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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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A Response to Reihan on Immigration

My brilliant and thoughtful friend Reihan Salam was kind enough to critique last week’s immigration posts. Here, I think, is the gist of our disagreement:

My basic frustration with my interlocutors on the immigration question is this: is access to the U.S. economy a fixed pie or not? If you’re arguing that it’s not, you will lose every political debate, because U.S. citizens don’t believe, rightly or wrongly, that everyone in the world should, by virtue of being a free and equal human being, be allowed to work and settle in the U.S. If you’re arguing that it is, we get into thorny questions of what kind of immigration policy we should have and how we should go about implementing it.

This passage left me scratching my heads. Reihan carefully avoids answering his own question here, but reading between the lines, he seems to be conceding that the pie isn’t fixed. However, he argues, “immigration doves” like me (and, he claims, himself) can’t afford to say so because the general public can’t handle the truth.

This is a deeply un-Salamian position to take. One of the things that makes Reihan’s work so delightful is his contrarian streak. If fixed-pieism is false, then Reihan, of all people, should be willing to say so even if the argument is a loser at the polls.

With that said, I actually agree with his assessment of the political climate. The low level of economic literacy among the general public makes it extremely difficult to convince voters that the American economy could gracefully accommodate much higher levels of immigration, even though that’s what the evidence shows. But that’s precisely why it’s important that the immigration debate not be primarily a debate about economics. The beauty of the DREAM Act, and Jose Vargas’s campaign on its behalf, is that it focuses the debate on concrete injustices perpetrated against specific, sympathetic immigrants. It’s much easier to whip up public anger about “illegal immigration” in general than it is to defend the deportation of an individual immigrant like Julio Hernandez.

Now, Reihan wants me to explain what I would consider an “acceptable immigration enforcement regime.” But I think this is the wrong place to start the analysis. No conceivable set of enforcement measures can enforce our current, broken immigration rules; that’s one of the reasons we need to change them. If we did a better job of welcoming immigrants who will make positive contributions to our economy and the federal treasury, one of the happy side effects would be that it would be a lot easier to deport the minority of criminals and deadbeats we really don’t want in our country.

But more generally, I reject the proposition that unless I’ve developed a comprehensive immigration reform agenda, I’m not allowed to make value judgments about individual parts of the immigration system. It’s obvious that Jose Vargas should be allowed to stay in this country. The exact details of how we accomplish that—whether we pass the DREAM Act, raise the quota for skilled Filipino immigrants, grant blanket amnesty, etc—is a question that reasonable people can disagree about. But our current immigration system is indefensible, as is the large number of people who seem to believe the top priority is to crack down even harder on its victims.

I also want to endorse Adam Ozimek’s response to Reihan’s arguments.

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Immigration and Pie

There’s a long-running argument between the left and right about whether economic policy should focus more on efficiency questions or distributional questions. At the risk of oversimplifying, progressives tend to focus on inequalities of income and wealth, and they worry that unfettered free markets will funnel too much money to the wealthy few and leave the rest of us behind. Conservatives counter that the economic pie is not fixed. Leaving people free to innovate will expand the pie and ultimately benefit everyone. And conversely, government interventions in the economy designed to to make peoples’ slices more equal in size will shrink the pie and leave everyone worse off.

And conservatives have another powerful argument against the government picking winners and losers. Like Jefferson, they believe that our rights come from God, and are only recognized, not granted, by governments. They reject progressive theorists like Cass Sunstein who argue to the contrary. This is why they’re so vehemently against progressive taxation; they believe that everyone is entitled to the fruits of their own labor, and that it’s unjust for the government to take from some to give to others in the name of fairness.

Now, consider the following passage from conservatism’s flagship magazine:

Punishing a minor by removing him from the culture he’s adopted as his own, for the crimes of his parents, does strike me as fundamentally unfair. But what liberals leave out of this story, time and again, is a competing — and in my view overriding — unfairness. Reihan has argued repeatedly, and effectively, that we should treat access to the U.S. economy, not to mention its extensive welfare state, as a scarce resource. We can debate and debate the best way of distributing this resource– from “not at all” to “come one, come all” and everywhere in between. But distributing it based on who manages most successfully to violate the law, at the expense of would-be immigrants who are honoring the process, is surely not a valid option.

Apparently, when the topic turns to people born outside the United States, all that stuff about expanding pies and inalienable rights goes out the windows. Now the pie is fixed—a “scarce resource”—and it’s up to the government to decide who is eligible for a slice. People are no longer endowed by their Creator with the right to keep the fruits of their labor. Rather, the freedom to earn a living must be carefully “distributed” by the government only to those it deems worthy.

Liberals like my friend Matt Yglesias like to argue that conservative rhetoric about freedom and individual rights is a cynical cover for policies that serve the interests of the rich and powerful. I think he’s wrong, but passages like this one do give his argument a certain plausibility.

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