Three requirements for Hyperbitcoinization – by Frank Braun

What does Bitcoin need to succeed in the long-run? How will Hyperbitcoinization become possible? Before we elaborate on this, let’s put Bitcoin into the wider context of the counter-economy.

The Counter-Economy

The counter-economy (a.k.a. the informal economy) in general is all economic activity which is not fully regulated, taxed, or controlled by the state. In its simplest form it is a lemonade stand which operates without a license. It partly includes a mom-and-pop store which optimizes its taxes by running some of its business off the books, and in the dark corners of it you can find completely separate marketplaces.

The counter-economy is not a small thing. If you combine all black markets of the world together you’ll get a 10 trillion US$ economy, second only to the United States of America. In many developing countries it already comprises large parts of the economy and it is growing faster than the officially recognised gross domestic product.

The term counter-economy in a more specialized meaning is also used in crypto-anarchy and agorism. Agorism is revolutionary market anarchism. In a market anarchist society, law and security would be provided by market actors instead of political institutions. Agorists recognize that the situation can not develop through political reform. Instead, it will arise as a result of market processes.

Crypto-anarchy is not a philosophical utopia, but the attempt to shape life and society in the presence of disruptive technologies. The corresponding technologies have already arrived and we are facing a great divide: we will either live in the total surveillance state or in a crypto-anarchist libertopia. Similar to Ludwig von Mises argument on capitalism vs. socialism, there is probably no third way regarding the question of total surveillance / transparency vs. crypto-anarchy / privacy.

Which role does Bitcoin play in this context? A free society needs a free market and a free market needs sound money. Bitcoin is money with good properties: it is pseudonymous, there are no frozen accounts in the Bitcoin system, it doesn’t allow chargebacks (a big problem for merchants accepting credit cards), and it is cheap and fast to transfer Bitcoin.

As such, the use of Bitcoin offers a huge advantage compared to a barter or cash-only economy, because developed economies need money transfer, at least for B2B transactions. So what does Bitcoin need to succeed in the long run? In short, it needs no state, no banks, but it does need over-the-counter exchanges. Let‘s look at the three hypotheses in more detail:

1. The Bitcoin community should not try to get legality for Bitcoin. We should not ask the state to resolve conflicts in the community.

2. The Bitcoin community should not focus on interoperability with the traditional banking system.

3. Widespread availability of over-the-counter (OTC) Bitcoin exchanges is crucial for Bitcoin to succeed in the long-run.

Let me explain the reasoning behind this hypotheses. Public choice theory in general and plain common sense states that people will do what is in their self interest. This includes politicians, bankers, and police. It is very important to fully grasp this simple truth: People do what is in their interest and you cannot assume that your interests equal their interests. They are usually not the same.

There is no such thing as people working for the “common good”. Even people who are supposedly helping others selflessly are actually helping themselves in order to live in accordance with their own value system.

Bitcoin Needs No State

The state is a regional monopoly of force which extracts resources (usually money) from its citizens to a) mainly finance itself, its wars and its surveillance apparatus and b) use the rest to provide so-called services which could be provided better and cheaper by the free market. These services are usually used as a justification of the existence of the state, but the real reason of its existence is the easy money the state money receivers can get. The money is taken away from the productive citizens via taxation and the monopoly of the money supply – via inflation your money loses value. Thereby, the latter strategy is better, because it is harder to notice by the ignorant masses.

If you combine the institution of the state and its inherent interests with the conclusions from public choice theory and the Bitcoin system there is potential for a lot of trouble. Bitcoin prevents inflation (there is no inflation in Bitcoin once all coins have been mined) and helps tax evasion (it is hard to regulate and control). It is potentially life-threatening to the state, because it strikes at the root of state financing. Therefore the state will fight Bitcoin heavily once it realises that. In my opinion it is absolutely ludicrous to think that the state will embrace Bitcoin.

The most likely scenario is that the state will try to close down Bitcoin altogether. If that is not possible the state will try to change Bitcoin in a way that allows implementation of Know your Customer (KYC) regulations. Just wait and see what kind of discussions we will get in the Bitcoin community once the state is cracking down more on Bitcoin exchanges and businesses. Actors like the Bitcoin Foundation will probably try to remedy the situation by “working together” with state agencies to make Bitcoin more regulatory compliant.

In my opinion the Bitcoin community should not try to get legality for Bitcoin and should not ask the state to resolve conflicts in the community. All this will do is drive more unwanted attention to the Bitcoin ecosystem. The self-interests of the state prevents legality and regulatory acceptance of Bitcoin in its current form.

Bitcoin Needs No Banks

Banks are major beneficiaries of fractional-reserve banking and can borrow cheaply from the central banks. They operate in one of the most heavily regulated industries which results in huge barriers to entry and not much competition. This leads to large profits, for example from transaction and credit card fees.

Financial service providers like PayPal, Western Union and Money Gram also have very large fees, because the regulatory hurdles reduce the amount of competition and result in high costs. Since small-income foreign workers who send money home are the largest customer base for such services the high fees are actually a tax on the poor. Bitcoin threatens this profit and poses a regulatory risk.

Therefore, Bitcoin exchanges will be attacked by competing financial institutions. A widely successful Bitcoin system is against the self-interests of the established financial industry. It makes no sense for them to deal with the corresponding regulatory challenges in the long-run. If the Bitcoin economy depends on the traditional banking system it is doomed to fail.

Bitcoin Needs Decentralised OTC Exchanges

We have seen that from a self-interest standpoint the state and the traditional financial industry are naturally opposed to Bitcoin. To ensure the long-term stability and success of the Bitcoin economy we need a completely separate system of money exchange, a network of over-the-counter (OTC) exchanges.

An OTC exchange happens when two people meet face-to-face trading Bitcoin for cash (or gold/silver). OTC is not the sending of cash in the mail or wire transfer. Such a widespread network of OTC exchanges is most resilient against state attacks, because it is heavily distributed and it entirely skips the banking system. This reasoning supports
the third hypothesis: Widespread availability of OTC Bitcoin exchanges is crucial for Bitcoin to succeed in the long-run and give us more freedom.

Over-the-counter exchanges should be arranged completely online. To do that, you should get your secure IT infrastructure and privacy basics down:
• use email encryption (GnuPG)
• use hard disk encryption
• use IP address anonymization (for example, with I2P/TOR/VPN)
• use (multiple) pseudonyms

To arrange the OTC deal online you can use websites like bitcoin-otc.com or localbitcoins.com. You should agree on the price and the amount beforehand and limit the transaction size. In a single transaction, deal only what you could afford to lose. The actual face-to-face meeting only finalizes the deal, there must be no deviation from the agreement. If you deviate, the probability of fraud rises sharply. The digital arrangement of OTC exchanges protects against the state: you produce less evidence and you make it harder to prove how much you dealt in the past.

Frank Braun is a software developer from Berlin. He is also an editor of the online magazine shadowlife.cc.

The opinions expressed herein do not necessarily reflect the opinion of the editors.