Un repaso a Bitcoin.

As an Australian, I have watched intently the testimony of Australian experts on the subject on 26 November 2014 and read the submission of MasterCard dated 27 November 2014, which was made available to the public. I believe that Australia, given the right framework, has the right people and ingredients to take full advantage of the promises of this disruptive technology.



As has been presented to you, the bitcoin name is associated with three things:

- it is a distributed peer-to-peer network,
- a platform on which to build applications and a token that can be used as a means of exchange.

Spoiler

It is important to note, however, that these tokens live on a distributed ledger, updated by operators commonly known as miners, in an organized manner that provides security and prevents double spending.

Thus, to assign value from a user to another, a secret key is required to access that ledger and conduct the tras*action. This means that users do not hold the digital tokens themselves, but rather the keys to access those tokens. By derivation, owning the keys means control, therefore ownership of the underlying tokens.

- Bitcoin is open-source, its design is public, nobody owns or controls bitcoin and everyone can take part in it.



The most important aspects of the Bitcoin platform, I believe, are as ***ows:

i) that its technology, by providing a workable solution to a long-standing computational problem called the Byzantine Generals Problem (or Two Generals Problem), is able to securely, incorruptibly, accurately and tras*parently provide consensus to its users as to the state of affairs on its network, without the need of a human controlled trusted third party;

ii) it has an in-built algorithmic protocol, baked into the network from its inception in 2009, which regulates the rate of issuance of its tokens;

iii) it uses gamification, or game mechanics, to influence miners to participate and provide computing power to secure the network, meaning that the network, platform and the token can’t be separated to achieve large-scale, secure and distributed peer-to-peer network;

iv) The utilization of the tokens for trade or speculation results in the ability for markets being able to price it. In turn this creates the ability to assign value to its network, from mining operations, the introduction of different applications, job types and more. Once this price discovery was achieved, bitcoin’s self-perpetuating system was designed to provide more benefits to honest actors supporting the system;

v) The tokens are programmable, thus capable of doing orders of magnitude more than a simple tras*fer of value. This can lead money to be a type of content, flexible in everyway to achieve a number of outcomes that were not possible before;

vi) Value can be tras*ferred instantly and for negligible fees anywhere in the world, or even in space, provided that there is a way to tras*mit information;

vii) Applications can be built to automate and dis-intermediate third parties, from real time voting systems, notarization, revenue, escrows, title registries, tax payments and more;

viii) It allows for the first time the use of M2C (machine to consumers) and M2B (machine to business) since an online robot can obtain an account to get and spend according to a set of mathematical rules (that can be as smart of as basic as required). Note that where people are required to present identification to open a bank account, with bitcoin anyone or anything can have a bitcoin address;

ix) It is creating its own economic output outside of the fiat currency economy, where people work, earn, invest, and spend in bitcoin. Another way of looking at this is like a universal loyalty community and program, where people can opt out of the current financial structures and systems by choosing the regime they want to live under;

x) It can be used to perform micro tras*actions, fractions of cents, globally which may tras*form the way content is consumed online; and

xi) It can bring the 2.5 billion of unbanked people and 3.5 billion people that have restrictive access to banking to join their productive values to the global economy by simply having access to global finance and liquidity pools.



This is the reason why thinking of the Bitcoin network (commonly confused with bitcoin, the token) as being the money of the Internet is missing the point. As an articulate advocate of this technology often points out, Bitcoin is the “Internet Of Money”. This is one of the main reasons that the smartest people are talking about this industry and migrating their productive value to the opportunities presented by this field of work.


There are currently over 580 start ups (at least those that are visible and advertised, so that number is likely to be significantly higher), that already service the market or are about to come out with innovative products built around Bitcoin, with thousand of jobs being created. About US$300m in Venture Capital investment has been put into this space in 2014. This is, however, only considering the amount invested in fiat currency.

When you consider that those holding bitcoin, and other similar type of decentralized tokens, are using them to lend money anywhere in the world or to fund ventures as well as investing in commonly termed crypto-stocks, you may appreciate the self-fuelling aspect of this new economy.


While the promises of bitcoin and similar technologies require a certain level of understanding to extrapolate into some sort of foresight, and that no-one knows whether these promises will eventually be met, the fact that we can contemplate using bitcoin technology to build innovative and disruptive companies in various industries, I would argue, should not be dismissed lightly.

As with all technology, bitcoin is not perfect. There are real concerns in the community about the centralization of mining operations, the digital security measures to protect the wealth of its users, the fact that it can be hard for mainstream users to trust a new technology, especially where wealth and their productive value is concerned, the scalability of the system, the current regulatory regimes that pain to keep pace with the level of innovation, the volatility of the tokens, the cultural predisposition of people, especially in poorer countries, to use the network for value tras*fers and more. Tremendous progress has already been made in these areas, but much more, I believe, needs to be made in order to get to a point the point of mainstream adoption.



I may offer some insights on issues addressed by your committee and the MasterCard submission.


Level Playing Field

I am of the view, as MasterCard stated in its submission to you, that “it is imperative that consumers and merchants are able to conduct business and commerce in a way that is safe and simple for all”. Confusion is introduced, however, where MasterCard says that payments systems that provide similar services to consumers should be regulated in the same way to achieve a level playing field for all. When comparing apples with apples, this statement makes absolute sense.

However, saying that Bitcoin’s use as a payments tras*mission network is simply another normal payment systems provider disregards the fact that bitcoin is a global peer-to-peer network, with its own monetized token, on a system that is by design open to all, secure, instant and unforgeable in its accounting, but most importantly that it doesn’t have a responsible party at the helm that can be forced to submit to being redesigned to fit a particular agenda.

I think that it’s accurate to say that Bitcoin’s application in payments tras*mission carves out the infrastructural and operational guts of companies like MasterCard and other type of payments system and replace these with an algorithm and an incentive system. Further, the fact that payment tras*mission companies have custody, access and stores the keys to its users bank accounts, their private information in a centralized repository, means that information security, encrypted tras*mission and various protections must be very diligently provided, regulated, audited and the like. Eventually, however, breaches and hacks occur (as was seen with target recently in the USA) impacting millions of users. These are inevitable.

On the other hand, bitcoin (where users can control their tokens themselves), doesn’t have any of these security concerns, tras*mission doesn’t have to be encrypted and there are no centralized repositories since it is a distributed system.

However, this should be critically distinguished where users’ secret keys to bitcoins (or other digital currencies) are given to trusted custodians. Here, the protections afforded by the Bitcoin network are removed. In this situation, the custodian has absolute control over their customer’s bitcoins, since they control their keys. This is no different to these custodians acting as a bank or a deposit taking institution. In this type of model, it’s very important that a proper procedure is implemented and regulatory oversight is vital to prevent destabilization of economic productivity.



Bitcoin as money

- The recent decision by the Australian Taxation Office (ATO) of classifying bitcoin as property was expected and appropriate with regards to the current legislation in place in Australia. This is because bitcoin and similar digital currencies are not defined as legal tender, or sovereign currency, in the Australian legal framework. In effect, the ATO, may be prevented from ruling to classify bitcoin in any other way. To be clear, these pieces of legislations are an artificial legal construct to only allow the legal tender of a nation to be good for payments and debts, which include taxes, in that particular country.

- To say that bitcoin is not money, or a real currency, or a medium of exchange in practice is, it is argued, not accurate. People that generate productive value have a choice of valuing their products and services in a form that they consider stable and appropriate for their use. If goods and services are bought with bitcoins, if investments return wealth in bitcoins and the like, it must therefore be considered a means of exchange in some form or another.

- We don’t know whether prices could ever be denominated in bitcoin. This requires trust and trust takes a long time to emerge in monetary systems. It must, at least initially, therefore, be pegged to another currency for users to assign a value to it. As more migration to the bitcoin economy occurs, such that businesses do not have to touch fiat currency systems, it is possible to see bitcoin denominated prices. I am of the view that this is a very long way into the future, if ever.

- In its submission, MasterCard lumps Bitcoin and Ripple in the same bucket. While there are some similarities, confusing the two, I believe, is a mistake.

Ripple uses a fork of the blockchain technology, that is, technology underpinning bitcoin to achieve consensus on the state of affairs on a ledger of who owns what, in a closed and vetted system to tras*mit value. There is no mining per say, in the sense of mining in bitcoin and therefore the network is not open.

In its system, Ripple represents a tras*fer of value from a basket of fiat currency or other tokens between one user to another, by tagging an XRP to that tras*ferred token. Because the XRP was tras*ferred, the tras*action is recorded and broadcasted to gateways (banks or other similar type entities). A settlement process occurs where, the tras*feree can then retrieve money on their end, in the local currency.

This means that tras*fers on Ripple is currency agnostic, and cheaper for tras*fers than bitcoin. In fact, Ripple could replace Swift Type systems or credit card tras*mission technology without even requiring an XRP currency, faster, more efficiently and at little cost. I believe that these are the sorts of systems that banks are actively working on and experimenting at present to innovate.



Consumer Protection

As MasterCard stated consumer protection is an essential minimum for any workable payment or tokenization system. The relevant areas affecting consumer protection, amongst other things:

- Volatility risks

Without a stable form of value, it’s very hard to price items, use it as store of wealth for the future and also increases the risk of exposure to credit and in turn the broader financial market. Most items in the bitcoin economy are priced in a local currency and merchants allow customers to pay with bitcoins, which is then, in majority, converted immediately to that preferred currency. In this case, to say that these merchants “accept” bitcoin is not quite accurate. They, however, understand that bitcoiners have bitcoin and they need a place to spend it, thus funnelling, much in the same that loyalty programs work, bitcoiners to their businesses. It’s simply another way to pay for them like adding a PayPal button. This situation may change in the future where those businesses keep a certain amount of bitcoin to pay their suppliers in bitcoin.

For more sophisticated merchants, there exist bitcoin derivative markets, where users can hedge their positions for a specific period of time. These are developing very fast and, lately, companies like BitReserve allows consumers very simply to hedge bitcoin against a basket of currencies, and even gold. The measures to combat volatility are being developed and it won’t be too long that there would be adequate protections against this in the marketplace.

However, it is important to understand that volatility can be a measure of several things but the most important one that comes to mind is that fact that bitcoin, compared to fiat currencies, has a very small pool of liquidity. It’s like having a large person jump in a small pool, the pool would slosh around. Compare that to that same person jumping in the ocean and nothing would happen. As bitcoin grows and that pool of liquidity increases, it is foreseeable that this would cause less and less volatility.

While volatility is an important consideration today for users of bitcoin, saying that bitcoin will not work in the future or be unreliable due to volatility and introducing regulated intermediates to manage this on behalf of its system is premature since this is an issue that may likely resolve itself on its own.



- Multi-Signatures And Escrows

MasterCard uses the example that “of a consumer uses digital currency [that] makes a purchase on line and the merchant fails to deliver the goods, [that] consumer has no recourse through the digital currency’s network". It is often said that bitcoin payments are irreversible in nature. However, while this is accurate on one level, several layers added in its protocol since its inception makes this issue solvable by the market itself.

The bitcoin of 2009 to the one today is vastly different. It is estimated that only 25% of the original code remains from its original code.

Today, several companies already address this issue through the use of multi-signature escrows (for example, Purse.io). In this process, funds are controlled in an n of m system, where n signatures are required for the funds to be disbursed to a particular party. For example, bitcoins can be released only if a product is received by the person, and that person is satisfied. Further, this can be automated through a time lock system or the users can chose which arbitration rules they want to use. This can have the potential to decentralize arbitrations, with a reputation system that can be as near to a frictionless position as possible but also, faster, at a much cheaper cost those current systems provided.

Multi-signatures have many applications beyond just shopping. These can be used for example in time locked wills, where money is programmed to be received by a particular person according at a particular time.

Again, at the moment, this seems to be a problem that is resolving itself in the marketplace.


- Illegal Activities, Money Laundering and KYC

These are very tough concerns to address and get right, especially in the digital currency space.

Unlike popular mainstream views, and those presented by MasterCard, bitcoin is not anonymous. In fact, bitcoin is the most tras*parent accounting and financial system ever devised, where all tras*actions are recorded in a public ledger available to all. While it allows surveillance and analysis of its ledger, it doesn’t allow ubiquitous surveillance.

This, it is contended, is privacy, not anonymity.

Cash on the other hand is totally anonymous. This is the reason why seasoned criminals prefer to use cash, as it doesn’t have a record of its underlying tras*action. In fact, bitcoin is a terrible tool to use to conduct illegal activity, as many of its users are currently finding out, since every tras*action is recorded and by pulling on one tras*action, it is possible to unravel the entire dealings from that bitcoin address (that information is public and therefore anyone can do so).

At law, simply proving that an account was tainted with the purchase and that a particular person held the key at the moment the tras*action was made, may prove the act of wrong doing. Further, it may also prove complicity in the tras*action right to the beginning of when the first tainted bitcoin was created.

This means that an opportunity exist for forensic analyst in law enforcement. Indeed, law enforcement may need to recalibrate itself over time to new ways of catching criminals, since the criminals are unlikely to disappear. It is my view that currency is always neutral and the people that adopt it determine its use. As more people adopt a means of exchange, it reflects the values of those people, whatever that may be. The same is true for any currency.


There are several reasons why tying identities to bitcoin addresses is futile:

Spoiler

- A bitcoin address can be created by anyone with a throw of the dice 32 times. This address is ready to receive bitcoin from anywhere in the world. Note that the person creating the address doesn’t even have to have access to a computer to receive the funds;

- A bitcoin address can be generated by a machine to receive bitcoins for a virtual service it provides itself (such as a decentralized drop box), pay people that store the fragmented information on their servers and distribute any profits according to key words found in online news the ***owing day. In this tras*action, no human interaction is possible and it is unsure how this online bot would be identified or even stopped;

- By centralizing identities in a database, this leaves a potential disaster in losses of personal information, which can then be misused to create more harm that it solves. Except that under this system, the damage can be even more far reaching because, the tras*actions of people can be retraced publicly anywhere in the world; and

- This may cause completely anonymous spin offs of bitcoins, which gain the required traction (bitcoin is pseudonymous) and this will make virtually impossible to stop. On this topic I’m reminded of Napster, which was a centralized service for file sharing. By stomping on Napster, which in effect was quite docile and manageable, Bittorent was born. Bittorent can’t be stopped unless the Internet is shut down. This is an example that would be unfortunate to replicate. By managing Napster, it would have been possible to avoid the tens of billions of dollars spent on combating this type of activities.


However, this must again be differentiated from businesses acting as custodians of keys to bitcoins on behalf of customers. In this instance, and mostly where most people are on-boarded to the bitcoin economy, proper KYC and AML legislations should be complied with, not only in attempt for regulators to make sure that tras*actions are properly reported, but also to protect the consumers themselves for accountability to the relevant parties in case that business folds.

It is often said that tax avoidance could result from using bitcoin. While this may be true of any currency, under any type of system, bitcoin and similar technologies provide the ability to program money. This can’t be understated as it may be used in future iterations of businesses providing services in this space to make sales and income tax filings more efficient. While these systems have not been devised, it should be possible for businesses to pay GST at the point of sale by splitting 1/11 of the payment to the ATO (converted immediately to Australian Dollars), and for a refund to be obtained by that business immediately from the ATO in real time in Australian Dollars or bitcoins when a purchase with an input taxed credit is made. This would be indeed make the A New Tax System (Goods And Services) Act live up to its name.

- Gox

Mt. Gox (Magic The Gathering Online Exchange, not to be confused with Mount Gox), was one of the most recognized exchange of in the bitcoin world. It contributed to the price discovery of bitcoin and was a pillar in the early development of bitcoin.

MasterCard wrote that “As we have learned from the experiences emanating from the Mt. Gox Bitcoin exchange collapse the existence of a “block chain” does nothing to allow law enforcement, other government authorities or the public to identify the real identity of the parties to a digital currency tras*action”. Unfortunately, this completely misrepresents the situation and in fact is the opposite of what is presumably being argued here.

Mt. Gox was an online exchange where users deposited funds, both fiat and bitcoin, to trade fiat to bitcoin or bitcoin to fiat. Traders could then retrieve their funds in fiat directly by a tras*fer of Mt Gox’s account to their bank accounts. In this respect, the majority of traders are known since bank accounts aren’t able to be opened anonymously, as far as I know.

Mt. Gox was a failure of the traditional banking model, similar to what happened in 2008. Except, even though they requested this from the bitcoin community, no one bailed them out.

By giving the secret keys to their bitcoin account to Mt. Gox, the users trusted Mt. Gox with their funds. In other words, they didn’t own any bitcoins, Mt. Gox did and represented to them that they had it in reserve. Through, what appear to be mismanaged operations, Mt Gox lost some funds and started to pay exiting traders with new money, essentially operating a Ponzi scheme. Eventually, the scheme came crashing down.

During this whole saga, the bitcoin network was unaffected and kept working as it was designed to. However, the price on all major exchanges around the world plummeted as speculators got out of the market in anticipation of draconian regulations and bans.

The Mt. Gox debacle was a failure of a mismanaged centralized institution, not bitcoin. It didn’t use the protection and security afforded by the bitcoin network, nor did it operate under the supervision of regulations that banks were subjected to.

However, the bitcoin price rebounded shortly after and because bitcoin is a public ledger, several of their customers identified the Mt. Gox bitcoin account and tracked every movement of funds in real time. An analogy would be that of Meryll Lynch folding and all their customers being able to see where all those funds have gone, how much they had in reserves and calling foul every time any money was moved from that account for a purpose and demanding answers. This is regulation and demands of enforcement by the customers, not oversight committees. The only reason, this could be done is because of the existence of the blockchain.



Overseas Push to Regulation

Some notable events in the space include:

- the decision of the HMRC in the UK to reverse its decision, within 4 months, of charging Value Added Tax (VAT) on bitcoin purchases noting that such a move would simply drive businesses overseas to more accepting jurisdictions;

- the IRS’ determination that bitcoin is property for tax purposes, like gold, leading to the payment of Capital Gains Tax, while FINCen (the Financial Crimes Enforcement Network) treats bitcoin and similar digital currencies as a value tras*fer and therefore subject to money tras*mission laws, where a business is conducted in that field. In addition, in Shavers v SEC, the courts of Texas established that bitcoin was indeed money while California treats bitcoin as lawful money;

- After holding several meetings, the NYDFS issued draft regulations for a bit license structure for companies wanting to offer services in the space. The reception of this license produced over 3,600 submission from the bitcoin industry and other affected players and is due for redrafting as the proposed submission as some commentators submitted would isolate New York, the new financial centre, from the future of finance. The second draft regulation is due to be released before the end of 2014;

- In accordance with the laws in Russia and China, no money substitutes is allowed, though I understand that bitcoin is still flourishing in those areas. The reasons for these regulations are to prevent capital flight.

- What most of the regulators around the world are finding is that due to the inseparability of bitcoin the token, the platform and its peer-to-peer network, bitcoin can only be classified on a use case basis. This means, that bitcoin is money in an instance, a commodity in another, a security, an asset, a registration system, a loyalty token and the list goes on.

For this reason, not one piece of legislation can be introduced to define it. This creates enormous headache for regulators that now have to think across disciplines to find out whether what they’re introducing not only clashes with the established entrenched players but also across various pieces of legislation themselves.




New possibilities that should be mentioned


Bitcoin Derivatives

Very innovative derivative platforms can be built with bitcoin on a peer-to-peer network, without any clearing-houses (the role of which is taken on by the blockchain) and invariably practically no fees. For example, a bitcoin to bitcoin mixture of a futures/forward contract is possible, where users wanting to hedge their bitcoins place these in a multi-signature account waiting for a speculator and choosing a pegged value to a particular currency and a time for the contracts to resolve. A speculator believing in the price appreciation of bitcoin can then credit the same multi-signature account to take that position. When the time for the contract expires, the difference in bitcoin is automatically sent to the respective parties so that the hedged amounts are respected.

Note that in the above example, this was done on a purely peer-to-peer basis without touching any fiat currency, banking, clearing-house, intermediaries and the like. It’s possible that it’s done instantly at negligible cost. This sort of peer-to-peer system can be used (and is currently) being used for the issuance of securities (much like a global Stockmarket) to fund companies or otherwise reinvent the world of finance we’ve been accustomed to.


tras*parent and auditable accounting

For those companies that are required to have a tras*parent accounting system, it is possible to publish the relevant financial details and tras*actions so that it is not only auditable by a select few but by everyone. tras*actions that need to remain private can be so. Note that this does not have to necessarily be bitcoin based but rather in the form of an alternative chain where the ins and out can touch either a fiat system or a bitcoin based incentive system.


Micro tras*actions

Micro tras*action (up to fractions of cents) was not possible to be done before whether in cash or over the net. With bitcoin, however, this is possible and completely frictionless. This can have significant consequences for online content, uses by countries where dollar denominations due to its strength may not be appropriate, spam reduction, online piracy and more.

I’d like to advance some of these possibilities in the ***owing examples:

- Currently, to show appreciation for content, users can share it with their networks, like a particular post, favoritize it and the like. This creates a deferred value to the content creator, because as the fan base grows, the likelihood of monetization increases. This monetization can be in several forms, however online it’s likely to be in the form of paid ads on a site and the like. While this may not affect visitors to a particular site, it does miccionan that the content creator is banking on the fact that the ad is relevant to the user and that a click will ensue generating revenue (like using the content as the bait). In this process, advertising companies track the users habits and show relevant advertising to them.

This means that the content being read is not being rewarded directly for its quality. Rather, the revenue generation process is independent of the content itself. This is like admiring a painting but paying a museum to get access to it, who then pays the artist. This means that the payment is aggregated for the collection rather than appreciation for a particular artist. The payment for the artwork is therefore subjective and controlled by the museum or the art collector.

Contrast this with an artist that puts its bitcoin address next to its painting. Payment to the bitcoin address can be split partly to the museum and partly to the artist. This means a democratization of recognition by allowing each individual painting to be recognized and the artist to be paid directly without intermediary by people that appreciate it.

This leads us into another question that is being quantified right now and is posed as ***ows: if a product is free, why would anyone pay or tip the artist for it? Although very early in this development, ChangeTip is finding out that people will tip a content creator if the content is viewed as quality content and the level of contribution can be different for everyone. This means that payment is not constrained by the medium used to tras*fer it. This is impossible to do with a medium of payment that has a minimum amount required to process a tras*action due to the many intermediaries in between.

The above can’t be stressed enough. It shows that people will tip or pay for quality content even where that content is available for free! However, while someone in Africa might pay $0.0001 and someone in America pay 10c for the same content, the more popular a content is the more revenue is generated by the content creator.

We’re now seeing that content creators are getting paid according to quality from any user in the world without gatekeepers. This dissociation of the tras*mission of value from any restriction imposed by the medium of tras*fer doesn’t have any equivalent in history.

This can also go a great way to resolve some of the concerns surrounding online piracy.

Bittorent today is 40% of all internet traffic and, whether it is legal or not, people do download pirated content. While this may be due to wealth disparity and not being able to pay $10 for a movie ticket, it nevertheless still creates intangible value in the form of a fan base, which can be monetized some other way. Assuming, that this trend continues, the ability to do micropayments can now be used voluntarily by content consumers to tip privately the content creators themselves. So rather than a ban that is likely not able to produce results, and in fact, adds to the drain of billions of dollars, bitcoin attacks the problem in an asymmetric manner.


We’re already seeing the beginning of this happening. For example, the book Mastering Bitcoins by Andreas Antonopoulos is available for free in pdf or text format online with the consent of the author. It is also available on Amazon in soft copy for a small fee and in print for close to $30. People wanting quality will pay for the print, others that don’t have the money will download it for free and with the ability of micropayment may show their appreciation. Others will simply not pay for it.

This gets us to the point of understanding digital media and mediums and a simple rule that information that is disseminated can’t be controlled. Where money is constrained by the medium it travels through, such as a minimum credit card tras*action amount of $1, this is not possible. It is also not possible with the fiat system we have with money to 2 decimal places because other countries or economies might value even 50c as being a lot of money. Allowing them to tras*act for a fraction of a fraction of a cent includes the broader populace.



Global Lending

Peer to peer lending has been possible before but due to friction in the payments industry this wasn’t able to be globally inclusive. For example, someone in America couldn’t lend somebody wanting to open a bike repair store in Mozambique, $1. Bitcoin makes this a reality and sites like btcjam.com already does this.

This access to global credit for third world nations directly to an individual without intermediary means that productive activity can boom in all corners of the world. The lender on their end, get payments via interest for their investment for newly created productivity without intermediaries.


Decentralized internet & mesh networks

Mesh networks and the idea of a decentralized Internet have existed for a long time although it was lacking a critical ingredient: why would anyone add their Internet connectivity and computing storage to a network? Most such schemes relied on the altruistic nature of the node (operator). Bitcoin through the use of game mechanics and valuable token has shown the way for operators (called farmers) to add their wi-fi or mesh to a network where the network pays them for that service in a frictionless manner. It is not a far stretch to see that mesh networks have the ability at much greater speed (a current project for mesh networks claims 7 gbs speed for a $40 appliance) and significantly improved connectivity the ability to generate value for the farmers, who can then access the peer to peer network by using these tokens.

With decentralized platforms like counterparty, these can be exchanged to bitcoin then cashed out or where a market exist for these, cash them out immediately to pay for electricity. MaidSafe is a project that raised over $6m earlier this year to provide the engine for these types of decentralized networks.

When you compare the billions of dollars spent on an NBN network in Australia, plus the timeframe to create these in order to give broadband to anyone and the fact that you could achieve the same thing for all Australians with better connectivity, orders of magnitudes greater speeds within one or two years at a cost that could be around the ½ billion dollar mark, it’s interesting that these alternatives weren’t even considered. Of course, the entrenched interest of ISP like Telstra would be disrupted by such a move.

I acknowledge that the above is just a simple extrapolation, but I mentioned this because of the possibilities that bitcoin type incentive systems can bring.



Payment directly to the producer of goods

Another embodiment of the bitcoin system is the ability to disrupt how producers or goods are paid. For example, a supermarket is an aggregation of goods where consumers pay the store and the store pays the producer. With bitcoin it is possible to pay the producer of goods directly from the shelf without any fees or processing. The supermarket owner can be relegated to a co-operative rental space with a property management team. This ability to remove friction drops the marginal cost of getting to markets. This means that the producer is being rewarded directly for its productivity, meaning that the cost of goods can fall and be accessible to consumers. In effect, the “slop” created by intermediaries is not present.


Money as Content

I am of the view that bans and regulation; being contemplated in countries where control on information is severe, on bitcoin is extremely short sighted. Money is now a content that is separate from the medium that carries it. An example is a dollar note. We carry money in denomination. If I had 1 cent and want to give ½ a cent to John and the other half to Peter, I’m constrained in doing so. This is because the medium used constrains the content or the thing that I’m trying to assign. When we remove this constrain, it means that money in whatever form (so long as the mathematics behind the network is strong) can now be represented by smoke signals, emoticons and in the case of bitcoin, so long as it reaches a miner by pigeon or snail mail or text message and it gets included in the blockchain (whether on earth or in space) the tras*action would be valid.

In order to control these you’d have to ban all mediums of communication, not just the Internet. If governments can’t ban Bittorent, it’s unlikely to be successful even in the more marginal cases.

It is thus contended that the genie is out of the bottle in terms of decentralized consensus systems and that is simply a new reality that we have to live with.

What is critically important, in my view, is that the consequences and opportunities are understood before trying to define and regulate the extremities of bitcoin and similar technologies. Even if a fraction of the opportunities and disruptions I enumerated above comes to fruition, its result could be a significant shift in the way we and our kids do business and interact in an economy.




Some suggestions for an effective regulatory system

As stated above, I believe that Australia has the ability to take advantage of bitcoin by those in power being educated first and approaching items like consumer protection carefully. I think that the ***owing should be considered:

- like the HMRC, removing GST on the purchase of bitcoin itself should be considered, otherwise good innovative Australian Businesses with the potential of creating numerous jobs, will move overseas. We’re already seeing this happen with CoinJar, the Coinbase equivalent relocating its home to the UK. This in the long run could be the equivalent of the red flag act in England which set its automobile industry back decades by requiring a person with a red flag to walk in front of an automobile to warn people that there was a car on approaching. This may require a subtle change in regulations since the reading of the law currently does not allow bitcoin to be treated other than property by process of elimination (it is not a foreign currency nor legal tender).

Not doing so will simply miccionan that three types of exchange process will exist:

- Australian exchanges becoming brokers, which basically act as tras*fer agents on a peer to peer basis taking a cut to which GST is applied within or out of Australia of the brokering service itself;
- Australian setting up their own account overseas and tras*ferring Australian dollars to potentially insecure sites;
- Australian mining companies trading bitcoin outside of Australia.

In this process, not only does Australia prevent bitcoin exchanges to be based on domestic soil preventing the required jobs to grow around it, but diminishes the ability to protect consumers by squeezing them towards overseas exchanges that may have different consumer protection standards.

Further, as adoption grows, this position isn’t sustainable. However, by the time it is allowed to re-join the bitcoin economy, Australian companies that would otherwise have flourished will be at a disadvantage.



- Utilising the innovation in the blockchain to protect consumers and provide for a tras*parent financial system is possible. Therefore, we must be able to distinguish between companies that have custody of funds and frame the type of measures appropriate based on ascertainable level of their reserves, as ***ows:

Spoiler

All custodial companies should provide a product disclosure statement identifying the risks of bitcoin and other crypto currencies, but likewise it’s benefits;

i) That all custodial companies should be duly registered corporations and under the supervision of the laws applicable;

ii) That all custodial companies operate a full reserve system, unless the company in agreement with the customer also uses these for lending purposes. In any case, it is suggested that each customer shouldn’t be able to provide for lending or investment purposes more than a suitable proportion of their funds to protect against a collapse.

Type 1 Custodial Companies

Spoiler

These are companies that hold funds on behalf of people that have implemented a cryptographic proof of reserve, so that in real time anyone can see tras*action effected by those companies. This would curtail fraudulent activities and misappropriation. A suitable person on a regular basis should audit this proof of reserve. In addition to the cryptographic proof of reserves, companies having custody of funds should contribute to a multi-signature fund with a regulatory agent acting as counterparty to cover losses as an insurance fund would. This fund must also be tras*parent and subject to the proof of reserve requirements.

The above would create tras*parent financial systems where fraudulent activities can be easily detected and rectified. For this, consumer protection is provided via tras*parency and audit available to everyone, since all the flow of funds of the custodian is tracked;

No bond or other financially restrictive requirements should be levied on these companies since there is no reason for such levies;

The relevant KYC/AML may be required in this system as proposed below.

Type 2 Custodial Companies

Spoiler

Companies that do not use the security of the bitcoin blockchain and operate like deposit taking institutions should be compliant to the full extent of the laws as deposit taking institutions, unless the funds deposited are less than a certain amount, for example a micropayments network where funds are less than $500 per user.

Type 3 Custodial Companies

Spoiler

Money tras*mission businesses for receiving crypto currency and making it available to a third party in a different location in another currency. Current legislative regimes already apply to these tras*actions.

Non-Custodial Companies

Spoiler

Companies providing wallet services, exchanges whether online or offline for users to retain their coins themselves (no custody) should provide a product non-disclosure agreement addressing the state of their product. Hardware wallets should be built according to a standard of security acceptable to the industry. Someone putting funds on a defective device and then not being able to recover same would bear the risk.

Peer-to-Peer tras*fers and Dealings

These should be exempted in all cases from compliance regulation except, of course, where the underlying action of the peers are against existing laws, such as used for money laundering, drug purchases and the like.


- AML/KYC

With bitcoin technology AML/KYC shouldn’t be centralized anymore at various points other that at the point of issuance. A bit-identification can be provided to streamline all AML/KYC processes in real time. This may be held at the government level (introduction into the system) and third party companies can then trust verification of process.

Where such system is not in use, record keeping may be required to be held by the companies having custody of the funds under stringent digital security measures.


- Exchanges & derivatives markets

On a peer-to-peer basis, this should be allowed without restrictions provided the proper product disclosure statements are received.

On a custodial exchange, provided AML/KYC is complied with and the product disclosures are provided, the trades may be made via that third party to others. Market manipulation legislation must still apply and the companies should be made to comply with the cryptographic proof of reserves as stated above.

Other custodial exchanges should be regulated, as is the case under the current system.


Facilitation of Payment Of Taxes

While all taxes must be paid in AU dollars, it should be considered whether a conversion agency could provide a service directly to the ATO where payment of taxes are required. This could remove friction and facilitate further growth in the industry. A hedging service as per the amount earned as it is earned could also be used to hedge money before the direct payment of taxes.

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sociedadponzi dijo:

no hamijo, no confio en papa estado, por eso creo que patron oro MAS criptomonedas son neecsarias

pero criptomonedas sin patron oro son el dinero de los pobres

el tiempo dara razones

el patron oro en la moneda nacional lo quiero para bloquear el patron oro en la moneda de reserva que nos pongan los estados, la cual ni es democratica ni tenemos acceso a ella y con la cual desligarian el dinero de las castas del dinero de la plebe creando 2 sociedades

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