Tag: BitCoin

The IRS Believes All Bitcoin Users are Tax Cheats

The Internal Revenue Service has filed a “John Doe” summons seeking to require U.S. Bitcoin exchange Coinbase to turn over records about every transaction of every user from 2013 to 2015. That demand is shocking in sweep, and it includes: “complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.” And every single transaction:

All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.

The demand is not limited to owners of large amounts of Bitcoin or to those who have transacted in large amounts. Everything about everyone.

The Boundaries of Westphalia

The Peace of Westphalia in the mid-17th Century established the idea of state sovereignty. Under Westphalian principles, each state has exclusive authority over its territory and domestic affairs.  That’s been pretty good for kings, ruling elites, and the lucky few who live in top-class democracies or benevolent dictatorships.

But Westphalia is on the way out. Individual sovereignty is coming in.

Territorial state sovereignty is just one way to organize human affairs. It was probably an improvement on constant tribal war, but it’s not the last step in political evolution. It’s exciting to see how the boundaries of Westphalia can be surpassed in favor of individual empowerment. People are increasingly able to conduct their intellectual affairs—speaking, transacting, and so on—without reference to nation-states.

I’m reminded of this far-sighted (or far-out) notion by a relatively practical observation from identity expert and former Utah CIO Phil Windley. In “Self-Sovereign Identity and Legal Identity” Phil says:

We’ve finally gotten to a place where self-sovereign identities are technically possible. This is a huge milestone. The next hurdle is getting organizations, including governments to allow the use of self-sovereign identities as the basis for their administrative identities.

Building the Bitcoin Ecosystem: Privacy Edition

Many in the Bitcoin community seek increased financial privacy. As I wrote in a 2014 study of the Bitcoin ecosystem, “Bitcoin can facilitate more private transactions, which, when legal in the jurisdictions where they occur, are the business of nobody but the parties to them.” That study identified “algorithmic monitoring of Bitcoin transactions” as a rather likely and somewhat consequential threat to the goal of financial privacy (pg. 18). It was part of a cluster of similar threats.

Good news: The Bitcoin community is doing something about it.

The Open Bitcoin Privacy Project recently issued the second edition of its Bitcoin Wallet Privacy Rating Report. It’s a systematic, comparative study of the privacy qualities of Bitcoin wallets. The report is based on a detailed threat model and published criteria for measuring the “privacy strength” of wallets. (I’ve not studied either in detail, but the look of them is well-thought-out.)

Reports like this are an essential, ecosystem-building market function. The OBPP is at once informing Bitcoin users about the quality of various wallets out there, and at the same time challenging wallet providers to up their privacy game. It’s notable that the wallet with the highest number of users, Blockchain, is 17th in the rankings, and one of the most prominent U.S. providers of exchange, payment processing, and wallet services, Coinbase, is 20th. Those kinds of numbers should be a welcome spur to improvement and change. Blockchain is updating its wallet apps. Coinbase, which has offended some users with intensive scrutiny of their financial behavior, appears wisely to be turning away from wallet services.

Bitcoin guru Andreas Antonopolis rightly advises transferring bitcoins to a wallet you control so that you don’t have to trust a Bitcoin company not to lose it. The folks at the Open Bitcoin Privacy Project are working to make wallets more privacy protective. Kudos, OBPP.

There’s more to do, of course, and if there is a recommendation I’d offer for the next OBPP report, it’s to explain in a more newbie-friendly way what the privacy threats are and how to perceive and weigh them. Another threat to the financial privacy outcome goal—ranked slightly more likely and somewhat more consequential than algorithmic monitoring—was: “Users don’t understand how Bitcoin transactions affect privacy.”

Bitcoin Governance as Competition

A few weeks ago, in a post entitled, “The Politics of Non-Political Money,” I talked about the Bitcoin blocksize debate as surfacing “politics” in the Bitcoin ecosystem. Important protocol and software development projects require people of disparate views and plans to come together over common standards and code. My thesis in that post was simply that good behavior is good politics because it builds credibility. Some differ, and many—it should be no surprise—aren’t taking my advice. But the precedents set in the blocksize debate are important for the future of Bitcoin, for other cryptocurrencies, and for similar projects that may offer alternatives to governmental monetary and administrative systems.

The politics are intense, there are ways that Bitcoin governance is like government, and proposals to fork the software are kind of like constitutional amendments. But I’m increasingly comfortable thinking of Bitcoin governance as a market phenomenon. Specifically, groups with differing visions are competing to win the favor of Bitcoin miners and nodes, so that their vision, if it prevails, can carry the Bitcoin project forward.

The Politics of Non-Political Money

An early trope about Bitcoin was that it was ‘non-political’ money. That’s a tantalizing notion, given the ugliness of politics. But a monetary system is a social system, technology is people, and open source software development requires intensive collaboration—particularly around a protocol with strong network effects. When the group is large enough and the subject matter important enough, human relations become politics. I think that is true even when it’s not governmental (read: coercive) power at stake.

Bitcoin’s politics burst into public consciousness last week with the “whiny ragequit” of developer Mike Hearn. In a Medium post published ahead of a New York Times article on his disillusionment and departure from the Bitcon scene, Mike said Bitcoin has “failed,” and he discussed some of the reasons he thinks that.

As do most people responding to the news, I like Mike and I think he’s right to be frustrated. But he’s not right on the merits of Bitcoin, and his exit says more about one smart, impatient man than it does about this fascinating protocol.

But there is much to discover about how governance of a project like Bitcoin will proceed so that politics (in the derogatory sense) can be minimized. Stable governance will help Bitcoin compete with governmental monetary and record-keeping systems. Chaotic governance will retard it. We just need to figure out what “stable governance” is.

How Much Profit Is There in Thwarting Financial Innovation?

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it’s worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky’s work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the “real dangers” of Bitcoin, including use by “narco-terrorists.” (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense.” Shortly after producing it, his office violated New York’s Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

“BitLicense” Foolishness

When New York’s Superintendent of Financial Services first encountered Bitcoin, he evidently thought it was a way to build his reputation as a hangin’ superintendent of financial services. (Doesn’t quite roll off the tongue like “hangin’ judge,” does it…) He sent subpoenas to everyone in the Bitcoin world and went on TV talking about “narcoterrorists.” That was foolishness.

Unfortunately, he also hatched the idea of creating a thing called a “BitLicense” for firms wanting to provide Bitcoin-based financial services in New York. That program is now hanging like an albatross around his neck.

I know nothing of the details, but a couple of decades in public policy make the probable outlines of what happened pretty clear. The press seized on the “BitLicense” idea. Lobbyists and business people came around to fawn over the “BitLicense” idea with Superintendent Lawsky, each hoping not to get cut too deeply by its inartful sharp edges. And Lawsky, having come around to favoring Bitcoin (it’s fairly evident from his speeches) found himself committed to coming up with this “BitLicense” thing.

When the first draft came out in July of last year, it was pretty universally panned. The Bitcoin community savaged it. Bitcoin businesses said they would not do business in New York. The idea of a second round of proposal and comment was quickly on offer.

But the second draft isn’t that much better. When comments close at the end of this week (how to comment), the “BitLicense” will again have received strong criticism. There’s always that contingent whose stock in trade is always—always—to play ball. And to others the “BitLicense” saga has gotten boring…

But the outcome is very probably set. In order to avoid backtracking, which would look foolish, the Department of Financial Services will probably continue forward on the errant path of creating a peculiar special license for Bitcoin-based financial services providers in New York.