Public Policy Report – Bitcoin (BTC)

May 27, 2014 Public Policy Report on Bitcoin (BTC). As Amagi Metals correctly notes, FATCA is in a footnote, but requires more attention. “In essense, it’s a regulation that creates barriers to entry (international trade and money management). Regulations like this and other regulations issued by the IRS/FinCen/FBI/DOJ/etc just make the cost of doing business ‘their way’ higher and higher.”

Abstract

This paper is intended to serve as a public policy report on the subject of Bitcoin (BTC) and the respective cryptocurrency movement. Included are four sections: (1) Key Public Policy Actors and Interest Groups; (2) Lead-Up to Bitcoin and the Public Policy Cycle; (3) Politics Involved with Bitcoin, and the Wilson Politics Matrix; and (4) Implications for Business and Appropriate Strategy. Due to the large number of key actors involved with Bitcoin, only the Creator(s) of Bitcoin, Bitcoin Miners, Bitcoin Governance, and Banks/Financial Institutions are covered in-depth. A full comprehensive list of actors are noted in Addendum 1. Also included is a full timeline of Bitcoin in Addendum 2. 

Key Public Policy Actors and Interest Groups

CREATOR(S) OF BITCOIN

Bitcoin is the world’s first private, decentralized digital currency (or cryptocurrency), which was created by a hacker or, group of hackers, known by the pseudonym, Satoshi Nakamoto[1]. Largely inspired by the works of University of Washington graduate Wei Dai in 1998, the creator(s) of Bitcoin envisioned devising a protocol that was not only a medium of exchange, but a more efficient method of enforcing contracts. At the core of Nakamoto’s vision was creating a currency that has value outside of a central authority or clearing house, and one that derives value from indestructible cryptography and natural market supply/demand.

At the heart of any major movement are those who believe in the cause. In somewhat of a blind faith in the cryptic Satoshi Nakamoto, those who believe in the digital currency and payment system have created an alternative economy now worth billions of dollars (Jefferies, 2013).

BITCOIN MINERS

As a decentralized, virtual currency using cryptographic and peer-to-peer technology, a properly functioning oversight community is absolutely essential to the viability, security, and ultimate survival of Bitcoin (Davey, 2013). As Louis Basenese of Trefis Research notes, “the way Bitcoin was set up to work is for all of the accounting to be handled online (and publicly) with cryptography keys. Every time someone tries to spend a Bitcoin, a network of peer-to-peer computers – known as Bitcoin miners[2] – must verify the authenticity of each transaction” (2014). Herein lies the fate of Bitcoin both as a viable currency and technology; will miners perpetually be available and willing to handle such a task, essentially acting as financial and ethical stewards of Bitcoin’s security and legitimacy?

Under the current protocol, miners verify all Bitcoin transactions by “intensive computerized trial and error,” where they actually compete against one another to mathematically verify the authenticity of every transaction (Sinegal, 2014). In approximately 10 minutes on average[3], the winning miner receives an award for his/her efforts (currently about 25 bitcoins or roughly $10K-$25K based on 2014 prices), and the accurate corresponding transaction is added like a fingerprint to the existing blockchain, or Bitcoin public ledger. In what many see as a Nash equilibrium, the creator(s) of Bitcoin generated a protocol where all miners are incentivized yet inhibited by the rules of the system. In the very early stages of Bitcoin where accelerated currency expansion was essential to growth and adoption, miners had a relatively easy task – calculations were simple and could be handled by any standard desktop or laptop computer, competition was minimal, and rewards were very lucrative (Davey, 2013).

As Bitcoin enters its sixth year of existence, however, there are already signs that they “rules” of the game are changing. In what has become an incredibly “arduous and time-consuming process,” mining Bitcoins today can no longer be done by any old office computer (Plassaras, 2013). As the creator(s) of Bitcoin intended to prevent manipulated inflation and deflation, Bitcoin mining has ever increasing limitations, as the currency expands towards a set cap of only 21 million Bitcoins in circulation (expected to be reached around 2025). Due to soaring electricity costs associated with the necessary added computing power, only super specialized computers (the equivalent of 70,000 of Intel’s fastest chips) can handle solving the swelling difficulty of Bitcoin’s mining algorithms[4]. Add to this the fact that as every 210,000 Bitcoins are created (approximately every 4 years), the reward to the miner is cut in half (Plassaras, 2013).

As these rewards are shrinking, the costs and complexity to mining continues to increase, creating a dilemma for the mining community – continue competing against one another for diminishing returns, or pool resources together with other miners to share in the remaining “spoils” (Basenese, 2014). Because there are thousands of miners handling the verifications of transactions worldwide, the creator(s) of Bitcoin anticipated a perfectly decentralized checks-and-balances system that would make manipulation or fraudulent activities near impossible, and any potential attack on the system exponentially more difficult. However, if a collective of miners could somehow amass more than 50% control of Bitcoin’s computing power, “they’d have the ability to confirm all Bitcoin transactions on their own. And suddenly, the potential for manipulation and fraud would immediately exist” (Basenese, 2014).

A vast majority of those in the Bitcoin economy (including miners) contend that this “hijacking” could never occur, but in Bitcoin’s short history, this “doomsday scenario” has nearly happened twice over the last year alone, most recently in January 2014 when a mining collective known as GHash.IO reached a 45% threshold. With the power of hundreds of the world’s super computers now needed within the Bitcoin network, sources within the community acknowledge that “larger and more concentrated participants will gain power” (Sinegal, 2014). As Louis Basenese notes, “Double spending. False confirmations. Reversing transactions. They all become possible in the hands of a nefarious collective” (2014).

What might a possible nefarious collective or cartel look like? As Bitcoin researchers Joshua Kroll, Ian Davey, and Edward Felten of Princeton University note, such an adversary might have a massive short position in Bitcoin exchange markets, may be attacking the Bitcoin economy as a form of social protest, or perhaps most interestingly, from a policy and regulatory standpoint, “such an adversary might, for example, be a law enforcement or intelligence agency[5] which wishes to see Bitcoin holdings weakened” (2013).

BITCOIN GOVERNANCE

Surrounding the mining collective issue, comes many critical decisions for the Bitcoin economy. To ward off the possibility of a 51% mining cartel from carrying out what the Princeton authors reference James Bond in calling a “Goldfinger Attack,” it is highly likely that Bitcoin will have to fall under some form of internal governance, separate from any exogenous governmental or regulatory body. As the Princeton authors go on to say, “The success of Bitcoin relies on a consensus on the rules – on which transactions and blocks are considered valid and which are not. Contrary to claims that Bitcoin is ungovernable and relies on fixed rules laid down at its founding, the rules can be and have been changed by consensus” (Davey, 2013).

Currently leading the internal governance charge are primarily two groups – Bitcoin’s lead developers and an entity called the Bitcoin Foundation[6] (Davey, 2013). Natural leaders of the Bitcoin economy, the currency’s lead developers have tremendous respect within the community and tend to carry the most weight with opinions such as the mining dilemma/cartel threat detailed above, and other critically important issues like the possibility of changing the fixed money supply and/or the creation of taxes/fees on transactions. While the key developers and others are wrestling with decisions about Bitcoin rules, the Bitcoin Foundation is involved more with the public relations and promotional processes of the blossoming currency and technology. There are certainly overlaps between developers and the Foundation; however, it does appear that the Foundation is taking more of a public role in Bitcoin’s brand identity/awareness, and ultimately acting as the liaison to governmental and regulatory actors (Davey, 2013).

The Bitcoin Foundation notes that one of its main missions is to be a single source for which the Bitcoin community can speak through in order to improve Bitcoin’s awareness, reputation, and usefulness to people worldwide (Bitcoin Foundation, 2014). Currently made up of about 1,000 members, the non-profit industry group has acted as a mouthpiece to the public, as well as to governmental and regulatory bodies. As the Foundation’s general counsel, Patrick Murck notes that the “group plans to begin lobbying more actively to make sure policymakers better understand Bitcoin, which he said is best described as a ‘protocol for storing and transmitting value across the Internet’” (Schouten, 2013). With Bitcoin’s technology and community as its main focus, the Foundation notes its dedication to three pillars: standardization, protection, and promotion (Bitcoin Foundation, 2014). While these three pillars are worthwhile pursuits, there is no telling what direction Bitcoin may take and what role these pillars will eventually play.

BANKS/FINANCIAL INSTITUTIONS

As economist James Rickards notes, “Bitcoin is not just a currency, it is also an open-sourced technology that can facilitate cheap, secure, distributed processing for all kinds of property transfers including stocks, bonds, and land titles” (2014). Even if Bitcoin as a currency is banned or fades away eventually[7], the ability to facilitate transactions without a trusted third party is what makes Bitcoin a technological breakthrough and potential economic disruptor poised for further advancement.

It is with this technological power to transfer money and property cheaply, quickly, and with no middleman that has banks and other financial institutions[8] scrambling to protect the status quo and dominance within their respective industries. Many see the electronic card-based payment industry as a potential victim of Bitcoin. The function of the current payment network is to ensure that a trusted intermediary between two parties (i.e. merchant and customer) facilitates authorization, clearing, settlement, fraud protection, and value storage (through the accompanying banking system) (Sinegal, 2014). Typically facing 1.5%-3.0% transaction fees (sometimes as high as 10%) for these “functions,” many are beginning to take a serious look at Bitcoin’s potential to cut those costs drastically[9] (Khwaja, 2013).

Other firms within the money transfer industry specifically are trying to cling to their $514 billion remittance coffers (Khwaja, 2013). Representing about 20% of total market share, companies like Western Union, MoneyGram, and Euronet are keeping a close eye on Bitcoin’s ability to expose the susceptibility of the entire payment industry to disruptive risks. Despite the sheer size, scale, and scope of these “incumbents,” Bitcoin’s continued acceptance and traction can “accelerate pricing pressure in the payment services industry and also threaten the plans of some payment companies, which intend to monetize consumer transaction data” (Khwaja, 2013).

Lead-Up to Bitcoin and the Public Policy Cycle

Bitcoin clearly demonstrates a strong demand for an “electronic equivalent of cash,” but the technology is “hardly the first attempt at a digital currency that operates outside of state boundaries” (Pagliery, 2013). Prior to Bitcoin, there have been approximately 30 years of digital currency efforts[10] (Davey, 2013). Most recently in Africa, for example, millions use what’s known as the M-PESA system to bypass third parties and banks to make payments by use of mobile texting (Pagliery, 2013).

While Bitcoin may prove to be a major success, the history of electronic currencies and payment systems suggests that Bitcoin and others like it have a tough road ahead. As Jim Sinegal notes, “During the dot-com boom, companies like DigiCash flourished, but eventually disappeared as customers found little need for additional security and anonymity, and became comfortable entering their card numbers on the web” (2014). Bitcoin, however, is the first of its kind to legitimately solve the so-called “double-spending” problem, which is intimately tied to counterfeiting (Parker, 2014). Due to the decentralized public ledger of debits and credits via the Bitcoin blockchain, not only are financial third-party intermediaries removed from the equation, but the ability to double-spend or counterfeit is severely hampered (Parker, 2014).

Despite the significant historical buildup and its solution-based technological feats, Bitcoin’s rise towards mainstream attention and into the public policy spotlight is heavily linked to the fallout from the recent global financial crisis and economic depression. As Ali Farid Khwaja of Berenberg Bank notes, “In some regions like Argentina, Cyprus, Greece, and Spain, people have been looking at Bitcoin as an alternative to the government-backed currency. This suggests that, like gold, Bitcoin might emerge as an alternative store of value in economies where the currency loses its value due to economic crises, hyperinflation or excessive printing of money (2013).

At the moment, there is no pending legislation in regards to Bitcoin, which indicates that Bitcoin and the cryptocurrency movement are in a public policy stage somewhere between the catalyst of an event/crisis and actual law-making. But certainly, the issue is currently drawing a lot of attention by policy developers and regulators. On the Bitcoin side, interest and industry groups are quickly forming around this growing issue[11]. On the governmental side, a two-day Senate hearing on Bitcoin in November 2013 provides a good example of no real definitive action taking place, but more of a “realization on the Hill that Bitcoin is now mainstream” (Wile, 2014).

Nevertheless, with a potential technology and currency disruptor like Bitcoin, it is no wonder that governments, regulatory bodies, law enforcement agencies and the like are scratching their heads as they employ a Strengths/Weaknesses/Opportunities/Threats (SWOT) analysis of Bitcoin and its budding economy. The U.S. government as well as other foreign governments (i.e. China[12], Germany[13], Denmark[14], South Korea, Thailand[15], U.K.[16]) are quickly moving the subject of Bitcoin up the ranks within their respective public policy cycles. In the U.S., Bitcoin is already making waves throughout the Treasury Department, Secret Service, DOJ, DEA, FBI, SEC, and IRS.

Despite some of the obvious immediate benefits (i.e. efficiency) of Bitcoin from a technology and commerce standpoint in the domestic/global economy, David Woo notes, “The government is unlikely to want to promote a new currency that could be viewed as one that could help facilitate ‘black market’ activities, or, tax evasion” (2013). The FBI has already issued a report on the use of Bitcoin for criminal activity (Davey, 2013). Meanwhile, the Senate Homeland Security and Governmental Affairs Committee issued a report in February 2014 stating, “There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation” (Manchin, 2014).

Right now, it is clear that the federal government is wasting little time going after and prosecuting those using cryptocurrencies for criminal purposes, utilizing existing narcotics, money laundering, and wire fraud statutes (McMillan, 2014). In May 2013, “the U.S. federal government brought an indictment against the operators of Liberty Reserve, a popular virtual currency, charging the operators with money laundering and operating an unlicensed money-transmitting business” (Marian, 2013). Making national headlines in April 2014, Bitcoin Foundation Vice Chairman Charlie Shrem was “indicted by a federal grand jury in New York on charges of funneling cash to the illicit online marketplace Silk Road” (Ax, 2014).

Within the securities industry, Bart Chilton, a former commissioner at the Commodity Futures Trading Commission (CFTC), has hinted that top financial regulators are seriously examining Bitcoin and whether it might fall “under their regulatory remit[17]” (Maglanoc, 2013). In March of 2013, the U.S. Treasury Department[18] noted that “all firms that exchange or transfer the virtual currency will be considered ‘money services businesses’ (MSBs) meaning they fall under government scrutiny in providing information to authorities as well as introducing/complying with money laundering statutes as per Bank Secrecy Act regulations[19] (Maglanoc, 2013).

Even if the government and financial regulators come to accept Bitcoin as money[20], a disruptive new technology, and competitive currency threat to the almighty dollar, there is little to no chance of tolerance when it comes to taxation (Randall, 2013). With a “monopoly as legal tender for the payment of U.S. taxes,” John Maynard Keynes and many other economists note that “it is the ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value” (Rickards, 2014).

In May 2013, the Government Accountability Office (GAO) “made public a report exploring the potential tax-compliance risks associated with virtual currencies and economies” (Marian, 2013). As Omri Marian of the Michigan Law Review points out, the growing popularity of Bitcoin and other cryptocurrencies comes at an incredibly unique time as “governments around the world have, for the first time, begun to cooperate with their foreign counterparts in their battle against offshore tax evasion” (2013). Without the ability to target cooperating financial intermediaries, however, Marian notes that Bitcoin’s lack of dependence on financial institutions may prove to be a major blow to the “governments’ recent successes[21] in addressing offshore tax evasion[22]” (2013).

Despite the obvious difficulty that lies ahead, the IRS is beginning to take action. Recently, the IRS stated that, “the increasing use and misuse of cyber-based currency and payment systems to anonymously transfer illicit funds as well as hide unreported income from the IRS is a threat [the IRS] is vigorously responding to” (Marian, 2013). Sparing little time already, the IRS in March 2014 issued its first substantive ruling on Bitcoin, treating the virtual currency as property (not as a currency) for tax purposes, applying rules it uses to govern stocks and barter transactions (IRS, 2014). As economist Karl Denninger notes, this means that every Bitcoin transaction has a cost basis and profit/loss (2014).

With the additional possible application of the wash sale rule[23], the IRS is also mandating 1099 reporting with individual payment amounts in Bitcoin worth more than $600 (Denninger, 2014). As Joshua Blank, a tax law professor at New York University, noted, “The danger is the creation of an electronic black market, similar to the cash economy…that’s what the IRS wants to avoid” (Dougherty, 2014). Although the IRS noted it may offer some relief to those who executed transactions before its ruling, it became effective immediately and covers all past/future transactions and tax returns (Dougherty, 2014).

Politics involved with Bitcoin, and the Wilson politics Matrix

Right now, the young Bitcoin economy represents many different things. If developers and an internal quasi-governmental entity like the Bitcoin Foundation are the informal leaders of the Bitcoin economy, what is their mission, and where would they like to see Bitcoin go in the future? Because Bitcoin is open-sourced technology, there are already countless copy-cats in existence with small variations to the Bitcoin code (i.e. Litecoin, Namecoin, Terracoin, etc.). Many see Bitcoin and its counterparts as “today’s embodiment of the idea that we now have the technology to democratize money” (Jefferies, 2013).

On one hand, Bitcoin represents a cataclysmic shift from the concentrated benefits/dispersed costs hegemony (i.e. Wilson Matrix’s Client Politics) of the traditional banking system and its accompanying fees, to an individually-centric, dispersed benefits/dispersed costs (i.e. Majoritarian Politics) world in which commerce can be done secretly, anonymously, and affordably (Pagliery, 2013). On the other hand, Bitcoin has already become a safe-haven for wealth storage within an underground economy, where “Bitcoin may help users avoid high taxes, capital controls, and confiscation” (Woo, 2013).

While it is clear that several regulatory bodies and law enforcement agencies have begun tackling many of the issues mentioned above, the politics surrounding Bitcoin have only just begun. Two U.S. Senators have sent warning letters about Bitcoin to the Department of Justice (DOJ) and Drug Enforcement Administration (DEA) (Davey, 2013). Senators like Chuck Schumer (D-NY) and Joe Manchin (D-W.Va.) have expressed caution and their desire to seek a ban on Bitcoin, while others like Rep. Steve Stockman (R-Texas) and Jim Fulner (Libertarian running for Senate in 2014) of Michigan are now accepting donations in Bitcoin (Friedman, 2013). In fact, in their own SWOT analysis, many politicians see an opportunity in front of them to utilize Bitcoin. In somewhat of a stunning unanimous decision on May 8, 2014, the Federal Election Commission (FEC) approved Bitcoin for usage in political donations[24], further legitimizing the currency (Schouten, 2014). Turning the issue of campaign finance on its head, Dan Backer, a campaign finance lawyer, recently launched Bit-PAC, “the first ever Bitcoin political action committee designed to support candidates who will promote the digital currency’s acceptance” (Wile, 2014).

While politicians are likely to make headlines with their respective stances and comments on Bitcoin and cryptocurrencies, the real political power struggle will undoubtedly be debated behind the scenes by a largely unelected group of actors who control the global monetary system. Many argue that if Bitcoin is deemed to be a true currency[25], then it should fall under the fiscal supervision and regulatory prowess of central banks like the Federal Reserve (Malloy, 2014). Oddly enough, the Federal Reserve has been fairly coy on the Bitcoin subject thus far. In a memo to the US Senate Committee on Homeland Security and Government Affairs, former Chairman of the Federal Reserve, Ben Bernanke acknowledged that there are “areas where the virtual currency may hold long-term promise” (Khwaja, 2013). Central bankers in Germany and Canada have also expressed some promise with the virtual currency (Friedman, 2013). Others, like Former Federal Reserve Chairman Alan Greenspan, have been more critical, suggesting that Bitcoin is a bubble and has no intrinsic value. Whether Bitcoin is here to stay or not, numerous Fed officials have noted there is no immediate plan to regulate cryptocurrencies (Kearns, 2013). Bernanke even noted that, “Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market” (Kearns, 2013).

While the Fed appears to be punting on the Bitcoin issue, it may because they realize that the cryptocurrency movement mixed with the current global economic trajectory suggests that Bitcoin may be a matter better suited for an organization dedicated to the international foreign currency exchange, like the International Monetary Fund (IMF). As has been seen in countries like Cyprus and Spain, which catapulted Bitcoin into the global spotlight, “government backed currencies are prone to a number of weaknesses, particularly susceptibility to inflation and political corruption” (Plassaras, 2013). Bitcoin is demonstrating an ability to threaten government’s monopoly on the supply of money, and as a result, “poses a serious threat to the economic stability of the foreign currency exchange if it continues to grow in both value and usage” (Plassaras, 2013).

As Nicholas Plassaras notes, one of the biggest problems the IMF was created to tackle is unstable exchange rates between various currencies, and Bitcoin has the “potential to create severe and possibly irreversible fluctuations in the foreign currency exchange” (2013). “Specifically, Bitcoin poses a liability to the IMF and its member nations in the event it is used in what is referred to as a ‘speculative attack’ on another currency” (2013). Essentially, the IMF protects its member nation’s currencies by having sufficient currency reserves from each constituent in the case of a currency being shorted or attacked. With an appropriate reserve ready to be deployed into the market, the IMF can often protect currency collapses and subsequent forex volatility. If a nefarious Bitcoin collective wanted to attack a nation state’s currency, however, the IMF (and other central banks) has zero supply of Bitcoins, and is thus “severely restricted in what it can do to assist member nations facing speculative attacks by Bitcoin users” (Plassaras, 2013). Interestingly enough for the future viability of Bitcoin, the IMF may have no choice but to eventually grant Bitcoin and other virtual currencies “quasi-membership” status, as a means to obtain the necessary supply of Bitcoins to prevent any major disruptions to the forex markets. As Plassaras goes on to say, “Direct interaction with the IMF would, in turn, bolster confidence in Bitcoin as a globally accessible digital currency and would increase the potential market for Bitcoins” (2013).

Implications for Business and Appropriate Strategy

Businesses thinking about adopting Bitcoin into their respective business model must first consider state and federal law implications. Many argue that at the state level specifically, corporate law appears to be fairly restrictive as to Bitcoin’s feasibility. As Keith Paul Bishop notes in California, “General Corporation Law doesn’t define the word ‘money’ but it does include a prohibition[26] on its issuance”. Professor Stephen Bainbridge at UCLA notes that a similar proscription exists in Delaware (2013). Even on a federal level, there are several laws in existence that may prove to be Bitcoin’s demise. Based on a report from the Congressional Research Service, for example, an antiquated federal law still in effect today could pose a threat to Bitcoin and its users. The 152-year old Stamp Payments Act of 1862 which “forbids any American from issuing a check, note, or token that’s worth less than $1” could potentially thwart Bitcoin’s use as the digital currency can easily be broken down into fractions worth much less than $1. Others believe that as criminal prosecutions mount in the future, federal enforcement agencies will have made a big enough dent in anonymity and illegal commerce aspects of Bitcoin, that the virtual currency will go the way of Napster, since a regulated Bitcoin protocol will be nothing more than an equal competitor to transaction payment systems like PayPal (Cunningham, 2013).

Businesses must also consider the fact that Bitcoin is not a be-all, end-all comprehensive business solution. The fact that the Bitcoin protocol resides outside of the traditional banking system is clearly a huge part of its appeal to users, however, for those businesses looking to take out a loan or draw a line of credit, for example, banks are still the only game in town. As Jim Sinegal of Morningstar Research notes though, “A Bitcoin lender could arise, but for the foreseeable future Bitcoin is a substitute for cash or debit only” (2014).

Despite the risks involved, Bitcoin’s ability to lower costs and reduce security risks provides several increased benefits to merchants. Since businesses are concerned with making money and avoiding costs. It is clear that Bitcoin provides a clear path towards significant cost reduction. Under the current central bank currency system, the estimated costs of processing and accounting of money, storage, transport, and security are at $60 billion per year, whereas the costs of an electronic payment system like Bitcoin would be at least half (Plassaras, 2013). Businesses that plan on utilizing these benefits must be also be aware that, at the consumer level, benefits pale in comparison (Sinegal, 2014). With the bulk of current Bitcoin consumer volume dedicated to mere speculation, businesses that adopt Bitcoin will likely have to incentivize customers to transact with Bitcoin using some form of additional rewards systems (Friedman, 2013).

Despite all of the uncertainty surrounding cryptocurrencies, Bitcoin’s current trajectory suggests that the government will allow Bitcoin-related activities to continue as long as federal laws are complied with. With that being said, the Bitcoin economy is currently analogous to the Wild West, where businesses and other participants must embrace a position of caveat emptor or buyer beware. Because Bitcoin and other digital currencies lack regulation and public policy oversight, businesses in particular must be prepared to endure credit, liquidity, fraud, and other operational risks (Plassaras, 2013).

ADDENDUM 1: KEY POLICY ACTORS/INTEREST GROUPS

Banks

Bitcoin Foundation

Businesses

CFTC

Committee for the Establishment of the Digital Asset Transfer Authority

Courts

Cryptocurrency Legal Advocacy Group (CLAG)

Cyherpunks/Hackers

DEA

Department of Justice

European Central Bank

Exchanges

FBI

Federal Election Commission

Federal Reserve

Financial Crimes Enforcement Network

Financial Institutions

Foreign Governments

IMF

IRS

Key Developers

Miners

Money Transfer Industry

Nakamoto, Satoshi

Payment Processors

Politicians and PAC’s

SEC

SEC

Secret Service

Treasury Department

U.S. Government

 

ADDENDUM 2: BITCOIN (BTC) TIMELINE

 

1982 Using cryptography, David Chaum was the first to implement the idea of electronic cash.

 

1998 The works of University of Washington graduate Wei Dai inspire the foundations of the BTC protocol.

 

2007 Satoshi Nakamoto begins working on Bitcoin (BTC) concept. While he is on record as living in Japan, it is speculated that Nakamoto may be a collective pseudonym for more than one person.

 

Oct. 2008 Nakamoto publishes BTC whitepaper, describing the BTC currency and how it solves the problem of double spending so as to prevent the currency from being copied.

 

Jan. 2009 First block (“Genesis” block) of BTCs is mined.

 

Jan. 2009 First BTC transaction executed.

 

Oct. 2009 BTC exchange rate is established (US$1 = 1,309.03 BTC) using an equation that includes the cost of electricity to run a computer that generates BTCs.

 

July 2010 MtGox exchange is established.

 

Aug. 2010 Vulnerability in the BTC system that causes BTCs to be improperly verified is discovered and exploited, resulting in the generation of 184 billion BTCs.

 

Oct. 2010 The Financial Action Task Force (inter-governmental group that develops and promotes policies to prevent money laundering and funding of terrorists), publishes Money Laundering Using New Payment Methods, to warn about the use of digital currencies to finance terrorist groups.

 

2011 Silk Road, a BTC marketplace, launches an illicit marketplace for drug deals, called the eBay for drugs.

 

2012 Cryptocurrency Legal Advocacy Group (CLAG) stresses the importance for taxpayers to determine whether taxes are due on a Bitcoin-related transaction.

 

Feb. 2011 BTC reaches parity with US dollar.

 

June 2011 BTC reaches $10 on MtGox exchange.

 

May 2012 FBI report on BTC leaked.

 

Sept. 2012 The Bitcoin Foundation is formed, implementing a core development team for the protocol and a body to oversee the digital currency.

 

Feb. 2013 BTC goes to $30USD.

 

Mar. 2013 The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury publishes its Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, which defines its position on virtual currencies.

 

Apr. 2013 BTC surpasses $100

 

May 2013 The United States Department of Homeland Security seizes over US$2.9 million from a Dwolla account that belonged to a subsidiary of MtGox because it allegedly “failed to register as a ‘money transmitting business’ in accordance with 18 U.S. Code 1960.”

 

July 2013 Winklevoss Bitcoin Trust is filed with the U.S. Securities Exchange Commission (SEC) by Tyler and Cameron Winkelvoss. According to the twins that are known for their legal dispute with Facebook founder Mark Zuckerberg, the Exchange Traded Fund (ETF) is “designed for investors seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk,” amidst mixed reactions.

 

July 2013 Committee for the Establishment of the Digital Asset Transfer Authority forms.

 

Aug. 2013 BTC ruled currency by Texas judge.

 

Aug. 2013 22 Bitcoin companies subpoenaed – The New York State Department of Financial Services (NYSDFS) issues a subpoena to 22 companies and investors that are involved with digital currencies to investigate the possibility that BTCs are being used for illicit activities and determine the necessity of regulatory action. The NYSDFS also wanted to ensure that funds are “safe and sound” after having received consumer complaints.

 

Aug. 2013 BTC ruled private money in Germany.

 

Oct. 2013 FBI shuts down infamous online drug marketplace Silk Road, seizing 3.6 million dollars worth of BTCs.

 

Nov. 2013 Senate hearing titled Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies discusses legitimacy and challenges of virtual currencies.

 

Nov. 2013 BTC goes above $1000, surging to a record of US$1242 after Senate hearings.

 

Dec. 2013 China’s central bank bars financial institutions from handling BTC transactions, causing a price drop of more than 20 percent to below $1,000, only to crash to nearly US$500 after a further ban is imposed on accepting deposits in yuan.

 

Jan. 2014 A mining collective known as GHash.IO reached a 45% threshold of BTC computing power.

 

Jan. 2014 Charlie Shrem, CEO of BitInstant is arrested over allegations of money laundering in connection with Silk Road. He is arrested at JFK airport for charges filed in a Manhattan federal court.

 

Feb. 2014 Senate Homeland Security and Governmental Affairs Committee issue warning report on BTC.

 

May 2014 Federal Election Commission (FEC) unanimously approves BTC for usage in political donations.

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[1] Positioned mostly in the northern pole of the Executive’s Compass (Liberty).

[2] Positioned mostly in the northern pole of the Executive’s Compass (Liberty).

[3] Bank of America Merrill Lynch analyst David Woo notes, however, that 50 minutes is frequently needed between unknown parties to protect against double-spending (2013).

[4] Reykjanesbaer, Iceland is now home to one of Bitcoin’s largest mining operations due to abundance of cold air to cool down computing machines and the cheap electricity from hydropower (Krugman, 2013).

[5] Due to its finite and low market-cap nature, the government could theoretically use its own massive computing power to own all of the virtual currency as a means to eliminate Bitcoin (Marian, 2013).

[6] Both are positioned near the Liberty pole on the Executive Compass, however, the Foundation naturally leans more towards Efficiency (tilt towards Free-Markets).

[7] John Normand, JPMorgan’s head of global FX strategy, notes that “currencies don’t become widely used spontaneously or through a grassroots campaign…they become widely used nationally because a government declares them legal tender, and they become widely used internationally because they are legal tender in a significant economic area with large, unrestricted capital markets” (Rizzo, 2014).

[8] Efficiency pole on the Executive Compass, however, with a corporatism tilt.

[9] Merchant service firms like BitPay and Coinbase bring transaction fees down to 0.01%-1.00% (Sinegal, 2014).

[10] Using cryptography in 1982, David Chaum was the first to implement the idea of electronic cash (Davey, 2013).

[11] In 2012, the Cryptocurrency Legal Advocacy Group (CLAG) stressed the importance for taxpayers to determine whether taxes are due on a Bitcoin-related transaction, while the Committee for the Establishment of the Digital Asset Transfer Authority formed in July 2013.

[12] China banned banks from using Bitcoin as a currency (Malloy, 2014).

[13] In August 2013, “Bitcoin was officially recognized as a form of private money in Germany,” with the likelihood of being taxed as capital assets (Marian, 2013)

[14] Danmarks Nationalbank (Danish central bank) issued a report warning that Bitcoin is not a currency, likening it to “glass beads” (Christensen, 2014).

[15] Thailand banned Bitcoin, while South Korea won’t recognize Bitcoin as a “legitimate currency” (Manchin, 2014).

[16] U.K.’s HM Revenue & Customs announced it would no longer levy value-added taxes (VAT) on Bitcoin transactions, but corporation and other taxes would still apply (Plunkett, 2014).

[17] Under Dodd-Frank financial reform, the CFTC has sweeping authority over retail Forex dealers, however, Bitcoin will only likely fall under jurisdiction if derivative/futures contacts are formed around the virtual currency (Maglanoc, 2013).

[18] Report issued by Treasury Department’s Financial Crimes Enforcement Network (FinCEN), specifically targeting “miners” who must register as MSBs and abide by the legal requirements of being a money transmitter with the U.S. (Wikipedia, 2014).

[19] Bitcoin Foundation’s Patrick Murck criticized FinCEN’s report as an “overreach” and claimed that FinCEN “cannot rely on this guidance in any enforcement action” (Wikipedia, 2014).

[20] Federal Judge Amos Mazzant of the Eastern District of Texas of the Fifth Circuit ruled that Bitcoin is “indeed money,” and noted that Bitcoins as a form of currency fall under the court’s jurisdiction (Wikipedia, 2014).

[21] Much of the governments’ recent success has come on the heels of passing the Foreign Accounts Tax Compliance Act (“FATCA”) in 2010. “Under FATCA, foreign financial institutions (“FFIs”) must identify their U.S. account holders to the IRS” – failing to do so results in a 30% gross tax on payments received from U.S. sources (Marian, 2013).

[22] Bitcoin is well suited to support tax evasion due to two important characteristics of traditional tax havens: lack of jurisdiction, and anonymity (Marian, 2013).

[23] IRS rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale (Investopedia, 2014).

[24] FEC imposed several conditions: (1) no anonymous Bitcoin contributions; (2) campaign treasurers must scrutinize donations for ‘evidence of illegality’ (Schouten, 2014).

[25] If Bitcoin is ultimately defined as a currency, treatment under the U.S. securities regulation framework “would be problematic, since ‘currency’ is excluded from the statutory definition of ‘security’ in section 3(a)(10) of the Securities Exchange Act” (Malloy, 2014).

[26] “Section 107 prohibits any corporation, flexible purpose corporation, association or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States…[tracing] its roots to Article XII, Section 5 of the 1870 California Constitution” (Bainbridge, 2013).

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