Bitcoin vs. the Regulators: Now it’s a lot of posturing, but someday, somebody with a lot of Bitcoins is going to say “no.”

To paraphrase a famous quotation: “Every year, I get mad about the taxes I pay, until I realize that it is the admission ticket to the greatest show on earth: politics.”

Wherever you fall on the spectrum of regulation: always good, often good, neutral, often bad, or always bad, if you are interested in Bitcoin, you have a front seat to a really great show: the regulation of virtual currencies.

I attended a Miami Bitcoin meet-up last Tuesday, and there was a gentleman, friendly enough, though forceful, who would not let the issue go: “All of you who think that Bitcoin is free of government control are kidding yourselves. You are in for a very rude awakening.”

Yes, and…? I thought to myself.

For those of you who have been around long enough, you may remember the days when Bitcoiners would say, almost hopefully, that someday, maybe in the distant future – if Bitcoin were to become big enough – that it would get the attention of the government.

To be lectured about the inevitable involvement of the state was rather amusing, since it would have brought cheers just two years ago. “We’ve made it! Bitcoin is a success!”

And it is a success, by almost all measures. On Sunday a friend of mine overheard me talking Bitcoin with another friend: “Oh, didn’t that get shut down. Like, isn’t it over?” I said, “No, it’s up 1,000% since January.” She, being a well educated private equity professional, blinked a little bit quicker than normal.

So where are we today? FinCEN has progressively tightened their stance on the definition of “money transmitter,” now seemingly including anybody that deals in virtual currency in any capacity, and a California finance watch dog has shot a cannonball over the bow of the Bitcoin Foundation.

Unfortunately, this is having a truly negative effect on small businesses who are trying to grow the Bitcoin economy and play by the rules. Last week, I had my friend over, the CEO of coingig.com, by all standards an upstanding and ambitious entrepreneur, who was agonizing over the question: “Am I a money transmitter?”

He’s not alone, but Bitcoin businesses are just proxies to the backbone of the Bitcoin movement: Bitcoin owners.

If the ambiguous regulatory rhetoric is to continue, then it will eventually progress past these establishments, and take aim at Bitcoin owners themselves. You, know, the individuals who own a string of numbers that can change numbers on a little piece of software that keeps track of some numbers.

Typically, it is incredibly difficult and expensive to defy the regulators. The established avenue is through public appeal and the court system. Regulators know this, and a tried and true tactic of snuffing out new enterprise that doesn’t jive with the established market players is to ensnare hopeful entrants in a quagmire of red tape. When it becomes too much to sustain, they just give up. They have to.

Looking forward, it seems reasonable to me that someday, maybe in the near future, that we will get to witness a regulatory demand upon an individual who owns a significant amount of Bitcoins – maybe 1,000, or 10,000, or 100,000.

When an individual puts his or her foot down and says, “no,” it’s usually in vain, since conventional assets can be frozen, garnished, or confiscated.

But let’s be clear – and the regulators should understand this, since it would be a great embarrassment to try – that if they push hard enough, somebody is going to say, “no.” They aren’t going to say, “NO, DAMMIT YOU CAN’T HAVE MY BITCOINS.” They are going to say, “no.”

And when they say, “no,” then the answer is, “no,” unless the state takes the confrontation to the next level. If somebody gives up their Bitcoins because they were beaten by a monkey wrench, then we will know that we’ve unequivocally entered a new era.

So sit back and enjoy the show. After all, you’re paying your taxes, right?

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How Bitcoin can allow a political compromise that makes (almost) everybody happy

Two of the hottest topics surrounding Bitcoin are how it may or may not be taxed, and its anonymity (or lack thereof).

In this article we’ll explore these issues, and see how they can work in combination to allow for an elegant political solution, a compromise that could please both the left and the right (and the middle, up, and down).

First, let’s take the idea of Bitcoin taxes. As it stands, Bitcoin is being viewed as a financial asset, meaning you would owe capital gains taxes from any realized profit upon re-exchanging your Bitcoins for fiat currency. Additionally, you probably owe taxes on unrealized gains if you spend Bitcoins outright, but this particular detail is not as well-defined.

Some have argued that until you can pay your income taxes in Bitcoin, it won’t be a “real” currency. But this always seemed irrelevant to me. For practical purposes, I can pay my taxes with anything that has value. The only thing standing between my prized camel and my completed 1040 is a quick sale, exchanging my camel for some US dollars, which then immediately go to the government. That is the whole point of having currency or money in the first place, so that you can exchange anything for anything else – taxes are no different.

What remains an interesting question is whether taxes are a good idea in the first place. Some say yes, some say no. Some call them unethical, others say they are necessary to support a complex civilization. It is between these two groups that I believe we can come to a really terrific solution, one that cannot be reliably executed with fiat currency… but can be with Bitcoin. But before we get there, we need to talk a bit about the digital currency’s anonymity.

One of the greatest myths being propagated at the moment is that because Bitcoin is completely anonymous, it will attract criminals who want to use it for money laundering, drugs, weapons, and child pornography. Some great articles have recently come out rebutting this notion, reminding readers that cash is the truly anonymous currency – the longstanding choice of people who want to trade illicit goods and services. Bitcoin actually does a pretty poor job of being anonymous, because it wasn’t designed to be anonymous. Satoshi made a trade-off between anonymity and network security, opting for using a distributed ledger, the Blockchain, to verify the provenance of every satoshi.

Yes, users are endowed with a level of privacy, provided they take certain precautions. But these measures are best accomplished when Bitcoins are staying still, hiding in cold storage wallets, the owners of which being difficult to ascertain. But it’s incredibly easy to snoop on other Bitcoin users if they publish their addresses. I recall an example months ago when a user was offering 1BTC to the first dozen or so people to respond to this thread with their Bitcoin address. I immediately looked up everybody’s addresses on the blockchain to see if anybody was careless enough to post one that had any significant amount of Bitcoins in them. You may not be surprised to hear that there were a couple of rich beggars in the group – and they certainly seemed caught off-guard when I said as much: “Wow, user12345, looks like you’ve got a lot of Bitcoin.” “WTF! Don’t say that in public, man!” See, not really anonymous. As soon as you can associate a particular address with a person’s identity, you can learn all sorts of things about their finances.

But if Bitcoin isn’t fantastically anonymous, maybe we can use that to our advantage. Is there anything that you can think of that you are not permitted to know about, even though it is probably very much your business? 

This brings us to our compromise. Regarding the latest NSA wiretapping scandal, thanks to whistleblower, Edward Snowden, we’ve relearned just how little we actually know about where the government spends our tax dollars. In fact, even the NSA budget (independent estimates range from $10-20B) is classified. I personally take that as an egregious insult. In addition to having no say in where my tax dollars are spent, I’m not even permitted to learn what they are spent on.

Unabashed freedom-lovers like myself are not alone in this sentiment. Even progressive liberals are expressing discomfort with this level of government unaccountability. Suspend disbelief for just a moment, and imagine that Bitcoin has become widely adopted, even perhaps the new de-facto reserve currency. Here is what I would propose. Consider this an open letter to the progressives from a libertarian:

1) I don’t think I should be taxed, but I will agree to it.

2) I don’t think that taxes should be progressive (i.e. the more you make, the higher your tax rate), but I’ll agree to it if we can simplify the tax code (thus reducing the billions of wasted man-hours spent every year in tax preparation, investigation, and enforcement) by eliminating all but one type of tax. I would prefer a consumption tax, but I’ll even concede that if I must. We can have a progressive income tax.

3) You like democracy, but majority rule makes me nervous about individual liberties such as free speech. I would argue that the current US democracy doesn’t really provide citizens with an effective use of their vote, so I propose a hyper-democratization of the tax code, something that gives people a louder voice in the political process. It would work in the following ways:

     a) All income taxes can be paid directly with Bitcoin

     b) By April 15th, everybody who pays income taxes receives an electronic ballot. On the ballot is listed government programs, to a certain level of granularity, i.e. education et al, defense et al, healthcare et al, etc.

     c) Individuals cannot reduce their tax burden, let’s say it’s 20%, but they can decide to allocate their tax money wherever they want. Somebody who favors education spending can assign all of their contribution to that cause, thus alleviating any lingering guilt that a drone attack which killed innocent people in Afghanistan was somehow paid for, in part, by them.

If we were to implement this system, it might shift the role of the politician away from campaigning to win elections, towards campaigning to convince the public of the merit of certain programs. The populace would then have the power to eliminate unpopular programs with a “keystroke scalpel.” The NSA saying “just trust us” or even more commonly, saying nothing at all, just doesn’t cut it for many people. If they want to still operate on our dime, they should provide more justification than “we know what’s best.” Maybe they do know what’s best, but they haven’t made that case… today they don’t have to.

The beauty of Bitcoin is that it would allow such hyper-democratization to occur. Not only would you be able to allocate your tax dollars where you see fit, but you would also be able to track them in real time, verifying that they are indeed used for their intended purposes. Obviously, much of the tracking and address analytics technology doesn’t exist yet, but in time we will have tools which make this kind of oversight trivial, even for that average person.

So what do you think? If you don’t favor taxation, would you be willing to put up with it if you could vote your dollars where you please? If you do favor taxation, would you be comfortable putting the fate of government expenditures at the whims of its citizens?

Money Laundering is a made-up crime

With all of the recent news regarding FinCEN, money transmitters, and money service businesses, Bitcoin enthusiasts are able to witness a side of the law that usually operates in obscurity, not necessarily because of anything particularly sinister, but rather because it’s intolerably boring – unless, of course, it is affecting you personally.

The term “money laundering,” the process of concealing illicit sources of money, is getting thrown around a lot lately, particularly by the regulators. But it rolls off of the tongues of regular folks as well. Most people probably would agree, yes, we must do something about this money laundering problem. After all, money launderers are bad guys, and everybody knows that.

In fact, money laundering rests squarely in a category of laws that I like to call “made-up crimes.” A made-up crime is essentially when a law-making group or government is already targeting a particular, specific crime, but due to a number of factors (i.e. the nature of bureaucratic institutions, acute events that lead to public outcry, or ideological political agendas), new laws are created in layers upon the old laws in order to reduce the risk that an actual crime will take place. They criminalize behavior that is not actually criminal.

Let me give an example. And I might lose you on the first one, since the majority of people seem to be a fan of this law, even though most of them have broken it at some point in their lives. So even if you support this particular made-up crime, bear with me.

Drunk driving.

The magic of made-up laws is that you can take two things which are not crimes, put them together, and voila!, you have created a brand new crime enforceable by law and subject to punishment in court. In the case of drunk driving, we take drinking (legal if you are over 21) and driving (legal if you have a valid driver’s license), mash them up and are left with a wonderful new unlawful act.

But hang on, we know driving drunk is bad, right? Yes of course. It is horribly foolish, irresponsible, and disrespectful. But just because it’s a bad idea doesn’t mean it should be illegal. Driving drunk just increases the risk that you will commit a real crime, such as damage to other people and/or their property. If somebody, let’s call him Chester, owns 1,000 acres of uninhabited salt flats in Utah, chugs a liter of scotch and drives off in his pickup truck, most people would react with laughter. This scenario is funny? I thought that crimes weren’t supposed to be funny. Well, they aren’t, but made-up crimes can be. We can laugh at drunk driving Chester because we know he is unlikely to hurt anybody, including himself; he’s unlikely to commit a real crime.

Before I get back to money laundering and Bitcoin, I would like to give you another example of how easy it is to create made-up crimes. Let’s start with the real crime of domestic violence. Now let’s pick two perfectly legal things that when combined increase the likelihood of domestic violence occurring, and make their concurrence illegal: Watching football, and being married.

It is a well-known fact that incidences of domestic violence go up dramatically in towns that have recently witnessed their home-team suffer a sports loss. It is ridiculous, yes I agree, that this is the case, but it’s true. But, how can you argue with me that prohibiting people from both being married and watching sports would decrease the incidence of domestic violence? What, people could just be cohabiting but not married? Good point, let’s make up a new crime for that too.

Why stop at drunk driving? Why don’t we make it illegal to drive a car to a bar? After all, it is obvious that most people who drive to a bar are going to begin drinking, and then subsequently drive home. Why don’t we make it illegal for a woman to wear skimpy clothes and walk down a dark alley? Try this exercise for yourself. If our world has become one in which we can criminalize risky behavior in addition to actual criminal behavior, should we be concerned?

I would argue a resounding “YES!” What is the purported function of money laundering laws?  Going after organized crime? Cracking down on narcotics? Making sure terrorists don’t get funding? That’s the story. But the US government doesn’t do a great job of it. Regardless of your foreign policy beliefs, you have to admit that maybe it wasn’t the best idea to fund the Mujaheddin when they were fighting the Soviet Union, nor the Mujahideen-e-Khalq in Iran, nor the Jundallah in Pakistan… But when the government makes the mistake of backing the wrong radicals, it gets to say “Oops!” whereas any individual found to be funding and arming known terrorists would probably be sent to Guantanamo for life.

Money laundering is more likely a convenient way for the state to keep tabs on its citizens, ensure easier enforcement of taxation, and intimidate groups that it disagrees with, even if those groups haven’t committed any real crimes (here’s looking at you, Bitcoin world). These laws are sometimes enforced arbitrarily, more as a tool to engage potential or suspected criminals; a means to an end.

Of course we have become accustomed to being told what we can and can’t do with our money. There is a long laundry list (pardon the pun) of classes of products that we are not permitted to purchase, and/or in certain quantities, including illegal drugs, firearms, munitions, explosives, pseudofed, fertilizer, etc. It only seems natural that it should be illegal to try and hide money that was obtained illegally.

But, hopefully you can see the argument that I am making, which is very simple: people should be prosecuted and punished for crimes they commit, not behavior that implies a risk or possibility of a crime. Drunk drivers should be charged with manslaughter, abusive sport-loving husbands should be charged with assault, and money launderers should be charged with whatever crime they committed in the first place. 

In conclusion, money laundering is a sloppy, yet convenient, made-up crime that only serves to expand the reach of the enforcing agencies at the expense of individuals. Bitcoin users should be exposed to this perspective, and encouraged to be wary of over-enthusiastic state agencies who may be using money laundering laws to overstep their bounds. It may be boring when it happens to somebody else, but when you are the one in the regulatory bull’s-eye, the political rules under which we live become relevant indeed.

 

 

Bitcoin reminds us to choose our own destiny

How many times have you been told that the best way to make something of yourself is to become a doctor, or a lawyer, or an entrepreneur?

Do you tie your self-worth to the perception of others? It wouldn’t make you unusual. All of us encounter social pressure to succeed by certain standards.

But what if you didn’t have to? What if you were able to set your own standards?

Bitcoin provides an opportunity for people to take complete control over their future; to make a statement about their values. As a Bitcoin owner, you can look somebody in the eye and say: “I’ve made a bet on the future, and I don’t expect you to agree with me, but I would be happy to talk to you about it.”

Bitcoin is incredibly risky. It combines volatility, uncertainty, and lack of government sanction into a tidy little ball. Anybody who deals in Bitcoin is treading the thin ice of insanity… or so they say.

But Bitcoin provides dignity. It allows for an individual to put their money where their mouth is and say: “I believe in this technology. You may disagree, and I respect your opinion, but Bitcoin is going to change the world.”

How many other things allow us this adventure? Name three things – nay – name one thing that permits an individual to put a stake in the ground and proclaim: “This is right, and you will see.”

Bitcoin combines being right with being wealthy. Take one or the other, but I hope you choose both.