Bitcoin Cypherpunk

Bitcoin Has Redefined Money

Bitcoin is a digital phenomenon that will continue to spread until it is as socially accepted as email is today. In this post, I will explain not only why this rapidly expanding computer network has changed the paradigm on what defines money, but why the blockchain represents a historical image of the digital economy and provides a record of any past activity due to the nature of peer-to-peer timestamp verification.

The Blockchain Is A Monetary Image

For the purposes of illustrating why bitcoin has redefined money, let us assume there exists two users on a blockchain – User A and User B. User A controls 3.0 million bitcoin on the entire network. User B controls 3.6 million. There also exists 14.4 million unmined bitcoin.

User A has used their private key to authorize a transaction to User B worth 1.8 million bitcoin. User A sends this amount to User B’s public key. At this point, the transaction has been authorized by User A and is in the process of being confirmed by miners of the network.

After the transaction has been confirmed, the bitcoin network now reflects the change in hands of the 1.8 million bitcoin User A sent User B.

Note that no currency has moved from point A to point B, but an authorization on behalf of User A to alter the network in a way which increases User B’s control of the blockchain by a measurement of 1.8 million bitcoin at the expense of User A. In bitcoin, this ledger payment system is the money supply and is radically different from any type of money we have previously seen.

When an individual makes a transaction on the bitcoin network, no actual currency is moved. That is – no file has moved. No commodity or asset has moved. No private or public key has moved. Rather, the only thing which changes is the percentage of the blockchain ledger which User A & B claim control over. When a transaction occurs in the realm of bitcoin, the image of the blockchain is altered. Nothing ever changes but the composition of this blockchain record.

The blockchain is a historical record of the bitcoin economy. There is no separation to be made between the blockchain and bitcoin. They are one in the same. Without the blockchain, you have no bitcoin ecosystem. Without an accompanying cryptocurrency, you have no measuring tool to determine the ownership of the blockchain.

Money is now an image, rather than something which can be separated from the system itself. This image of money is being constructed, altered, and verified by the thousands of machines acting as miners across the globe, and it’s a composition on public display for all to see. The miners are the painters of this network composition. The users, the brush and strokes.

In the bitcoin digital economy, money is an image continuously being constructed, verified, and reattributed by way of cryptographic authorization.

“Tangible money, old-fashioned money … is a phantom from the past, an anachronism. In its place is an entirely new form of money based not on metal or paper, but on technology, mathematics, and science. This new ‘megabyte’ money is creating a new and different world wherever it proceeds. Money now is an image.”

– Joel Kurtzman, The Death of Money

With the intrinsically valuable property of decentralization, we have a monetary system that comprises a historical record of purchasing power at any point of time in existence. The timestamping function of the blockchain allows anyone to go back and publicly determine the holdings of any address (perhaps soon any individual).

A payment conducted with bitcoin represents a paradigm shift in our concept of money – one where there is no division between currency and the system through which it flows.

Bitcoin has redefined money. Money is now an image.

Bitcoin Forecasting

Bitcoin May Become A Global Reserve Instrument

Bitcoin may become a global reserve instrument as individuals use it both as a ledger for financial and informational assets.

Bitcoin Cypherpunk

Bitcoin Threatens The Income Tax

As the age of cryptocurrency comes into full force, it will facilitate a subversively viable taxation avoidance strategy for many of the technically savvy users of peer-to-peer payment systems. In doing so, cryptocurrency use will act to erode the tax revenue base of national jurisdictions, and ultimately, reposition taxation as a voluntary, pay-for-performance function. In this post, I cover some of the benefits such a strategy will have for cryptocurrency investors, why our notion of taxation is ripe for disruption, and why cryptocurrency taxation is infact enabled by default.

The Siren Song of Tax Havens

Although investors have been lured by the siren song of tax havens for as long as governments have existed, none have existed with the legal and architectural characteristics found in cryptocurrency. By operating in a peer-to-peer nature, it is reasonable to forecast the impracticality of systemic taxation on these types of financial assets from national jurisdictions.

Although bitcoin operates behind a veil of cybersecrey, this pseudo-anonymity will not allow the subversion of national taxation. Rather, the principle reason that bitcoin will create a new form of tax haven, is that the State acts as an unnecessary third party in the conduct of payment within this system. From the perspective of bitcoin, recognizing the State as a legitimate entity is both cumbersome and unnecessary. What need is there for the State when business is conducted in a voluntary, peer-to-peer manner on a network which no one owns?

Running The Numbers on Cryptocurrency Taxation

It has been said that compounding interest is one of the most powerful forces in the universe. When we apply the black magic of compounding returns to the profit-maximizing actions of consumers, we see quite clearly why every user aware of the benefits of using cryptocurrency, even if only for the tax-savings, will opt to do so over traditional fiat money. The allure of avoiding the clutches of national taxation is strong enough that any rational consumer will make cryptocurrency a portion of their financial portfolio given they have the sufficient technical understanding.

“Each $5,000 of annual tax payments made over a 40-year period reduces your net worth by $2.2 million assuming a 10% annual return on your investments,” reports James Dale Davidson in The Sovereign Individual: Mastering the Transition to the Information Age, “For high income earners in predatory tax regimes (such as the United States), you can expect to lose more of your money through cumulative taxation than you will ever earn.”

James Dale Davidson, co-editor of Strategic Investment

Never before has there existed a tool that can preserve economic and informational assets with such a high degree of security combined with a near-zero marginal cost to the user. This revolutionary capability of the bitcoin network does, and will continue to provide, a subversively lucrative tax haven in direct correlation with its acceptance on a worldwide basis.

Government Response to Cryptocurrency Taxation

Many government agencies have already cued in to the tax avoidance potential of bitcoin and cryptocurrencies. However, it would seem that they misjudge this emerging threat looming over their precious tax coffers. The Financial Crimes Enforcement Network in the United States (FINCEN) for example, has already issued guidance on cryptocurrency taxation, yet makes a false distinction between real currency and virtual currency. FINCEN states that “In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency,” and later “virtual currency does not have legal tender status in any jurisdiction.”

What these agencies fail to realize, is that cryptocurrency is not virtual in any sense of the word. Indeed it is as real, and perhaps even more real, than traditional fleeting fiat currencies. Currency is an abstract concept from the outset. If such currency is capable of purchasing real-world goods and services, then it is indeed real. Only the most careless investors would mistakenly believe money “does not have legal tender status in any jurisdiction” due to its digital makeup. Bitcoin, and cryptocurrencies as a whole, are creating a new jurisdiction entirely.

Bitcoin and cryptocurrency offer a near perfect alternative to traditional tax havens which are being tightly controlled by new laws associated with the Foreign Account Tax Compliance Act (FATCA). In his report Are Cryptocurrencies Super Tax Havens?, Omri Marian makes clear the pressure for financial institutions who interact with the US banking system to hand over account holder information, and for a collective crackdown on offshore tax havens with the enactment of FATCA in 2010. Such a legislative act, it would seem, is a boom for bitcoin’s antifragile position in the marketplace.

Tax policymakers seem to be operating under the faulty assumption that cryptocurrency-based economies are limited by the size of virtual economies. The only virtual aspect of cryptocurrencies, however, is their form. Their operation happens within real economies, and as such their growth potential is, at least theoretically, infinite. Such potential, together with recent developments in cryptocurrencies markets, should alert policy-makers to the urgency of the emerging problem.

– Omri Marian, Are Cryptocurrencies ‘Super’ Tax Havens?

Current bitcoin payment processors such as BitPay have recently revealed that government agencies are watching cryptocurrency transactions through the bottlenecks and exchanges where it can be tracked and traced with a high degree of transparency. It should not come to anyone’s surprise that governments are watching cryptocurrency nor that companies are complying with their laws, but understanding why national governments require users of an emerging digital economy to cut them a slice of the pie while they contribute nothing to it’s operation, and in many cases, hinder the adoption of this technology, remains a callus mystery.

Governments initially attempting to control cryptocurrency taxation through the businesses and bottlenecks which it can be monitored through will have as much success as they have limiting peer-to-peer file sharing.

Old laws seldom resist the trends of technology. The attempt of government agencies to levy taxation on cryptocurrency transactions directly is as futile as attempting to regulate the direction of the wind. No matter the tool of choice, state actors will be overrun by continuously expanding waves of cryptocurrency adoption.

Cryptocurrency Is Taxed By Default

What would you say if you were told cryptocurrency taxation occurs on every transaction by default? In the realm of digital currency, the transaction fee which the user decides to (or decides not to) attach to each payment represents the taxation. This user can decide to attach a large fee or no fee at all. In doing so, the miners of the network will choose preference for the transactions with a larger fee attached. Thus is the nature of the mining fee incentive. Miners work to confirm these payments sooner than those with smaller fees.

This transaction queue represents a voluntary, pay-for-performance taxation structure where the performance derived from the system is correlated with the willingness to pay of the user.

Algorithmic Regulation

Cryptocurrencies have an inherent regulation, the peer-to-peer architecture they are built upon. Truly, bitcoin is code as law.

Cryptocurrencies have regulation built into the very nature of their existence, just not through our conventional ideas of human intervention. Because of the technological nature of cryptocurrency taxation, judicial regulations bestowed upon these types of systems will always be, to a large degree, futile.

Bitcoin has established it’s own set of rules through the source code which it is built upon. Forcing legal frameworks on this type of 21st century innovation will only cause unnecessary friction during its adoption phase.

The only choice of regulation we have in terms of cryptocurrency taxation is not to try and fit it inside some existing doctrine, but to abide by their laws of voluntary exchange and information freedom. We must be the ones to conform to the regulation, not vice versa.

Bitcoin is a system which will only be governed effectively through digital law, an approach which functions solely through the medium of mathematical technology. It will not bend to the whim of those who still hold conventional forms of law-making as relevant today.

For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.

– Richard Feynman

When we come to understand the systemic subversion to judicial intervention, it becomes quite clear that cryptocurrency taxation will remain a voluntary, pay-for-performance function. No longer will taxation be enforced through coercion, but become a voluntary act towards increased system performance.

Mass taxation on bitcoin is infeasible through judiciary law. You, or anyone motivated to maximize their net worth, will find a subversive tax haven in the realm of cryptocurrency.

Bitcoin Cypherpunk Forecasting

Africa May Leapfrog Traditional Banking

If bitcoin acceptance reaches a critical mass where necessities of food, shelter, and clothing can be bought with it, it could reach a tipping point where it challenges the dominance of national currencies in many developing countries.

In this scenario, many areas of the world may leapfrog banking infrastructure and traditional money wire transfers. Most notably, the financial landscape in developing economies such as Africa is well positioned to leapfrog traditional banking and move directly to a bitcoin-enabled financial paradigm.

Bitcoin Leapfrogging Banks

Leapfrogging is described as a theory of economic development which skips inferior or obsolete technologies in order to move directly to advanced ones. Take, for example, phone coverage in African countries. Landline grids for household use were never fully developed because by the time Africa came into market view, mobile phones were the new paradigm of telecommunications. The entire infrastructure for household landlines was leapfrogged by cellular technology.

Similar to cellular technology, bitcoin could empower Africa to leapfrog the banking infrastructure of western countries and go directly to a new financial paradigm. The preeminent requirement on behalf of African citizens is a mobile device with internet connectivity. Many citizens of Africa are already well-versed in making mobile payments with cellular devices.

Mobile Payments

The potential to provide financial services worldwide is echoed by the adoption of mobile payment technologies such as M-Pesa, a mobile-phone based money transfer and microfinancing service for Safaricom and Vodacom. M-Pesa is estimated to have a near 70% market share in Kenya and is becoming more accepted in surrounding countries.

According to Mobile Payments Today, in 2002, only 3% of people on the entire continent of Africa had mobile phones. That number exploded to 48% by 2010. In 2014, 70% of the continent’s population had a mobile phone as the market continues to adopt cellular devices.

Banking the Unbanked

World Unbanked Population
World Unbanked Population (ALBERTO CHAIA, 2010)

Worldwide, approximately 2.5 billion people lack a formal account at a financial institution. Access to affordable financial services is linked to overcoming poverty, reducing income disparities, and increasing economic growth.

If one third of adults lack access to formal banking systems, a bank account stored in cyberspace may prove to be a catalyst of growth for developing markets.

Bitcoin will benefit Africa more than any other region in the world due to the massive business opportunity which presents itself as an unbanked, yet mobile-friendly market. Such a leapfrogging effect would serve to pull struggling African economies out of stagnation and onto the global stage in a very big way.

The combination of ubiquitous internet-connected mobile devices and digital currency presents a tremendous opportunity to radically expand access to financial services on a worldwide basis.

– Jeremy Allaire, Circle Internet Financial, 2013 US hearing on digital currencies

Currency Mismanagement

Beyond just mobile payments and access to banking infrastructure, several African economies are the product of mismanaged currency policy. Zimbabwe’s legacy of collapsed currency, with inflation reaching 231,000,000% in 2008, is a prime example of such disastrous government intervention. The hyperinflation that crippled Zimbabwe was largely caused by currency being too liberally printed, a swollen stock of money chasing a diminished supply of goods.

Advantage Africa

Bitcoin may not be the definitive answer for the masses that remain unbanked, but it is certainly a step towards a brighter future.

Governments in Africa will have diminished options for instituting thoughtless policies once bitcoin is adopted by the populous. The hotspots for adoption will be most apparent in geographies which have a very unreliable currency and lack mature financial infrastructure. Out of all the regions on Earth, African countries stand to benefit the most from financial technology such as bitcoin.

Bitcoin Cybereconomy

Bitcoin Introduces Digital Scarcity

Scarcity, the idea that some one thing is finite, has been thus far not applicable to the digital realm. Until the arrival of bitcoin, nearly anything that was of digital nature could be duplicated without recourse. Due to the ease of reproducing computer code, the problem of double-spending was the unsolved mystery of viable digital money. However, the innovation of the blockchain ledger has added a potent economic function to the equation of online exchange: digital scarcity.

The Introduction of Digital Scarcity

Beyond the realm of money supply, bitcoin has enabled everything from informational products, media, art, and more to be delivered in a manner where ownership is mathematically verified. Because digital ownership can now be determined, it proliferates a scarce quantity of goods. Digital scarcity marks the emergence of a new cohort of potential business models.

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

– Eric Schmidt, CEO of Google

The attribute of scarcity in bitcoin is not necessarily derived from the actual file information itself, but the method in which the information is stored. The difficulty in reworking the cryptographic proof-of-work which has hashed and timestamped the property with the creator’s digital signature represents the construct of scarcity. The difficulty of reworking this cryptographic chain then, is directly correlated with the difficulty of duplication (double-spending), as more hash power would be required to retroactively alter the information’s assigned ownership. Information hashed at the very beginning of the blockchain for example (such as the genesis block), could be viewed as nearly unforgeable in comparison to information hashed in the last 10 minute block because it would take magnitudes more computational power to rework that section of the chain.

The Digital Economy’s Missing Layer

Scarcity is a fundamental layer of any economic system. Without scarcity, there be no need for money. In a perfectly abundant world, resources would be limitless and money would serve no need because exchange would be entirely unnecessary.

Bitcoin introducing digital scarcity represents a milestone in the development of a totally digital economy, one which has the capacity to stand independent of national economies. In the years ahead, it is likely we will see new business models arise from the potent characteristic of digital scarcity.