Topic: [Available for Download] Academic legal paper re: Bitcoin & Anonymity (Read 7866 times)

Well, I have to thank you for beating me with a clue stick. I deserved this at least once a decade. I wasn't supposed to comment on the matters related to a pending litigation, even if only tangentially and anonymously.

I'm such an idiot.

[___]

Probably should have put this on the draft, but if you feel like donating: [redacted]

UPDATE: Paper is largely complete. Will be primarily fine tuning from here on out. This has been an awesome learning experience for me and I think I have compiled an impressive body of research.

Available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1937769   or see my signature.

Individuals from the forum are cited to!!! So download and read to see if I cite your posts!

Thanks to everyone who commented and provided feedback.


I suggest you read my paper for a more optimistic perspective. Really though I think the regulatory scheme you propose is too expansive. I suppose I'm looking at regulation in more of the immediate/short run.

I'd like to believe this..  but if as part of the taxation system, regulators enforce all merchants and exchanges within their jurisdiction to regularly report a list of the transaction ids for all Bitcoin revenue/expenditure

then, combined with
a) Know your customer laws for the exchanges - linking initial bitcoin purchases, and cash-outs to entities and their traditional bank accounts.

b) banning the running and use of address mixing services (with occasional seizure of mixing services and/or creation of government honeypot mixers)

c) creating a public 'tainted coin' list -  tracking and tagging coins involved in activities deemed to be illegal
(e.g by reporting of stolen coins, running honeypots, instrumenting seized/infiltrated illegal operations)

d) penalizing/taxing merchants and individuals who exchange coins with a 'tainted' history to the exchanges

e) penalizing/taxing merchants (not individuals - as they don't report) who exchange coins with a 'tainted' history to other merchants

Couldn't we end up with a situation where by cooperation with other governments, most bitcoin flows are tracked, if not always to the individual, to an extended acquaintance-set?
With a sophisticated coin address tagging and tracking overlay, couldn't the regulators automatically create a tax liability for infringement, and if so, along with the desire to maintain coin-spendability, wouldn't this create an environment where it's in most participants interests to only accept clean coins?
(e.g by running wallet software which subscribes to the government's 'clean/dirty' database)
Presumably this would also give the incentive to notify and cooperate in back-tracing transactions in order to get any dirty wallets re-marked as clean if certain addresses are belatedly added to the 'tainted' register.

(I guess this would be a break in the fungibility of bitcoin and in a way create a secondary market/network of tainted coins and underground exchanges trading them at a different value.)

Perhaps I don't understand what you mean by successful regulation not bringing the anonymity level 'to a quantum less than that of the internet', and maybe I'm overestimating the practicality of such an over-arching regime.

Bump. Will have complete paper posted by this weekend. Any comments on my thesis/premises?

I should be nearing completion with this very soon.

I have now distilled my thesis to the following:

1.  Anonymity on the internet is a function of the resources at ones disposal and of technological knowledge and ability.

2. [Assuming the existence of] two analogous phenomena, namely that of the respective relationships between bits of information and the internet, and between money and prices. Money acts as the basis for price-indexes, through which individuals communicate economic information to one another, whereas digital bits communicate information between individuals on a network called the internet. Severing the concept of the money from the concept of internet is an illogical course of action at this point, and will result in continued nugatory regulation.

3. But because of its innate qualities, “successful” attempts on the part of states and international actors at regulating Bitcoin will not result in a reduction in its anonymity to a quantum less than that of the internet.


Completed draft should be on SSRN within weeks. As always feedback is appreciated.

Another important argument that I missed:

Stifling innovation.  The U.S. is a technology innovation haven that doesn't like to stifle innovation.  It is all through the IP law.  Like when Google blatantly ignores copyright law to do image search, google books, site previews, etc.  Court decisions like the Perfect 10 case show the court's reluctance to apply an old law rigidly to a new technology in a way that stifles innovation.  

Similarly, prepaid cards were granted a 10 year amnesty from FinCEN requirements, an amnesty that recently ended.  Bitcoin will probably be viewed the same way, with a period of amnesty from adapting old regulations to a new thing, letting the technology grow and develop, watch how it is used, then regulating only when it is ripe for regulation.

http://www.fincen.gov/statutes_regs/frn/pdf/Prepaid%20Access%20NPRM.pdf
which led to
http://www.gpo.gov/fdsys/pkg/FR-2011-07-29/pdf/2011-19116.pdf

as to your equations, it is funny because x and y are both high for small value, lower as value raises, measured in dollars and megabytes.  So anonymously spending $100 is quite easy, just get cash and spend it, no one will ever know what you bought with it.  Anonymously surfing text and image websites is also easy, just download the tor browser bundle.  But if you want a lot of bandwidth, like downloading whole videos, it is slow.  Similarly, spending $10,000 anonymously is a little slower, because the source of cash is not easy.  Or if you have a lot of cash, getting it into traditional electronic deposits is not as easy as $100.

BUT mixing x and y is not anonymous, since e-gold, until bitcoin.  So spending even $10 on the internet anonymously was impossible.  That chills a lot of private behavior, and is a significant problem for people who sell privacy-sensitive goods and services.  Sure there are people in corporations and government that say we should just accept the lack of privacy on the internet, but that is not what people want.  People want privacy, and they have a right to privacy (see Katz, ECPA, Omnibus Title III) in online communications. 

It is ridiculous to assert and maintain a right to privacy in communications but deny a right to privacy in economic transactions.  Because an economic transaction IS a communication.  With electronic bank deposits transferred through SWIFT, it is a secret communication restricted by coercion to a third party who does not respect individual privacy.  With bitcoin through the open-source bitcoin network, it is a public communication entirely unrestricted that does respect individual privacy.  Quite the turnaround.

I had gone astray, but i think you have me back on the right path. I am adjusting my thesis as we speak. Will post clean version in a few days. But I would love to hear your and anyone elses thoughts on this:

Anon of money = x

Anon of internet = y

What is proper in a free society?

x=y,x>y,x=y

No, that is overly simplistic.  Bitcoins are anonymous by default.  When the creators of bitcoin and others comment about anonymity, they are talking about "hard" anonymity, in that Bitcoins are not anonymous if the transaction reporting a transfer in the blockchain happens while a significantly large portion of the network is being monitored in realtime by a determined attacker.  We went through a lot of talk about this when we tried, without success, to find the mybitcoin scammer/hacker who made of with at least 75k bitcions and the allinvain hacker who stole 25k.  That kind of hard anonymity is difficult to find "on the internet" outside of tor and i2p networks.

Bitcoins are "soft" anonymous, though, by default.  If there is not a determined adversary, trying to piece it together afterwards is difficult.  Your assessment is partially correct.  After all, if someone has no desire to be anonymous, uses one bitcoin wallet for all transactions, and publishes their identity linked to their wallet, then their bitcoins from that wallet can be tracked more easily.

As to the internet in general, desire is not enough.  Technical knowledge is also required.  Due to the high intelligence and technical ability of many bitcoin community members, the idea of anonymity being difficult to acquire is scoffed at.  However, many people are serving long prison terms for internet crimes right now due to their failure to achieve anonymity while said crimes were committed.  None desire more anonymity than a criminal, so the desire to anonymity function is not as simple as you propose.


There has been a certain tendency to ignore and destroy the constitution and the bill of rights, especially principles of privacy and liberty.  All three branches are guilty of this crime against the people of the U.S.  You can choose to predict that this trend will continue, as it has for my entire life.  Or you can choose to predict that it will reverse.  I predict the latter.  People have had enough, it is an election year, and politicians are campaigning on promises to restore personal choice.  I tend to think those politicians are lying and have no intention to deliver on their promises, but that is a different thread of conversation.  I cite the Tea Party movement, the Arab Spring, the Occupy Wall Street ongoing, growing protests, the angry mobs in Greece, Italy, Spain, and Ireland.  The bankruptcy of Iceland. 

They spent 50 years forcing us to put our money into banks or else it could be seized with little due process.  Then the banks abused the position of power they bought themselves.  Now we don't want our money in banks anymore.  I cite the price of gold, silver, oil, etc.

Governments have to respond to these things or face the grim prospect of governing without the consent of the governed.  I cite the lowest approval rating Congress has ever had since polling began.  Obama's rating is in the dump, so is the Supreme Court's.  We are looking at less than 50% approval of all three branches of government here.  Politicians should respond to that unless they want to operate an openly fascist government.  It's time for an about face, everything adds up, so it would be safe to predict one.

Is that far enough from normative for you?


Read this wikipedia article to get a sense of how far we have fallen from the economic freedom that our grandfathers and great-grandfathers enjoyed, and fought and died for.  http://en.wikipedia.org/wiki/Large_denomination_bills_in_U.S._currency

People would be paid in cash, they would keep their savings in cash, and they would only have to go to the bank for big things, like starting an interest-paying account, doing a wire transfer to a brokerage account, or getting a loan.

Nowadays, you can't do anything significant with cash in the U.S.  We should have $1000 and $10,000 bills, at least, but we do not due to government regulation. 

Let's look at drugs and terrorism, the watchwords the banks pay their lobbyists to have on their lips.  (including academics - I cite Inside Job, a great documentary where he gets some gotcha moments on some corrupt professors of economics).

Drug money still gets in to the economy.  Where else do you think it goes?  You think there is someone with 200 billion dollars in $100 bills somewhere?  No, it gets in, but only under the watchful eye of the banker and the politician.  All the billions of dollars people spend on drugs in the U.S. does not disappear, it turns into electronic bank deposits.

And terrorism is practically non-existent.  It is just fear-mongering, and I roll my eyes every time they say "terrorist financing".  It's complete and utter bullshit, representing less than 0.00001% of transactions, being generous to the imaginary deep pockets of imaginary terrorists.

Any time you read someone trotting out the drug and terrorism pony show, you should know that they have a hidden agenda.  That's why Schumer, a big dog on the Financial Industry committee, a proto-typical "captured" regulator, has already come out against bitcoin.  The banks want sole control of the instant electronic transfer of wealth over great distances.  It is the most powerful technology that currently exists and it is used for all sorts of nefarious purposes.  Bitcoin allows instant transfer of wealth anywhere in the world without paying the devil his due, so the devil will want to destroy it, of course.

However, the financial industry will lose its power in government.  The drug war will draw to a close.  Freedom will prevail over tyranny.  That's your prediction for the future.  And you writing about it and grounding it well can help it be achieved by allowing your peers to see that there is a different way to go than the course plotted by our fathers and grandfathers.  They plotted a course for economic disaster and a lack of liberty.  We have to plot a different course.  What is the point of writing about anything else?  Why predict a future that you wouldn't want to live in? 

First I would like to thank you for your input, as it is some of the most detailed and critical so far  . Having said that...


Quite the opposite my friend.


This is a normative statement.


First, would you agree with my assessment of anonymity on the internet as a function of ones desire to be anonymous, and there being an analog in Bitcoins anonymity?

I realize the potential of cryptocurrency to strip power from various institutions... But am I correct to understand your conclusion as being that states etc. will NOT attempt to regulate the anonymity of its citizens transactions(assuming 'widespread' use of a cryptocurrency). If so could you please elaborate and cite some basis for your belief...

I'm not looking to support or justify any type of regulation of the anonymity of money. Instead I aim to give a practical sense of what is likely to happen. Perhaps this does not come across succinctly in the abstract, but I will be posting a draft soon, and maybe my conclusions will elicit a better response then.


EDIT:I am grappling with this statement   Please expand... i.e. explain the ideal level of anonymity in money(your statement implicitly assumes there is an ideal level)

From the abstract you posted above, I gather that your approach is founded on a very post-9-11, Statist, Globalist view of money.  I ask that you take your blinders off.  This view has been damaging for the western democracies who have embraced it, leading to a decrease in GDP growth and other measures of economic prosperity.  Creating regulations and bureaucracy to track every penny while at the same time lavishing unchecked billions on corporate welfare in the finance, real estate, and insurance sectors is what led to the financial crisis and, in its aftermath, the destruction of the middle class.

Anonymity in money is a good thing.  Trying to strip anonymity from money has been disastrous.  Businesses and individuals are chilled in their economic behavior.  The meager increase in tax revenues resulting from creating and enforcing draconian anti-tax-fraud and anti-money-laundering measures is entirely consumed by the policing, imprisonment, and capital flight costs.  This leads to a net loss in government revenues from these socialistic/fascistic policies. 

Meanwhile, large institutions, cloaked in presumptions of legitimacy, are able to effectively disguise the source of money from their clients and customers.  Two especially unethical examples of this are Goldman Sach's short selling against investments that they created and sold to clients and the widespread use of credit default swaps to package subprime mortgages as AAA-rated vehicles of investment.

The anonymity available to large institutions through de-regulation is not available to individuals.  It wasn't always like this.  As recently as the 1980s, large amounts of cash were legal to possess and transact in everywhere.  They still are in most nations.  In nations that have stripped individual consumers and investors of the power to use anonymous cash through statute and case law, like the United States, banks have gained tyrannical (undemocratic, unchecked) institutional power over money.  Looking at measures of wages, wealth, human development, individual happiness and perceptions of prosperity, "the 99%" of people in the U.S. are not better off now than they were when the massive financial institution and prison-industrial complex expansion of the last 30 years began.

I write all this in an attempt to influence your thinking.  I am no longer a student and will not be publishing any academic articles unless I somehow become fabulously wealthy and no longer value my time at the rate I currently do.  However, I hope you can present an argument AGAINST regulation, instead of justifying and supporting it as you seem to intend to do. 

Cryptocurrency has the potential to change the world for the better by stripping governments and financial institutions of power over individuals' economic transactions with each other on the internet.  Power is sure to be abused once granted, and only with great effort taken away.  Giving power over money to government and banks has been proven to be a big mistake, and cryptocurrency is a promising effort designed to take back that power and give it to the people.

The fable of the Ring of Geyges is appropriate, and in closing I will quote Plato's Glaucon, a la wikipedia, who tells the tale:

"wherever any one thinks that he can safely be unjust, there he is unjust."

lol - well, if they couldn't come up with something like that themselves then I highly doubt they would be able to implement it anyway

Don't give them any ideas.

Bitcoin could in fact make it easy for the IRS to check for the taxable (BTC-) income of a company by requiring that all companies need to register their pool of Bitcoin addresses with them first. Customers or other business partners could check (at the IRS) if the payment address given by a company is indeed registered for that company or else they could blow the whistle on them at the IRS. That way companies have a strong incentive to only use registered addresses.

It would require only minor modifications to the Bitcoin client and of course the IRS to actually pursue this

Bitcoin could easily retain its level of anonymity from the outside while making it easy for the IRS to make sure companies don't hide their incomes.

+1



What do you mean by this?


Bump. Anyone else have any suggestions, strictly related to anonymity/privacy Bitcoin issues...?

I'll be interested to see what you come up with in regards to regulation.  I think Bitcoin is actually really a perfect currency to use to help ease law enforcement and tax collection given that it allows for records of all transactions.  That has upsides and downsides, but it can make it more difficult to hide wealth or connections between criminal organizations.

I actually think that it's exactly like Second Life, except for central authority difference. Both are digital, and can be somewhat anonymous, both are used by various merchants outside of Second Life, and both can be used for money laundring. Biggest difference is Second Life currency is subject to manipulation by the central owner, and is thus possibly more risky and unpredictable (Though Second Life tries to hold the price level, and has so far succeeded, their tools to inflate or deflate the corrency are somewhat limited).

ups.. mea culpa!

Thanks

Sounds very good to me.

When and where do you plan to publish it?

Yeah, those are really just placeholders right now, but E-Gold is actually a useful differentiation to make (and there's actually case law on it  )

Nice.

I would avoid comparing it to things like zynga and second life, it make bitcoin look like something comparable to them and with some differences.

UPDATE: I have decided to focus on anonymity of Bitcoin and subsequent legal implications and compare to the internet at large...

see abstract below:



Bring on the feedback

edit: forgot the working title "Bitcoin: Tempering the Digital Ring of Gyges or Implausible Pecuniary Privacy"

Now really bring on the feedback

...and succeed.

JDBound, sorry for the belated post. If you are interested in the countries that descend their legal system from the Roman Law, then you should search the web and book catalogs for the Roman legal term: "depositum irregulare" or with different spelling "depositum irregularae".

http://en.wikipedia.org/wiki/Indiana_Pi_Bill

And now you have.

I would like to see someone try to legislate mathematics.

Press hits and notable sources thread is great for inspiration.

Please don't try to put bitcoin in a pre-existing box.  Point out how it can be distinguished from every existing regulatory regime.  Keep your options open.  Hope you write a good paper looking forward to reading it!

Yeah I saw this. It's likely to be a precedent setting case as is suggested in the thread. Looking forward to the outcome.

Excrement hits air moving device: Bitcoin in France: first legal decision directly related to Bitcoin?

Personally I don't buy the "But you signed over ownership!" argument, but you might want to take a look at it: https://bitcointalksearch.org/topic/ownership-vs-possession-of-bitcoins-41242

Pre-labor day bump. Anyone else with anything?

I'm not sure if in that case it's actually tax avoidance per-se, since the corporation doesn't actually have a specific home base. Plus taxes will have to be paid when currency is converted to the home currency of the employees, just like a corporation based in US earns revenues in Euros isn't required to pay taxes until it repatriates the currency back into USD.
The benefits I would would be a more stable accounting system, using a single currency independent of world currencies instead of having to deal with currency conversions and changing rates. On the other hand, suppliers and customers will still want prices comparable to their home currency values. Being able to transfer money over the web without having to go through bank wire transfers and, again, currency exchange rates, will be a definite plus as well. I can easily pay my employees without worrying about where they are or what currency they need me to pay them in, all from the same company cash account.
Since a large part of state income is payroll, I think they will dislike this idea. It's essentially a state being invaded by another entity, with its residents living within the jurisdiction, but not having to pay for their use of roads and government services. Sales taxes will be a problem for states, too. Just as Amazon doesn't charge me state sales tax when I order stuff from another state, an online bitcoin-based business won't have any home residence, so won't know what sales taxes to pay.

I don't think State B will have much success, since there isn't really a way to track Bitcoin purchases. It would be like online casinos servicing people in US while being based in countries where online gambling is legal. It's difficult enough to track it with regulated financial entities, but with Bitcoin it'll be impossible. Of curse this also depends on the nature of the business. Services will be difficult to monitor and stop, while products may be a bit easier, though the main targets f legal prosecutions will be the customers. Treaties may be one way to deal with it, though I have a feeling the political issues caused by this will be significant.  Just look at Mexico's frustration with easy access to guns from US. And guns aren't even really illegal in Mexico, I don't think. State A would also likely not want to get into any treaties, since that would hurt their own economy and give them nothing in return.
All in all, though, these are somewhat boring political issues. I think the idea of a nebulous, entirely online, borderless business is way more exciting

You may want to skim the  "List of Legal and Illegal Nations." thread in the newbies section. I feel that it is not so black&white. First, you have to decide what Bitcoin is. Is it a currency, commodity, or something else like barter?

I have not yet drafted that letter to Fintrac. Currently, my opinion on the issue remains the same.

Very helpful! Bitcoin raises issues of tax avoidance, money laundering, and corporate governance as you suggest. Beyond the tax advantages, what other benefits would corporations have for adopting the model you suggest? Do you think states would be amenable to this new type of organization and why(pros and cons here)?

I'll pose another question to the thread. If state A is 100% a proponent of Bitcoin, going so far as to encourage its adoption, while state B has outlawed Bitcoin, making it illegal to deal in... what happens? Would there need to be an IMF/UN treaty to deal with these disagreements? Based on what precedent?

One issue we have been exploring in my international business and global sourcing type classes is the nature of new globally distributed companies. There are companies out there that have a P.O. box as their office address, employees in one or two countries, and databases and warehouses in completely other countries. They essentially exist in the cloud, which makes mit difficult for them to figure out which laws and regulations to follow. For example, some countries require that employee's personal information is not allowed to leave the country, which means that your employee database has to be separate from your main database, and stored locally. Some countries have more lax financial regulation laws than others, and it may be an issue figuring out whether you should be following the laws of your home country, or the country you are doing business in.
I think, laws aside, Bitcoin may be the tool required for a truly distributed, cloud-based, business to exist. One that may not have a base of operations, may not be tied to any one specific country's laws, and operate entirely within its own currency system, possibly even entirely anonymously, with laws and currencies only taking effect when its earnings or products actually reach specific people. Kind of as if the Internet was a whole separate nation, and people only have to follow specific rules when they repatriate their earnings or products.
Not sure if this will help you in any way, since your topic is rather broad, but here you go.

Thanks for your support! If all goes according to plan this piece will be published in Spring 2012.

Fantastic! Exposure to academic circles and discussion on all issues regarding Bitcoin can only be a good thing. Keep us posted.

I am going to be writing an academic legal paper, also known as a law journal article here in the states, on the international legal implications of Bitcoin. I am doing this for my Int'l Telecommunications Law class (don't flame me on this, i know the topic could fall into numerous other categories, but doing it for this class is a marriage of convenience, and the prof is probably the most helpful of my available options), and plan on submitting it to several Tech. and Economic Law journals.

As a primer, I recommend this unpublished piece by Mr. Grinberg from Yale: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857

My paper is going to be about half the size of that and will obviously have less of a U.S. domestic focus and more of an international one. My goal for this thread is to provide me with some inspiration, in terms of research I will need, and also hopefully unveil some issues which I may not have previously considered. Having said that my topic is very nebulous currently. My goal is to write a concise piece which fully examines a legal implication.

I will be drawing heavily from this forum for citations, and may even credit those who offer valuable contributions in this thread and elsewhere.

Thanks for your help, I look forward to the discussion. If you need any clarifications, or have questions about the U.S. legal system please ask.


Edit: This effort is now focused on anonymity and its legal ramifications. Additionally the abstract below is an inaccurate reflection of my thesis
another edit: PAPER NOW AVAILABLE FOR DOWNLOAD http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1937769

Title:
"Bitcoin: Tempering the Digital Ring of Gyges or Implausible Pecuniary Privacy?"

Abstract:
Bitcoin is a peer-to-peer cryptocurrency; which is entirely decentralized, open-source, and non-institutional. A comprehensive history of Bitcoin transactions is constantly distributed among users, while partial anonymity is accomplished through public/private key transactions. Bitcoin differs from digital currencies like Zynga, Second Life, and E-Gold, because no central authority issues new currency, instead it is ‘mined’ by self-interested individuals. States have an interest in regulating Bitcoin, due to its purported desirability as a medium for funding the drug trade, terrorism, and other subversive activities.
Bitcoin’s architecture will encourage continued adoption, which will result in mounting pressure on the legal systems of interested states to codify a solution. For instance, states may define Bitcoin using classical legal designations, chiefly: money, commodity, debt, security, currency, or virtual currency.
The architecture of the internet generally leads individuals to perceive themselves as having a greater of degree anonymity when online. Bitcoin’s architecture is analogous in that it utilizes peer-to-peer networking and cryptography, resulting in a similar perception of anonymity. But, anonymity on the internet is a function of one's desire to be anonymous, and of the amount of resources one is able to dedicate towards that end. States, international bodies, and institutional actors constantly struggle with crafting their laws to mollify this equilibrium. This article proposes that anonymity inherent in Bitcoin operates on much the same principle and that these entities will react to Bitcoin with regulation which will make it less anonymous than the internet proper.