respond to a challenge to S.1241. Two judges in two different US jurisdictions have found that Bitcoin is not money, and have thrown out absurd “Money Laundering” charges against two men:

U.S. Magistrate Judge Hugh B. Scott ruled in a money laundering case in Buffalo, N.Y. that bitcoin is more like a commodity and is not a form of currency, according to a local news report.
He recommended the money laundering charge be dropped against the defendant since bitcoin isn’t money.
In another money laundering case last year, Miami-Dade Circuit Judge Teresa Mary Pooler stated it is very clear, even to someone with limited knowledge in the area, that bitcoin has a long way to go before it is the equivalent of money.

Bitcoin is not money. KYC/AML should not apply to it at all, and S.1241 should be torn to shreds and burned. The ruling of Judge Hugh B. Scott is highly significant, because it directly contradicts the idea of BitLicence and S.1241, and sets a welcome, and entirely America centric legal precedent. The is exactly why the judiciary was designed to be a separate branch of government, and is an example of the American system working.

The only way to approach Bitcoin is by telling the absolute truth about it. It is not money; it is a database. Clever analogies are for marketing, and not the law. It is not logical that WhatsApp and Apple’s iMessage and other 100% encrypted and private services are free to operate unrestricted and Bitcoin put under an onerous and un-American regime of un-Constitutional regulation.

Bitcoiners will go to court if the Senate passes this very bad, Crony Capitalist Bill, and the Bitcoiners will win. The public won in the 1990s with PGP in the outrageous Zimmerman case and Bitcoiners will win this one too in the end. The question is will America be the center of the new economy, or will some other country with more enlightened legislators be the winner?

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