[Cryptography] On the 'regulation proof' aspect of Bitcoin

[Phillip Hallam-Baker]

I am getting rather fed up of all these BitCoiners telling me how
their scheme can't be taken down like the Feds took out Gold Age. And
back when I was predicting the Feds would take out Gold Age like they
took out Liberty Reserve they were telling me how that wouldn't happen
because no extradition treaty. And before that they were telling me
they couldn't touch Liberty Reserve like they took out E-Gold because
no US servers and before that they were saying E-Gold was untouchable
because it was incorporated in St Nevis and Kitts.


Telling me that something is impossible is like making it a challenge.
I have seen a dozen of these schemes over the years and every one of
them has told me how they are utterly unlike any religion before and
that theirs is the true God. The fact that the genuine innovation in
BitCoin is that it is a Ponzi scheme without a central mastermind only
makes matters worse. People never want to be told that Madoff has
stolen their money rather than getting that 20% return or that the
Nigerian Prince isn't going to send that money ever.

Greed is a powerful inhibitor of curiosity.


So given that the gauntlet has been thrown down, here is how I would do it:

First note that for purposes of preventing Bitcoin being used for
criminal purposes, it is sufficient to significantly degrade the
infrastructure to the point where it is no longer a practical
mechanism for extracting ransomware payments, purchasing illicit
materials, etc.

1) Federal Reserve issues notice stating that all BitCoin transactions
regardless of size require a Currency Transaction Report (CTR) to be
filed.

This immediately makes running a US based exchange impractical. It
also means that any direct transfers between a US bank/financial
institution and a foreign exchange are subject to notification. The
Fed maintains various watchlists of foreign institutions whose
activities are automatically considered to be suspicious.

Still want to buy that weed with BitCoin? Better hope the Feds don't
decide to raid you for kiddie porn.

At this point notice that there are two sets of effects on the BitCoin
infrastructure. One is purely practical, preventing the use of the
currency as a means of exchange in the US. The other is economic. The
less attractive it is to hold BitCoin, the lower the demand. The lower
the demand, the less the value. The less the value, the less incentive
to mine new coins.

I rather suspect that merely issuing the notice would be sufficient to
start a run on BitCoin. But let us assume for the moment that it is
not.

2) Partner with EU regulators.

BitCoin is not exactly popular in Europe either. But it is tolerated
largely because nobody considers it significant enough to make a fuss.
The development that is likely to start people making a fuss is the
use of BitCoin to collect ransomware payments.

Most EU regulators have the same toolset as the Fed and they have
recently been using it to impose sanctions on Iran. Unlike Iran,
suppressing BitCoin does not create foreign policy concerns. Plenty of
countries wanted to sell exports to Iran or buy cheap Iranian oil.
BitCoin isn't a country so there isn't the same incentive to protect
BTC commerce.

3) Start making examples of BitCoiners in the US.

There have already been some arrests of people who were marketing
BitCoin as a vehicle for evading currency controls. The main
difficulty in bringing charges being the ambiguous status of BitCoin
transactions. But once the Fed has ruled that a CTR must be filed,
merely using BTC becomes cause for criminal complaint.

OK so at this point it is really difficult to transfer money into or
out of BTC from the US and attempting to do so risks a jail term. do
you think BTC is going to return to $1000 under those conditions or
sink like a stone?

Sure you could bring a lawsuit. But on what grounds? Control of the
currency has been considered a core government function for thousands
of years. Article 1 Section 8 of the constitution clearly and
unambiguously gives the Federal government the exclusive right to
regulate minting of coin.

Even if a lawsuit was brought, it would be three years before any
final decision and in the meantime, the value of BTC would drop like a
stone.

So why doesn't the Fed do this?

My guess is that until ransomware, BTC just wasn't a big enough
irritation and there is always the knowledge that as fast as one
scheme is shut down, another pops up to take its place.