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Bitcoin, Blockchains and Regulation

Blockchain-based technologies could revolutionize not only how companies operate but also how regulators and law enforcement officers perform their supervisory and investigative duties. Could the transparency, user-defined privacy and programmability of blockchains minimize market failures and reduce the need for regulation?

The First Blockchain

Through an ingenious combination of well-known technologies and economic incentives, Bitcoin brought about one of the most exciting and potentially transformative inventions in modern history —the ability to achieve consensus and guarantee truth without a central authority and with censorship-resistance. So revolutionary is this breakthrough that it has ignited a gold rush of investment and creativity similar to the pre-browser years of the Internet.

Blockchains were born with Bitcoin. And by Bitcoin I do not mean bitcoin (lowercase), the volatile and supposedly anonymous virtual currency that is not controlled by any third party, and allows individuals with Internet connectivity to send and receive value in any amount, globally, and almost for free. Lowercase bitcoins are an inextricable component of this new technology, and a uniquely significant one that transcends their monetary nature. They are digital containers that can be programmed to represent digitally “anything of value,” such as a security, a medical record or a work of art.

Bitcoin (uppercase) is an open source software that runs as a distributed network made up of thousands of smaller computers —nodes— that jointly certify the ownership and transfer of value without having to trust one another. In this sense, Bitcoin acts as as a semi-autonomous robot that utilizes advanced cryptography to enforce rules embedded in its core that guarantee everyone’s honest behavior. Part of that enforcement mechanism consists of recording transactions in a counterfeit-proof and immutable ledger that is also distributed to all participants in the network. This public ledger —Bitcoin’s database— is called the blockchain. Continue reading

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Is Bitcoin Selling its Soul to the State?

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This question or some variation of it has actually been posed to me by many virtual currency enthusiasts over the past few months.  It so happens that the financial services regulations applicable to many new virtual currency businesses have been seen as impinging upon the core features that make Bitcoin so innovative and potentially disruptive.

First, the hope for complete anonymity was shattered by the statutory obligation to implement know-your-customer procedures at the currency translation points.  Second, the irrevocability of transactions was dampened by the federal consumer obligation to provide for delayed executions, cancellations and refunds.  Is financial privacy next? 

One of Bitcoin’s most salient and innovative attributes is that its block chain, the public ledger where the entire history of every transaction ever conducted is stored, is publicly viewable by anyone with the right tools.  Given this unique window into their virtual currency wallets, are Bitcoin users not at risk of giving up the right to the private use of a currency that cash affords them today?  I say at risk because it may still be possible to Continue reading

Winklevii Warn Investors in Their ETF That Bitcoin May Become Illegal

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Apart from the cookie-cutter risks everyone is required by law to disclose, the Winklevoss Bitcoin Trust prospectus contains a series of unique risk factors that would make even Bernie Madoff cringe.  One of those risks, indicated as my favorite below, almost made this post qualify for my ‘Seriously?’ category, reserved for cases of utmost nonsense and near insanity.

All joking aside, the unique virtual currency-related risks listed in the Winklevoss twins’ new Bitcoin fund SEC filing hint at the number and complexity of roadblocks that the crypto-community will need to surmount if it aspires to take digital currencies to the mainstream.  On the positive side, this first (technically, second) Bitcoin fund marks Bitcoin’s official entry into the capital markets and could go a long way towards legitimizing it as a commodity.

Here are some of the more salient risks for your edification and enjoyment:

  • The loss or destruction of a private key required to access a Bitcoin may be irreversible.  The Continue reading
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