Should we regulate Bitcoin?

by on April 11, 2014 at 9:16 am in Economics, Law, Web/Tech | Permalink

There is a new paper by Jerry Brito, Houman Shadab, and Andrea Castillo, the abstract is here:

The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Along related lines, you might consider Adam Thierer’s excellent new book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.

1 prior_approval April 11, 2014 at 9:27 am

Why does anyone care about Bitcoin specifically?

This is like caring about Hurd, which is esentially the same age as Linux. Or FreeDOS, for that matter, after MS cancelled supported for DOS ( ).

The concept is important, not the specific implementation.

That concept being actual freedom, something this web site tends to be very wary of.

2 Alexei Sadeski April 11, 2014 at 1:47 pm

The satire continues into the comments section now?

3 carlospln April 11, 2014 at 4:31 pm
4 dan1111 April 11, 2014 at 10:08 am

If you don’t care about FreeDOS, then why did you sneak a link to the Wikipedia page in there, even though it is completely irrelevant to your point? Why did you even think of FreeDOS as an example? It’s not most people’s go to example for “things that are implementations of concepts.”

It is very revealing that you have posted this on the site–and that you have FAILED TO MENTION that “Undocumented structures used by Windows make the DOS box unreliable.” One would think this would be of interest to the readers.

5 Just Another MR Commentor April 11, 2014 at 10:23 am

Bitcoing surging agan despite al these naysayers. Regulation will fail and the end of government control and theft is near.

6 Michael April 11, 2014 at 12:45 pm

Are you calling that little uptick at the end a “surge” ?

7 Hook April 11, 2014 at 10:25 am

The major innovation behind Bitcoin and other crypto currencies is the ability to set up complex transactions without relying on trust or even anything beyond a temporary pseudonymous identity. Unfortunately, this breaks down when it comes to any sort of regulations, be it regulations on derivatives trading or taxation. This puts crypto currencies in conflict with regulating authorities.

One way to resolve the conflict is to give up part of the anonymity aspect of crypto currency. Bitcoin supports multi-party transactions ( ). If someone registered the public key of a wallet (and their real world identity) with a regulated financial organization that financial organization could act as a third party signatory in transactions for which that person is allowed to participate. If a regulatory authority suspected some kind of malfeasance on the part of a particular wallet, they could conduct legal action through the financial organization.

The nice part of this solution is it doesn’t involve any change to the underlying protocol of a crypto currency. A crypto currency could still be used for “briefcase of cash” style transactions, but in a world where the above board transactions are signed by a third party, those transactions will look properly suspicious.

8 Adrian Ratnapala April 11, 2014 at 10:47 am

But one of the ideological drives behind BitCoin is that people don’t want banks and credit card companies having a veto over financial transactions. If regulations somehow gave banks the ability to decide on those “…transactions for which that person is allowed to participate…” then people would stop using BitCoin.

But you are right that limiting anonymity is the key to regulation. The block-chain is already the ultimate paper-trail, and is not really very anonymous even now. That means government might profit from detecting and punishing crimes that have actually been committed rather than trying to restraining the public before-hand. What a thought!

9 Hook April 11, 2014 at 1:38 pm

You’re right about the current ideological drive of BitCoin. I’m hoping that we’ll be able to get some of the benefits of “permissionless innovation” in the financial sector without having crypto currencies relegated to black markets. With third party signatories the block chain could even be useful for fiat currency transactions.

10 collin April 11, 2014 at 11:21 am

I say let Bitcoin freedom ring free and let all kinds of people lose their saving over it. As long as it is unregulated all kinds theft, rises and dramatically falls are going to occur.

11 Craig April 11, 2014 at 1:12 pm

Leave it unregulated. It can serve as an example of what happens when the government butts out of everyone’s lives.

12 NK April 11, 2014 at 7:22 pm

Another laughable piece by so-called experts.
Here’s my paper on the topic: we shouldn’t.

Just one, obvious point. Okay, two:
1. I can use any altcoin to get around of these “measures” and “regulations” targeting Bitcoin
2. In the world of P2P trading, predicting and betting that’s going on on darknets, who cares what the government (or experts) have to say?

The digital, non-centralized nature of crypto currencies is wreaking havoc among “scholars”, it’s really fun to watch!

13 dan1111 April 12, 2014 at 2:01 am

The paper does not advocate regulation; it suggests regulation is inevitable (which is surely correct whether you want it or not) and advocates ways of limiting regulation.

14 gwern April 12, 2014 at 3:55 pm

It might be worthwhile to do some MR posts on the specific proposals for distributed markets etc using Bitcoin-like technologies. For example, Truthcoin (, a fully-decentralized prediction market where contract resolution is done by a clever weighted-majority-voting system which incentivizes truthful judgments.

15 bitcoin mixer April 19, 2014 at 6:25 am

The coins and finance are only relevant to the extent that it gives people an incentive for maintaining that register. Thus you might need to throw in a transaction fee if you want your notarisation to actually happen.

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