Bottom-up

Last month, an engineer named Dorian Nakamoto was identified by Newsweek as Satoshi Nakamoto, the creator of Bitcoin. Early Monday morning, Dorian issued his strongest statement yet denying the report. Here is his full statement:

My name is Dorian Satoshi Nakamoto. I am the subject of the Newsweek story on Bitcoin. I am writing this statement to clear my name.

I did not create, invent or otherwise work on Bitcoin. I unconditionally deny the Newsweek report.

The first time I heard the term “bitcoin” was from my son in mid-February 2014. After being contacted by a reporter, my son called me and used the word, which I had never before heard. Shortly thereafter, the reporter confronted me at my home. I called the police. I never consented to speak with the reporter. In an ensuing discussion with a reporter from the Associated Press, I called the technology “bitcom.” I was still unfamiliar with the term.

My background is in engineering. I also have the ability to program. My most recent job was as an electrical engineer troubleshooting air traffic control equipment for the FAA. I have no knowledge of nor have I ever worked on cryptography, peer to peer systems, or alternative currencies.

I have not been able to find steady work as an engineer or programmer for ten years. I have worked as a laborer, polltaker, and substitute teacher. I discontinued my internet service in 2013 due to severe financial distress. I am trying to recover from prostate surgery in October 2012 and a stroke I suffered in October of 2013. My prospects for gainful employment has been harmed because of Newsweek’s article.

Newsweek’s false report has been the source of a great deal of confusion and stress for myself, my 93-year old mother, my siblings, and their families. I offer my sincerest thanks to those people in the United States and around the world who have offered me their support. I have retained legal counsel. This will be our last public statement on this matter. I ask that you now respect our privacy.

Dorian Satoshi Nakamoto
Temple City, California
March 17, 2014

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.

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.

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.

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.

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.

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

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.

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.

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.