Cryptocurrency: Why America Cannot Regulate Cryptocurrency

grarpamp grarpamp at gmail.com
Wed Dec 5 21:55:08 PST 2018


https://hackernoon.com/why-america-cant-regulate-bitcoin-8c77cee8d794

Why America Can’t Regulate Bitcoin

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:

    Pieces of software that can be rendered as printed text on paper
    Software that generates unique blocks of human readable text
    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 governs publishing.

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.

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 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 unethical
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
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?

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 and 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.

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 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 anyone advocating that there should be a
“BitLicense”. Don’t waste everyone’s time and money and resources
knocking 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.

And what can the people who want a “BitLicense” forced on the public
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 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’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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