On a recent episode of the 1776 Podcast, Coinbase co-founder Fred Ehrsam and 1776 co-founder Evan Burfield discussed the concept of regulatory hacking in the context of Bitcoin.

Regulatory hacking is a philosophy that 1776, a business incubator based in Washington, D.C, has taken to heart, and the basic premise is to find new ways to change or circumvent regulations that slow down progress in certain industries. Ehrsam mentioned some of these industries during the podcast:

“You have a few select industries, which it sounds like you guys at 1776 are focused on here, which have not been disrupted to date a whole lot, largely because they tend to be more centralized and/or government regulated. Those include finance, healthcare and education. There are others, but those are the big three that I would think about.”

Bitcoin’s open, permissionless and censorship-resistant nature makes it a potentially powerful tool for regulatory hacking in the area of finance.

Bitcoin Turns Finance Into a Software Problem

When asked for his overall perspective on the importance of Bitcoin, Ehrsam talked about how the blockchain turns finance into nothing more than a software problem. As opposed to the highly regulated and slow-to-adapt traditional financial system, creating a financial application on top of Bitcoin requires nothing more than the ability to write some code.

The Coinbase co-founder then talked about the positive effects on society found when real-world problems become software problems:

“We’ve all seen what happens when a problem becomes a software problem; the level of innovation and the rate at which iteration can occur just goes through the roof. As a result, you get way more great ideas being built, and the consumer usually ends up winning, too, because the services are better and the fees go down.”

In other words, the competition associated with an open, somewhat-lawless system creates better situations for entrepreneurs and consumers. As Ehrsam put it, “Said another way, [software problems] are subject to real market forces rather than being closed. It’s open, just like what we’ve seen with the Internet.”

The Frustrations Related to Old, Closed Financial Systems

In order to describe the benefits of Bitcoin’s openness, Burfield covered the issues related to the traditional financial system. He noted:

“I don’t think most people can actually articulate just how frustrating interacting with financial services on a day-to-day basis actually ‒ like, there’s so many dumb things that you encounter over and over again.”

Burfield then explained that the problems associated with traditional financial services companies have not been as obvious in the past due to the lack of an open system to be compared against:

“We just, sort of, accept that as part of the background noise of leading our daily lives, and until you flip it and start to get innovators attacking the problem without all of the barriers a closed system encounters, I don’t think you can even start to show people where things should be at.”

Burfield went on to contrast Bitcoin with the financial system in Africa. While a money transfer between two parties in different African nations routinely costs more than 10 percent of the transaction’s value, and central bankers are sometimes not resistant to the temptation to print more money, Bitcoin has extremely low costs as a payment settlement network and has a monetary policy that is essentially controlled by the users of the digital currency.

Is Coinbase Involved with Regulatory Hacking?

When asked for Coinbase’s approach to regulatory hacking, Ehrsam was quick to note that the concept is difficult to apply to the financial services industry today, especially in the United States. He explained:

“I think it’s more difficult for people in financial services, generally speaking, than other industries, like the taxi industry for example, to do what you would think of as regulatory hacking. The reality is that financial services are highly regulated by many, many different parties, whereas you might just have one in other industries. Also, just given the recent past in financial services, it tends to be an area of extreme focus ‒ maybe more so than any other point of history in the United States.”

Ehrsam then stated that Coinbase’s approach to regulators has been rather friendly:

“Our approach, as a result, has actually been quite the opposite; it’s to proactively go to regulators early on and say, ‘Hey. Here we are. We’re good guys. You can know us. If you have questions, please come to us.’” See Also Investing Yes, You Can Use An IRA For Bitcoin Investing

Coinbase has taken a lot of flack in the Bitcoin community due to its compliance with regulations, but the reality is that it would be shut down rather quickly if it didn’t follow the law. Recently, Coinbase CEO Brian Armstrong published a Medium post where he pointed out that the company is an exchange and not a wallet provider. In the past, ShapeShift CEO and longtime Bitcoin entrepreneur Erik Voorhees has defended Coinbase against various attacks from the community.

Bitcoin Won’t Create a Libertarian Utopia

Although Evan Burfield sees the need for more regulatory hackers in the world, he does not feel that Bitcoin is going to create some sort of libertarian utopia. He explained:

“The idea that Bitcoin is going to be this completely libertarian utopia where there’s zero regulation and complete anonymity is probably not real practical when you look at stuff like this.”

Ehrsam mostly agreed with Burfield’s stance. He added:

“The reality is maybe somewhere in between where businesses that operate on the Internet are subject to all the same laws and regulations, but the reality is that we now have a more open environment, which you could argue is libertarian in some ways. But the net result, I agree, is not complete libertarian utopia. It’s more about the services that this brings that fundamentally couldn’t have existed before.”

There has always been perceived tension between the early adopters of Bitcoin and the people who want to take the technology to the general public. It’s important to remember that, while the businesses built on top of the Bitcoin blockchain can be regulated, the base protocol is much harder for regulators to get their hands around.

The aspects of Bitcoin that do bring more libertarian, or even anarchistic, ideals into the real world are usually found in software rather than startups. A company can be targeted and shut down, but individuals are free to run open-source code, such as JoinMarket or Dark Wallet, on their own computers. Bitcoin is far from anonymous right now, but it will be interesting to see what happens if more privacy-enhancing features are added to the protocol.

Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, NASDAQ, RT’s Keiser Report and many other media outlets. You can follow @kyletorpey on Twitter.