Counterrevolution: Bitcoin Startups Stifled by Regulation
The American Revolution is still being fought, and the Washington-based administrative state is the biggest enemy. Just ask Bitcoin entrepreneur Jaron Lukasiewicz. He recently lamented that regulation is damaging his industry. In a column titled “Nail in the Coffin: The Day U.S. Regulators Stifled Bitcoin Startups,” Lukasiewicz pinpointed March 18, 2013, as the juncture at which the counterrevolution directed at his company and others began.
That was the day when the U.S. government issued guidelines that classified most Bitcoin companies as money-service businesses, wrote Lukasiewicz, cofounder and former CEO of Coinsetter, a New York–based Bitcoin-exchange service. “Being the optimist that I am, I viewed this announcement as a positive development — an opportunity to legitimize our company and the broader bitcoin industry,” he wrote in a column published July 4 on CoinDesk.com. “In hindsight, the policy would become the slow ‘nail in the coffin’ that would prevent bitcoin from disrupting consumer payments at mass.”
The guidelines established a system that involved reporting to 50-plus regulators and included onerous rules for licensing, transaction monitoring, banking relationships, and reporting and capital requirements, Lukasiewicz noted. Licensing was “impossible to obtain,” he wrote.
The industry encompassing Bitcoin and its accompanying blockchain technology “hasn’t been the same since,” he lamented. After Bitcoin companies dedicated large amounts of money to hiring lawyers and consultants and large amounts of time to filling out forms, most regulators delayed action, leaving companies in “a legal gray area,” and closed bank accounts, which severed Bitcoin companies from the global banking arena. The banking troubles Bitfinex and other exchanges suffered recently are a “lingering, direct consequence of these policy decisions made four years ago,” Lukasiewicz wrote.
Regulatory fever is beginning to hit other projects involving blockchain, which is the technology platform that gave birth to Bitcoin, the entrepreneur said. “It’s unfortunate, since these organizations are building the modernized infrastructure that will create a more secure digital future for everyone in the world,” Lukasiewicz wrote. “I believe they’ll succeed, but anyone starting these companies will have to deal with similar regulatory uncertainties like bitcoin faced a few years ago.”
The United States has more riding on Bitcoin and blockchain than most people realize. “I hope companies will take a strong public stance against stifling regulation as it comes up,” Lukasiewicz wrote. “For those in the U.S. it is important to remind regulators that technology companies are going overseas because of the current regulatory environment. Billions will be invested in blockchain startups — will the U.S. choose to benefit from it?”
Bitcoin has its genesis in 1990s writings on cryptocurrency by Wei Dai, who sought to develop a method of payment that relies on cryptography to control unit creation and transactions without a central authority. Bitcoin and blockchain were fashioned by a single researcher or a group named Satoshi Nakamoto and rolled out in 2009.
The invention of blockchain made Bitcoin the first digital currency to solve the double-spending problem without the use of a central server or trusted authority, The Economist said in a 2015 article. The supply is limited to 21 million Bitcoin and that can never be changed, according to Bitcoin.com. One of the great appeals is that Bitcoin can never be inflated at will like government-issued currency.
Bitcoin is not presently a threat to the global hegemony of the dollar and gold, and it may even be a bubble, currency trader Jim Rickards said. Prices of Bitcoin, a digital virtual currency, have risen steeply this year, but there’s “no evidence” for the theory that a loss of confidence in the dollar is what’s driving up those prices, he said last month. “If you were losing confidence in the dollar then gold would be going up and it’s not, so it looks like a bubble,” Rickards said in a June 14 interview with Daniela Cambone of Kitco News. The market for virtual currencies including Bitcoin is too small to threaten dollar supremacy, said Rickards, noting that 60 percent of global reserves are in dollars.
A lawyer who authored several books, including “Currency Wars” and “The New Case for Gold,” Rickards characterized Bitcoin as money that just happens to be the object of a strong liquidity preference of late. A “bitcoin bond market” would need to be created before Bitcoin could become a reserve currency, he said. “It’s not an investment; it has no yield,” said Rickards, who also said he doesn’t own any Bitcoin but does hold gold and dollars.
Rickards opined that there is a childish element in the Bitcoin phenomenon, likening its participants to playing in a sandbox. “They’re having fun over there,” he said.
A majority of those trading Bitcoin likely are not properly reporting gains on their tax returns, Rickards said. The Internal Revenue Service could come down hard on such people in the same way that the U.S. government treated Americans holding Swiss bank accounts, he warned. “The IRS is kind of waiting on this one,” Rickards said. The IRS may be the other shoe to drop on Bitcoin unless more people infused with the Spirit of ’76 decide to fight back.
