Two weeks ago I was on a three person half hour panel on “Bitcoin and the Future” at an O’Reilly Radar Summit on Bitcoin & the Blockchain. I was honored to be invited, but worried as I had not been tracking the field much. I read up a bit, and listened carefully to previous sessions. And I’ve been continuing to ponder and read for the last two weeks. There are many technical details here, and they matter. Even so, it seems I should try to say something; here goes.
Worth noting that specific cryptos like Monero use Stealth Addresses, Ring Signatures and soon a Ring Confidential Transactions scheme as well as a View key. This means transactions between two parties are totally private however sharing the viewkey can enable Bitcoin-like transparency between two parties.
No, I don't think you understand the problem: for the IRS to have a presence on a blockchain the currency the blockchain deals in has to be officially recognized as taxable property (the grass on your lawn is not being taxed, that would change if grass became particularly valuable, but it would take time) while new blockchains could spring up every other day (and convert accounts from older blockchains). This requires some creative solutions by tax revenue services.
There already are income taxes and or capital gains taxes. Most people are just paying their income and or capital gains taxes but at this time it's not like cryptocurrency has taken over the world.
If they do take over the world then the government can make it easy for people to pay their taxes due to the fact that while cryptocurrency is decentralized there are chokepoints in the network such as Coinbase, Circle, centralized exchanges, large businesses, and most people don't want to be completely anonymous.
Also if you start spending a lot of money the IRS will know you've got income and you'll pay. How is this any different from what happens now with cash? If someone starts spending a whole lot of cash out of the blue the IRS will wonder where the cash came from and will investigate based on statistics.
Bitcoin itself isn't anonymous. Zerocash is the anonymous cryptocurrency and it's not developed at this time so anonymous cryptocurrency is mostly still just on the academic wishlist rather than a practical reality but I will admit it's much harder for the IRS to track Bitcoin than credit card.
I think it cryptocurrency catches on you'll see the taxes in different forms. The IRS itself might have a presence on the blockchain so that people can voluntarily let the IRS track their income but in general Bitcoin would have to be threatening the dollar and have a market cap in the tens of trillions of dollars before we would have this problem.
I don't think it's as much of a problem as people think though. When you buy stuff then other people will notice you're buying stuff and the IRS notified.
Governments have to pass laws to mark specific crypto currencies as taxable property. This is inherently slow, at least compared to the speed with which new blockchains can be set up (or have their names changed). Identities behind accounts can also be heavily encrypted.
Bitcoin crunches useless numbers. Proof of work is a wasteful part of the design. Proof of stake is generally superior because you don't need to crunch all that numbers to obtain the same level of security.
Proof of work is only preferable if the work itself is useful.
Robin I think the purpose of Bitcoin is to encourage entrenched interests and government to finally wake up and innovate. Governments have let the infrastructure crumble and collapse to the point where if they won't do anything to improve the state of finance people will work outside the system to evolve the entire financial ecosystem.
It appears to be working. Now banks and governments are paying attention and will sooner or later have to improve their technologies. This means we all win.
As for the regulations I do think we have too many for our own good but I don't think people using Bitcoin are using it to dodge regulations. There is a vocal group of Bitcoin early adopters who are true crypto anarchists but as Bitcoin goes mainstream the community will begin to change.
The Internet was similar early on back in the 1990s. It wasn't until around 2000 when the Internet started to go mainstream and wasn't just associated with computer nerds anymore. The same will happen with blockchain tech and 10 years from today we will have a look back at these posts and wonder how we could have the community we have now again.
Bitcoin is more secure than credit cards for certain people to do certain things. Credit cards allow you to get your money back though.
Ideally if you have concerns about the direction of cryptocurrency it is an evolving industry. Simply create a alternative cryptocurrency or extension to Bitcoin which allows people to do everything they can do with credit cards without the need for transmitting a credit card number.
Bitcoin as a technology will never be effective at evading government. In fact I doubt any electronic based currency will be effective unless a person has more knowledge of how these systems work than the government.
Rather than the government fearing Bitcoin and shutting it down they simply would have to hire all the smartest people to obtain and maintain a knowledge advantage. As far as I know they already have some of the smartest cryptographers and computer scientists.
This is not true. You have many different kinds of cryptocurrency technologies. It's not really in my opinion a good design to have a universal token which everyone uses.
The platform itself should have the token such as with Ethereum or Bitshares. In Ethereum you have Ethers and with Bitshares you have BTS. From these tokens which may have a fixed cap you can set it up so that people are trading BitAssets.
So $1 worth of BTS is always equal to 1BitUSD. Speculation pegs the price so that the buying power of $1 always equals 1BitUSD. This mechanism would work for any asset that can exist and ultimately allows for the stable value people want without having to have a fixed or infinite supply of primary tokens.
Blockchain technology do allow for much more trustworthy infrastructure because there doesn't have to be a single point of failure. Most of the failures in institutions are human failures so when you decentralize and automate you can have more secure information systems.
This isn't always the case because there can be bugs in the code or something can go wrong but it's a lot easier to audit code than to audit people. Over time the multiple blockchains will compete, evolve, and the fittest blockchain designs will emerge.
The blockchain can be analyzed. It would be more like a honeypot than an actual device for tax evasion.
People who believe Bitcoin can work for tax evasion don't have a good understanding of how the blockchain works.
True a lot of people who believe in the blockchain are spiritual about their beliefs but this doesn't invalidate the technical and security benefits of decentralization.
A decentralized system designed properly is less likely to collapse. Also anyone can create their own money now and exchange value on a personal currency basis.
This will create lots of opportunities for entire new industries. It will single handedly enable the Internet of Things to thrive as an industry and is as important as the birth of the World Wide Web or Internet.
I agree that national currencies are unlikely to be replaced anytime soon. But many fears could be realized even if alt currencies become large and robust, without "taking over."
Dear Robin: this is a great post, but it seems to be assuming some sort of rapid and widespread switch from traditional currencies to Bitcoin. This sort of cataclysmic modification of society seems to be the dream/spectre implicit in the minds of both boosters and alarmists. Perhaps we've gotten trained to think of powerful new technology as completely taking over, because we've seen events in our lifetimes, such as landline phones almost completely replaced by smartphones in a mere couple of decades.
But, I don't think major national currencies are like landlines in this way. I think even in the rosiest (from my perspective, as a dice-thrower) scenarios, if Bitcoin (or its successor) continues to work, and if it gets into the self-accelerating curve of a successful technology, then it will still not displace a major national currency like the US Dollar within the next 30 years.
Now as opposed to currencies, payment systems like SWIFT, PayPal, or Western Union are a different matter. Maybe one or more of those could be completely replaced by a cryptocurrency-powered alternative in the next 10 years. But this would not trigger the alarm bells, right? In fact, it should make us feel less alarmed, because we're going to get a chance to see what effect cryptocurrencies have on some specific niches long before they come for our national currencies.
Also, weak national currencies, which tend to self-destruct every few years anyway, might get replaced by a cryptocurrency within the next 10 years. When Zimbabwe's national currency self-destructed in 2009, it was replaced by a Babel of the national currencies of other countries (mostly US Dollars). You could imagine that a similar disaster in today's cell-phone powered world could result in mass uptake of a cryptocurrency.
(Cue: “We do not influence the course of events by persuading people that we are right when we make what they regard as radical proposals. Rather, we exert influence by keeping options available when something has to be done at a time of crisis.”—Milton Friedman)
But again, the prospect of some miserable population losing all of their money and then switching to a cryptocurrency shouldn't really ring these alarm bells. First of all, the alarmists don't live there, so this should make them feel more at ease that they get to observe what happens to the unfortunates long before it happens to them. Secondly, having a cryptocurrency as an alternative, next to the national currencies of other nations, when you're losing all your money seems a lot less threatening than the — in my humble opinion unlikely — spectre of waking up one day and finding that your otherwise healthy national currency has secretly been replaced by Folger's Crystals, I mean Bitcoin.
You have hit on something really important: by adopting a new hard currency we would be giving up an important technology: the independent central bank. We would have more booms and busts, and more great depressions in a world with no central bank ability to print or destroy money. To the extent a central government wanted to manage the macroeconomy, they would be left only with fiscal policy, and it wouldn't be as well-managed as most central banks are now (which is NOT THAT WELL but better than a hard currency).
By the way, you are using the word "inflation" to mean "increase in the money supply," and I think that might introduce confusion for most readers. It's is an archaic definition. Most academic papers, textbooks, etc. use that word to mean "a rise in the general price level."
Blockchain Bingo
Neither cash nor bitcoins bears interest or pays any sort of dividends.
Worth noting that specific cryptos like Monero use Stealth Addresses, Ring Signatures and soon a Ring Confidential Transactions scheme as well as a View key. This means transactions between two parties are totally private however sharing the viewkey can enable Bitcoin-like transparency between two parties.
No, I don't think you understand the problem: for the IRS to have a presence on a blockchain the currency the blockchain deals in has to be officially recognized as taxable property (the grass on your lawn is not being taxed, that would change if grass became particularly valuable, but it would take time) while new blockchains could spring up every other day (and convert accounts from older blockchains). This requires some creative solutions by tax revenue services.
There already are income taxes and or capital gains taxes. Most people are just paying their income and or capital gains taxes but at this time it's not like cryptocurrency has taken over the world.
If they do take over the world then the government can make it easy for people to pay their taxes due to the fact that while cryptocurrency is decentralized there are chokepoints in the network such as Coinbase, Circle, centralized exchanges, large businesses, and most people don't want to be completely anonymous.
Also if you start spending a lot of money the IRS will know you've got income and you'll pay. How is this any different from what happens now with cash? If someone starts spending a whole lot of cash out of the blue the IRS will wonder where the cash came from and will investigate based on statistics.
Bitcoin itself isn't anonymous. Zerocash is the anonymous cryptocurrency and it's not developed at this time so anonymous cryptocurrency is mostly still just on the academic wishlist rather than a practical reality but I will admit it's much harder for the IRS to track Bitcoin than credit card.
I think it cryptocurrency catches on you'll see the taxes in different forms. The IRS itself might have a presence on the blockchain so that people can voluntarily let the IRS track their income but in general Bitcoin would have to be threatening the dollar and have a market cap in the tens of trillions of dollars before we would have this problem.
I don't think it's as much of a problem as people think though. When you buy stuff then other people will notice you're buying stuff and the IRS notified.
Governments have to pass laws to mark specific crypto currencies as taxable property. This is inherently slow, at least compared to the speed with which new blockchains can be set up (or have their names changed). Identities behind accounts can also be heavily encrypted.
Bitcoin crunches useless numbers. Proof of work is a wasteful part of the design. Proof of stake is generally superior because you don't need to crunch all that numbers to obtain the same level of security.
Proof of work is only preferable if the work itself is useful.
Robin I think the purpose of Bitcoin is to encourage entrenched interests and government to finally wake up and innovate. Governments have let the infrastructure crumble and collapse to the point where if they won't do anything to improve the state of finance people will work outside the system to evolve the entire financial ecosystem.
It appears to be working. Now banks and governments are paying attention and will sooner or later have to improve their technologies. This means we all win.
As for the regulations I do think we have too many for our own good but I don't think people using Bitcoin are using it to dodge regulations. There is a vocal group of Bitcoin early adopters who are true crypto anarchists but as Bitcoin goes mainstream the community will begin to change.
The Internet was similar early on back in the 1990s. It wasn't until around 2000 when the Internet started to go mainstream and wasn't just associated with computer nerds anymore. The same will happen with blockchain tech and 10 years from today we will have a look back at these posts and wonder how we could have the community we have now again.
Bitcoin is more secure than credit cards for certain people to do certain things. Credit cards allow you to get your money back though.
Ideally if you have concerns about the direction of cryptocurrency it is an evolving industry. Simply create a alternative cryptocurrency or extension to Bitcoin which allows people to do everything they can do with credit cards without the need for transmitting a credit card number.
Bitcoin as a technology will never be effective at evading government. In fact I doubt any electronic based currency will be effective unless a person has more knowledge of how these systems work than the government.
Rather than the government fearing Bitcoin and shutting it down they simply would have to hire all the smartest people to obtain and maintain a knowledge advantage. As far as I know they already have some of the smartest cryptographers and computer scientists.
This is not true. You have many different kinds of cryptocurrency technologies. It's not really in my opinion a good design to have a universal token which everyone uses.
The platform itself should have the token such as with Ethereum or Bitshares. In Ethereum you have Ethers and with Bitshares you have BTS. From these tokens which may have a fixed cap you can set it up so that people are trading BitAssets.
So $1 worth of BTS is always equal to 1BitUSD. Speculation pegs the price so that the buying power of $1 always equals 1BitUSD. This mechanism would work for any asset that can exist and ultimately allows for the stable value people want without having to have a fixed or infinite supply of primary tokens.
In summary it will not be a problem.
Blockchain technology do allow for much more trustworthy infrastructure because there doesn't have to be a single point of failure. Most of the failures in institutions are human failures so when you decentralize and automate you can have more secure information systems.
This isn't always the case because there can be bugs in the code or something can go wrong but it's a lot easier to audit code than to audit people. Over time the multiple blockchains will compete, evolve, and the fittest blockchain designs will emerge.
The blockchain can be analyzed. It would be more like a honeypot than an actual device for tax evasion.
People who believe Bitcoin can work for tax evasion don't have a good understanding of how the blockchain works.
True a lot of people who believe in the blockchain are spiritual about their beliefs but this doesn't invalidate the technical and security benefits of decentralization.
A decentralized system designed properly is less likely to collapse. Also anyone can create their own money now and exchange value on a personal currency basis.
This will create lots of opportunities for entire new industries. It will single handedly enable the Internet of Things to thrive as an industry and is as important as the birth of the World Wide Web or Internet.
I agree that national currencies are unlikely to be replaced anytime soon. But many fears could be realized even if alt currencies become large and robust, without "taking over."
Dear Robin: this is a great post, but it seems to be assuming some sort of rapid and widespread switch from traditional currencies to Bitcoin. This sort of cataclysmic modification of society seems to be the dream/spectre implicit in the minds of both boosters and alarmists. Perhaps we've gotten trained to think of powerful new technology as completely taking over, because we've seen events in our lifetimes, such as landline phones almost completely replaced by smartphones in a mere couple of decades.
But, I don't think major national currencies are like landlines in this way. I think even in the rosiest (from my perspective, as a dice-thrower) scenarios, if Bitcoin (or its successor) continues to work, and if it gets into the self-accelerating curve of a successful technology, then it will still not displace a major national currency like the US Dollar within the next 30 years.
Now as opposed to currencies, payment systems like SWIFT, PayPal, or Western Union are a different matter. Maybe one or more of those could be completely replaced by a cryptocurrency-powered alternative in the next 10 years. But this would not trigger the alarm bells, right? In fact, it should make us feel less alarmed, because we're going to get a chance to see what effect cryptocurrencies have on some specific niches long before they come for our national currencies.
Also, weak national currencies, which tend to self-destruct every few years anyway, might get replaced by a cryptocurrency within the next 10 years. When Zimbabwe's national currency self-destructed in 2009, it was replaced by a Babel of the national currencies of other countries (mostly US Dollars). You could imagine that a similar disaster in today's cell-phone powered world could result in mass uptake of a cryptocurrency.
(Cue: “We do not influence the course of events by persuading people that we are right when we make what they regard as radical proposals. Rather, we exert influence by keeping options available when something has to be done at a time of crisis.”—Milton Friedman)
But again, the prospect of some miserable population losing all of their money and then switching to a cryptocurrency shouldn't really ring these alarm bells. First of all, the alarmists don't live there, so this should make them feel more at ease that they get to observe what happens to the unfortunates long before it happens to them. Secondly, having a cryptocurrency as an alternative, next to the national currencies of other nations, when you're losing all your money seems a lot less threatening than the — in my humble opinion unlikely — spectre of waking up one day and finding that your otherwise healthy national currency has secretly been replaced by Folger's Crystals, I mean Bitcoin.
You have hit on something really important: by adopting a new hard currency we would be giving up an important technology: the independent central bank. We would have more booms and busts, and more great depressions in a world with no central bank ability to print or destroy money. To the extent a central government wanted to manage the macroeconomy, they would be left only with fiscal policy, and it wouldn't be as well-managed as most central banks are now (which is NOT THAT WELL but better than a hard currency).
By the way, you are using the word "inflation" to mean "increase in the money supply," and I think that might introduce confusion for most readers. It's is an archaic definition. Most academic papers, textbooks, etc. use that word to mean "a rise in the general price level."
Guys why do we get so hung up on bit coin. The block chain protocols are really about a way verifying something without reference to a central source.
In the case of bit coin it is a currency but other uses are not hard to imagine and every bit as trans formative.