Silicon Valley Was Built On Permissionless Innovation; We Shouldn't Give That Up Just Because 'Bitcoin' Is Involved

from the licensing-is-a-problem dept

Innovation in America, and Silicon Valley in particular, has never waited for permission. The ease of starting companies, the low barriers to accessing capital, and (of course) the existence of an open and free internet on which anyone can build anything have all been major contributors to the vitality of Silicon Valley and the wider tech industry, which permeates nearly everyone's daily life. The most successful companies of our time — Apple, Google, Facebook, Twitter and more — didn't have to ask anyone for permission to innovate. They didn't have to explain their businesses and get special licenses. They just came up with an idea and built it.

This is important.

Innovation only exists when those who have ideas can go out and try to execute them, quickly, with as few barriers as possible. Each hurdle weeds out more and more innovators before they have a chance to breathe the open air of the marketplace and find out whether or not they've truly created something useful.

So we should be concerned when governments create unnecessary "permission" requirements without clear benefit.

Back in March, we wrote about a problematic bill in California that would regulate Bitcoin-related businesses, effectively requiring them to ask the state government for permission to operate. A few months ago, the bill moved forward. And now it's on the move again, passing the House and heading to the Senate for a vote.

The bill has improved quite a bit since the initial version, but there are still serious concerns about the framework it sets up. While there's a reasonable argument that an absence of rules is problematic, mainly for the uncertainty it creates, the rules that are put in place could have a tremendous impact on future innovation. We should be exceptionally careful when implementing rules that have the potential to shape — or strangle — the very roots of innovation. New York, for instance, has already established BitLicense regulation, chilling Bitcoin innovation in the state that is the financial center of the world.

The proposed California bill does not go that far, but still revolves around obtaining special licenses — i.e. permission — before innovating. As the bill itself says:
This bill would enact the Virtual Currency Act. The bill would prohibit a person from engaging in any virtual currency business, as defined, in this state unless the person is licensed by the Commissioner of Business Oversight or is exempt from the licensure requirement, as provided. The bill would require applicants for licensure, including an applicant for licensure and approval to acquire control of a licensee, to pay the commissioner a specified nonrefundable application fee and complete an application form required to include, among other things, information about the applicant, prior virtual currency services provided by the applicant, a sample form of receipt for transactions involving the business of virtual currency, and specified financial statements. The bill would make these licenses subject to annual renewal and would require a renewal fee paid to the commissioner in a specified amount. The bill would require licensees to annually pay the commissioner a specified amount for each licensee branch office. The bill would require applicants and licensees to pay the commissioner a specified hourly amount for the commissioner’s examination costs, as provided. The bill would also require the commissioner to levy an assessment each fiscal year, on a pro rata basis, on licensees in an amount sufficient to meet the commissioner’s expenses in administering these provisions and to provide a reasonable reserve for contingencies.
The authors have clear and reasonable intentions. They're worried about the kind of virtual currency-related fraud that has shown up in several recent and troubling stories. The bill strives to limit the licensing requirement to companies that are engaged in moving currency around — an area already covered by many existing laws.

But Bitcoin, and (even more importantly) the blockchain technology that underlies it, does much, much more than just move money around. It's sometimes difficult to understand this if you're not immersed in the Bitcoin world, but Bitcoin and the blockchain are two separate but deeply intertwined concepts. They exist because of each other, and they need each other — but Bitcoin is just the currency aspect, and the blockchain itself is much more powerful. And there's a real risk that when you set up a permission-based system for Bitcoin you slide down a very slippery slope towards regulating all blockchain-based innovation, even things which are wholly unrelated to "moving virtual currency around," despite their ability to do so.

At this stage of the game, creating licensing regimes and putting permission barriers on innovation is very, very premature. Everyone is still figuring out just what the blockchain is good for, and it's a long and varied list. Blockchain technology was crafted to solve a difficult currency problem, but it has enabled all sorts of powerful new apps and services that are often much more secure and useful than the alternatives. But it's still too early in the rise of this core infrastructure technology to say for certain what those "killer apps" will be.

On top of that, because Bitcoin is programmable, many of the biggest concerns that regulators are expressing can be dealt with in the code itself. Rules can be built into the code without having to rely on a centralized bureaucracy. In fact, that's one of the key features of the blockchain concept.

Blockstream, Bitgo and a few other companies that are innovating heavily in this space already have now sent a letter to the California Senate, which we at the Copia Institute helped them put together and advised them in writing. As Blockstream notes in a related blog post, we should be careful about requiring permission without a clear reason:
A key topic at issue in any of the legislative debates underway in California and elsewhere is licensing. In systems like Bitcoin, which establish a trustless and decentralized infrastructure, licensing offers little upside in terms of consumer protection and security, yet imposes substantial costs and burdens on innovators. We strongly believe the California law should not require licensing of entities that don’t hold unilateral custody of digital currency. And even when an entity is a custodian of users’ digital currency, we see value in alternative policy approaches like safe harbors or the UK’s voluntary consumer protection standards in striking a balance between consumer safety and innovation.
Again, the intentions here are good. The authors of the bill want to prevent truly bad actors from doing dangerous things, while at the same time laying out the ground rules under which companies in this space can act. But the bill is still a step down the path towards requiring permission to innovate, and that's something to be very careful about, especially when other jurisdictions aren't erecting the same barriers. We should also be wary about deciding to put layers of government bureaucracy on things that can be accomplished in the code itself. As the quote above notes, the UK has taken an innovation-friendly approach that does not require permission, and is thus becoming a welcoming home for innovators.

Let's look at a counterexample from the rise of the internet itself. One of the most powerful factors in fostering online growth was Section 230 of the CDA, which set up a "safe harbor" for intermediaries of internet content. The key was that it set out useful ground rules, and said "if you follow these rules, you are free from liability." It did not require you to ask for permission first. As we enter an age of innovation in the blockchain, we should be looking for similar solutions. It's great to define a safe harbor where open innovation can occur, but requiring a specific "license" only creates headaches for everyone involved.

It builds up bureaucracy. It becomes a weapon wielded by incumbents to block competition. And, worst of all, it repels innovation.

Silicon Valley was built on permissionless innovation, especially on the internet. Saddling new core infrastructure like Bitcoin and the blockchain with a permission-based framework sets the wrong tone entirely, and virtually ensures that Silicon Valley won't be home to the leading innovators in this new and exciting space.

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  • This comment has been flagged by the community. Click here to show it
    identicon
    Anonymous Coward, 10 Jul 2015 @ 11:01am

    Half true. But you keep disregarding the property rights of others.

    Criminals don't bother with permission, either. As Kim Dotcom, whom you continue to support.

    So long and so far as you support "business models" that rely on using the content of others, you support criminal conduct.


    Now, will this comment make it through your censoring? Or is use of this web-site based on permission?

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 10 Jul 2015 @ 11:53am

      Re: Half true. But you keep disregarding the property rights of others.

      Still on the side of guilty till proven innocent? Do you get your posse together and string up offenders before trial? I prefer to be on the side that would let 100 guilty people go free than 1 innocent person be falsely convicted. Kim still hasn't been declared guilty and as far as I am concerned, the US has a vendetta against him and wouldn't send him to trial fairly if he went. Especially since the US has already done a bunch of the illegal things against Kim.

      reply to this | link to this | view in chronology ]

    • icon
      Derek Kerton (profile), 10 Jul 2015 @ 12:19pm

      Re: Half true. But you keep disregarding the property rights of others.

      You're not censored. You are just voted down by the community.

      See, you've already been flagged, and I'm still able to read your crap.

      So stop whining.

      reply to this | link to this | view in chronology ]

  • This comment has been flagged by the community. Click here to show it
    identicon
    Anonymous Coward, 10 Jul 2015 @ 11:04am

    By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

    Alternate currencies have been tried before, and they're always criminal schemes.

    reply to this | link to this | view in chronology ]

    • icon
      Gwiz (profile), 10 Jul 2015 @ 11:20am

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      By the way: Bitcoin is not backed by any substance...

      The US Dollar isn't backed by anything other than faith that the US government will continue to exist. How is Bitcoin any different in that respect?


      ...nor actually traceable...

      The transactions are completely accountable. More so than even our current banking system. Everyone can see the block chain which lists the transactions. The parties involved are obscured, but the transactions are there.


      ...can be remotely deleted,...

      How? Please explain. There's thousands of copies of the block chain and if yours doesn't match it gets tossed.


      ...subject to fraud.

      Perhaps. But you know what else is susceptible to fraud? Any currency.

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 10 Jul 2015 @ 11:49am

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      Ah, so just like bank-issued credit.

      reply to this | link to this | view in chronology ]

    • icon
      Derek Kerton (profile), 10 Jul 2015 @ 12:23pm

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      Others have noted that any FIAT currency, like the US$ is also faith-based.

      But with bitcoin, the ability to print more is removed. The decision structure is distributed, not subject to the whim of a fed or central banker.

      And I'd add that a lot of people want to go back to the "gold standard", but the value of even gold is faith based. Think about it - what fn use is gold? You can't eat it or build a house with it, so the only reason it has value is that we all agree that it is valuable. Diamonds are the same - a fake scarcity and marketing campaign has given us the impression this carbon is inherently valuable. It's not.

      reply to this | link to this | view in chronology ]

      • icon
        Gwiz (profile), 10 Jul 2015 @ 6:32pm

        Re: Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

        But with bitcoin, the ability to print more is removed. The decision structure is distributed, not subject to the whim of a fed or central banker.


        Right. What is really funny is that I've seen Blue rant about the Federal Reserve on more than one occasion. Here's one example. Now we are talking about Bitcoin, which doesn't allow such manipulation by design, and Blue's still bitching.

        Just goes to show that Blue is only here to nay-say everything he possibly can, even to the point of contradicting himself and looking foolish.

        reply to this | link to this | view in chronology ]

      • identicon
        observer, 10 Jul 2015 @ 6:34pm

        Re: Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

        Gold is useful for making certain electronic parts, but "ooh, shiny" antedates that by a good few millennia.

        reply to this | link to this | view in chronology ]

      • icon
        Gwiz (profile), 10 Jul 2015 @ 7:00pm

        Re: Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

        Think about it - what fn use is gold? You can't eat it or build a house with it, so the only reason it has value is that we all agree that it is valuable.



        The island of Yap is a great example to reinforce this point.

        http://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-money

        reply to this | link to this | view in chronology ]

    • identicon
      observer, 10 Jul 2015 @ 6:37pm

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      I'm healthily sceptical of Bitcoin as it currently stands, but every currency was an "alternate currency" at one point.

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 13 Jul 2015 @ 8:57am

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      Cash isn't backed by any substance, it's not easily traceable, can be stolen is totally subject to fraud.

      So what's your point about Bitcoin again?

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 14 Jul 2015 @ 2:39pm

      Re: By the way: Bitcoin is not backed by any substance, nor actually traceable, can be remotely deleted, and subject to fraud.

      Money is not backed by anything.

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Anonymous Coward, 10 Jul 2015 @ 11:11am

    Maturity

    I think that Bitcoin has some maturing to do before I will use it. I also think it, or something close to it will mature to the point that it will be commonly accepted.

    I had not thought of the technology having other uses. What are some of the possibilities?

    reply to this | link to this | view in chronology ]

    • icon
      GMacGuffin (profile), 10 Jul 2015 @ 11:26am

      Re: Maturity

      Short answer: Blockchain is an public ledger that cannot be altered unless you have more computing/hashing power than everyone else on the decentralized network combined; e.g., virtually impossible. So basically anything you can think of that can go in a ledger sheet could be done with blockchain tech, and nobody can realistically mess with the numbers.

      reply to this | link to this | view in chronology ]

    • icon
      Leigh Beadon (profile), 10 Jul 2015 @ 11:54am

      Re: Maturity

      One very simple example would be a voting system. You can create your own tokens on blockchain technology, and they don't have to represent currency, or follow the same rules, as it's all highly programmable.

      So say you issued everyone in your organization or whatnot a single "Votecoin", which has the ability to be "spent" on a candidate or option or whatever the vote is about, but is otherwise non-transferrable. Everyone "spends" their votes.

      What has that accomplished? Quite a lot: you get a full public ledger of the entire vote, accessible and verifiable by everyone involved, but in which everyone remains anonymous, and in which fraud is impossible, all completely online without the need for any sort of agency or watchdog to run the whole thing beyond simply issuing the "Votecoins", and no need for any kind of additional security or encryption.

      reply to this | link to this | view in chronology ]

    • identicon
      Satoshi1, 10 Jul 2015 @ 1:27pm

      Re: Maturity

      "What are some of the possibilities?"


      You can take ANY database, from ANY industry and convert it to a decentralized database, protected by the security of the Bitcoin network.

      The possibilities are endless....put your sunglasses on because the Bitcoin rocket ship is taking off soon and it's gonna be huge.

      Buy some Bitcoin, get a ticket for the rocket ship and buckle in.

      reply to this | link to this | view in chronology ]

  • identicon
    Rekrul, 10 Jul 2015 @ 11:23am

    Again, the intentions here are good. The authors of the bill want to prevent truly bad actors from doing dangerous things, while at the same time laying out the ground rules under which companies in this space can act.

    And extract license fees! Don't forget the license fees!

    The real issue here is that governments don't like what they can't control. Any time a new technology comes along that has the potential to disrupt the status quo, the government wants to control it.

    If solar-powered homes ever become more than a niche market, the government will step in and try to control that as well. You'll need a license to put solar panels on your roof or in your yard and anyone not having a license will be deemed to be "stealing" sunlight.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 10 Jul 2015 @ 11:55am

      Re:

      Now wait a minute. What about the section of the sun I bought? I should be getting some of those licensing fees.

      reply to this | link to this | view in chronology ]

  • icon
    toyotabedzrock (profile), 10 Jul 2015 @ 12:01pm

    Innovation on the internet is often free of third party harm. Bitcoin looks to be internet only but it also presents itself as a money transfer service and an investment service. Which as seen in 2008 can be used for fraud with big consequences that the average person can't always understand.

    reply to this | link to this | view in chronology ]

    • icon
      orbitalinsertion (profile), 10 Jul 2015 @ 12:55pm

      Re:

      Legislators clearly do not understand it, either, and their regulations (and deregulations) rarely hinder fraud and other problematic behaviors, and frequently help them along. Also, as a whole, they don't listen to anyone who does understand, or whacking the great piles of evidence stuffed under their noses.

      reply to this | link to this | view in chronology ]

  • identicon
    John Cressman, 10 Jul 2015 @ 12:16pm

    Virtual current issues in ONE state

    California seems hellbent on self-destruction. Is it run by Greeks now?

    So, if I were a business, why would I not just incorporate in Las Vegas. Heck, I don't even have to move from California. I just run the business remotely. And now California gets none of my business revenue.

    Talk about electing IDIOT socialists.

    While they're passing the law, maybe they want to release a few more illegal immigrant murderers.

    reply to this | link to this | view in chronology ]

    • identicon
      Pragmatic, 13 Jul 2015 @ 5:57am

      Re: Virtual current issues in ONE state

      Partisanship causes more problems than it solves. We've got Red Team running both houses of Congress now, and we're not exactly basking in paradise, are we?

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 10 Jul 2015 @ 2:31pm

    Even if the USA wasn't currently one of the most corrupt governments around this would be a bad idea.

    reply to this | link to this | view in chronology ]

  • identicon
    GEMont, 11 Jul 2015 @ 1:15pm

    Faith based usury

    I have complete faith in the authorities that strive to regulate human endeavor.

    If there is a wrong way to do it, we will find that way and enshrine it in law, adopt it into our cultures and insure that it will be nearly impossible to remove it.

    ---

    reply to this | link to this | view in chronology ]

  • identicon
    Pragmatic, 13 Jul 2015 @ 5:54am

    Re: Financial center

    Don't bet the farm on it while the petrodollar is a thing. That's what all the regulation is about.

    reply to this | link to this | view in chronology ]


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