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Bitcoin must be self-regulated

12 March 2014


Christiaan Elderhorst :
In the wake of Bitcoin exchange Mt. Gox's bankruptcy filing, more than four hundred of its customers have expressed interest in filing a class action lawsuit against the parent company and its chief, Mark Karpeles. Mt. Gox was the cryptocurrency's largest marketplace. Although Bitcoin's functioning is still incomprehensible to many its value is real. Mt.Gox's losses are estimated at $480 million.
The accusations of fraud and negligence are certainly justified, but a lawsuit might not be the best way to seek justice in the unregulated Internet economy. It's odd that members of the Bitcoin community, many of whose members oppose government intervention in the money supply, are so easily persuaded to appeal to government legal systems once the situation goes awry.
A lawsuit will undoubtedly open up avenues for lawmakers to further complicate use of Bitcoin and similar cryptocurrencies.
American political activist Samuel Edward Konkin III popularized the term "counter-economics" to describe all voluntary transactions that occur outside of the realm of the government-regulated marketplace. Bitcoin, and cryptocurrencies in general, fulfill an important role in this counter-economy by taking fiat money out of the equation entirely. However, to fully sustain the power of the counter-economy we must integrate non-state legal systems into its overarching framework. Instead of running back to the state when things take a wrong turn the opportunity must be used to discuss and develop systems by which businesses in the counter-economy can be held accountable for their actions.
An example of counter-economic regulation comes from the community around the Silk Road, a Bitcoin-based online marketplace for the buying and selling of illegal drugs. A group of its users calling themselves the LSD Avengers ran chemical analysis on acid they bought to test whether they were in fact in possession of genuine LSD, providing other users with a safety standard by which drugs could be ordered and consumed safely.
This illustrates how a black market can self-regulate without resorting to the imposition of bureaucratic agencies like the Food and Drug Administration.
Bitcoin itself plays a liberating role in places like Ukraine and Iran, providing a system of payment independent of governments meddling and directives set forth by central banks. It is plausible that if the fate of Mt.Gox is placed at the hand of judges then regulation will follow. Regulation might satisfy our western need for guaranteed illusory feelings of safety. But it will hurt economic freedom in countries with people less fortunate than in the West. This will detract from the revolutionary potential of digital currency.
Currently there is no system by which Bitcoin marketplaces can be held accountable. Resorting to government legal systems might indeed be the only way by which Mt.Gox customers can receive the restitution they deserve. What does have to be kept in mind is that this option is far from optimal. Further talk of government regulation of crytocurrencies will not be a surprising result.
In fact it seems inevitable. In the future the digital counter-economy will have to find ways to regulate itself. The ingenious online methods that are bound to come up might lead to insights by which we can regulate our own "analog" communities as well. One day government regulation of the marketplace will be a thing of the past as the self-regulating counter-economy replaces it entirely.
(Christiaan Elderhorst is a columnist writes mostly on economics)

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