Everything no one wants me to say about Bitcoin

I’ve received some weird emails lately from people, again, asking me about Bitcoin. The assumptions, statements, and accusations I am reading are insane.

I use that word because these emails are not rooted in logic but rather hype, misunderstanding, meandering decisions made by uninformed people and fueled by armchair economists and misinterpreted reporting.

I posted something about Bitcoin in 2011 which inevitably meant I’d get some nutty emails. I think everyone reaching out expects me to say something incredibly damning about the virtual currency, but I don’t feel that way.

My company, Dwolla, has held an agnostic position on the virtual currency since we learned about it. However, my interest in economics and value exchange has led me down a natural path of curiosity in the developments of various forms of value.

Given what I know, I’m not scared. I don’t know why anyone else would be.

When one of these nutty emails shows up in my inbox, 99 out of 100 times I’m thinking…

Why do you care so much, and what are you so pissed off about?

The reality is most people don’t think or care about currency. Why should they? For most, currency is just the outcome of work. For others, the importance of currency and changing it in any way is a conversation fit only for gods.

Bitcoin has found itself somewhere between rational people and this other world of unknowns. The reason being, it doesn’t have a central owner and can be converted between currencies and owners relatively easily. While you could argue those profiting are now owners who care about it’s future, most enthusiasts would not. That is not the case with Amazon coins and Facebook credits.

Bitcoin, like any other protocol, was created for/by a group of people who may or may not have understood how it would be used – even if they dreamt of how it could be. The world will give them credit (while blaming them) for everything it ever does, but with most creations, the creator does not know until after the fact.

Combine that with the world’s melting pot of pragmatic bankers and regulators – throw in a spice of reporting, fraud, an open mind, crooks, capitalism, the world’s biggest technology companies,  and some passionate but slightly confusing people – and you’ve got a circus. I don’t believe Bitcoin as an idea is a circus, but I do believe the confusion around virtual currency has become one.

I say this as a disclaimer: Virtual currency is worth appreciating because it does mean something and it is here to stay. You can buy it in Wal-Mart, on Facebook or Amazon, and there are countless apps in your phone that allow you to own credits.

You can also use these forms of value to buy drugs or purchase illicit services. The USD $100 may be the most famous form of funding illicit activity, but I’d bet my life savings that someone, somewhere, has used Facebook credits in a money laundering scheme. I’m not saying the USD or Facebook credits are bad. It’s just what happens with forms of value – they get abused. Typically, however, they are used for perfectly rational purposes such as paying for a car or buying new eggs in a Facebook game.

My point is odd reactions, in my opinion, come from a few glaring misconceptions about virtual currency:

  • Virtual currency is unregulated.  It’s not.
  • Confusion about the size of the virtual currency markets. They’re small comparatively but will grow.
  • Anyone who thinks virtual currency is great must be (insert asinine extremist adjective).  Normal people use it.
  • Anyone who isn’t buying virtual currency with all their money must be  (insert asinine extremist adjective).  Most people don’t care.

New markets are being created and governments, companies, and consumers will react accordingly as they grow. Once the government reacts, you’ve got a reality with a fixed cost.

In the US, the government just reacted.

For virtual currency platforms, markets, and suppliers, the world just got a more predictable fixed cost and new direct oversight.

FinCen recently issued an interesting release. They declared virtual currency is relevant enough to regulate. Given you can buy Facebook credits at Wal-Mart and with every major credit card, that day was coming faster than the average internet enthusiast thought.

Here is what FinCen has to say about currency vs. virtual currency:

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.”3 In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

Here is what they say about who is regulated in the new exchanges taking place, and specifically, who is classified as a money transmitter (read:requires licenses):

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter 

Read the whole thing here. This is thoughtfully written. The part that applies to specific virtual currency/Bitcoin is under, c. De-Centralized Virtual Currencies.

By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.

That’s a $10MM dollar problem for any platform who is a money transmitter by definition. Virtual currency just turned into a “no amateurs allowed” business in the United States.

This is probably one of the reasons massive corporations like Facebook and Amazon carry money transmitter licenses. As a seller of virtual currency, they now need them. Yes, I realize Amazon also sells certain payment services, but I have a hard time believing they didn’t see this coming.

This feels like a bad thing for virtual currency, but it is not.

It’s actually a statement of legitimacy in relatively small markets – comparing them to the USD. Even $10B markets are dwarfed by the daily volume of the USD. The fact that regulators are this forward thinking on the subject is amazing.

That also means something for Bitcoin, Ven, Linden, virtual currency economies, and maybe even in store credit providers. They’re now going to be regulated as value, and those who sell the services get treated the same as those transferring dollars, yuan, euros, or the guinea.

Oddly, that means they’ll assume the costs of the standard platforms and the price for exchanges plus ownership will normalize across various forms of exchange.

The cost of regulation is fixed.

This change coincides nicely with the bitcoin spike of recent, but no one mentions it. Whoever didn’t see the government giving virtual currency a nod was valuable to a group of really wealthy (and speculative) buyers seems to be ignoring the obvious.

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That also means virtual currency got more relevant and regulated regardless of the platform it’s bought or sold on.

That’s not all bad. It means government is kicking in some oversight. It means  all the hype caused by speculation is boosting a really interesting virtual currency economy, and the world is starting to treat it like other currencies, as value, which is regulated.

This post isn’t for or against Bitcoin. I have a lot of friends who bought Bitcoins at $1 and $10, and used Dwolla to do it. That’s ok with me.

In my opinion, the government made the right move.

They didn’t create a prohibition, they created a tax. As obnoxious as taxes are, they’re just a fact of daily life. Even the government knows:

For every prohibition you create, you also create an underground. ~ Jello Biafra

The government is now realizing when the underground gets big enough, you don’t outlaw it, you tax it. I say all this knowing full well it will get used out of context and reworded in a million different ways.

Nonetheless, value is what you deem it to be.


12 thoughts on “Everything no one wants me to say about Bitcoin”

  1. The most rational BTC article I’ve read yet. I’ve been following virtual currency since the Dialbo II days (if had it’s own ‘de facto’ currency above and beyond the ‘gold pieces’ in the game), and it’s amazing to watch BTC grow as quickly as it has.

    I wonder if Magic the Gathering: Online event tickets will be considered ” currency “. I know that Hasbro very much does not want that to be true.

  2. “The government is now realizing when the underground gets big enough, you don’t outlaw it, you tax it.”

    This will prove embarrassing to the US government if they try to enforce taxes on Bitcoin. They’ll get a few suckers but overall the Feds will just look as powerless as they are in the face of P2P money. They can’t even meaningfully enforce their regulations on filesharing. They’ll certainly be impotent against encrypted money.

    Bitcoin signals the beginning of the end of the Hegelian state:


    1. The only difference I see here is that filesharing doesn’t threaten the basis that the government is built on; taxes. Once bitcoin shows to actually scrape away at the foundation of the federal government, they will bring their full weight down to secure that foundation.

      1. I think file sharing makes a poor comparison because, unlike Bitcoin, it doesn’t result in a new physical asset appearing in your possesion: i.e. a new car in your driveway. The government might remain powerless to the P2P side of things, but they will wait to see it’s influence in the real world, track the source, and tax based on that.

  3. Nice balanced post. I agree that the regulation will have a positive overall effect on virtual currency markets, giving currencies like Bitcoin an increased air of legitimacy and likely boosting its market.

  4. Here’s why you’re getting angry mail about Bitcoin. Some people believed, myself included, that Dwolla was able to provide instant fund transfers to anyone, at any time, in whatever amount one had in their Dwolla account. Suppose I wanted to send 1 billion dollars to Mt. Gox. There are really only 2 questions that you need to ask. #1 – Do I have the money in my Dwolla account? If yes… #2, where is it going. But you don’t simply ask those 2 questions. You ask a multitude more about my bank account, identity, and then, depending on the recipient, Mt. Gox in this case, you just hold on to the money for an arbitrary period of time. And then if I do some trading on Mt. Gox and turn my 1 billion dollars into 2 billion dollars, I may want to use Dwolla to move the money back into my Dwolla account.

    More waiting. More verifications. More of everything that undermines what I understood Dwolla to be. Everything Dwolla promises to be, Bitcoin actually is. Look on Dwollas website for “Individuals”. “Dwolla is like cash in your pocket, without the cash.” Oh really? I don’t remember the guy at Taco Bell asking to hold on to my cash for a week, just to confirm that no one claims I robbed them prior to lunchtime.

    The contents of your inbox are the result of Dwolla’s stance on Mt. Gox and its users, not your personal stance on Bitcoin itself. And if this stance of delays extends everywhere, not just Mt. Gox, then why advertise yourself as a cash replacement. The problem comes from Dwolla’s constant interference in how people want to use the service. Don’t advertise yourself to be “like cash” if as soon as people want to use it like cash, they get locked into an arbitrary waiting game, during which they’re all thinking the same 2 things… “I could’ve just sent the cash itself in an envelope had I known about these delays…” AND “I’ll be so glad when this is over so I can get my Bitcoins and have something that actually does act like cash online.”

    1. Herman – I appreciate the response but these things aren’t as arbitrary as they might seem. There is a lot of things
      the network has no control over and these are great reasons that scaling things
      like our FiSync with the core platform are so powerful. Those technologies solve
      significant problems but take time to openly distribute to the banks.

      The identity verification you’re talking about is a requirement and we’re all
      held to it. It’s a huge cost center and people don’t love it. It is a
      requirement though. We’re always working on new ways to make it easier.

      I don’t see it as A versus B. Virtual or non-virtual as defined by FinCen at this point, everyone
      has to do it.

      If you do business in the US and you’re in the payments business with any
      currency you have the same fixed cost as the other guy now. The guys who write
      the rules just wrote the rule.

      I’m simply saying that’s a nod of legitimacy.

      RE: The Taco Bell scenario… Your bank does that before they grant you access
      to a credit on your account without actually telling you. That isn’t a bad
      thing but I don’t think that should be the case. FiSync actually posts in real-time
      and solves that problem. I hope we can bring that to your bank soon.

  5. herman, you are wrong. KYC regs keep things this way, and yes, I can send as much dwolla funds to mt.gox as I want.

  6. “Bitcoin, like any other protocol, was created for/by a group of people who may or may not have understood how it would be used – even if they dreamt of how it could be. The world will give them credit (while blaming them) for everything it ever does, but with most creations, the creator does not know until after the fact.”

    Like the above, some very good statements in there, Ben. Well-written.

  7. Bitcoin is completely free and unregulated… right up until you convert it to cash (or something of significant value). Once you convert to cash you are back in the eye of the Federal Government and all the rules/regs/taxes imposed. People are making a huge mistake if they think they can get away without paying taxes on BTC profits or earnings, yet I get the feeling that many will do just that.

  8. “by contrast, a person that creates units of convertible virtual currency
    and sells those units to another person for real currency or its
    equivalent is engaged in transmission to another location and is a money

    So, does this mean that someone Mining Bitcoins only for their own purposes has to get a Money Transmitter license if they want to use Dwolla (or any other BTC->USD exchange) to exchange Bitcoin for USD? I understand they would be liable for taxes on those USD, but do they have to become an authorized Money Transmitter?

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