Why Satoshi Nakamoto worked so hard to hide his identity

We may now know who Satoshi Nakamoto, the creator of Bitcoin, is. According to Newsweek, he’s a reclusive 64-year old Japanese man who lives in Temple City, California. And Satoshi Nakamoto is his real name. (He has reportedly denied being involved with Bitcoin.)

Newsweek portrays Nakamoto as secretive, reclusive and a little paranoid. And certainly the awkward scene when Leah McGrath Goodman confronted Nakamoto in his driveway suggests that the man is genuinely uninterested in seeking the spotlight.

But Nakamoto’s decision to disappear from public view just as Bitcoin was taking off wasn’t just a reflection of his eccentric personality. It was essential to getting the currency to take off.

Fiat curencies like Bitcoin are fundamentally built on faith. People treat a currency as valuable because they expect others to consider it valuable. And for a decentralized currency like Bitcoin, that faith depends on a belief that the rules of the currency will be stable over time.

For example, it’s generally reported as a fact that there will never be more than 21 million bitcoins. But that “fact” is just a social convention. There will never be more than 21 million Bitcoins because the Bitcoin community has agreed to a set of rules that doesn’t allow more than 21 million Bitcoins to be created. In principle, those rules could be changed. Bitcoin’s success depends on people having confidence that the rules won’t be changed in a way that will destroy the value of their holdings.

This means that a strong leader would have been a liability in Bitcoin’s early years. As Bitcoin’s creator, Satoshi Nakamoto would have had a unique ability to change the rules of the game and get the Bitcoin community to accept the changes—Nakamoto’s version of the Bitcoin software was Bitcoin by definition. As long as he was around, people would worry that he could make future changes that would destroy the value of their investments.

Disappearing in early 2011 helped to remove that potential impediment to Bitcoin’s growth. Gavin Andresen, Nakamoto’s successor as the leader of the Bitcoin project, is a smart and capable programmer. But he’ll never have the stature within the Bitcoin community that Nakamoto did. If Andressen tried to make dramatic, potentially harmful changes to Bitcoin, he’d face a lot of resistance from the rest of the Bitcoin community.

The lack of an official Bitcoin leader has also been an asset in the regulatory arena. A key argument for Bitcoin is that no one owns the Bitcoin network, which means there’s no way to regulate it. Had Nakamoto’s identity been known a year ago, he might have been dragged before Congress to testify at last fall’s hearings on the future of Bitcoin. Nakamoto might have faced pressure from regulators to change Bitcoin to make it easier to regulate. But with Nakamoto out of the picture, the leaders of the Bitcoin community could truthfully say that no one had the authority to change Bitcoin’s rules. That forced policymakers to accept the system the way it was and develop policies to accommodate it.

If the man Newsweek identified today proves to be the real Satoshi Nakamoto, the question is whether he’s been away from the project long enough that Bitcoin will continue to be seen as truly outside anyone’s control. I think the answer is probably yes. There’s now a significant community of Bitcoin developers who have grown used to managing the currency without Nakamoto’s input. They probably wouldn’t defer to him the way they would have in 2011. But just to be on the safe side, it would be smart for Nakamoto not to rejoin the Bitcoin development community any time soon.

Posted in Uncategorized | 5 Comments

The case against land value taxes

Alice and Bob were both born in 1957, and became friends after they both settled in Washington, DC. In 1986, Alice bought a 2-bedroom home in the up-and-coming Dupont Circle neighborhood. Bob thought owning a home sounded like a lot of work, so he rented a similarly-sized apartment instead. His rent was cheaper than what Alice paid for her mortgage and local property taxes, and each month he put the difference into a 401(k).

Fast forward to 2016. Alice and Bob are 59 years old. Alice’s house is now worth $750,000. She’s paid off her mortgage but doesn’t have any other savings. Bob is still a renter, but over the years the value of his 401(k) has risen to $750,000.

Neither of them is wealthy, but each figures they’ll be in pretty good shape when they retire. Since Alice owns her home outright, she won’t have to devote any of her Social Security check to paying the rent. Bob expects his $750,000 nest egg to generate an income of around $2500 per month, which will just cover his rent payment.

In November, Joe Biden is elected president. The overwhelming success of Obamacare has given the Democrats large majorities in both houses of Congress. And at the top of Biden’s agenda is a cause that’s been championed by prominent bloggers like Matthew Yglesias.

A few years earlier, Yglesias had calculated that the value of all land in the United States was worth $14.5 trillion. Four years later, the figure was $17 trillion. The income tax is projected to generate taxes of $1.7 trillion in fiscal year 2018, so Biden’s advisors propose that the income tax be cut in half, with the lost $850 billion in revenue being made up with a 5 percent land value tax.

Bob likes this idea. He makes $100,000 per year and pays about $1500 per month in federal income taxes. With taxes cut in half, he’ll be able to squirrel away an extra $750 per month, increasing his retirement savings by $50,000 by the time he turns 65.

But Alice isn’t so enthusiastic. She makes the same salary as Bob and will get the same $750-per-month tax cut. But because she’s a homeowner, she’s going to owe additional taxes. The Internal Revenue Service has determined that $600,000 of her home’s $750,000 value is attributable to the value of the land underneath the home. So her land value tax bill is $2500 per month. The net change to her tax bill is $1750 per month.

Alice doesn’t have an extra $1750 lying around each month to spend on land value taxes. She can scrape together an extra $750 per month, but beyond that she realizes she’s going to have to tap her home equity to help pay the higher taxes.

But then she encounters a big problem: the value of her home has plummeted. Before the land value tax, people would have paid her $750,000 for her home, which would have meant a mortgage payment of around $3000 per month. But now owning her home means a liability of $2500 in land value taxes alone. Potential buyers take this extra cost into account, and it reduces the amount they are willing to pay for the house from $750,000 to $150,000.

Each year, Alice takes out a home equity loan of $12,000 to help her cover the added cost of the land value tax. But by her 70th Birthday, her home equity has dwindled to the point where the bank won’t lend her any more money. She’s forced to sell, with the sale netting her $30,000.

Alice is justifiably angry about the land value tax. Over the course of their careers, Alice and Bob both worked hard and saved significant sums. While they chose to invest in different assets, their investments had similar value in 2016. It’s not fair that a decade later Alice’s choice to invest in real estate would leave her penniless while Bob’s choice to invest in stocks and bonds would give him a windfall.

Advocates of a land value tax emphasize its efficiency, but efficiency isn’t the only thing that matters for tax policy. Fairness is also important. Similarly-situated individuals should pay similar taxes. A high land value tax fails this test, imposing potentially ruinous taxes on those who have chosen to invest their savings in real estate for the benefit of those who have invested in stocks or bonds.

This story illustrates another important point too: while the land value tax is paid over time, the burden of the tax (its incidence, in economics jargon) falls entirely on the person who owned property at the time the tax was instituted. The value of future taxes gets immediately priced into the value of real estate. For those who buy property after the tax is instituted, the higher property taxes are offset by lower mortgage payments.

In other words, the economic efficiency of the land value tax comes from the fact that it operates by confiscating wealth accumulated in the past rather than taxing the accumulation of new wealth. This, too, is unfair. Society benefits when people defer gratification and save for the future. People justifiably expect that if they save today, they’ll enjoy the benefits of that accumulated savings in the future. Of course, people who generate income from their accumulated wealth should pay their fair share of taxes. But a land value tax goes way beyond that point, depriving owners of one particular asset class of the benefits of decades of thrift.

Posted in Uncategorized | 30 Comments

Here’s why Bitcoin-the-network needs Bitcoin-the-currency

This week I was making the argument on Twitter that it’s more helpful to think about Bitcoin as a new kind of payment network than a new kind of currency. Multiple people asked variants of the same question: if the goal is to create a new kind of financial network, why base it on an alternative currency? Why not just create a new payment network based on a conventional, stable currency like the dollar?

It’s a good question, and I think the answer comes in three parts:

1. Bitcoin’s potential for innovation comes from its openness. Anyone is free to create Bitcoin-based software or services. That will allow more experimentation and faster innovation than with conventional payment networks like Paypal or Mastercard.

2. That openness comes from the fact that no one owns or controls the Bitcoin network. If there were a “Bitcoin Inc.” with authority to oversee the Bitcoin network, that company would come under immense pressure to comply with a variety of legal obligations, for example policing the network for fraudulent transactions. To deal with those obligations, the company would be forced to become increasingly picky about who was allowed to participate in the network and what they’re allowed to do.

3. If there’s no company controlling a financial network, then there’s no way to guarantee that the unit of account inside the network is pegged to some stable unit of value outside of it. Dollars in Paypal are worth a dollar because the Paypal company has promised to pay a dollar to anyone who wants to withdraw their funds. But in a peer-to-peer network, there’s no one to perform this function. So a fully decentralized financial network necessarily needs to use its own unit of account that floats against conventional currencies.

Paul Haahr had an interesting response to this line of argument: for Bitcoin to be useful, doesn’t it need to integrate with the conventional financial system? And won’t those points of integration make the consumer-facing parts of the network just as bureaucratic as a conventional payment network?

I think the answer to the first question is clearly “yes.” Answering the second question is complicated.

Every consumer-friendly financial network needs to have some kind of strategy for combatting fraud. Ordinarily, this takes the form of the network operator accepting liability for unauthorized transactions and then establishing rules that minimize the amount of fraud that occurs. But there are many possible strategies for detecting and combatting fraud.

In a centralized network, the whole network has to adopt a single unified strategy for fraud prevention. Because the network operator is on the hook for any losses, those rules tend to be pretty conservative. To become a Visa or Mastercard merchant, for example, you have to participate in a lengthy approval process and comply with a variety of complex requirements. This is not very conducive to innovation.

In contrast, an open financial network allows different payment processors to adopt different strategies for combatting fraud. Some might require consumers to adopt sophisticated techniques like two-factor authentication before they can spend Bitcoins. Others might set fairly low limits on how much consumers can spend in a day.

Some might only allow payments to merchants that agree to refund payments that later prove to be fraudulent. Others might use sophisticated machine learning algorithms to try to guess which transactions are likely to be fraudulent. Still others might cater to large organizations who already have elaborate systems for controlling payments. And of course, payment processors could use these techniques in any combination.

It’s true that in the long run, many of these consumer-facing payment processors will be forced to take the same kinds of elaborate precautions that conventional networks like MasterCard and Paypal do. But the barrier to entry is much lower for a Bitcoin-based payment processor. Thanks to the standardized Bitcoin protocol, a new Bitcoin payment processor can immediately send payments to everyone else on the Bitcoin network. So there can be a constant stream of new companies bringing new ideas—and a fresh willingness to ignore the rules while pioneering new approaches—to the network. In contrast, a company like Paypal has to build its network from scratch, a much more daunting proposition.

There’s an obvious parallel to the Internet here. Large Internet companies such as Google and Yahoo are required to comply with laws around the world regulating libel, indecency, copyright infringement, the sale of Nazi memorabilia, and so forth. Yet the Internet’s decentralized architecture makes it a much more hospitable place for freedom of speech than it would be if there were a single Internet, Inc. that could be held legally responsible for everything that appears on the Internet. If major Internet intermediaries were held liable for website content, there’d be an elaborate rulebook every website operator had to comply with before he was allowed to start a website. In that environment, services like YouTube or Facebook would have never gotten started.

So that’s why Bitcoin-the-network needs Bitcoin-the-currency. Innovation requires openness. Openness required decentralization. And decentralization is only possible on a network with its own unit of account.

Posted in Uncategorized | 15 Comments

New job

After spending a fantastic year at the Washington Post, I’m pleased to announce that I’ve accepted a position at Vox Media, where I’ll be helping Ezra Klein launch a new website focused on explanatory journalism. I’ll be focusing on the same tech policy topics I previously covered for the Washington Post.

Working at the Washington Post has been an honor. I’m grateful to Andrea Peterson and Brian Fung for making the blog we started together, the Switch, a success. And I want to especially thank my boss, Greg Schneider, for giving me a unique opportunity to create something new at the Washington Post. Greg is deeply dedicated to the Post and to the journalists who report to him. The Post is lucky to have him. I’m looking forward to seeing where he takes the Switch and Wonkblog in the coming months.

I won’t have anywhere to write between now and the time the new Vox site launches, so expect sporadic posts here in the next few weeks.

Posted in Uncategorized | Leave a comment

New Job

I’m excited to announce I’ll be starting a new job on Monday, covering tech policy with the Washington Post‘s Wonkblog team. Led by Ezra Klein, WonkBlog provides in-depth analysis of domestic policy issues. I hope you’ll subscribe to Wonkblog and follow along.

The move to the Post also requires me to end my relationship with the Cato Institute, with which I’ve been affiliated for almost a decade. It’s been an honor to be affiliated with some of the sharpest and most original thinkers in the think tank world. I’ve learned a lot from David Boaz, Jim Harper, Adam Thierer, Brink Lindsey, Gene Healy, and others at Cato over the years, and I’ll always be grateful for their support.

I expect the Post to keep me busy, so don’t expect me to post here very often. But I’ll use this blog as an outlet for posts that are too personal, philosophical, or off-topic for Wonkblog.

Posted in Uncategorized | Leave a comment

This Blog Has Moved

The blog that used to be here is now hosted at Forbes. Click here to go to the new site. Please update your bookmarks.

Posted in Uncategorized | 2 Comments

Moving Day

Tomorrow will be a big day for this blog. After two happy years hosted by the good folks at Dancing Mammoth, I’ve accepted an offer to join the growing Forbes family of bloggers.

More details about the blog’s new incarnation will be available after the switch. For now, I just wanted to let you know what you need to do to follow me to the new location: nothing. With any luck, your RSS reader will automatically switch to the new Forbes RSS feed on Wednesday afternoon.

If, come Thursday morning, you still aren’t seeing new Forbes posts, that means you’re using a primitive RSS reader that doesn’t know how to handle redirects (or we screwed up somehow). In that case, visit the home page on Thursday morning for instructions on manually subscribing to the new blog.

Thanks for reading, and hope to see you on the other side.

Posted in Uncategorized | 3 Comments

Paul Graham on America’s Heritage of Disobedience

On the Fourth of July, the day when we celebrate the treasonous act that led to the creation of our nation, I think everyone should read Paul Graham’s essay about what makes America great:

Hackers are unruly. That is the essence of hacking. And it is also the essence of Americanness. It is no accident that Silicon Valley is in America, and not France, or Germany, or England, or Japan. In those countries, people color inside the lines.

I lived for a while in Florence. But after I’d been there a few months I realized that what I’d been unconsciously hoping to find there was back in the place I’d just left. The reason Florence is famous is that in 1450, it was New York. In 1450 it was filled with the kind of turbulent and ambitious people you find now in America. (So I went back to America.)

It is greatly to America’s advantage that it is a congenial atmosphere for the right sort of unruliness—that it is a home not just for the smart, but for smart-alecks. And hackers are invariably smart-alecks. If we had a national holiday, it would be April 1st. It says a great deal about our work that we use the same word for a brilliant or a horribly cheesy solution. When we cook one up we’re not always 100% sure which kind it is. But as long as it has the right sort of wrongness, that’s a promising sign. It’s odd that people think of programming as precise and methodical. Computers are precise and methodical. Hacking is something you do with a gleeful laugh.

I’m proud to live in a country where people resist coloring inside the lines.

Posted in Uncategorized | 2 Comments

On Calling a Pie a Pie

Two quick responses to Reihan’s latest. First:

It is by no means obvious to me that it is morally sound for us to treat “criminals and deadbeats” who’ve lived in the United States from, say, the age of 2-3 days differently from “criminals and deadbeats” who were born on American soil. Tim seems to believe that there is an obvious bright line between immigrants who make positive contributions to our economy and those who do not.

To be clear, I don’t believe this at all. Rather, my point is a more narrow one: there are a lot of immigrants (like Vargas) we can easily tell are likely to be on the positive side of the line. For these immigrants—strong English speakers with marketable skills and no criminal record, say—the pie is clearly not fixed. The American economy could easily absorb millions of them.

And yet we do a poor job of admitting even these obviously meritorious applicants. Look at the arbitrary cap on H1-B visas, for example. This suggests to me that our current immigration system is driven by irrational anti-foreigner bias rather than plausible concerns like crime, welfare, assimilation, or the like.

My point isn’t to endorse immigration restrictions based on these particular criteria. For example, I’m not worried about assimilation and would rather not see English fluency as a criteria for entry. But if that’s what you’re worried about, then you should have no objection to admitting people who speak fluent English, which isn’t hard to test.

Reihan again:

So what we are dealing with is a difference of opinion regarding which kinds of exclusion are more morally problematic. Is it better to protect the interests of would-be beneficiaries of the DREAM Act or potential migrants from HIPCs? The inevitable answer — why can’t we do both? — leads us back to the fixed pie question. By accepting that there should be any form of immigration restriction at all, one is already conceding the point that the pie, a constructed, political pie determined through a process of legislative deliberation, is and ought to be fixed.

This is mixing apples and oranges. The “fixed pie” question I care about is the empirical economic question: does the US economy have a maximum “capacity” beyond which admitting more immigrants will cause net harms to those of us already here? My answer to this question (call it “economic fixed-pieism”) is “no,” and I don’t think Reihan disagrees with me.

Reihan seems to be making a different claim, that we might call political fixed-pieism. That is, he thinks passing the DREAM Act will consume political capital that could otherwise have been deployed to expanding immigration from Senegal or Malaysia. This might be an accurate description of the political constraints facing Congress at the moment. But if so, it’s crucial to remember that political fixed-pieism is a consequence of the public’s erroneous economic fixed-pieism. And so in addition to debating how best to spend the limited political capital immigration reformers have right now, we should also be thinking about ways to change the public’s fallacious beliefs about immigrants over the long run so that the public becomes more supportive of immigration liberalization in general.

My view is that re-framing the immigration debate to focus on injustices to individual immigrants (like Vargas) is going to be more effective than dry economics lectures about gains to trade. But I’m happy to see more of both. Either way, it’s important that those of us who know economic fixed-pieism is false (which again, I think includes Reihan) say so.

Posted in Uncategorized | 1 Comment

The Solution to Bad Speech is More Speech

I’m a longtime donor to the Institute for Justice, the nation’s premiere libertarian civil liberties organization. They’ve taken cases to the Supreme Court a number of times, and on every previous occasion, I’ve been rooting for their success. But on Monday, when the Supreme Court sided with IJ (and my Cato colleagues) in Arizona Free Enterprise v. Bennett, I found myself disagreeing with the majority’s arguments.

Let’s start by reviewing the broader campaign finance debate, and especially the arguments in Citizens United. Advocates of regulation argued that “independent expenditures”—that is spending on political speech by people unconnected to any campaign—were a grave threat to the integrity of the democratic process. They warned that a wealthy interest group could walk into the offices of a member of Congress and threaten that if the member didn’t vote the way the group wanted, the group would pour millions of dollars into negative ads in the member’s district. Faced with a threat to his political survival, the member will be forced to do what the interest group wants.

First Amendment zealots like me had two responses. First, running ads praising or criticizing a candidate in the weeks before an election is precisely the kind of “core” political speech the First Amendment is supposed to protect. Therefore, we’d better have an extremely solid reason for restricting such speech.

Second: if it were really true that elections were decided based on which candidate had the most spent on his behalf, this would be a pretty strong argument for regulating independent expenditures. But fortunately, voters are not mindless automatons. They evaluate the messages being presented to them and compare them with elected officials’ records in office. An incumbent with a good record will find his ads reach a receptive audience. Conversely, an interest group whose agenda is broadly unpopular with voters is going to have a harder time using ads to reduce the candidate’s poll numbers.

Relatedly, as Meg Whitman recently learned, advertising dollars are subject to diminishing returns. If the average voter sees candidate A’s ad 10 times and candidate B’ ad only once, that’s likely to give candidate A a sizable advantage. But if the average voter sees candidate A’s ad 1000 times and candidate B’s ad only 100 times, the gap is unlikely to matter. Indeed, some voters might get so tired of seeing candidate A’s ads that they vote for candidate B out of spite.

Put these arguments together, and we see that the threat from our hypothetical interest group isn’t as dire as the advocates of regulation think. If an incumbent has a good record and enough funding to explain that record to the voters, he’s likely to get re-elected regardless of how much is spent against him. Conversely, if an incumbent has a bad record and his challenger has enough money to inform voters about why it’s bad, the incumbent is likely to lose no matter how many millions in independent expenditures are made in his defense.

OK, with that background, let’s think about the Arizona Free Enterprise v. Bennett. This case focused on Arizona’s “clean elections” system of public financing. Under the Arizona system, a candidate has a choice between accepting public funds or raising funds privately. If a candidate opts to raise money privately and spends more than the default public subsidy, then all publicly-financed candidates are automatically given matching amounts to spend on their campaigns. Public candidates are also given funds to match any money spent by independent groups in support of private candidates.

In an opinion by Chief Justice Roberts, the Supreme Court ruled that when the state matches a private candidate’s spending, the state is effectively “punishing” the candidate for exercising his first Amendment rights. This isn’t a crazy argument. Obviously, a candidate isn’t going to want his opponent to get a larger public subsidy, and so at the margin it does provide some disincentive to campaign spending.

But there’s a few things to note about this. First, the regulation in Citizens United was direct and literal censorship—criticizing a candidate for office in the 60 days before an election was illegal. Here, the “punishment” is much more indirect and indeed its status as a punishment is somewhat speculative. So First Amendment scrutiny is called for, but the justification probably doesn’t need to be as compelling as you’d need to justify direct censorship.

Second, the degree to which having your opponent subsidized will be perceived as a “punishment” greatly depends on the circumstances. If the privately candidate is handsome and charismatic with an impressive record, while the publicly-financed incumbent is a politically tone-deaf hack with a long record of corruption and incompetence, then the challenger might welcome his opponent having more money to spend putting his ugly mug on TV. Similarly, if an independent organization is running ads in order to get candidates to talk more about its pet issue, it might not care at all about whether its spending causes certain candidates to get more money in the process.

Conversely, a candidate whose strategy is to bury his opponent in noisy attack ads that don’t stand up to scrutiny will find the matching funds provision very burdensome indeed. But it’s only “burdensome” in the same sense that robust debate always burdens people with unpersuasive messages.

Finally, the state’s interest in reducing corruption seems pretty compelling. Not compelling enough to justify censorship, but strong enough to justify a system of subsidies that creates a mild disincentive to private spending on political speech.

Speech is never a punishment, and it strikes me as especially dangerous for supporters of free speech to suggest otherwise. If libertarians call it a “punishment” when the government subsidizes your opponent’s political campaign, it’s hard to object when more censorious types call it a “punishment” when a third party runs a nasty campaign ad against a politician. The solution to speech is more speech. I don’t love the Arizona campaign finance system, but I think it’s hard to argue that it runs afoul of the First Amendment.

Posted in Uncategorized | 5 Comments