Regulators Need to Take It Easy on Bitcoin Startups | Hacker News Reader

Regulators Need to Take It Easy on Bitcoin Startups

wired.com

16 pointspeter12357 comments

I agree. Bitcoin exchanges should be free to lose and/or steal all the bitcoins they hold at any time with no repercussions. As a non-participant in bitcoin, lack of regulation makes the whole bitcoin economy so much more interesting to read about.

It's already illegal to steal bitcoins. And if an exchange represents that it takes certain measures to secure wallets when it really doesn't, that's fraud. Other than that, what is there to regulate?

Well, I lost all of my Mt. Gox bitcoins, and it seems to me there were no repercussions for the founders. They could have stolen the coins and nobody would be the wiser. It's already become clear that there was much more to the story than Gox has revealed, e.g. that they knew about malleability since 2011 and then were reminded again in November.

Why hasn't anyone gone after the founders? Why haven't you?

Heh. Because I no longer have the money to.

Sorry for your losses. The silver lining is next time, you and others will probably be much more critical of an institution before trusting them with your valuables (even virtual ones). You'll be more apt to demand more transparency and evidence of solvency. That's the piece missing in the feedback loop for so many other parts of the financial system.

The great thing about bitcoin being unregulated is that governments haven't yet gone after mixers, so it's trivial to launder bitcoins. If you want to steal and not get caught, bitcoin is the place to be.

Curious what you think about PCI Compliance and whether it should exist. After all, stealing credit card numbers is already illegal.

That's a lot different. Credit card holders aren't even responsible for fraudulent charges. That's one advantage, but it takes a ton of infrastructure and cooperation to make that happen. There's plenty of room for a money transfer option that doesn't have those downsides, even if it gives up some upsides too.

PCI Compliance is entirely private/free market, isn't it?

Yeah. But is this a conversation about "if you want to participate in system X, follow rules Y" or specifically anti-government sentiment?

As the Wired article talks about the cost of coming into compliance, I think it is reasonable for the parent poster to ignore the source of the rules. Unless you wanted to make a point about the source of rules impacting compliance costs or voice your other reason for such a government/private distinction. But now that I've already started arguing with myself I'm not going to go any further.

I don't know much about PCI Compliance, but it appears to be an industry-imposed standard, and Nevada is the only state that mandates it: https://en.wikipedia.org/wiki/Payment_Card_Industry_Data_Sec...

I'm sure this is a silly question, but... under what law is it illegal to steal bitcoins, exactly?

Presumably under any theft law in any state?

Nothing was "stolen", the state of the blockchain was altered in a way you did not want to occur. Now everyone using bitcoin agrees that any transactions you issue are invalid because you don't have any funds on the address you'd like to pay from.

Convincing a judge there was an actual theft is going to be your first challenge; unless laws are updated the theft of bitcoins doesn't obviously fit into existing rules that were designed around physical goods or fiat currency.

It's not that hard. Moving a few numbers around in a bank's mainframe could be described the same way.

Yes, but we have laws that specifically recognise existing currency. Is their applicability to bitcoin entirely clear?

Yes, but looting the corpse of a fallen enemy on an MMO could be described the same way, as well. Should that now be considered a crime?

The line gets very blurry especially when you start accounting for MMOs with official real-world economic links like EVE.

I'm not saying I think theft of bitcoins shouldn't be illegal, just that the situation is a lot blurrier than some people seem to think, and until someone is convicted for (or at the very least charged with) stealing bitcoins there's really no point in debating the matter.

Nothing was "stolen", a number in your bank account was just deducted in a way you did not want to occur.

There are laws specific to electronically stored fiat currency. They don't automatically apply to World of Warcraft gold, spaceships in Eve Online or Bitcoins.

If you can establish that bitcoins are personal property, then at least in California where I am, stealing is a violation of California Penal Code section 484a.

Define relevant measures for protection: too many exchanges (three so far) have gotten away with the equivalent of bacon advertising as “without any added sugar”.

I find it amusing when it’s about stupid-mocking the content of my breakfast, it's a lot less enjoyable when the security protocols being explosively undermined by jerks also protect and ensure trust in non-BitCoin economy.

You are not alone. Stop arguing that is your libertarian right to lick plague-ridden rags.

Article says: >>Not because protecting consumers isn’t important — it is — it’s just that regulators should balance their goal of protecting consumers with the equally important goal of fostering a climate that welcomes entrepreneurs and innovation.

Of course nobody wants random mass-bitcoin-holding businesses imploding with robberies and scams, but I don't think I want it to be like Banks/WesternUnion/etc either. One issue in particular; I don't want this[1] to be possible with bitcoin.

1. http://falkvinge.net/2012/11/20/europarliament-scolds-visa-m...

Jerry has a few things right here, but he's mostly wrong.

Regulators should do anything but "take it easy" on Bitcoin startups. Bitcoin has proven to be in practical terms one of the most risky potentially legitimate investment classes known to man. I'm not discussing its potential use as a currency because it's in fact so risky that it hasn't even made it there yet. All of this means that regulators should be forcing Bitcoin startups to justify themselves.

I have proposed a bill to amend 18 U.S.C. § 1960 that I think would be a step in the right direction:

http://www.plainsite.org/issues/index.html?id=2

I think the notion of a proportionally and increasingly scaled premium paid to an FDIC-style insure is the right way to go (bigger institutions put slightly more in per dollar held in trust to account for systemic risk), but if you handle Bitcoin? Multiply the premium times 30.

If you don't want the risk, then don't invest. Nobody is forcing anyone to put money into Bitcoin or Bitcoin-related ventures.

I haven't. But it's not fair or sensible for Bitcoin-related companies to get a free pass (when they present higher levels of risk) while other companies that aren't similarly risky get normal levels of scrutiny.

You're assuming a false dichotomy here though. The question you should be asking yourself is whether companies should be under such scrutiny in the first place, not whether they should be treated like everyone else.

Whoa there!

I'm a supporter of bitcoin and I got some funds in it... but I __definitely don't want__ etrade.com to be free of regulations the way bitcoin exchanges currently are!!!! I'm prepared to lose my bitcoin funds at any moment. Losing my funds in etrade would wreck me. I understand stocks can be risky, but most of my funds are in very low risk stock like SPY and AGG. Barring an economic disaster(2008 mortgages), I don't want those funds at risk for random theft or scams.

The only thing I think I want from bitcoin exchanges is to be FDIC insured. But I'm sure to get that requires all kinds of regulations to be followed undermining whatever bitcoin is trying to accomplish.

It's important that the corner bank be under scrutiny because everybody knows you're supposed to put your money in a bank, and you get a lot of very unsophisticated people wandering in. There's nothing wrong with financially risky things existing so long as there isn't a substantial problem with random people thinking that they're less secure than they are. And besides, penny stocks are just as risky as bitcoins but it's still legal for normal people to invest in them.

This may all change if crypto-currencies take off the way their supporters dream, but as long as most people's experience with them is hearing about MtGox's implosion on the news more regulation probably isn't needed.

I'm happy that the US is insuring my savings account and regulating the bank that holds it, but I'm glad I could risk my money on bitcoin if I chose.

> It's important that the corner bank be under scrutiny because everybody knows you're supposed to put your money in a bank

There's actually a certain chicken-and-egg aspect to this, where "everybody knows to put your money in a bank," and is unsophisticated (i.e. uneducated) about banking, because the government promises to bail you out if the bank loses your money.

It's really not hard to get a sense of a bank's safety from a combination of the interest rates it pays (high rates are a danger signal) and third-party services like Weiss Ratings. No one bothers though, because why even care whether your bank is safe or not?

Everybody has varying levels of comfort with the amount of risk they're willing to take. There's no need for regulation. Let the companies operate how they want to operate and let people decide if they want to do business with them. We don't need bureaucrats telling us the level of risk we're allowed to get ourselves into.

That ship's already sailed.

Governments regulate things that are risky. It's the main reason we have agencies like the FDA and SEC.

Are you familiar with the revolving door between the FDA and companies like Monsanto? It doesn't make me feel much safer about what is approved by the FDA. Not to mention the number of drugs that could be saving lives but are tied up in their bureaucratic processes.

Let people decide what they want to consume.

I don't necessarily agree with regulating risky things, so there's no point arguing with me. I was just pointing out that we already do it, and are likely to continue doing it.

Which I believe is a horrible mindset to have. That's why I prefer to inform people of these things because "we already do it, and are likely to continue doing it" isn't acceptable in my book.

We already did slavery once, and were likely to continue doing it at the time. We already kept women from voting, and were likely to continue doing it at the time.

First off, it's a little hyperbolic and a straw man to compare risky behavior like trading bit coin with civil rights violations like slavery and women's suffrage. If nothing else, risk minimization laws protect everybody equally.

And although I personally agree that it shouldn't be the government's job to baby sit people, the country as a whole is currently going the opposite direction with things like the Affordable Care Act and Sarbanes Oxley.

When too many people take bad risks, it can take the whole economy down with it, affecting people who never took the risk in the first place. So yes, we do need bureaucrats to regulate risky investments.

And why should we trust bureaucrats to do this? Won't they just sell their political power? Who will regulate the regulators? And who will regulate those regulators? I don't think you've proposed a real solution.

1. I haven't proposed any solution. I'm defending the existence of regulators. And I never said regulation was perfect. Just that we need some.

2. Asking "Who will regulate the regulators" is unproductive. Obviously, human nature wont change, and corruption will always exist. But just because regulation isn't perfect doesn't mean we should throw it out.

Also, you should already know the answer to your own question. By promoting transparency, citizen participation, and establishing checks and balances, we can mitigate the effects of corruption (but not entirely). This has been known for, I dunno, a few hundred years. Are we really debating this now?

Leaded gasoline. In my 70s-era car, I want to use it instead of unleaded, since it improves my fuel economy significantly. However, the total cost of the lead in the environment far outweighs the economic benefit. We needed regulation to fix this.

Thalidomide. Regulation prevented thousands of deformities in the US by imposing a proof-of-safety barrier before the drug was allowed to be sold. Other countries were not so lucky as to have that regulation in place.

More to the point... How, as an individual, am I supposed to make an informed judgement about the relative risks of MtGox vs Bitstamp, say? I have no inside information about how those companies operate. There's a huge information asymmetry problem that regulation alleviates.

> There's a huge information asymmetry problem that regulation alleviates.

How does regulation alleviate it?

By forcing companies to disclose the truth about their product.

We could easily go back and forth with cases that show the market regulating itself or bad events that happened when there wasn't any regulation in place - not because of it. Anyways, to the more important point.

You would make a judgement based on their website and feedback from sources such as HN, Reddit, Twitter, word-of-mouth, etc. That's how we all make decisions based on nearly everything we use regardless of whether or not it's regulated by the government. And if it's a new service where you don't have access to credible sources, you make a judgment based on the level of risk you're comfortable with.

That's exactly why some people are willing to give emails or phone numbers for 'Show HN' posts on here and others are not. Some don't care so much and really want to try the product. Others want to wait to ensure they are credible.

If I want to keep my BTC at an exchange or bank with deposit insurance, I can choose to do so for myself, thanks.

Don't get me started on the notion of deposit "insurance" backed by razor-thin reserves against the total level of liabilities, like what the FDIC represents today. It's hard to imagine a more effective engine for creating moral hazard (and ultimately systemic risk, although we still have yet to see this manifest itself with the FDIC, I think it's coming). As I see it, one of the biggest potentials wins from the Bitcoin ecosystem is bringing back the possibility for custodians to compete on terms of liquidity and safety. It would be a shame if that potential was squandered by a meddlesome intervention like yours.

compete on terms of liquidity and safety

But this doesn't work, because the public have no real means of assessing either of these and Akerlof's Market For Lemons applies.

If "the public" doesn't have the means to assess it, do you really think that a handful of regulators will have the means? After all, the public is a superset of the regulators.

Didn't we already try the whole a-handful-of-experts-in-the-government-will-keep-the-system-safe thing leading up the last financial crisis? The portions of effort just aren't there to make that work. One single large financial institution can employ many more lawyers and accountants intent on skirting regulation than law makers and gov't agencies can employ intent on reigning them in.

The public has very little (it's inaccurate to say "no") means of assessing the safety of banks precisely because the government has told them not to worry about it, to just bank wherever and let the FDIC sort everything out. There is almost no market demand whatsoever for liquidity or safety reporting services in USD banking

Before the FDIC's existence, there was a plethora of publications, audit services, and third-party examiners for banks -- a kind of like Consumer Reports for financial institutions. If fractional reserve banking ever takes hold in Bitcoin (and there's reason to doubt that it will, the system is kind of designed to discourage it as much as possible), I expect something similar will arise in Bitcoin.

Here's a paper talking about the bank reputation ecosystem and how it worked in the pre-FDIC days. Contrary to popular modern perceptions, it wasn't an era of constant boondoggles by shady wildcat banks. http://www.nber.org/papers/w4400.pdf?origin=publication_deta...

The interesting thing about Jerry's article is that beyond the "take it easy" headline, he seems to be suggesting that even unlicenced Bitcoin startups should have to pay a bond proportionate to the level of transactions they're handling (presumably in dollars) and could be shut down relatively swiftly if they attract consumer complaints. That's placing a higher bar for entry than exists in a regulatory environment where many BTC startups think they can worry about money transmissions licences later anyway.

The bitcoin community needs to come together and prove that legitimate self-regulation and sufficient transparency can work. We need to shed the Mt. Gox's by choice, and choose firms that are willing to undergo third party audits (like Coinbase did recently).

I'm a firm believer that there are better avenues than regulation-at-gunpoint, and cryptocurrencies are looking like a big part of that, but the community needs to prove this.

To self-regulate, we need to convince people not to keep balances in third-party wallets. This was one of the main features of bitcoin, and people are just ignoring it. I don't hold out much hope for other reforms like "don't trust faceless websites with your money".

Money and self-regulation is never a good mix and it has not even been 10 years since the last time we have all suffered the result.

Of course, the point is not doing it too early to avoid chocking the potential of bitcoin, but eventually, as bitcoin grows, after the power has shifted from the original believer to greed-driven finance professional, you will need regulation to rein them in.

Of course, we can dream that communities will be strong enough. But let's be realistic - financial world has the money and it is their job to play with it, it would make no sense for them to ignore something as important as bitcoin is becoming.

>Money and self-regulation is never a good mix and it has not even been 10 years since the last time we have all suffered the result.

Unless you have unyielding cryptographic primitives to help.

I'm at the Austin Bitcoin conference right now listening to a talk about Open Transactions and cryptographic exchange auditing. It sounds like exchange theft is pretty much a solved problem. Using crypto, we now have ways to make theft or coin loss pretty much a problem of the past, because we can make operating a fractional reserve exchange impossible and make stealing coins very, very hard. It seems like cryptographic regulation is drastically more effective than government regulation.

So, a prediction - stealing coins will always happen. Maybe no one will break your cryptography, but you will never close off all side channel attacks.

So should we give up now?

Of course not - but don't expect to be able to throw away lines of defense, like regulation and state enforcement.

No they don't.

Thank you for your valuable insight.

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