How do practitioners in 2010 view BTC financial regulation ten years later?

Author: Bitcoin podcast Block Digest co-founder Shinobi; Translator: Wuzhu, Golden Finance

This article was written by Shinobi ten years ago, discussing what Bitcoin will be like in 2020.

The first article in this series can be viewed by clicking "How do practitioners in 2010 view the BTC ecosystem ten years later?"

The second article can be viewed by clicking "How do practitioners in 2010 view the BTC construction path ten years later?"

The third article can be viewed by clicking "How do practitioners in 2010 view BTC financial transactions ten years later?" 》

Take a look back at the history of Bitcoin. I guarantee that a few events will come to your mind first, like milestones. If you keep thinking about it, your brain will probably start filling in those milestones as anchors from there.

Don’t take these as hard predictions, ignore the hyperbole I can’t stop myself from adding here and there, and note that there are no dates on these. I’m going to make a list of “watershed moments” or macro shifts that I think are almost certain to happen or begin in the next decade.

Visiting the U.S. Supreme Court

Bitcoin creates an inherent contradiction within the current regulatory and legal framework, at least in the U.S. and anywhere the U.S. effectively calls the shots, and this involves two major themes of how Bitcoin itself works and regulation and law.

• KYC/AML Laws:These laws exist to ensure that financial institutions know the individuals they are dealing with in order to prevent criminal activity, money laundering, or terrorist financing through the use of their services. This requires extremely intrusive information collection, tracking, and communication of said information between different institutions. It requires throwing privacy out the window.

• Financial Privacy Laws:The reason countries like the United States, which have a Fourth Amendment to their constitution, have things like KYC/AML is because of the Right to Financial Privacy Act. There are laws limiting the circumstances and conditions under which the government can obtain a citizen’s financial records. These laws were implemented following a Supreme Court case challenging KYC/AML laws (ironically called the Bank Secrecy Act), which ruled that financial records belong to the institution, not the customer.

See the contradiction? All of this is based on the idea that records of financial activity are kept privately in privileged silos, unavailable to the public. Government access is not the same as public access. That’s not how Bitcoin works. All information on the blockchain is clearly visible for everyone to see. So while financial institutions must enforce KYC/AML laws and identify their customers, are they not also required to protect the privacy of their customers’ financial activities unless there is a legal order to disclose that information?

We are at a point where privacy tools are starting to really come into play in the Bitcoin ecosystem, and we are already starting to see some behavior where Bitcoin exchanges are flagging this behavior as “bad behavior,” resulting in accounts being reviewed (and potentially closed and/or seized at a later stage) in response to the use of privacy tools. Now, I don’t see the United States repealing all of the country’s KYC/AML laws in the near future, but I do see a very strong argument against exchanges and institutions reacting this way to their customers using privacy tools.

The argument is simple: they have a right to their privacy from the public at large. The system does not keep all records private by default, only selectively disclosed to authorities. Everything is public and publicly verified by architectural requirements. So if I had a constitutional right to privacy under the old model, do I not have one under the new model?

Now let me say that again: this is definitely not a strong enough basis to overturn all KYC/AML and ID requirements. But I do think it is a strong enough basis to potentially solidify the Supreme Court’s ruling that businesses may not censor or target customers simply because they use privacy protection tools in activities unrelated to those businesses. If things continue to go the way they seem to be going, I think such legal challenges to such practices are inevitable. If I’m right, what will the outcome be? I guess we’ll find out if I’m right.

The Inevitable Evolution of the Mining Landscape

Besides price, mining is probably the easiest thing to show the average person how far Bitcoin has come in the last decade. Ten years later, from consumer-grade desktops to data centers. This change will continue to happen quickly, and part of the next shift is already underway. Vertical integration. Things go from desktop CPUs to GPUs to specialized ASICs. But those ASICs are still something that is easily accessible to retail consumers, small group buyers, and small professional operators. It’s still easy to get efficient and up-to-date hardware at different scales (although the price depends on your scale).

This will change, and signs are already starting to show. As companies start to prepare, mining will become increasingly unprofitable for retail and small market (ignoring professional hosting arrangements) participants. This market is still very volatile, and miners from producers to equipment operators have very large capital investments that can be very risky during market downturns. Things tend to go crazy when the market moves upward, and things can get very bad for the unprepared when the market moves downward. This time, things are going to get very serious in terms of minimizing and managing risk.

Bitmain's financials during their Hong Kong IPO show how they made huge profits, then turned around and continued to take huge risks that just happened to work out in a bull market. This hit them hard, and all of the manufacturers who attempted to IPO did so to varying degrees due to overall market volatility, and the Hong Kong Exchange rejected all of them based on this overall pattern. The overall market these companies competed in was deemed too risky to be suitable for listing directly exposed businesses on the Hong Kong Exchange. This cut off the capital they needed to continue to expand as Bitcoin grew by orders of magnitude. This was very bad.

Bitmain’s response in terms of adaptation (ignoring the recent “coup” attempt from within) has been to take action to restructure the business to accommodate this painful lesson. They have numerous self-operated mining farms in China that either operate their own mining equipment or host other people’s mining machines. These types of operations have expanded internationally, including the states of Texas and Washington in the United States and the province of Quebec in Canada. The strategic value of operating these mining farms is in creating predictable electricity costs and having the dual option of deploying their own hardware for mining or selling capacity to other miners. Now, if you combine these…they have positioned themselves as 1) making and selling the metaphorical shovel, 2) mining with it themselves, and 3) selling the shovel to others and trying to sell them a place to mine. This is exactly what Bitmain is doing with the new service.

Wu has also established new financial services and tools that Bitmain offers to help customers hedge some of their risk by taking on the risk themselves, as well as other more nuanced arrangements that benefit Bitmain. It’s unclear if this particular strategy will last given Bitmain’s internal struggles, but it demonstrates an acknowledgement of and response to the risks inherent in this level of market volatility. This is absolutely necessary for the long-term survival of this sector of the ecosystem.

This is where the future is headed, and there is a huge momentum behind it. Players in different roles in the mining industry will slowly begin to try to scale up and handle every layer they can handle in-house: Production | Research & Design | Hosting | Operations | Power Procurement | Financial Risk Hedging | Lobbying. As economies of scale continue to put pressure on players in the mining industry to streamline and streamline to the leanest and most efficient level, they will begin to try to integrate as much of the entire stack in-house as possible to be able to control and hedge financial risk.

This economy of scale effect will have a second order effect that plays out in a Darwinian fashion across all miners. Governments will begin to creep into the base layer and begin to realize that they can exert influence.

We need to be very, very aware of this dynamic. Unless you find Harry Potter’s wand and a magic spell that can bring down all governments in the world in an instant, they are out there and we have to deal with them. There are only two real strategies to fix this, and one of them is not viable.

The unviable strategy is to try to move stuff completely off the grid and onto the black market. That is impossible. You are talking about hidden data centers with cumulative network energy consumption equivalent to the size of an entire country. There is no choice, and if you want to try to fix this with a POW change fork, good luck to you. You know where the door is.

The viable strategy is to simultaneously: 1) push for non-restrictive and non-draconian policies at the most local level where these businesses are located (and where you live as a Bitcoiner), if you can; and 2) push for policies that localize sovereignty and power as much as possible at the non-local level. If Bitcoin holders and other relevant groups do not remain vigilant and actively participate in this space, then what initially are local pegs will lead to state pegs, and in turn to federal pegs from your country's government on the basis of the mining industry (electricity supply). These pegs undoubtedly already exist in some places. If action at the societal level doesn’t effectively deal with this, then we are headed for a very dangerous situation:

• Eventually sliding towards national-level regulation and direct intervention in how mining operations are run.

• If Bitcoin’s value and market relevance continue to grow and expand exponentially, then the scenario is that whichever country has the cheapest energy reserves will come to dominate mining.

• This could easily devolve into something like a superpower dynamic in mining distribution, which, if a stable (or “stable enough”) equilibrium is reached, could ultimately result in a more centralized and restricted access state at the base layer, detrimental to Bitcoin’s full potential.

This aspect of the Bitcoin network/system is the weakest against real-world “real space” threats. Ultimately, if the people of a country empower their government to do so, they will show up and confiscate your mining equipment. This would have to be an extremely resource-poor government or a very unique geographic region for this to be impractical. The only way to address this is societal.

And coercion isn’t the only mechanism for interfering with this layer of Bitcoin. Distorting incentives is another. Chain Anchor is a protocol proposal from MIT that aims to effectively bribe miners to initially prioritize and then exclusively mine KYC-ed transactions. The ultimate goal is to orphan non-compliant blocks. These economic incentive distortion problems can ultimately only be fixed through economic incentive correction.

This is the “shift” I’m most confident about in this post. I wouldn’t call it a short-term “holy crap, we’re screwed!” urgency, but it’s not something Bitcoin users can take lightly.

New Jurisdictions

I talked about Binks above, and the technology for “grafting” a subset of Bitcoin’s properties to Binks, and the incentives for doing so. It’s a game of jurisdictional arbitrage with huge potential profits. But there’s an interesting potential twist to this given that it’s the 21st century: cyberspace itself arguably constitutes a jurisdiction. Anyone remember darknet markets? So there are two ways a “new Switzerland” could develop: an actual physical jurisdiction that legalizes KYC-free or KYC-lite financial operations and provides a safe haven for such operations, or an “out of jurisdiction” (in quotes because the servers are hosted somewhere) darknet operations.

Let’s look at the real world possibility of a country deciding to become a bink haven jurisdiction with no KYC or KYC lite. First, Bitcoin is a borderless global currency/settlement network that anyone with internet access can interact with. Therefore, the potential customer base that can deposit and withdraw Bitcoin at one of these binks is anyone in the world with an internet connection and access to Bitcoin. That’s the potential capital inflow that could be attracted in the most wildly optimistic scenario. That’s why you can collect taxes. Second, given a host jurisdiction, these binks can be legally registered and become responsible entities. Even without KYC, crypto can provide a basis for fraud assertions and rebuttals of those assertions, at least in terms of a basis or initial filter to start legal disputes. These binks can offer anonymous accounts denominated in BTC, anonymous untraceable web cash denominated in BTC, loans, custody services, oracle services for complex smart contracts executed by the bink. All the traditional world financial services are available through a smartphone, and there is either no KYC or very little, it feels like 2013, and then there are some icing on the cake.

This is a huge potential profit for a jurisdiction. As a jurisdiction, an actual nation-state with a legal system, it is possible to build enough trust for international customers to actually enjoy this. OK, so from a customer's perspective, how do you deal with problems that arise between you and the bink? If you are a citizen of the country, it's simple: you take legal action. If you are not a citizen? Well... taking legal action in an international jurisdiction is complicated to say the least. And expensive. But if we are at the stage where this bink is operating, then we assume that the government of this country wants it to work and attract businesses, right? So the government could account for this asymmetry between citizen bink customers and non-citizen bink customers and create legislation that would alleviate the complexity for non-citizens in dealing with their disputes with binkies. More importantly, the government could actually enforce this legislation equally for citizens and non-citizens.

Another question is how would the rest of the world react? The US in particular loves to tell the world how to run their affairs. Especially their financial affairs. How far can you really push things forward before a US drone strikes your country? No one will know until someone tries to do it.

That being said, I think the jurisdiction where this could actually happen would be one of a very small number of unique jurisdictions. Probably places like North Korea, Iran, Venezuela that are heavily sanctioned and excluded from the global financial landscape. Desperation is a powerful motivator. Or maybe secessionist movements in Spain or Italy succeed, or France slowly boils over until we see the French Revolution of the 21st century. Big political upheavals are followed by big changes. What if the King of Thailand decided to host binkies without KYC (or KYC-lite)? Thailand is already heavily dependent on foreign tourism dollars economically. Why can't you accept foreign bitcoin deposits? Tourism has a lot of negative effects on the country... Unless you think the US is going to invade, bitcoin deposits won't be there.

I'm not saying it's likely to happen in a relatively short time like the next decade, but I think the idea is definitely not crazy.

Okay, let's look at the "darknet, unknown jurisdiction, completely anonymous" scenario. The situation is exactly the same as the previous one in terms of deposits and customers, and they can process BTC withdrawals and deposits for anyone in the world. However, binks that operate illegally cannot legally register in any jurisdiction, nor establish any legally responsible entity. This is a major difference in the trade-offs compared to binks hosted by a complicit jurisdiction. This is a much harder place to try to bootstrap binks' network effects, because it accepts cash and deposits from your network, rather than direct BTC settlement. The network effects of binks are completely rooted in trust in the bink operator. This is much easier as a legally registered and responsible entity in a known jurisdiction. The landscape in which your relationship with binks lies is already very clear. This is the opposite of how darknet binks work.

Darknet scams have no legal liability, no government to turn to, no legal process to pursue, nothing. The guarantees you get are enforceable through cryptography, everything else is enforced through blind trust, no recourse. That's it. This creates a major bootstrapping problem for this scam. How do you get customers to trust you with their deposits if you've defrauded them and they have no recourse? This dilemma, in my opinion, guarantees that this scam will never grow to the size of a scam with a legal identity in a safe haven jurisdiction.

Darknet scams will likely never be used by mainstream users, they will be businesses that are only patronized by users under very restricted circumstances. People who engage in dangerous illegal activities. Scammers. People who are censored and completely excluded from the traditional financial system. I just don't think the average person would want to risk depositing BTC into a bink where they have no legal recourse and are only associated with a pseudonym. It is possible to create stronger guarantees through cryptography than what is available today, but this starts to get into weird territory. As I said above when talking about possible technological developments over the next decade, it is possible that constructs will emerge that completely blur the lines between services and protocols. If all goes well, perhaps darknet binks can compensate for the difficulty of establishing trust by building stronger cryptographic protections.

I think it is very likely that something like this will start working in the next decade (especially a simple trust-based darknet bink), the only question is how rampant will the exit scams be?

The Birth of New Markets

Bitcoin is evolving into money, and this is something we are all witnessing and participating in. From speculation to value transfer to unit of account. A core and absolutely necessary dynamic for this evolution to complete is large-scale liquidity arbitrage between Bitcoin, fiat currencies, and goods and services. This arbitrage will enable businesses to truly accept and use Bitcoin. Once Bitcoin is large enough and relatively stable, businesses can accept it and pay suppliers without the kind of volatility risk that exists today. The closer Bitcoin's stability is to the corresponding fiat currency, the safer it is to accept and use Bitcoin directly, rather than immediately sell it for fiat currency. Arbitrage traders will trade these gaps, and businesses will likely arbitrage these pairs themselves! Is it better to receive a return in Bitcoin or fiat? Incentivize with a discount. Is it better to pay suppliers in Bitcoin or fiat? That’s what you’re going to decide. This dynamic is what’s really going to push Bitcoin into the currency space.

Right now, the world’s geopolitical balance is shifting rapidly. The United States has spent the last 20 years playing an imperial role, destroying many countries, and forcing the world to isolate others, following the events of 9/11. We’re clearly starting to see other countries react to this, starting to develop alternative settlement systems and reduce their reliance on the dollar. China and Russia have already started to build their own alternatives to SWIFT to settle payments. They’re even trading oil in non-dollar currencies. Venezuela is even trying to facilitate oil trading in its own centralized “cryptocurrency”, the Petro. The world is tired of U.S. overreach, and they’re starting to take action to create platforms and systems that are not controlled and censored by the U.S.

This trend will undoubtedly continue, and inevitably begin to impact Bitcoin itself. Bitcoin <> Fiat Currency <> There is no reason why the arbitrage dynamic between goods and services has to start in the retail market. In fact, I think it likely won’t. Within the next decade, I am highly confident that a coalition of nations aligned with the United States will begin trading and settling oil in Bitcoin. If Bitcoin’s market cap, liquidity, and price continue to grow at their historical pace, then this is inevitable. The protocol and network can handle it, products and services for hedging volatility risk are increasing every year, and overall liquidity will provide more utility than individual non-USD fiat currencies and nation-states’ interesting “crypto” currencies.

Such an event would bring capital inflows and price volatility on a scale you can’t imagine, and I think the odds of this not happening within the next decade are extremely low. Buckle up.

Conclusion

The next decade will bring so much change and development, it will blow your mind. I really don’t think many people in this ecosystem truly understand this. Obviously, the people who create things, the company CEOs, the participants who are actually involved in these shifts and changes know it. It’s also safe to say that savvy and balanced observers know it, too. But most people who hold Bitcoin or are casually involved or watching this space…I don’t think they know anything.

The last decade has been the transition from cypherpunk daydreaming to playing in the minor leagues. The next decade will be the transition to the major leagues. Did we all screw up? Did we hit a home run? If we hit a home run, will anyone get hit?

Who knows. I think people who are observant are able to see the inevitable consequences of megatrends, see the megatrends themselves and anticipate the different directions they might go.

This is a serious situation right now, and it requires serious action and thinking.