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Why America Can’t Regulate Bitcoin

Dr. Silberman from “Terminator 2”, a dead ringer for Mr. Sherman. Both sceptical and WRONG.

Hearings on Bitcoin and its derivatives are being held in the USA on a regular basis, and invariably the expert witnesses fail to properly describe the actual processes going on. If they used the correct language and excluded all analogies, the only possible conclusion would be that America cannot regulate Bitcoin under its current legal system. The Constitution guarantees the inalienable rights of American citizens, and therefore Bitcoin is a protected form of publishing. The only way Bitcoin can be made regulable is if the Constitution is changed; and that does not mean adding a new Amendment, it means removing the First Amendment entirely. Inevitably the anti-Bitcoin protagonists will face a robust and ultimately successful legal challenge that will remove the possibility of any sort of “BitLicense” or interference from the CTFC, FinCEN or any other agency. It will also remove any possibility of interference at the State level. The consequence of adhering to the basic law of the United States will cause America to become the centre of all Bitcoin business for the entire world.

Let me explain why this is the case.

Some say that Bitcoin is money. Others say that it is not money. It doesn’t matter. What does matter are three things; that Bitcoin is, that the Bitcoin network does what it is meant to do completely reliably, and what the true nature of the Bitcoin network and the messages in it are.

Bitcoin is a distributed ledger system, maintained by a network of peers that monitors and regulates which entries are allocated to what Bitcoin addresses. This is done entirely by transmitting messages that are text, between the computers in the network (known as “nodes”), where cryptographic procedures are executed on these messages in text to verify their authenticity and the identity of the sender and recipient of the message and their 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. This output can take different forms, like machine readable QR Codes, or it can be printed out in 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”.

At the time of the creation of the United States of America, the Founding Fathers of that new country 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 escaped, wrote into the basic law of that then young federation of free states, an explicit and unambiguous freedom, the “Freedom of the Press”. This amendment was first because of its 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.

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 goods are 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 from the moment it was first distributed, but all copies of PGP outside of the United States were “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 it happen legally.

The source code for PGP was printed out.

The original print out of the PGP source code.

It’s 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 binary, the US government ridiculously tries to assert that immaterial software is a device, and not text (software or “binaries” is text that can be run on devices). Clearly the idea that software is a device is patently absurd, but rather than waste money arguing this point in court, printing out PGP removed all doubt that a First Amendment act was taking place.

The printed source code was shipped to another country, perfectly legally and beyond challenge, and then transferred to a machine by OCR (Optical Character Recognition, a software tool that can turn a printed page into a text file, removing the need for a person to manually type out a printed page), resulting in a PGP executable that was legally exported from the United States.

The direct analogy to Bitcoin should be vividly 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 message was not read or changed in transit. The purpose of Bitcoin is to absolutely verify the ability of the owner a cryptographic key (which is a block of text) that can unlock a ledger entry in the global Bitcoin network. 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 software clients that do the message signing to the text the compiled clients generate, send, receive and process.

Bitcoin is text. Bitcoin is speech. It cannot be regulated in a free country like the USA with guaranteed inalienable rights and a First Amendment that explicitly excludes the act of publishing from government oversight.

Bitcoin and PGP generate 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, or your right to publish. Typewriters can include Patented methods in their construction, and those Patents have no bearing on your First Amendment right to publish what you create with Patented tools.

Copyright gives the generator of these texts privileges under the law imposing fines on someone copying your message without your permission, but Copyright law has nothing to do with exporting, regulating 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 or other bureaucrat dares to try and regulate Bitcoin, they will be on a hiding to nothing. 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.

Bitcoin’s operation is fundamentally no different to what all email, text 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. 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 it’s stored in a private database, but that’s another story. Wink wink.

Here is another example of case law proving that this reasoning is correct.

In Bernstein v. US Department of Justice it was established that code is speech and is protected by the First Amendment. This absolutely and unambiguously applies to Bitcoin, with eerie parallels to KYC/AML in Bitcoin. The unconstitutional ITAR requirements are exactly the same as asking Bitcoin traders to register as “Money Transmitters” and seek licenses before they can be paid to transmit text to the Bitcoin network for publication on the public ledger. The Ninth Circuit Court of Appeals found in Bernstein’s favour, and ruled that software was speech protected by the First Amendment and that the government’s regulations preventing its publication were unconstitutional. It is clear to see that Bitcoin falls squarely into the category of protected speech, there is no way around any of this, and the US courts must come to the same conclusion for Bitcoin. Bitcoin is protected speech, and the case law says so explicitly.

The position that Bitcoin is money is fundamentally wrong, and systems like it have existed for many years without gaining the attention of any three letter agencies. Take for example FarmVille, the massively popular farm simulation game on Facebook.

From Wikipedia’s entry on FarmVille

This hugely popular game is no different to Bitcoin in nature. FarmBucks exist in a closed system, just as Bitcoin does. The only difference is the size of the space where the messages are being sent, and in the case of FarmBucks, the number of users and transactions (messages sent) was large. FarmVille had 83,760,000 monthly active users and not a single one was subjected to KYC/AML to exchange fiat for FarmBucks or FarmCash. Why not? What happened to that money? Why weren’t FinCEN or SEC all over that game as they are on ICOs? No one can explain this adequately. This example is very useful as a tool to pull back the curtain on the people who assert that Bitcoin is a money and is fundamentally different to a money kept in a game. All the rationales they use (mostly in the form of run on sentences) to explain the difference are inaccurate, and never address the fundamental processes; if they did, they would have no choice but to conclude that Bitcoin is no more subject to regulation than FarmBucks or PGP are.

Clearly, allowing legislation to touch Bitcoin means that any software of any kind will suddenly be liable to arbitrary and unconstitutional restriction. It will set a precedent that will be devastating to all software development in the USA, and software is the means by which everything is run, communicated, exchanged and ordered in modern society. In fact, it is impossible to run a modern society without software.

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 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 bank? Would that suddenly change the nature of each Tweet that is sent on their network, and cause them to be “Money Transmitters”? 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?

Essentially, Bitcoin allows you to make written 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” 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.

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

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 have 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 billions of 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 websites that sell goods on-line and the jurisdictions where those websites operate is without precedent. Only a fool would do something that could harm the advent of this transformation, or shun this new technology and the business building on it.

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 the State can possibly hope for is to tax new businesses that use the new tools as they emerge, and encourage entrepreneurs to incorporate in their jurisdictions. If America wants to drive away Bitcoin developers, exchanges and new businesses, 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 come under attack.

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 behave correctly and fulfil promises, 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 anyone advocating that there should be a “BitLicense”. Don’t waste everyone’s time, money and resources proposing this anti-American 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.

And what can the business people who want a “BitLicense” forced on the software industry say? That they don’t trust themselves? That’s patently absurd. That they do not trust their competitors? If it’s the case that their competitors are not good actors, then the good actors have a market advantage, and remember; a license cannot protect the public from fraud or provide any guarantee of any kind, it can only distort the market.

What these “BitLicense” advocates actually want is a guaranteed market advantage. They are Crony Capitalists. They want to prevent the emergence of a “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’s un-American.

The American legislature must let the American dream flourish and extend its power to Bitcoin, or it will be compelled to obey the law, and this has started to happen. Two judges in the USA have now found that Bitcoin is not money, and have thrown out “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. The Hugh B. Scott ruling is highly significant, because it directly contradicts the idea of BitLicence. And lest there be any doubt, all of this, including legal remedies for breach of promise, applies to “ICOs”, which are also nothing more than text stored in a database. The fact that they are called, “Initial Coin Offerings” is irrelevant to the underlying processes, and it is not illegal to parrot the language and terms of finance, which are not trademarked or copyrighted. The Hollywood Stock Exchange wasn't deceptive because it called itself a “Stock Exchange”. Opponents of Bitcoin and ICOs have no good arguments, and the threadbare pretexts for regulation they’re able to synthesize are as flimsy as fiat.

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