According to the proposed 17th July bitcoin regulation from New York State, the public now has 45 days to comment and then a 45-day grace period prior to full adoption. But what’s after 17th October? More importantly, what’s after New York?

The poor regulators are in a quandary. It’s hard not to be sympathetic sometimes. They are practically in a no-win situation, because regulators must use their tools to regulate, but the more they do, the more they inadvertently encourage market-based responses.

With the New York framework for bitcoin businesses, financial regulators need to demonstrate that they have not ceded control of the payments mechanism and the wholesale money transfer business, while simultaneously trying not to be accused of squashing technological innovation.

If improved financial privacy is considered a bitcoin innovation, then, yes, government choke points do stifle innovation.

Sitting on a razor’s edge, their actions can either propel bitcoin more into an off-the-books counter-currency or retard US monetary progress for decades as more nimble jurisdictions exploit the economic benefits of cryptographic money. However, in the regulator’s mind, they have no good options and permitting unimpeded bitcoin growth is unacceptable – so act they must.

Regulators and their red herrings

It is this general desire for enforcement action that so fatally misses the mark, because it blindly ignores the societal consequences of the great cryptocurrency wealth transfer and the temporary turmoil for the wave of people caught ill-prepared.

If anything, governments should encourage greater bitcoin savings and user-friendly open-source software. Seismic shifts that will transform existing financial and political institutions are now occurring directly underneath our feet.

And, while all of that happens, what do New York regulators choose to focus on?

Among many red herrings, they focus on perceived problems, like identifying physical addresses of bitcoin transactional parties and prohibiting bitcoin-related companies from maintaining profits in bitcoin.

Contrary to what the alarmist Perianne Boring states, bitcoin’s fate will not be decided by lawmakers and regulators in the next 18 months. The only fate that will be decided is that of New York and any other regions that would adopt such a harsh line of regulatory thinking. In other words, the New York Department of Financial Services (NYDFS) doesn’t harm bitcoin, it harms only the citizens of that jurisdiction who suddenly become disadvantaged relative to citizens in the rest of the world.

Here’s what happens on 17th October: bitcoin continues to be a juggernaut, rolling over the promiscuous money printers and corrupt kingpins of the centrally planned banking system, albeit with some market-based adjustments. Markets perceive regulation as ‘damage’ and route around it. This is true with Internet-related damage and it is equally true with bitcoin-related damage.

Ultimately, the market will provide solutions to cases of bitcoin privacy ‘damage’, so I provided two handy reference guides: ‘Why Bitcoin Fungibility is Essential’ and ‘A Taxonomy of Bitcoin Mixing Services for Policymakers’.

Bitcoin, Tor and Financial Privacy

For starters, don’t be discouraged by the New York regulatory proposal, because while exchanges and banking interfaces are useful for price discovery, they are optional for everyday bitcoin usage. Government attempts to exploit systemic choke points is all part of the natural transition process.

Similar to the Electronic Frontier Foundation’s Tor Challenge to circumvent government censorship, the bitcoin community needs a challenge to support and encourage true financial privacy, compared to the sanctioned privacy permitted under the guise of consumer protection. Privacy is claimed – it is not sanctioned.

Without privacy by default in the original Satoshi bitcoin client software, additions and workarounds for various wallet implementations have been the norm.

Writing in Forbes, Andy Greenberg explains that an upcoming version of bitcoinj – the software that powers many of the most popular bitcoin apps like Multibit and Bitcoin Wallet – will route all connections to the bitcoin network over Tor’s anonymity network before reaching another bitcoin node.

Bitcoinj creator Mike Hearn said:

“The fact I use bitcoin isn’t a secret, but I don’t want all my transactions in an NSA database. When I use bitcoin in a bar, I don’t want someone on the local network to learn my balance. The way bitcoin is used today, both those things are possible.”

Thanks to IP tracking, it’s “possible that the NSA and GCHQ have de-anonymized most of the block chain by now,” he added.

Also, various implementations of the CoinJoin method have emerged recently, including Shared Coin from Blockchain and the Dark Wallet alpha release from developers Cody Wilson and Amir Taaki.

Relying only on bitcoin for operations and avoiding the regulatory glare implicit via banking relationships, Blockchain’s modern uniqueness is in tune with bitcoin’s principles, including user-defined privacy.

Despite some prior user claims to the contrary, Blockchain does not block Tor exit nodes – although individual account owners can block Tor IP access. Denial-of-service defenses may also cause some Tor exit nodes to be blocked temporarily.

In an enormously important three-minute interview, political theorist and global resilience guru Vinay Gupta recognizes that “[bitcoin] cannot be divorced from pre-existing political theory.”

Gupta goes into explicit detail on the meaning of power and the significance of property rights:

“The vast majority of the people using bitcoin are politically shallow. The problem is that bitcoin has succeeded technically and is midway through the process of failing politically.”

Gupta explains that the fundamental underlying issue for bitcoin and its future success is how to do strong property rights within the system and no property rights to operate the system as whole. The answer lies in what we already know about political theory and similar economic arrangements.

Foreshadowing the coming slew of ambitious regulatory restrictions, he surmises that “until the bitcoin community admits that it’s got political problems rather than technical problems, they’re trapped”.

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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