Jesse Colzani is a regulatory expert and Bitcoin researcher.
When asked if the Bitcoin network can be regulated, people tend to answer in a binary way. On the one hand, there are those who say that everything can be in order. On the other hand, there are those who believe that Bitcoin irrevocably separates money from the state. This article is an attempt to better understand what Bitcoin regulation depends on and what tools regulators can reasonably use to limit its adoption.
For the purpose of this article, regulation is considered legal restrictions mandated by the state. However, laws are not the only force shaping society. Professor Lawrence Lessig identifies three other forces that limit an individual’s action in what is often called the “pathetic point theory.”
- Markets are regulated by the price and cost-opportunity tool.
- Social norms represent a complex set of behavioral standards commonly accepted within a community (such as tipping a server at a restaurant).
- Architecture includes geographic, technological, and biological barriers to human behavior (like the laws of physics that prevent us from levitating, or a web application that prevents us from accessing an online service).
Each power can – willingly or unwillingly – affect the others. Laws can limit deforestation (architecture), social norms can shape markets, and weather (architecture) can affect agricultural production and food prices.
Forces can affect other forces
When a law cannot directly target individuals, legislators try to regulate other forces. This happens when the government causes cigarette prices to rise (the market), prohibits the use of certain words on television to influence citizens’ behavior (social norms), or creates concrete barriers to creating pedestrian zones (architecture).
Legal markets can influence architecture and social norms
But can laws always affect architecture? Can laws eradicate a virus? In today’s world, highly contagious viruses cannot be eradicated due to a combination of biological reasons (architecture), financial constraints (market) and hostility to constraints (social norms).
Like a virus, Bitcoin spreads globally (mutates when necessary) and depends on the right market incentives or socio-political momentum. Lawmakers cannot shut down Bitcoin or eradicate a virus, but they can use legal restrictions to reduce the risk of certain undesirable consequences.
Direct Execution Through Users
The law can have a direct impact on individuals
As long as someone has a phone and an internet connection, they will be able to use Bitcoin. Therefore, the effectiveness of the application directly depends on the jurisdiction in which it takes place. In fact, only a disproportionate restriction of individual freedom can limit Bitcoin adoption in the short run (underground peer-to-peer markets will likely emerge in the long run).
Also, individuals tend to be more willing to break the law when their money is at stake. This is why the past decade has been filled with examples of software developers, political activists, and criminals using more or less sophisticated techniques to evade government scrutiny over Bitcoin.
Execution Through Architecture
Law can influence architecture
While John Perry Barlow’s “Cyberspace’s Declaration of Independence” still relates to the lifestyle of some people today, governments often exercise a certain degree of control over internet architecture. In fact, data flowing from devices passes through central bottlenecks that allow public authorities to shut down websites, identify anonymous users and control online traffic.
Bitcoin is different because it is significantly more decentralized than most web applications we use today. With a strong network of nodes and mining rigs, changing the blockchain would be a Herculean task for any government.
At the same time, Bitcoin relies on internet infrastructure for nodes to communicate. In theory, this provides lawmakers with a regulatory access point to the technical infrastructure. For example, since Bitcoin transactions are not encrypted, internet service providers may use special techniques to recognize them or even decide not to process them. However, even with the strictest measures in place, experienced users will always have ways to broadcast transactions to 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 easily disappear and continue their work anonymously. Second, because the Bitcoin community is based on broad consensus, even the most influential developers will not be able to force government-imposed changes to the code.
Execution Through Market Incentives
Law can affect markets
Governments can offer compelling 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 every citizen who downloads the Chivo wallet – a custody solution where the government has full control over the funds.
The most popular way governments are currently trying to regulate Bitcoin is through exchanges, liquidity providers and other intermediaries. By complying with know-your-customer (KYC) and anti-money laundering (AML) regulations, these new banks can offer attractive rates and attract the most inexperienced users. This has important implications for the changeability of the bitcoin supply and arguably poses one of the biggest threats to Bitcoin’s promise of individual self-sovereignty.
It’s unclear when and how governments will introduce central bank digital currencies (CBDCs) into their economies, but it could deter bitcoin payments, just as a government can encourage the use of its CBDC through economic incentives. For example, fees for accessing utilities or local taxes can be reduced when using a government-issued digital currency when full-priced, or even more expensive if bitcoin is used. This is important because CBDCs on their own will not have an impact on the network., They can slow Bitcoin adoption. Such an approach is often described as libertarian paternalism., because individuals can freely choose whether they want to join or exit a particular system.
Execution Through Social Norms
Law can affect social norms
It is undeniable that a lot of institutional skepticism has negatively shaped the public’s perception of Bitcoin. In fact, laws can try to shape public perception in various ways. For example, banning Bitcoin-related words on TV or creating school programs that focus on the risks of using bitcoin.
Policymakers could go a step further and promote “bottom-up” campaigns as an attempt to change the Bitcoin code. An unconventional coalition is embarking on such a strategy, though not supported by any public authority.
Bitcoin’s Main Vulnerability
Just as we assume that no government thinks they can completely eradicate a virus from their country, regulators have finally realized that the same is true for the Bitcoin network, and their best option is to try to limit the way the virus spreads. Rather than risk watching their monetary strength slowly erode, governments will try different combinations of the tools described above to slow hyperbitcoinization. process.
Bitcoin was designed to be a highly secure and decentralized system, but it is important to remember that its most important components are people, which can be unreliable and unpredictable. Governments aren’t always one step ahead in understanding technology, but they have a successful track record in driving human behavior.
This is a guest post by Jesse Colzani. The opinions expressed are their own and may not necessarily reflect the views of BTC Inc. or Bitcoin Magazine.