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Written Evidence Submitted to Her Majesty’s Treasury Committee’s “Digital Currencies inquiry” on…

HM Treasury Committee asked for submissions from interested parties to their Digital Currencies inquiry, and Azteco made the following contribution. You can watch the astonishing oral evidence part on YouTube. Pay special attention to Martin Walker (who mirror a small section of our thinking closely), John Mann and Stewart Hosie, who asks the right questions .

Executive Summary

  • Bitcoin is a historic opportunity. The UK can become the “Silicon Valley of the Internet of Money”.
  • Britain will not get a second chance. “Silicon Valley Events” only happen once.
  • Britain cannot control Bitcoin without negatively impacting other forms of software development.
  • Britain can’t regulate encryption or Bitcoin without killing it.
  • Historically Britain is good at setting up and ordering countries like Hong Kong. Use that thinking with Bitcoin, and Britain will prosper.
  1. I am Akin Fernandez, system architect and software developer at Azteco¹ . Azteco is a Bitcoin service that uses the familiar top up voucher format available globally to pay for mobile phone air time as a means of delivering Bitcoin. Our service is identical to iTunes, T-Mobile and Amazon² vouchers. I am submitting evidence to the committee to prevent Britain from making an historic blunder that will prevent it from becoming a global centre for Bitcoin.
  2. Several voices will submit evidence to the committee making the claim that regulation of Bitcoin is a prerequisite to making Britain a centre for this software activity. They are incorrect, and that claim is the opposite of the truth³. History shows us that the free market causes jurisdictions to become centres of activity; the most recent example being Silicon Valley, where unregulated software and Internet services founded there dominate the globe. Bitcoin is a software service that is no different to WhatsApp, Twitter or Facebook, none of which face any special regulation, and all of which are now global players. Currently there is no global centre for Bitcoin development; Britain has a chance to capture that centre with its ideal position.
  3. The role of digital currencies will have a significant impact in Britain. People in the UK will download Bitcoin wallets to send and receive messages with them, in exactly the same way they do with WhatsApp and Facebook. Bitcoin will be used for every purpose that Sterling and credit cards are used for. This is going to happen whether Britain is the place where these transactions are accounted for and whether the businesses that provide the wallets and on-ramps are based in the UK or not. Bitcoin is a global network that is not country specific; anyone anywhere can use Bitcoin without permission, just like Facebook and WhatsApp.
  4. Consumers will benefit from international messaging, “Bitcoin”, that is inexpensive and instant. They will benefit from access to the global Bitcoin messaging network, as people in jurisdictions that are poorly served by the legacy banking system all come on line with a form of messaging in lieu of money that totally eliminates payer fraud. E-commerce in Britain will see a massive boost as people shop online in Britain with Bitcoin.
  5. The risks involved are a rounding error. Payer fraud is abolished with Bitcoin, removing a key barrier to e-commerce sites in the UK accepting payments from foreign countries. Consumers will have irrefutable proof that they have paid for something online, provided for free by Bitcoin itself.
  6. Government will benefit by a large increase in taxable business activity carnying on in Britain, as well as the revenues from Bitcoin businesses operating in Britain maintaining the payment software suites used to mediate the payments.
  7. Bitcoin represents an historic opportunity for Britain to lead in the development of new businesses models and the software needed to deliver them. Bitcoin is very sensitive to the way in which software is written that addresses it. New security practices are being developed to manage this risk, and Open Dime is one example of a company doing that. If the climate in Britain is right, we can expect companies like Open Dime to relocate here.
  8. There is no such thing as “distributed ledger technology” or “Blockchain without Bitcoin”. This idea was a fad started by companies wishing to sell software that claimed to have the advantages of Bitcoin but none of the negative connotations. Everything these companies do can be done with an ordinary SQL database, and many of the “Blockchain not Bitcoin” start ups are now pivoting away from “Blockhain” to other software services, as their prospective clients begin to understand that you cannot have Blockchain without Bitcoin.
  9. Financial institutions will need to become peers on the Bitcoin network if they want to continue to provide services. Just as Public Libraries are essentially useless now that everyone is on the Internet and can read any book or check any fact from anywhere, legacy financial services must reinvent themselves as Bitcoin businesses. This may include interfacing for Government, which should begin accepting Bitcoin for settlement of tax bills, as the Swiss have.
  10. There should be no “regulatory response” from the Government, just as there has been (and indeed cannot rationally be) a “regulatory response” to SSL, which is required for world commerce to be transacted. Bitcoin is software that combines the capabilities of a database and cryptography. It is not money. Any attempt to regulate it will cause harm to Britain, by contaminating database and SSL using businesses (every company in Britain) and diminish the UKs role in the inevitable growth of Bitcoin.
  11. If the UK classifies Bitcoin as money, it will need to classify in-game monies as money, and subject them to any regime Bitcoin is subjected to. What game development that is still currently done in the UK will most likely consider that Britain is hostile to their industry. Anti-Money Laundering rules do not apply to Bitcoin because it is not money. The only reason questions about “KYC/AML” are being asked is that the vast majority of commentators are gravely misinformed about what Bitcoin actually is.
  12. Consumers are protected by Bitcoin itself. There is no human counter-party in Bitcoin; it is mediated by secure software. All existing laws applicable to fraud are sufficient to regulate Bitcoin businesses, and provide a beneficial environment to keep everyone honest. Businesses that use Bitcoin cannot be defrauded by the Bitcoin network, so they do not require protection at all.
  13. Any interference in Bitcoin’s operation will stifle innovation in the UK. Entrepreneurs will move to other jurisdictions where people are free to write and release software. If this committee is to consider anything, it should be thinking about what sort of inducements Britain can offer to entrepreneurs to encourage incorporation in the UK, not signal that onerous and illogical restrictions will be placed on them from the off. Regulation is not an inducement.
  14. There are no such things as “digital currencies” there is only Bitcoin. There is only one Internet that the entire world has settled on, and the same will be true with Bitcoin. What people call “digital currencies” (alt-coins which are Bitcoin clones) are inferior to Bitcoin, whose rapid development and feature set out performs all imitators. The large team of exceptional, world-class developers working on Bitcoin present an insurmountable hurdle to any variant replacing Bitcoin as the global payment rail for the Internet.
  15. Bitcoin will replace all means of payment on the Internet, as it is vastly superior to current methods. Because it is programmable, the variety of services that can be built on it and offered to anyone anywhere securely, exceed the number and types of service that are done on the traditional payment rails, at any amount.
  16. All arguments that dismiss Bitcoin on its capacity limitations are incorrect. The Lightning layer¹⁰ alone causes Bitcoin to exceed the capacity of all credit card companies combined by several orders of magnitude. Offline Bitcoin transactions are unlimited in transaction per second using devices like Open Dime¹¹ that don’t record their use on the public block chain.
  17. Bitcoin is a total replacement for all traditional means of payment on line. It will be used to make micro-payments as well as very large settlements. It is easy to imagine the BBC charging for its content on a by programme basis with Bitcoin in iPlayer. The software that does this for the BBC should be written in Britain, and this can only happen if Bitcoin companies and service providers are based here.
  18. Bitcoin will not disrupt the economy; it will greatly enhance it. When the unbanked of the world are on-boarded to Bitcoin, they will be buying goods and services on the Internet. Those transactions will terminate in the UK. This will be a net benefit to Britain. All businesses and individuals are liable for taxes as normal in a world where Bitcoin is the way people transact over the Internet. The change that is required is the public sector becoming a peer on the Bitcoin network, receiving in it along side credit cards and cash.
  19. Bitcoin is not disruptive in the negative sense. It is the same in nature as the Internet, which provided many opportunities for increased efficiency and consumer satisfaction. Prescriptions and NHS interactions regularly use the Internet to streamline services¹², and this is beneficial.
  20. Whatever the risks of Bitcoin are, they are greatly outweighed by the manifest benefits it brings to society. The Internet has brought negative effects along with it, but no one would say that these negative effects are the defining character of it. The same is true of Bitcoin. A tiny minority will lose their wallets, suffer hacks and the other things that happen on-line, but the vast majority will not have any issues. There is nothing Government can do to stop the vanishingly small number of negative events from happening, and it isn’t possible to have a network free of negative consequences. Regulation and law are tools that should be used sparingly and not at all when inappropriate, as is the case here.
  21. The Government previously ran a consultation¹³ to which we supplied a detailed response¹⁴. The only change Government should be making is the introduction of a Bill to legally guarantee a moratorium on any new legislation that addresses Bitcoin. If the Government does this, (which will cost it nothing) Bitcoin entrepreneurs from around the world will converge on Silicon Roundabout, bringing billions into the UK as well as nurturing the expertise needed to write the software and design the products that use Bitcoin as the backbone. This is the only way Britain can guarantee that it captures the title of “The Home of the Internet of Money”.
  22. The most important change the Government can make is to become a peer on the network, accepting Bitcoin for the settlement of tax bills, as the Swiss have¹⁵. HMG, by integrating with Bitcoin (in the same way that it now has a significant presence on the web) can ensure its processes are not disrupted, and educate everyone about Bitcoin in the process. Bitcoin will be seen as just another way to pay, like credit cards and cash. It will not be an outsider or adversarial phenomenon, but instead will be just another service progression, as the web was. Normalising and pioneering with Bitcoin should be the Government’s priority, not regulation. Bitcoin is as harmless as the Totnes Pound¹⁶, just bigger in scale.
  23. There is nothing anyone can do to stop messaging on the Internet. An irrational focus on one aspect of the Bitcoin network’s use, and attempting to control it in a way that will make it impossible to incorporate in the UK is self defeating and illogical. The edge use cases are not the standard by which policy should be formulated.
  24. If the Government institutes a 118 year moratorium on regulating Bitcoin as I advise, then it will be striking the correct balance. HMG cannot protect consumers and businesses; it does not have the means or the competence to do so. It cannot protect the public from credit card fraud, phishing and the other edge cases in other services. The only real power it has is the power to stifle innovation, and this will cause perfectly beneficial, profitable and innocuous businesses to move elsewhere. Already there are Bitcoin businesses that used to be incorporated in Britain which have fled. They keep programming offices in London, but all their monies are routed through another jurisdiction.
  25. Regulation will not have any effect on consumer trust. Bitcoin doesn’t require regulation to convey trust; the reputation systems that are already running online do this adequately, and they ruthlessly punish bad actors. Bitcoin was designed to remove the need for trust; it is redundant and pointless to add another layer of impotent trust on top by regulation that will guarantee nothing. All Bitcoin apps are a maximum of 5” from each other on a mobile device screen. It is trivial to move your Bitcoin from one app to another. As soon as it is known that a Bitcoin app is not being managed properly, it is common practice for a mass exodus to occur. This effect happens on non-Bitcoin apps like Snapchat, where a single tweet from Kylie Jenner¹⁷ caused millions to abandon that tool. Start ups don’t need regulation; they need an environment where they can experiment without having to jump through artificial hoops and mount Security Theatre¹⁸ barriers to write software. Other jurisdictions, understanding that start ups have special requirements, have instituted “Sand Box Regimes” for them to to work under without interference, but this is a tacit admission that the regulations they’ve put in place damage the start up culture that is crucial to discovering new business models.
  26. The only rational way forward for Britain is to concede that current laws bestow a great amount of power and protection to the consumer, who has many avenues of redress available to him and are sufficient. Combined with the risk of losing all your customers over-night due to bad PR, a climate that encourages best practices is already in place in the UK, balancing the freedom to innovate entrepreneurs expect from a country like Britain.
  27. Overseas responses to this sea change in how things will be paid for on the Internet range from banning (in undemocratic, totalitarian and backward jurisdictions) to the entirely correct position that holds that Bitcoin is in fact a sort of right (Texas) and that no regulation is needed at all (Hong Kong). There is no place for a “nuanced” approach, or a regime that falls somewhere between totalitarian ban and partidal freedom; there is only one correct way to approach Bitcoin, and that is to abandon any plan to regulate. It is an indication of the rightness of a hands off approach that Hong Kong¹⁹ and Texas²⁰, two utterly different cultures both of which are capitalist and very prosperous, have come to similar policy positions when it comes to Bitcoin without referring to each other.
  28. My recommendation is that the British government enact a law in Parliament shielding Bitcoin from regulation of any kind, for a period of 118 years, ending when the last Bitcoin block will be mined. By then, everyone will know exactly what sort of business models Bitcoin requires, and there will be many decades of development under its belt. The layers on top of Bitcoin will be well populated, robust and transacting billions of times daily. The generation of 2136AD sitting in the Committee Seats you occupy today will have a very good understanding of Bitcoin; they will have grown up with it as a part of their ordinary lives. It is those people that the committee should be thinking about, as they consider responses to this inquiry.
  29. Others will make submissions to the committee that concentrate on only the minority use cases involving crime. Concentrating on these minority use cases is not in Britain’s long term interest. A disciplined, long view must be taken. We know that Bitcoin will be here from now on; Britain must not allow this opportunity to slip away at the behest of vested interests, or on the bad advice of people whose stock-in-trade is fear, and who don’t build businesses or contribute to society. These negative voices are fated to lose; there is no reason why Britain as a nation should lose as well.

1/ Azteco Bitcoin: https://azte.co/
2/ Wikipedia Page on Gift Cards: https://en.wikipedia.org/wiki/Gift_card
3/ Forbes: “Bitcoin Is Not a Systemic Financial Risk, Say Top Economists” http://fortune.com/2017/12/20/bitcoin-systemic-financial-risk/
4/ Open Dime https://opendime.com/
5/ Slide from R3 announcing they’ve abandoned “Blockchain” https://pbs.twimg.com/media/C5NfLHnWYAAZO5o.jpg:large
6/ Why you cannot have Blockchain without Bitcoin. “Grundsaudaag, Jour de la Marmotte, Groundhog Day” https://hackernoon.com/grundsaudaag-jour-de-la-marmotte-ground-hog-day-8570677dd90b
7/ Coindesk: “Swiss Town to Accept Tax Payments in Bitcoin” https://www.coindesk.com/swiss-town-to-accept-tax-payments-in-bitcoin/
8/ “Renown” from Tom Clancy’s “Rainbow Six Siege” , “Linden Dollars” from Linden Labs “Second Life”, to name but two. In game currencies are commonplace, all unregulated and none of them are money. Bitcoin is identical to them all, with the game space being the entire Internet.
9/ Map of Coins shows the lineage of Bitcoin derivatives that are “forks” of the original Bitcoin release. Some alt-coins cannot integrate Bitcoin’s new features, like SegWit, because their maintainers have introduced changes to them that make this impossible. An exception is Litecoin, which is faithful to the Bitcoin standard, and which has feature parity with Bitcoin so far. http://mapofcoins.com/bitcoin
10/ Video: “Lightning Network Demo” showing the speed of Lightning payments. Lightning is a layer on top of Bitcoin that exponentially increases Bitcoin’s transaction capacity. https://www.youtube.com/watch?v=o_pTB8gCuvQ
11/ A Quick Demonstration of Open Dime: https://www.youtube.com/watch?v=LK5G5jAzoyk
12/ NHS: “Patient Online — encouraging patients to order repeat prescriptions online” https://www.england.nhs.uk/wp-content/uploads/2017/01/po-why-should-I-repeat-prescriptions.pdf
13/ “Digital currencies: call for information” https://www.gov.uk/government/consultations/digital-currencies-call-for-information/digital-currencies-call-for-information
14/ Our Submission to the British Government’s “Digital Currencies: Call for Information” https://hackernoon.com/our-submission-to-the-british-governments-digital-currencies-call-for-information-160fbf103bbc
15/ “Chiasso accepts tax payments in bitcoin” https://www.swissinfo.ch/eng/business/swiss-fintech_chiasso-accepts-tax-payments-in-bitcoin/43503464
16/ The Totnes Pound: https://www.totnespound.org/
17/ CNN: “Snapchat stock loses $1.3 billion after Kylie Jenner tweet” http://money.cnn.com/2018/02/22/technology/snapchat-update-kylie-jenner/index.html
18/ Security Theatre: https://en.wikipedia.org/wiki/Security_theater
19/ “The (Hong Kong) Government doesn’t consider it necessary to introduce new legislation to regulate trading in virtual commodities or prohibit people from participating in such activities.” http://www.info.gov.hk/gia/general/201503/25/P201503250463.htm
20/ “Texas Lawmaker: No Government Shall Prohibit Bitcoin” https://news.bitcoin.com/texan-constitutional-right-own-bitcoin/

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