Edit 25th March: the actual number of bytes which was implemented in 0.9.0 for OP_Return turned out to be 40, not 80 as originally promised. This is already causing some controversy. An excellent example of the tragedy of the commons in action. -J

Butter for Your Toast?

By now, everyone realizes that Mt.Gox is toast. They've plainly been circling the bowl for months, but now it's official. As one might expect, any mainstream media which reports on Gox's demise can hardly forbear to throw in a few digs insinuating that this mess occurred only because no friendly government regulators were looking out for the public interest. This report from The Wall Street Journal is typical: "...stoking concern about the future of a digital form of money traded by professional investors and ordinary people, but regulated by no one." And: "Unlike a U.S. bank failure, in which deposits are insured by the government, there may be little recourse..." You can even see some similar sentiments being expressed within the community, here.

It isn't certain exactly what happened at Gox, though it was plainly misfeasance or malfeasance or some combination of the two. Criminal investigations are pending, naturally. What is certain is that the failure of the largest (or former largest) Bitcoin exchange will act as a wedge driving the steely blade of the axe of regulation deep into the heartwood of Bitcoin. Future regulation of Bitcoin exchanges raises the possibility that the next operation to lose half a billion dollars might be deemed Too Big to Fail, and its executives Too Big To Jail, something like a top-tier international bank or MFGlobal's Jon Corzine. But so far no one with those kinds of political connections is promoting Bitcoin, and established financial interests still seem to view it mainly as unwelcome competition they probably wish would go away.

Bitcoin 0.9: Gox Opportunity Knocks

This could be about to change. One of the significant mods going into the next major release of the reference Bitcoin client is "Provably Prune-able Outputs." The Dev Team's Gavin Andresen discusses this here. He states that he has "reluctantly" merged in "pull request #2738," which "...lets developers associate up to 80 bytes of arbitrary data with their transactions." Plenty of people are excited about this change, on the grounds that it will make it much easier to do colored coins, or otherwise use the blockchain as a public ledger for data associated with, but not necessarily part of, a coin transaction. Perhaps it will make what Mastercoin is doing technically easier as well.

However given the regulatory axes being honed today, I can't help but wonder if this "reluctant" change might have a dark side to it. The looming Russian approach to Bitcoin is simply to outlaw it. Brusque, humorless — and completely impractical. But recently US Senator Joe Manchin also demanded a complete ban, remarking that he is "weary of its use." China has said that it can be bought and sold as a commodity, but not used as money. Canada is being coy, making the usual noises about terrorism and money laundering (for both of which read: tax evasion), while promising to conduct studies which will lead to regulation down the road. (Note however that this is being done at the federal level, while financial activity is normally regulated at the provincial level.) Perhaps not surprisingly, the most elaborate regulatory scheme so far comes from the nanny State of New York.

The NY plan is significant because it proposes that "virtual currency firms" acquire a "BitLicense." It isn't clear what constitutes a virtual currency firm: exchanges and trading platforms, or merchant service providers, or merchants who merely accept Bitcoin (or even individual users in NY, come to that). If past history is any guide, it seems pretty likely that firms like BitPay and Coinbase would need a BitLicense from the start, with the regime then being extended to merchants accepting BTC, and finally to the ordinary users (perhaps above a certain volume threshold).

Now here's where it gets interesting: what if the 80 bytes were used to contain the BitLicense id number of the payer, or of the payee, or both? A mere 80 bytes is insufficient for a name, email, street address, and phone number, but it could certainly accommodate an unique index or two. This unique index would identify a record in a government database linking the wallet making or receiving the spend to a real, verified identity. Licensed parties would be required to accept bitcoins only when the "OP_RETURN data TxOut" field was validly filled in. If this were implemented, "archive nodes" would then have a permanent record of all transactions that occurred between licensed parties.

Imagine being able to generate a 1099 for a business's gross sales (or its sales in bitcoin, anyhow) just by scanning the blockchain. That's even better than requiring banks to report merchant account sales and retain the records for seven years, because you don't need a warrant or a subpoena to access the supporting information, which is permanent. Ordinary people (presumably) wouldn't have the ability to look up a BitLicense id and see who it belonged to; though there would probably have to be an API through which privileged users could confirm that a given id was valid, corresponded to a particular name, and was "in good standing." This is not so far from how credit reports from the US "Big 3" credit bureaus work, being indexed by a name and SSN. In fact, a company like Equifax could easily provide the database, or at least link into the government's.

The Future

Now imagine that all of the OECD countries implement this mandate more or less simultaneously, taking the "BitLicense id" concept far beyond NY and transforming it into a trans-national phenomenon something like an IBAN. At this point, with merchants and users in all sorts of countries required by law to deal only in BTC payments linked against identity databases, Bitcoin truly becomes Govcoin. Every digital transaction would automatically be recorded, regulated, and taxed. In which case, I expect we'd see every large financial company and regulatory body in the world jump into the pool with both feet. A cashless society with uber digital convenience, 100% tracking and 0% privacy is every statist's wet dream. These people have wanted to license internet users for decades, as is done in China. A global "BitLicense" regime would act as a vital wedge issue to achieve this goal. As in, "We don't want to regulate your free speech, just your online financial activities, because, well, you know, terrorism." Mission creep will accomplish the rest, once the public couldn't imagine life without their licensed online wallets.

It might be objected that if events unfolded in this way, the blockchain would fork, the underground would continue to accept unlicensed payments generated by alternate wallet clients, or the like. This could be addressed by means of a 51% attack: say if big banks bought up enough mining hardware to become the arbiters of reality on the blockchain. In that case the 80-byte "extra" field could easily be made mandatory. Failing that, coins spent WBOL (without benefit of license) could be tainted or blacklisted at "respectable" merchants and exchanges.

But in fact I think this scenario is unlikely to play out with Bitcoin. Too many coins are missing, have already been mined, are being hoarded by who-knows-who, were involved in past criminal activity, etc., for this kind of regime to be entirely satisfactory now. I suspect Bitcoin will act as what it ostensibly is: a prototype, a beta test demonstrating the usefulness and acceptability of crypto-coins. What hasn't been demonstrated yet is the ability of the state to regulate and control such currencies. Once that is done (and I believe this 80-byte field change may hold the key to it), the currency which will become "Govcoin" will likely be a fresh start. Probably it will have sanction as an international fiat money, as well — something else the globalists have wanted since at least the time of Keynes. A global digital euro, or bancor, or amero, or whatever catchy name it gets, will follow the trail blazed by Bitcoin and its siblings. A trail which leads to statist hell, not to libertarian paradise.

To be sure, there would be illicit competition. But neither original Bitcoin nor any future private crypto-coin would ever be more than a minor niche competitor against a Govcoin that had full international backing and massive commercial adoption and promotion. We need to recognize that most people don't truly want freedom, not if it comes at the cost of convenience or perceived security. That's why the TSA is an overreach which generates push-back: because it impacts convenience. A two hour flight is now a nine hour ordeal. But a digital wallet Govcoin, if it were well done, would provide second-to-none convenience, and at least purport to increase security. So its inherent cost to freedom will predictably be ignored.

This is why I do not subscribe to the belief that crypto-currency, by its very nature, is liberating. I think the question which commands our attention is this: given a state-controlled money, how do we deploy tradecraft technology to utilize it privately? If this can be done with dollars and euros, it can surely be done with Bitcoin and its future progeny, even a Govcoin. Technologies which take this general approach include Voucher-Safe, OpenTransactions, and Ripple.