The above illustration highlights the problem we are having regulating bitcoin. It is an image that helps us to grasp the parable of “The Blind Men and the Elephant.”
The parable goes like this:
In a distant village, a long time ago, there lived six blind men. One day the villagers announced, “Hey, there is an elephant in the village today.”
They had never seen or felt an elephant before and so decided, “Even though we would not be able to see it, let us go and feel it anyway.” And thus they went down to the village to touch and feel the elephant to learn what animal this was and they described it as follows:
“Hey, the elephant is a pillar,” said the first man who touched his leg.
“Oh, no! it is like a rope,” argued the second after touching the tail.
“Oh, no! it is like a thick branch of a tree,” the third man spouted after touching the trunk.
“It is like a big hand fan” said the fourth man feeling the ear.
“It is like a huge wall,” sounded the fifth man who groped the belly .
“It is like a solid pipe,” Said the sixth man with the tuskin his hand.
The parable exemplifies how US regulators have dealt with Bitcoin. The SEC wants to define it as a security. The CFTC says it is a commodity. The IRS- property. FINCEN wants to call it money. The trouble is bitcoin is really none of these things and it will be hard to defend these definitions in court.
Witness the recent Florida ruling:
A Miami judge has dismissed charges against a Florida-based bitcoin seller after he was indicted in 2014 on illegal money transmission and money laundering charges.
It was a surprising ruling and the State of Florida is seeking an appeal. I suspect it will fail:
Elsewhere in the ruling, Pooler suggested that lawmakers in Florida may want to move to address how the statutes, as they exist today, do not account for bitcoin and digital currencies.
In other words, you can’t call it a pipe, tree branch or ear when the thing is actually an elephant:
The Florida Legislature may choose to adopt statutes regulating virtual currency in the future,” she wrote. “At this time, however, attempting to fit the sale of bitcoin into a statutory scheme regulating money services businesses is like fitting [a] square peg in a round hole.
The point is Bitcoin acts like money but is not money. It acts like property, but it isn’t. The same for securities and commodities. Certainly bitcoin can act like all these things, but isn’t that what makes it utterly remarkable? Never in history have we had anything like it.
Bitcoin is a network. It is software. It is certainly not a coin you can own, because all you have is specific code in a virtual wallet that agrees with a ledger that exist on all the nodes on the network. If you accept the virtual as reality, you are walking a garden path that leads to failure.
The point is, bitcoin is already highly regulated. How? It is regulated by the protocol of the network. The genie is already out of the bottle, you can’t put this one back in. If regulators want to regulate, they will need to work with the protocol and above all, accept that there is an elephant in the room (Sorry, the cliche’s are too hard to resist).
We can’t overlook what bitcoin is just because it is too technical. We are already facing this problem with High Frequency Trading. Regulators are struggling:
The challenge in pursuing charges against these firms is that they are taking advantage of changes in the technology underpinning the markets to profit from quick trades, which is not illegal. But regulators can find it difficult to draw the line between acceptable trading strategies and manipulation because of the complexity of the strategies.
Computer technology is moving faster than regulators and they can’t keep up. Imagine when High Frequency trading starts working in earnest within the cryptocurrency markets? In fact, there is evidence to suggest this is already happening.
Caitlin Zaloom, a cultural anthropologist wrote an amazing book, “Out of the Pits”, which I recommend for those interested in pursuing how financial markets are adapting to the digital age. She makes an interesting point that could guide regulators in their mission. She was doing field work, interviewing traders on the floor of the CBOT. The problem was, the traders insisted she would never understand them until she had actually taken some risk in the markets herself.
By insisting that my knowledge of their task would be inaccurate without a personal risk, the traders taught the anthropologist an important fieldwork lesson: abstracting the task can limit analysis.
I can’t tell you how often I encounter otherwise brilliant legal and financial minds, who discount bitcoin in precisely the same abstract way. I interact with them mostly on Twitter and they often have good arguments that many would agree with. However, when I ask them if they ever used bitcoin, they tend to change the subject.
This type of intellectual abstraction is what bothers computer software developers the most. They are a sensitive bunch, just like traders, and they are frustrated that much of what is bitcoin can only be understood by the computer geeks. They hate it when all the “experts” miss the mark and never bother to understand the protocol.
We really have no choice but to get in there and understand all the complexities of our digital age. By doing so we can leave the land of the blind and see the elephant for what it is.
Disclaimer: The author owns Bitcoin in his portfolio. Nothing he writes should be considered financial or legal advice.