Jesse Coljani is a regulatory expert and bitcoin researcher.
When asked whether the bitcoin network can be regulated or not, people answer in a binary way. On the one hand there are people who say that everything can be regulated. On the other hand, there are those who believe that bitcoin has already irreversibly separated money from the state. This article is an attempt to better understand what bitcoin regulation depends on and what tools regulators can use to limit its adoption as appropriate.
For the purpose of this article, regulation is considered a state-mandated legal restriction. But laws are not the only force shaping society. In what is often referred to as the “pathetic point theory”, Professor Lawrence Lessig identifies three other forces that impede a person’s action.
- Markets regulate through price and cost-opportunity tools.
- Social norms represent a complex set of standards of behavior that are widely accepted within a community (such as tipping a server in a restaurant).
- Architecture includes geographic, technical and biological barriers to human behavior (such as the laws of physics preventing us from levitating or a web app preventing us from accessing an online service).
Each force – intentional or not – can affect the other. Laws can limit deforestation (architecture), social norms can shape markets, and weather (architecture) can affect agricultural production and food prices.
Forces can have an effect on other forces
When a law cannot directly target individuals, lawmakers try to regulate other forces. It occurs when the government causes an increase in the price of cigarettes (the market), when it prohibits the use of specific words on TV to influence the behavior (social norms) of citizens, or when it prohibits the use of specific words in a pedestrian area ( architecture) creates a solid barrier to build.
Law can influence markets, architecture and social norms
But can laws always affect architecture? Can laws make the virus disappear? In today’s world, highly contagious viruses cannot be eradicated due to a combination of biological reasons (architecture), financial constraints (markets) and hostility to sanctions (social norms).
Like a virus, bitcoin spreads globally (when necessary) and depends on the right market incentives or socio-political momentum. Lawmakers can’t shut down bitcoin, nor can they eradicate a virus, but they can use legal sanctions to reduce the risk of specific unwanted consequences.
Direct enforcement through users
The law can have a direct impact on individuals
As long as one has a phone and an internet connection, she will be able to use bitcoins. Therefore the effectiveness of direct enforcement depends on the jurisdiction where it takes place. In fact, only an unequivocal restriction of individual liberty may limit bitcoin adoption in the short term (underground peer-to-peer markets will probably emerge in the long run).
Plus, individuals are more willing to violate laws when their money is at stake. So the past decade is full of examples where software developers, political activists and criminals used more or less sophisticated techniques to evade government scrutiny on their bitcoins.
Enforcement through Architecture
Law can affect architecture
Although John Perry Barlow’s “Declaration of Independence of Cyberspace” is still relevant to the lifestyles of some people today, governments generally exercise some degree of control over Internet architecture. In effect, data flowing through devices passes through centralized barriers that make it possible for public authorities to shut down websites, identify anonymous users, and control online traffic.
Bitcoin is different because it is significantly more decentralized than most of the web applications we use today. Thanks to a robust network of nodes and mining rigs, transforming the blockchain would be a daunting task for any government.
At the same time, Bitcoin relies on the Internet infrastructure for nodes to communicate. In theory, this gives lawmakers a regulatory access point on the technical infrastructure. For example, since bitcoin transactions are not encrypted, Internet service providers may use special techniques to identify them and may even decide not to process them. However, even with the most drastic measures, experienced users will always have ways to broadcast transactions over the network (including last resort options such as SMS and Morse code).
Another solution would be to target core developers. This is a bad idea for at least two reasons. First, if threatened, identifiable developers can simply disappear and continue their work anonymously. Second, because the bitcoin community relies on broad consensus, even the most influential developers will not be able to push through government-imposed changes to the code.
Enforcement through market incentives
Law can affect markets
Governments can offer forced market incentives to their citizens to slow bitcoin adoption or maintain control over money flows. For example, the government of El Salvador offered $30 to each citizen who downloaded the Chivo Wallet – a custody solution where the government had full control of the funds.
Currently the most popular way for governments to regulate bitcoin is through exchanges, liquidity providers, and other intermediaries. By adhering to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, these new banks are able to offer attractive prices and attract the most inexperienced users. This has important consequences for the optionality of bitcoin supply and is probably one of the biggest threats to bitcoin’s promise of individual self-sovereignty.
It is unclear when and how governments will introduce central bank digital currencies (CBDCs) into their economies, but just as governments may promote the use of their CBDCs through economic incentives, it may discourage bitcoin payments. Is. For example, fees for accessing public services or local taxes can be reduced when using a government-issued digital currency, while full value or even more expensive when using bitcoin. This is important as the CBDC will have no impact on the network, They could be slowing the adoption of bitcoin. Such an approach is often defined as liberal paternalism., Since individuals can freely choose whether they wish to opt in or opt out of a specific system.
enforcement through social norms
Law can affect social norms
It is undeniable that a lot of institutional skepticism shaped public perception of bitcoin in a negative way. In fact, laws may attempt to shape public perception in a variety of ways. For example, banning bitcoin-related words on TV or setting up school programs that focus on the risks of bitcoin use.
Policymakers can even go a step further and promote “bottom-up” campaigns as an attempt to change the bitcoin code. Although not supported by any public authority, an unconventional coalition is attempting such a strategy.
Key Vulnerabilities of Bitcoin
Just as we can assume that no government thinks it can completely eradicate a virus from their country, regulators finally understood that this also applies to the bitcoin network, and their best option. Trying to limit the way it spreads. Rather than taking the risk of seeing their monetary power gradually dwindle, governments can experiment with various combinations of the tools described above to slow hyperbitcoinization. process.
Bitcoin was designed to be an extremely secure and decentralized system, but it needs to be remembered that its most important components are humans, who can be unreliable and unpredictable. Governments are not always ahead in understanding technology, but they have a successful track record in driving human behavior.
This is a guest post by Jesse Coljani. The opinions expressed are solely their own and do not necessarily represent those of BTC Inc. either . reflect the thoughts of bitcoin magazine,
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