Bitcoin and Regulation Founders Grid Asks the Experts


I recently had the good fortune to be contacted by Chris Osborne of Founders Grid, a social networking site for entrepreneurs, who asked me to weigh in on a number of questions about bitcoin as an expert. The first question Chris asked was about how the regulatory field of bitcoin is going to change in the next 12 months.

Chris’s question is well-timed at the beginning of what many people are calling the year of bitcoin. Bitcoin may have started as a libertarian dream, and there is something inherently anarchic about bitcoin that’s going to give regulators sleepless nights for a long time, but it is also beginning to penetrate the mainstream. Businesses, small and big, are going to need to have their questions about whether taking bitcoin is going to bring a lot of unwelcome legal attention their way.

The hearings that have been going on in New York are a case in point. Regulators, more than anything else, seem to be concerned about things that are not limited to virtual currencies. They are worried about money laundering, funding of terrorist organizations and states, narcotics, child pornography, etc. These are all things that can happen with bitcoin, but happen equally well without. To hear regulators speak of virtual currencies being a means of funding terrorist states made me pause – is this really a concern? Well, to these guys, yes, and we are going to need to keep speaking to them and help them understand that at the very least, bitcoin will not be worse than fiat, but trying to crush bitcoin because they fear it may bring even worse consequences like bitcoin businesses abandoning the US and turning it into a bitcoin backwater.

Which brings me back to the mom-and-pop stores that may be thinking it would be nice to get some publicity from being the first bitcoin business in their area: until the questions about how they pay taxes, if there is going to be any extra regulatory hassles, and if they are going to get any bad publicity from getting involved are answered, many are going to sit on the sidelines.

The question of regulation is an important one not because governments will try to quash bitcoin (they may, and in the process slow down adoption, but ultimately fail), nor that it is a violation of the core principles of bitcoin (it’s not bitcoin is a protocol, not an ideology), but a conversation with a great many people who are just learning about bitcoin and what it can do for them now. When people start to feel that bitcoin is safe for them to use, both in terms of speculation and regulation, they are going to adopt in droves.

I asked Chris is it would be OK for me to reprint a few of the best responses from his questionnaire on regulation. You can read the full article on the Founders Grid Blog here.

Alena Vranova, CEO ofSatoshiLabs(TREZOR) responds:

I’d rather expect further discrepancy than some international unification over the coming 12 months. The governments will continue in trying to get to know Bitcoin and to find a balance between the risks and business opportunities.

This will lead to arbitrage in creation and resettlement of bitcoin businesses to territories with more bitcoin friendly environment.

The government who will acknowledge the opportunity (like Cyprus or Singapore) will definitely find themselves in the winning positions, some might refine the rules (like Germany) and others will probably continue to discuss (France).

Rodolfo Novak, Founder ofCoinkiteresponds:

Over the next 12 months, we do not expect regulation to change significantly, but we do expect to see “tax advice” to come out for more countries, much like the very reasonable notice from Canada’s CRA (our federal-level tax folks).

Vitalik Buterin, Author atBitcoin Magazineresponds:

I think we will see over half of the world’s governments take a formal position on Bitcoin by the end of this year.

I expect positive movements on the regulatory front; BTC is already increasingly establishing itself as a legitimate thing, and the conversation is already turning from “should we ban Bitcoin” to “banks are unfriendly to Bitcoin businesses, what can we as regulators do to provide more regulatory certainty?”.

We will likely see substantial reforms in some US states, allowing a specific licensing category for Bitcoin businesses, and we will continue to see more tax clarification.

Elizabeth Ploshay, Manager atBitcoin Magazineresponds:

It is unclear precisely how the US government and governments around the world will specifically act. I see that one area of regulation will come in the realm of taxation. The IRS is to publish guidelines on how to consider digital currencies and what type of tax will be placed on these currencies.

As Bitcoin continues to become more mainstream and as larger and more prominent companies also start utilizing the currency, I believe we will see a larger group of companies requesting further regulatory clarity.

Additionally, there will be perhaps greater clarity in terms of regulations for banks offering accounts to Bitcoin related businesses.

Flavio Rump, Co-Founder ofBitcoin Pulseresponds:

I think an important part will be how ‘traceable’ government bodies perceive bitcoin. With mixing services, unregulated exchanges like BTC-e it is not that hard today to actually make your transactions untracable, which may scare governments more than it will help.

At the very least, all exchanges will have to have KYC and AML best practices implemented, and the appropriate Money Transfer Licenses, in some cases bank licenses.

It is also interesting to observe that smaller countries tend to be more open to bitcoin than large ones (US, China). Maybe they are trying to stay/become more relevant when it comes to innovation/attracting capital and entrepreneurs and thus are much more open. I expect this general trend to continue.

Ash Moran, Co-Founder ofBitcoin Manchesterresponds:

The current trend seems to be that people in national governments (e.g. Germany, Switzerland, Singapore) are cautiously receptive to Bitcoin, but banks are generally hostile (especially in the UK and China).

It’s impossible to predict how the regulation will go, and I don’t understand the global systems well enough to comment with any authority but I can see it coming in two rounds. The first round is how to regulate it while it’s still small in currency scales, the second is if and when it competes with major national currencies.

What happens, for example, if a country with a struggling or failing economy finds its people dumping their local currency and saving and trading in bitcoins instead?

In 1933, the US government issued an order to confiscate all private gold so it could gain control of the money supply. Would we see such panic regulation again? I’m not convinced either politicians or banks are thinking this far ahead though, so I suspect we’ll see a mish-mash of inconsistent regulation in the mean time.

The situation in Germany is different though; it has a strong productive economy, has Austrian-school economists in government, and would probably like to free itself of the Euro. I expect the most positive Bitcoin regulation will come from there, ECB backlash notwithstanding.

Ron Gross, Mastercoin Foundation Executive Director of responds:

2013 was the year regulators throughout the world started paying attention to Bitcoin. In 2014 we are going to see some bold movements in that space. Governments like Honduras are pushing the regulatory limits (see Edan Yago’s work).

I believe that larger government are also going adjust their positions in 2014. Canada, Germany, Switzerland are all likely players to continue pumping out regulation that’s positive to Bitcoin.

I believe that key elements in the U.S leadership also want to keep U.S as one of the key players in the space, and will not allow U.S regulation to continue stifling startups, or even worse, pushing things like CoinValidation.

I do not expect any western government to outlaw Bitcoin (in 2014 or ever).

Dominik Weil, Co-Foudner ofBitcoin Azerbaijanresponds:

The “Wild West” days of Bitcoin where you could completely fly under the radar with your Bitcoin business are definitely over (in case you serve a notable scale of customers and don’t try to run your business completely anonymous via the Darkweb and even there the law enforcement will try to track you down, if you are involved in any “criminal activities” by their definition ) and all the regulators around the world have done or are doing heavy scrutinies on how to deal with that new kind of technology.

12 months from here, the given regulatory framework will become much clearer and if the governments are not acting stupid, they will provide a framework, which makes it possible for the Bitcoin economy to prosper.

It is very clear, that the governments as well as the most big players in the current financial system initially don’t like Bitcoin, due to the fact, that Bitcoin is diminishing their power.

If they could, they would have shut it down like they have done with other potential “threats” to their monopoly (e-gold, New Liberty Dollar etc.) the thing with Bitcoin is: They just cant.

The idea is out there and it will never go away. It cant be “undone”. There is not a single point of failure, which they could attack. So at this stage, they have to understand, the upside potential of Bitcoin and that this kind of thing is the future.

If they don’t want to fall behind the development, they should provide a business-friendly and Bitcoin-friendly regulatory framework in order to secure one of the front positions during the “global financial revolution” which is on the horizon thanks to the Bitcoin technology and which will affect much more areas then just money/currency.

The currency/money function is just the beginning and we will see many, many more developments on top of that over the upcoming years some of them are in the pipeline already; some we probably even cant imagine now.

Nikos Bentenitis, Founder ofCoinSimpleresponds:

Most regulators are still learning about Bitcoin. As the number of companies that accept and use Bitcoin increases, the number of people who can educate and influence regulators will increase.

Michael Dunworth, CEO ofsnapCardresponds:

I would prefer them to spend the next 12 months educating themselves on what Bitcoin is and what potential it has on a global scale.

Daniel Mross, Director ofThe Rise and Rise of Bitcoinresponds:

I expect regulation to evolve slowly, but steadily, especially as businesses start adopting bitcoin for use in commerce.

A lot of banks are still wary of bitcoin, mostly because of the regulatory uncertainty, but I suspect bitcoin is nearing the point where the burden and costs of moving regulation forward will be worth the early mover advantages.

I expect the SEC approval of the Winklevoss trust will pass, and if so it will open the floodgates for additional funds and financial products to include bitcoin and possibly other crypto-currencies.

For individuals, I think most Americans are eager to hear what the IRS decides regarding taxation and I believe we will see new tax rules that apply to digital currencies.

Alexander Lawn, director ofKnCMinerresponds:

I believe we all hope to see encouraging steps in the right direction. Governments are without doubt taking it more, and more seriously and I think for the most part are keen not to make rash decisions.

There is obviously an existing financial industry to consider, and whilst cryptocurrencies are here to stay at an institutional level they need to be able to integrate seamlessly.

Over the weekend the UK Government has revealed they are ready to alter their classification of Bitcoin from being a tradable voucher to that of a private currency, meaning VAT becomes non applicable, with only capital gain being applied if a sum is held for more than a year.

So I would rather they take their time to review the opportunities a burgeoning financial industry presents us all with. I believe governments are taking Bitcoin seriously enough to consider proactive regulation, and I welcome their discussion on the topic further.

Mrs P, the founder ofThe Bitcoin Wiferesponds:

I think we’re going to see more governments weighing in and declaring their official status on Bitcoin and how it can be used.

In the US we could potentially see a knee-jerk reaction once taxes are filed and information is officially gathered from Bitcoiner’s filings on how big its presence really is here. Whether or not the Bitcoin community is going to care, good or bad, is another story.

Mark Norton, editor atBitcoin Warriorresponds:

Bitcoin has been making the news over the last year and getting some attention from regulators. Within the Bitcoin community, it’s easy to feel that these are huge events and that the government is carefully considering how to handle Bitcoin.

In fact, Bitcoin is still a small enough economy that every coin could be purchased at the current price by many thousands of individuals, organizations, and governments around the world. This means that despite Bitcoin’s meteoric rise over the last year, it is still a trivial thing to most regulators.

These regulators don’t have the time, manpower or resources to adequately tackle their most important cases; for now, they will only pay attention to Bitcoin when something happens to make them take notice of it.

Right now, though they don’t know it, we are in a race with the regulators. The race is to get more people aware of and using Bitcoin and getting it more and more entrenched in the economy.

When the regulators finally wake up to Bitcoin, and they will, it would be best if they did so with the realization that there is little they could do that is effective and that there are many people from all walks of life that will oppose them.

I personally believe that the biggest push against Bitcoin is going to come from the banks and the credit card companies. Just recently, Wells Fargo announced that it was having a ‘summit’ to determine ‘rules of engagement’ with cryptocurrencies.

The banks are already aware of the disruptive potential Bitcoin has, but also view it as too small, difficult, and obscure for most people. I expect that they think that cryptocurrencies will eventually find a role to play, but that they will do so within the existing banking framework, perhaps replacing the ACH system.

When people start closing bank accounts because they bank with their Armory wallets, when they stop using their credit cards so much because they can pay with their cell phones, and when they start remitting money themselves to other countries, Bitcoin will start affecting the banks’ bottom lines. That is when you will see a governmental and media blitz against the evils of Bitcoin.

Over the next 12 months, I am not really expecting much movement on regulation. I think that will come in 2015 or 16. In the next year we are going to see a building of the pressure that will eventually lead to attempts at regulation.