How bitcoin's immaculate conception was a regulatory miracle

Amber Scott

Thank you to Zooko where the concept of bitcoin's immaculate conception was originally proposed. Here is my hefty disclaimer. Okay. In the Catholic tradition, I wanted to start with a confession. In this group it might be fairly appropriate.

I didn't give a single damn about bitcoin the first many many times that I heard about it.

I interacted with bitcoin for the first time under what I am going to say is a bit of duress, which is to say someone that I really know and that I like and respect deeply said "I'm doing a bunch of processing for a bitcoin exchange and can you update my risk assessment". My gut instinct was no. I read about bitcoin in Wired. I knew about Liberty Reserve and eGold and the trouble they got into. I was a regulatory compliance geek and I didn't understand why he was interested. He asked me, and then I talked with him. I found every single aspect about bitcoin to be annoying, and I found it hard to understand. They were not things that appealed to me as a former banker or things that appeal to me as someone who has an MBA and they did not jive with me about anything I knew about finance or the world. It was challenging, and not in a good way. He was really excited. I wanted to be excited too, but I didn't get it.

So I asked that he pay my retainer in bitcoin for that engagement. This was in 2013. So he told me to download a wallet, figure out wallet security, and he said he could not help me with securing a private key because it would expose him to my private key and I thought man that's stupid. He sent me a bunch of articles and resources on a Thursday and by Monday he called back and he said you can tell me if I'm ready to accept bitcoin or not. So I spent the weekend reading and searching and getting really, really angry a lot.

In the end, bitcoin did win me over. I started to develop a genuine interest which came from the realization that for me as a Canadian that grew up in Canada-- someone asked me do I trust my banks? Yes, I do. I can. I've been very lucky in my lifetime that this is a true statement for me. But I understand it's not a true statement for everyone. I'm familiar with stories for people who immigrated and stuffed gold coins into baby diapers or precious metal melted down to coat hangers because coat hangers aren't likely something someone is going to seize and they aren't going to look in the baby's diaper.

The idea that you could move wealth by remember some words, a string of letters and numbers if you have that kind of memory, that was really appealing to me. But as a compliance geek, there were a lot of things that still raised big scary risk questions.

In the religious theme... In the beginning, there was the Byzantine Generals Problem and Satoshi said let there be a p2p electronic cash system. This is funny to me now, and it was absurd to me back in the day. I didn't understand who was thinking about BGProblem. I was challenged by the notion that there is no central issuing authority and no customer service that you can call and what happens if you mess something up etc. These are still things I think are incredibly challenging for folks from the traditional financial sector in terms of understanding.

It's not an easy concept.

I was challenged by the notion that this was just code existing on the internet. Anyone could just copy it and do anything with it. Why wouldn't anyone else do exactly what bitcoin has done? The last 10 years have taught me that it's because it's not really an easy thing.

One of the incredibly different things that bitcoin evolved is that there was no pre-mine. There was no pre-sale. Anyone could immediately once the software was launched anyone anywhere could start mining bitcoin. For anyone in the space for a while, we all have friends who were mining on a laptop while they were sleeping during university. I envy that. I'm not going to speculate why that is. I don't know if there was a thought to the value of these things would be like eventually. At that point of time there wasn't really the number go up hype. But the idea that from the beginning this was actually a distributed network and that anyone could participate in it, and anyone could mine it, is something that has been of influence and of influence even where there is the most hawkish regulators, even where I see regulators who would love to classify some of these things as securities.

I'm not demonizing regulators here. There was an astute observation of how the Canadian securities regulators chose to regulate custodies. They looked at anyone who has a fiduciary responsibility on behalf of retail customers and they didn't find anything so they figured out where this might touch Canadian securities regulation which is the idea that you have a contract. If you are holding custody, then you are giving them a digital representation and the contract behind them could be classified under Canadian securities regulations and now they are securities dealers in Canada.

There is no path in that to classify bitcoin itself as a security. They were looking at it, though. Could these digital assets themselves be a security? The answer for some of the other digital assets is very much yes. Bitcoin is quite unique in that.

In Canada, bitcoin is one of two assets that investors can invest in without limits. In Ontario, there is a $30,000 limit for any other kind of asset. That's intended to provide some form of investor protection.

The other piece that is interesting and related to that is the idea that bitcoin's network has always been open. It has been transparent and online. People can build whatever they want to on top of bitcoin. There have been block explorers since the early days. If you can build a block explorer, then you can build data visualization and build a risk visualization. You can build blockchain analytics from this data. I don't care what you think about blockchain analytics. These tools have been incredibly helpful in helping regulators and traditional finance and the FATF and other inter-governmental bodies at understanding some of the risks related to these assets. It helps them feel like they can understand what the transaction movement looks like and what the risk looks like.

In the FATF guidance in relation to virtual assets and virtual asset service providers (VASPs), one of the pieces that has always caught my interest is the idea that there shouldn't be an outright ban of digital assets. In fact, if there is a member of FATF that wants to ban digital assets then they will need measures to enforce that and that's really hard if you're talking about something that is p2p. Being able to enforce a ban is not something that I think most jurisdictions that aren't autocratic and aren't totalitarian societies can do with any degree of effectiveness.

It comes down to how we manage risk and what that looks like. There's an expectation that jurisdictions are going to manage risk. There are some tools to build to do that and build comfort around that risk. I think that has been an incredibly important element for regulators.

The other piece that I think always open that anyone has always been able to access the network and mine on it, that bit, is that bitcoin has been able to be labeled with probably one of my favorite acronyms coined by the SEC called "decentralized in name only". This is the idea that we have so many things that claim to be decentralized in some sad attempt at regulatory arbitrage that don't have any real element of decentralization. Decentralization by the way is I think a difficult term to pin down. I moderated a panel at the Cambridge Symposium on Economic Prime. We had lawyers, computer science PhDs, and a beautiful mix of humans and I asked the tech folks what is decentralization or its definition. I thought that would be easier as a conversation than the regulator conversation. I learned that there could be a mean spirited debate on both sides of the isle. It was spicy and interesting. But it's not simple. We don't have an easy answer to what is true decentralization from a technology or regulatory perspective.

But here's the one thing that the technology folks and the law folks agreed on: it's that bitcoin and the bitcoin network was decentralized. I think that's an important callout. We're at the Proof of Work Summit. It's the idea that from both of those camps there were also serious questions about the idea that Proof of Stake could ever be truly decentralized. I think those are important questions and concepts. As a regulatory geek, I think that with a lot of our regulators the jury is still out for what that looks like for Proof of Stake and where regulation touches that.

Another piece that I think is interesting is the open network was accessible from anywhere on earth. There was no citizenship. There was no registration. There was no company. No foundation. Nothing that was bound to a particular place. That gets interesting I think because regulation is very localized and it's slow to change. Technology is instant and global. Those kinds of orthogonal quadrants end up being a point of tension not just in crypto-asset industry but in general between technology and regulation.

Bitcoin skirted a lot of those problems in a very interesting way, and not necessarily using regulatory arbitrage by incorporating in a different jurisdiction (TLDR: this does not save you). There was something entirely different about bitcoin's approach. There were a lot of things that came into that. Part of that is that there was no salesforce. There was no salesperson calling you. Nobody was promoting it. There are a lot of people that have represented bitcoin in various ways. Many of my friends got their first bitcoin from Roger Ver. But he was not an official representative of bitcoin. Satoshi did not knight people to go forth and spread the word. People could voluntarily choose to do it on their own.

In the ICO hellscape of 2017, there were constant pitches, sales calls, and a variety of representations some of which got them in trouble with the regulators - but not enough in my opinion. Bitcoin itself has not had to deal with this where people were going out and selling like that directly from a centralized project.

The last piece and ah cheese as a compliance geek every time I talk about pseudonymity I cringe because so much of that is related to AML/KYC. I think there's something incredibly beautiful about Satoshi Nakamoto's lasting pseudonmity. Technically speaking as someone who tries to have half-decent opsec the idea that you can even maintain pseudonymity against an army of super well funded media outlets that would love to unmask you and a whole worldwide army of keyboard warriors would really like to figure it out too. ... 4chan was able to pinpoint the flag within hours. This has been something lasting, and that's fascinating. It's also played into all the other points: this is a figure who produced something and then in my opinion was absolutely humble enough to say that I don't need my name to be connected to this. I don't need my personality to be connected to this and I think I can release it into this world and this global village and not be bound to my identity. This also tied into not being tied to a particular jurisdiction and actually being decentralized.

I'm thankful for that. I'm still leery sometimes as a compliance geek about things like systemic risk in bitcoin. For what it's worth I think that the traditional finance community and the compliance community should all be a little thankful for the miracle that is bitcoin. I would leave you there for questions.

Q: Do you believe in bitcoin's immaculate conception? Can it be repeated or has it been?

A: I don't think there has been any other asset that has replicated this set of characteristics in such a way.

Q: Is bitcoin a cult or is it a religion?