I try to avoid political talk on this blog, but in this day and age when overtly authoritarian governments are controlling every aspect of people’s lives the topic is unfortunately impossible to avoid if we wish to have an sort of meaningful discussion beyond explanations of how p2p technology can benefit humanity. For technology to be broadly used, its users must feel safe using it, and right now this right to safety and freedom from outside interference is under attack in the Bitcoin community. It is up to the enlightened among us to fend off these attacks, battling bad ideas with good. This is but one such attempt; a small battle in a very large war for control of the fledgling cryptocurrency economy. May it not be said that no one ever tried to defend freedom in the face of tyranny, and may the pen be ever mightier than the sword.
At Bitcoin2013, one of the big topics of discussion was regulation, which no one is excited about but everyone anticipates. The United States Treasury’s Financial Crimes Enforcement Network, or FinCEN, recently issued “guidance” as to how Bitcoin transactions will be regulated under their current regulatory regime, and the general consensus offered by the “Issues of Regulatory Compliance” panel at Bitcoin2013 was that all businesses which buy and sell bitcoins should register as a Money Services Business with the Federal Government and as Money Transmitters with every state government whose jurisdiction the business plans to operate in. There is heated debate between proponents and opponents of State regulation, and rightly so: regulation often protects incumbents more than it protects consumers. Any lobbying for regulation by Bitcoin-related organizations, even if the motivations appear innocent, should be looked at as a threat to Bitcoin as a whole. State regulations only serve as a barrier to entry for new businesses, which will lead to centralization and cartelization of the Bitcoin economy. This completely goes against the motivations for Bitcoin’s invention in the first place. While lobbying defensively to stave off new laws and regulation would be understandable (though likely a futile effort long-term), offensive lobbying which would help shape new laws and regulations is just that: it’s offensive, to both Bitcoin users and entrepreneurs.
Bitcoin is not the only p2p industry that regulators are clamping down on right now. O5rte56rganizations that help facilitate peer-to-peer collaborative consumption such as Airbnb, Uber, and Craigslist are all central points of failure that have been exploited or attacked by criminals recently. Bitcoin now suffers from the same problem, with the most critical aspect of Bitcoin – exchanging in and out of fiat currencies – being centralized around just a few major exchanges. This isn’t the only central point of failure: servers belonging to merchants, marketplaces, and e-Wallets can all be considered central points of failure, especially if there is no redundancy. The companies operating these servers are themselves central points of failure, and can easily be subjected to regulation. Corporations are, after all, playing on the State’s turf. They’re incorporated with the State and immediately subjected to a myriad of laws, taxes, and regulations, all of which are constantly changing. This is unsustainable and dangerous territory for any individual or organization that does not want to “play ball” by lobbying for more favorable legislation. There is an alternative to State regulation for freedom-loving individuals and organizations, and that is peer regulation. While this may seem unthinkable to some, peer regulation has a long history of success in tribal and merchant communities. But how would a p2p economy with peer regulation scale in an interconnected world with over 7 billion people?
For any marketplace to work, there has to be clear and common communication channels so market participants can make accurate assessments as to where they should be putting their time, effort, and resources. Before the invention of electronic communication technology, this had to be done centrally for the sake of efficiency: everyone would go to the same place at a designated time and receive the information that was needed. This could be a message board where information was posted, or a town square where information would simply be shouted out to others. Marketplaces worked the same way: everyone would show up somewhere at a designated time and people would mill around looking for the best deal. Nowadays, even with the advent of the internet, things are still done in much the same way, with centralized walled gardens everywhere. The reason for this is simple: money. If information has to pass through one central entity before reaching its intended recipient, that is an opportunity to make money. The downside is that this creates a central point of failure which can easily become a target for criminals. This happened with Napster, it happened with E-Gold, and now it’s happening to Bitcoin exchanges. The solution is decentralization. File sharing became decentralized through torrent technology and currency has become decentralized through cryptocurrency technology. There is now a solution for decentralizing marketplaces and currency exchanges, which will enable the p2p economy to blossom like never before.
FellowTraveler recently posted a topic on the bitcointalk.org forum entitled “The Holy Grail! I wish I could kiss the author of Bitmessage on his face.” In it, he explains how the p2p messaging software BitMessage (BM) turns his Open Transactions (OT) software into a decentralized global marketplace (dubbed BMOT for short). Users of BMOT will be able to use BM to broadcast market orders to anyone on the planet, rather than be stuck inside only the OT servers that they’re contracted with. Previously, that was the limitation of OT: users are limited to discovering only other users on the same server. Now, there can be order discovery worldwide with the use of BM’s broadcast / subscription service. Open Transactions itself is already an amazing piece of software: users can write cheques, trade in mathematically-untraceable Chaumian digital cash, issue assets, and create smart contracts (a full write-up on OT from this author is forthcoming). Add BitMessaging capabilities and we now have a decentralized marketplace running on federated servers – no central point of failure. Open Transactions is, at it’s most basic implementation, centralized: there’s a server, and there are clients. When servers become federated, this creates decentralization, and this decentralization can be spread out even further as more servers are added. BitMessage is fully decentralized and distributed, operating purely p2p. Combining these two creates a market environment that is resilient to attacks from criminals. If an OT server is attacked, traffic routes around that server and the other servers pick up the slack. All that is needed is a way to track the reputations of users in OT, and then we’ll have an incredibly efficient and resilient global marketplace.
If BMOT is the peer-to-peer marketplace that needs regulated, then it is each peer in the market who is doing the regulating. Peer regulation involves webs of trust, where peers trust other peers because of a mutually trusted peer. It has self-enforcing mechanisms, such as trusted third party arbitration and ostracism of bad actors. The importance of these mechanisms cannot be overstated. If they are impeded in any way, market distortions will arise and market conditions will quickly go south. State regulation impedes both of these mechanisms by monopolizing their provision and cartelizing industries. The monopoly State creates cartels by threatening violence against individuals and businesses who do not meet regulatory requirements, impeding the ability for consumers to ostracize bad actors. If a cartelized business is behaving badly, where can consumers turn? Only other cartelized businesses, who can also engage in monopolist behavior. The way corporations can use State protectionism to grow massive makes them increasingly difficult targets for effective ostracism, especially if they’re given a de facto monopoly in their industry. Third party arbitration is similarly impeded by the State because the State maintains a monopoly on the provision of justice in society. This makes it difficult for competitors to arise, since virtually everyone is already forced to fund the State court system, leaving less money for people to spend on voluntary arbitration systems. Still, voluntary third party arbitration does exist. Affordable services like Judge.Me give people the option to use a mutually agreed-upon arbitrator to solve disputes, and if someone does not abide by the arbitration outcome, they can be ostracized by communities they’re a member of. Communities which harbor criminals can themselves be ostracized by the rest of civilized society.
What does not yet exist is a decentralized system to track and communicate reputation. There could be a way to build reputation ratings into Open Transactions, but as of right now this feature does not yet exist. If verifiable reputation can be given and received in Open Transactions, BMOT will be even more of a game changer than it already is – and that’s when things start to get really interesting. One possibility is that a white colored coin called “+repcoin” could be sent along with a payment after a successful transaction has completed with or without escrow. Negative reputation would spread through arbitration networks and word of mouth, or, alternatively, arbitrators could issue a red colored “-repcoin” to guilty parties. The proper amount to send would be socially standardized so people couldn’t artificially inflate or deflate reputation balances, and users could set filters in their BitcoinX client for which repcoins they see balances from as an extension of a Bitcoin address web-of-trust. Combining BMOT and repcoins with something like Monkeysphere or Convergence and running them in a personal cloud could be the ultimate decentralized solution, where identity, trust, and reputation information is stored in a personal cloud and BMOT is running on top as a decentralized marketplace application.
I’m not sure what the solution will ultimately be, but I do know that these decentralized p2p technologies are all helping to build parallel market systems which actually help consumers and businesses rather than hurt them, and that is something to be very excited about.
