Bitcoin primer for policymakers

Instead of using an intermediary such as PayPal or submitting credit card information to a third party for verification—both of which often include transaction fees and other restrictions—Bitcoin allows individuals to pay each other directly for goods or services. The characteristics that make Bitcoin so innovative have also made it a target for regulators, who fear that the cryptocurrency will aid tax evasion, money laundering, and other crimes. While it is true that it can be used for nefarious purposes, the same can be said of cash. But, unlike cash, Bitcoin transactions are recorded in an online ledger. In this new primer published by the Mercatus Center at George Mason University, Jerry Brito and Andrea Castillo describe how the digital currency works and address many of the common misconceptions about it.

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Content:

• Regulators Need to Take It Easy on Bitcoin Startups
• Blockchain, FinTech & the Law Conference 2021 Speaker Bios
• Bitcoin: New “Money” or a New Threat?
• ISBN 13: 9781942951162
• OUR PEOPLE
• International Economics
• History of bitcoin
• Bitcoin : A Primer for Policymakers by Andrea M. Castillo and Jerry Brito (2016, Trade Paperback)

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Regulators Need to Take It Easy on Bitcoin Startups

This paper examines Bitcoin from a legal and regulatory perspective, answering several important questions. We begin by explaining what Bitcoin is, and why it matters. We describe problems with Bitcoin as a method of implementing a cryptocurrency.

This introduction to cryptocurrencies allows us eventually to ask the inevitable question: is it legal? What are the regulatory responses to the currency?

Can it be regulated? We make clear why virtual currencies are of interest, how self-regulation has failed, and what useful lessons can be learned.

Finally, we produce useful and semi-permanent findings into the usefulness of virtual currencies in general, blockchains as a means of mining currency, and the profundity of Bitcoin as compared with the development of block chain technologies. We conclude that though Bitcoin may be the equivalent of Second Life a decade later, so blockchains may be the equivalent of Web 2.

Introduction: The hype about Bitcoin as a cryptocurrency 2. Introduction to Bitcoin 3. Problems with the current implementation 4.

Legal and regulatory issues 5. Alternative uses of blockchain protocols 6. In , the developed world banking system almost collapsed and had to be rescued by sovereign governments via takeovers of bad banks with bad loans, and the printing of money to loan to major banks, whether rescued or surviving.

In the long recession of to , governments supported their economies with a variety of means. With close to zero inflation and interest rates, governments had to find ways to stimulate some economic growth. Others chose a more radical path. Iceland bankrupted its banks and massively devalued its currency [ 4 ].

It then adopted a series of policies that alienated the population in a severe recession. In late , the largest party by popular support is the Icelandic Pirate Party [ 5 ], which proposes far wider use of virtual currencies which would not rely on sovereign support. Rejection of the mass consumer economic model funded by debt is by no means universal or even a majority view. In January , an aspiring entrepreneur called Ross Ulbricht created an online marketplace called Silk Road [ 6 ].

This was not just another electronic commerce Web site, Silk Road was unique in almost all of its features. First, it was not available on the normal Web. Second, it offered a range of illegal merchandise not found on eBay or Amazon, mostly drugs, catering to discerning users by offering customer reviews and vendor ratings. Third, the Silk Road was able to operate because it used a new virtual currency called Bitcoin that allowed users to remain anonymous and conduct transactions with little fear of interference by law enforcement.

The currency has even transcended the financial pages to be featured in popular television shows like The Good Wife, Almost Human and The Simpsons. Even the famous Winklevoss twins, of Facebook fame, have become heavy investors. Academics have published many social science papers about Bitcoin since , with increasing regularity: six by the end of , 19 in and since the beginning of until August [ 9 ].

It is not merely an academic fashion: many books have been published in the period since we published a working paper on which this work is based [ 10 ], from the how-to-get-rich-quick variety [ 11 ] to the revolutionary [ 12 ] and its anti-thesis [ 13 ] to regulatory [ 14 ] and even academic [ 15 ]. And yet This paper will look at Bitcoin from a legal and regulatory perspective, answering several important questions. In the following section, we explain problems with Bitcoin as a method of implementing a cryptocurrency.

We are aware that the introductory section may seem extensive, and that including a very detailed description of currencies and Bitcoin may seem basic at this level. This is done on purpose, because in our experience whenever there is talk of Bitcoin and blockchains, non-technical audiences tend to miss the importance of some developments because they do not understand the basics. It is one of the goals of this article to be able to act as an easy introduction to cryptocurrencies.

We ask the inevitable question for lawyers: is it legal? We explain why virtual currencies are of interest, how self-regulation has failed, and what useful lessons can be learned. We conclude that though Bitcoin may be the equivalent of Second Life, so blockchains may be the equivalent of Web 2.

There is a voluminous literature on regulation of virtual economies [ 18 ], virtual communities [ 19 ] and a fast emerging literature on Bitcoin itself [ 20 ]. Virtual currencies are wildly successful in their respective in-game economies, they are used by millions to buy goods and services in limited virtual environments, and it has been proven that people will pay real cash to boost their online content [ 21 ].

Amazon has announced that it will be launching its own virtual currency for their Kindle app store, Amazon Coins. Amazon Coins will almost certainly be used exclusively within the Kindle environment to buy content for the Kindle, such as books, music, movies and TV shows.

Virtual communities can create social networks but also valuable goods and services for other users [ 22 ]. This value is generally exchangeable for real world currencies, as in the largest role-player community World of Warcraft with an economy measurable in the billions of U. Some virtual communities have gone further, developing virtual currencies that can be accepted in other communities. Bitcoin has taken a further step, as it is a virtual currency that claims to be tradable in exactly the same fashion as sovereign currencies, yet without a sovereign.

The value is created by users, and the operation is distributed using an open source client that can be installed on any computer or mobile device. In order to better understand Bitcoin, we will discuss currencies in general, and electronic currencies specifically. Payment systems in general, and currency specifically, depend on value. Value is simply the desirability that someone allocates to something, generally material items according to our needs, such as food and shelter, or according to their scarcity, such as gold; we also give value to energy in the shape of labour.

Finally, we value intangibles, such as experience, knowledge, creativity and know-how [ 26 ]. Currencies were invented as a means to transfer value. Initially, this was done through barter, and then people started allocating value to coins using metals that were considered inherently valuable for their scarcity. In the Renaissance in Europe [ 27 ], as coins became unwieldy, a more flexible system of value embedded in paper money was devised in order to make transactions easier, as carrying gold and silver bullion was insecure and expensive [ 28 ].

The first paper notes worked as a promise to give the bearer the equivalent value in metal to the one inscribed on the document.

Money therefore relied on the idea that the issuer had metal reserves that could be redeemed at any time, hence giving value to a given currency. The problem with this system, called the gold or silver standard [ 29 ], is that it placed a limit on the amount of money that could be exchanged at any given time by the issuer to that which could be allocated to metal reserves, therefore creating an upper limit to the size of the economy that was equal to the available metal expansion of empire was often motivated and financed in part by the desire to gain gold and silver reserves, as for the Spanish and Portuguese in South America and British in South Africa.

When a country needed to issue more money than it had in metal reserves, such as during time of war, this could result in devaluation, as people would not trust that there were reserves that supported the money.

This is what is known as fiat [ 30 ] money. Modern fiat currencies have value based on the economic strength of the issuer. In some libertarian and anarchist circles, it is said that fiat money does not have any inherent value, but this fails to recognise that neither does the gold standard [ 31 ].

Gold does not have intrinsic value; under the right circumstances gold could be valueless except as an industrial input. In fact, there is no such thing as inherent value; all value is dependent on circumstances. The value in fiat money arises from the law, the currency has the support of the government as sovereign, and therefore, it is supported by the economy of the territory where it is accepted.

Trusted governments support strongly valued currencies, though governments permitting hyperinflation can destroy that trust. Bitcoin was developed in as a concept by an anonymous developer going by the pseudonym of Satoshi Nakamoto, who posted a paper detailing the currency to a cryptography mailing list [ 32 ].

The paper details a decentralised system with no issuing authority that would serve as both a means of exchange but also as an anonymous and fully open log of all transactions known as the blockchain.

The paper gained some traction in cryptology circles, and it was coupled with the anonymous registration of the Bitcon. The currency continued to become more popular, but it was not until the creation of the Silk Road in that it achieved more mainstream notice [ 34 ].

The miners create a block after a period of time that is worth an ever-decreasing amount of bitcoins in order to ensure scarcity. Each bitcoin consists of million smaller units, with each unit called a satoshi. The operations performed to mine are precisely to authenticate other transactions, so the system both creates value and authenticates itself, an elegant and simple solution that is one of the appealing aspects of the currency.

Once created, each Bitcoin or million satoshis exists as a cryptographic address that is part of the block that gave birth to it. The blockchain is the public record of all transactions. Another way of looking at the currency is that Bitcoin is simply allocating value arbitrarily to a program that performs the mathematical equations necessary to support the creation of a bitcoin.

It is a self-referential and circular currency, and its only value is that which people give it, just like fiat money, but with faith placed in computer programming, not sovereign states. Why do people use Bitcoin and dedicate computing resources to mine them? One obvious element would be profit, but even before mining was profitable, there were thousands of people dedicating resources and efforts to the currency. Any visit to a Bitcoin discussion forum provides evidence that an important core of the BTC community consists of libertarian types of all stripes, from those who want to see the end of all fiat currencies, to slightly more moderate and pragmatic supporters [ 35 ].

However, most seem to accept that coexistence will be prevalent. A more nuanced picture of the user base is beginning to emerge. Liu conducted a survey of over a thousand cryptocurrency enthusiasts in various Web sites, and found that the average BTC user is a year-old libertarian male, motivated by curiosity, profit and politics [ 36 ]. Yelowitz and Wilson conducted a large study using Google Trends data from the United States, and found that computer science and illegal activity were some of the most prevalent topics linked with Bitcoin, with less correlation to political discourse and investment [ 37 ].

Bitcoin adoption may be motivated by a various number of features, including transparency, politics, anonymity and its use in illegal activities. Studying community dynamics is therefore made much more difficult than even such pseudonymous or avatar based communities as Habbo Hotel, World of Warcraft or Second Life. The ethical implications of studying such communities raise similar problems as those of Tor, Anonymous [ 38 ], Lulzsec and other anonymous hacker communities [ 39 ].

Journalistic accounts of BitCoin markets are largely subject to sensationalism, hype and inaccuracy, even more so than in the earlier hype cycle for Second Life, exacerbated by the first issue of anonymity.

Ideally, a decentralized currency should be politically neutral and strive to be efficient. An important part of the concept behind Bitcoin is that it has built-in scarcity because mining for coins becomes more difficult as time goes by and the market grows [ 41 ]. The algorithms that produce new BTC coins increase the amount of processing power necessary to create each new block, so producing new coins is more difficult.

This difficulty is built into the system to in order to keep the total amount of Bitcoins at a maximum of 21 million. By June , there were , blocks, making a total BTC of 6,,, and a difficulty of , In June , there were , blocks with a total 12,, BTC in existence, and a difficulty of over 10 billion.

At the time of writing June , there were , blocks and just over 14 million BTC had been mined, with a difficulty of over That means, making a new block is more than 47 billion times more difficult than it was for the initial block, and four times more difficult than it was exactly one year before. This difficulty will only go up, so an individual cannot hope to have the processing power to develop new coins, and this can only be done currently through pool mining CPU resources [ 43 ]. While this model is trying to replicate scarcity in the market, it acts as a punishing disadvantage for late adopters, and means that early adopters have market power if they hoarded coins.

Blockchain, FinTech & the Law Conference 2021 Speaker Bios

Foster, M. Gupta, and R. The Long-View: Edition? Bernstein Global Wealth Management , pp. DOI : Gonggrijp, M.

Bitcoin: New “Money” or a New Threat?

Skip to search form Skip to main content Skip to account menu You are currently offline. Some features of the site may not work correctly. Castillo Published 26 April Business Crypto-currencies promise to lower the cost of payments but are threatened by excessive regulation, say Jerry Brito and Andrea Castillo. Save to Library Save. Create Alert Alert. Share This Paper. Background Citations.

ISBN 13: 9781942951162

Try out PMC Labs and tell us what you think. Learn More. Bitcoin is designed as a peer-to-peer cash system. To work as a currency, it must be stable or be backed by a government. In this paper, we show that the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates US dollar against the euro and the yen.

OUR PEOPLE

Georgia Quinn is the general counsel of Anchorage, the premier digital asset custodian and financial services platform for institutions. Prior to that she was the general counsel of CoinList, a cryptocurrency exchange and platform that provides services to top token developers including compliant offering, distribution, and liquidity services. She is also the co-founder of iDisclose, a legal technology company focused on the disclosure and legal document needs of small business and startup entrepreneurs. Quinn began her practice in capital markets at Weil, Gotshal and Manges and later moved to Seyfarth Shaw before founding iDisclose. Marco is a recognized authority in the law and policy of blockchain technologies.

International Economics

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History of bitcoin

Whether or not you understand blockchain and other new financial technologies, they have massive implications for us all. An interview with R. Farrokhnia, the founding executive director of Advanced Projects and Applied Research in Fintech , a Columbia Business School initiative that undertakes leading-edge research and practice at the intersection of finance and technology. Farrokhnia teaches at the schools of business, engineering, and journalism.

Bitcoin : A Primer for Policymakers by Andrea M. Castillo and Jerry Brito (2016, Trade Paperback)

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In this new edition of their popular primer, Jerry Brito and Andrea Castillo provide fresh analysis of the latest policies and regulations that could either help or hinder the growth of the innovative cryptocurrency and blockchain industries. They describe how the Bitcoin protocol works and address many common misconceptions about it. This expanded edition contains new descriptions of the cutting-edge blockchain applications that are poised to disrupt law, trade, and even content distribution in the same way that Bitcoin disrupted finance through distributed ledger technology. The authors analyze current laws and regulations that may already cover digital currencies and blockchain applications and warn against preemptive regulatory restrictions that could stifle these new technologies before they have a chance to evolve. In addition, Brito and Castillo make several recommendations about how policymakers should treat Bitcoin and blockchain applications going forward.

Although the mechanics of blockchain are extremely complex, the basic idea is simple: to decentralize the storage of data so that such data cannot be owned, controlled or manipulated by a central actor. The recent surge in and subsequent collapse of the value of Bitcoin has brought renewed attention to the blockchain architecture that underpins cryptocurrencies. The technology could change the way that ownership, privacy, uncertainty and collaboration are conceived of in the digital world, disrupting sectors and practices as diverse as financial markets, content distribution, supply chain management, the dispersal of humanitarian aid and even voting in a general election. The talk covers:.