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From the Front Page - General

  • 39 Comments
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    Categories: General
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    Categories: General, LTB News, LTBCoin

    Investing in Fantasy Is Reality!

    October 15th, 2014 by therealtwig
    Imagine you are watching your favorite [ESPN Fantasy Football analyst Matthew Berry](http://espnmediazone.com/us/bios/berry_matthew/) discuss his picks for successful players to start in your lineup. You are so enamored by his analysis that you decide to check out his fantasy team online. You see that he is in first place, he has a team you believe to be great, and he is routinely scoring more points than anyone else in the league each week. Below his team name, you see a button that invites you to invest in his team. . . . Read More
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    Erik Voorhees Explains Why Some Bitcoin Companies Are Blocking American Users

    October 14th, 2014 by kyletorpey
    Although Americans generally believe that they live in the home of free markets, the United States’ role as a leader of economic freedom has been declining for decades. The United States ranked 12th on the latest version of the Heritage Foundation’s economic freedom index and is now relegated to the designation of “mostly free.” The myth of unbridled economic freedom in America is being exposed by Bitcoin. Read More
  • 53 Comments
    2,473 views
    Categories: General, Fiction, Columns

    Chain Wars: Tine Attack

    October 13th, 2014 by mdw

    This is part two of a series called Chain Wars. It started last week with this double length intro: http://letstalkbitcoin.com/blog/post/chain-wars-the-worm

    Tine van der Hoeff was an expert in keeping next generation blockchains running. But she was lured away on an important task by an unknown patron. Working with her friend Theo, she plans to attack the chain worm, Naga Sib.

    Tine understood how important it was for humans to maintain control over their technology. She knew that humans set the rules for the chain when the code was launched. Surely, she thought, better chain design could prevent chain infections from happening.

    Some parts of the Naga Sib codebase remained mysterious, including the instruction set for building the next generation. Many of its secrets were hidden in a big binary blob, from which both parts of the worm could be made. It was not clear how to extract the information from that binary hunk of code, but it contained the digital DNA of the chain worm.

     

    Tine's current goal was to figure out how it worked and how to conquer it. She would kill both halves of this at the same time. Then she intended to find out who was behind Naga Sib, and why.

    Read More
  • 44 Comments
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    Categories: General
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    6,112 views
    Categories: General

    Darkcoin Anonymity Fully Functional and Open Source; Instant Transactions on the Way

    October 8th, 2014 by fernando
    Today I provide more detail on DarkSend, the name of Darkcoin's anonymity feature, and sketch the next amazing use of masternodes -- instant transactions. Read More
  • 58 Comments
    4,918 views
    Categories: General, Guest Blog, Columns

    On Singularity - Part 2: Decentralized Autonomous ... Human Beings

    October 5th, 2014 by ry.walk
    While the significance of putting a man on the moon is obvious, what is often lost is an appreciation for the enormity of prior achievements and the conditions required to make it possible. The establishment of the nation-state as a societal structure unleashed the untapped potential of collectively incentivized human action. Had it not been for its existence, how many more centuries may have been required for mankind to reach such literal and figurative heights? Akin to the establishment of the nation-state, the ascension of decentralized autonomy may further catalyze collective human action to even greater levels of achievement, including the reaches of singularity. Read More
  • 58 Comments
    4,279 views
    Categories: General, Fiction, Columns

    Chain Wars: The Worm

    October 4th, 2014 by mdw
    It all started when a decentralized app called Naga Sib, running on the NetherChain, got out of control. These autonomous entities could be coded to prioritize self-preservation, even if that meant bad consequences for others. Naga Sib was no ordinary app. It was designed for trouble. How easily we lose control of our technologies when we're not careful. Read More
  • 69 Comments
    3,132 views
    Categories: General, Columns

    Bitcoin Is the Currency of the Private, Decentralized Economy

    October 3rd, 2014 by kyletorpey
    Bitcoin makes the private, decentralized ecommerce economy possible. Now that value can be transferred in a censorship-resistant manner, nothing is stopping the creation of services for private forms of communication and finance over the Internet. Read More
  • 34 Comments
    6,332 views
    Categories: General, LTBCoin
  • 12 Comments
    3,709 views
    Categories: General, Columns

    How Louis C.K. Could Make Millions More by Selling His Specials Via Bitcoin

    September 23rd, 2014 by kyletorpey
    When it comes to monetizing online videos, Louis C.K. is an innovator. In 2011, he decided to [distribute his new standup special on his website](https://buy.louisck.net/purchase/live-at-the-beacon-theater), downloadable for $5. . . . He was able to bring in more than $1 million in sales in less than two weeks during his experiment. . . . It could have turned out even better with the help of Bitcoin. Read More
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    7,089 views
    Categories: General, LTB News, Tokenly Blog

    Token Controlled Viewpoint (TCV) Genesis, Characteristics and Early Use Cases

    September 17th, 2014 by adam
    _Edited by Mike Roncone and Denise Levine_ _with input from Xavier Hawk, Matt deCourcelle and Andrew De Gabriele_ #Abstract **Token-Controlled Access (TCA)** is a simple idea. In a given system, different levels of access to that system and abilities within it are granted according to the combination of tokens in a particular users wallet. **What is TCV?** Token Controlled Viewpoint (TCV) is an application of TCA to information content ([forums](http://letstalkbitcoin.com/token-s... Read More
  • 59 Comments
    3,154 views
    Categories: General, Guest Blog

    The Possibility of Alternative Incomes

    September 9th, 2014 by cryptochief
    Surely everyone has considered how incredible it would be to get paid for doing all the things one really wants to do, or at least the things one is already doing. Read More
  • 30 Comments
    6,738 views
    Categories: General, Legal Activity

    Long-Arm Lawsky, Part II: Interstate Commerce

    September 7th, 2014 by wildjo
    The BitLicense is getting a lot of attention these days because it is the first significant regulatory attempt by a US authority to proscribe activity in the Bitcoin space. Not surprisingly, this first attempt is fundamentally flawed. Last week, I [demonstrated](http://letstalkbitcoin.com/blog/post/the-blockchain-the-bitlicense-and-the-costs-of-compliance) that the regulations proposed by the New York Department of Financial Services (DFS) were unlawful because the DFS lacked the statutory authority to regulate Bitcoin. This week we tackle the constitutionality of the regulations and come to a similar conclusion: the BitLicense violates the Commerce Clause of the US Constitution and is, therefore, unlawful. Read More
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    5,282 views
    Categories: General, Columns

    Telephone and the Blockchain

    September 4th, 2014 by therealtwig
    Editor: Chulseapple Original: The security of an individual Bitcoin address is well documented and an awesome [mathematical certainty](http://www.royalforkblog.com/2014/08/11/graphical-address-generator/). But what about the security of sending Bitcoin to somebody? Is there a mythical CEO of Bitcoin somewhere, warding off would-be hackers attempting to steal your funds through a [man-in-the-middle attack](http://en.wikipedia.org/wiki/Man-in-the-middle_attack)? What guarantees the absolute certainty of your transactions? Quite frankly, mathematics! # The Telephone Game Do you remember the telephone game from your childhood? A big group of people, say thirty, sits in a circle. One person whispers a word or a phrase to the person next to them. That person delivers the message to the next person, and so on, until the message goes entirely around the circle. The goal is for the message to get back around to the beginning exactly the same as it started. ![](http://redeapp.com/images/blog/WordofMouth.jpg) # Why the Telephone Game Fails In a telephone game with thirty people, there are thirty separate, singular points of failure. This is a very important point, because even though the players in this game can be honest, all it takes is just one dishonest person to wreck the honest intentions of others. If one of the players decides to be *that guy* and wreck the game by sharing the wrong message, no one will know who threw the game. Since each whisper transaction is peer to peer, each player puts their complete trust in the one person that came directly before them to relay the correct message. #Change the Rules! How could we fix the rules of the telephone game to ensure that it could never fail, keeping in mind the above issues? Instead of thirty people sitting in a circle, let's start the game with only one person in the room. This person creates a message, and then another person is allowed to enter the room and hear the message. We then change the rules so that no whisper will take place between just two individuals. We bring an independent group of 100 observers to assist. This independent committee records on a piece of paper all information possibly related to that whisper, including: * The time the whisper takes place * The individuals involved in the whisper * The actual message that was passed from person to person To incentivize this supervision, $1 USD is awarded for the successful recording of each whisper transaction. Unfortunately, bringing in this independent team would be expensive, especially if we paid every single one of these 100 individuals for each whisper in the game! After all, how much skill does it really take to listen to two people talking, and record the results? Therefore, we will require the winning observer to not only be the first one to record the whisper transaction, but also the first to solve a Sudoku puzzle correctly. I am pretty sure we could have asked them to do anything to prove they were working, but I like Sudoku puzzles, so Sudoku puzzles it is! ![]( http://sudokublog.typepad.com/photos/uncategorized/sudoku4920050829150940clue.png) As soon as the first lucky observer solves the puzzle, all other observers come to a consensus on who won. That person gets paid the $1 reward, and maybe even any tips the two people playing in the telephone game decide to give them for being so awesome at solving Sudoku puzzles. This new process is now not only safe to extend through the end of the telephone game with just 30 people, but also feasibly forever with an infinite amount of participants. In fact, the only way this game could be ruined is if a majority of observers are somehow in cahoots with one another, and decide to transcribe the message incorrectly. In theory, they could pool their puzzle solving power together, coordinate a fake message, and manage to solve the puzzle correctly before the other observers manage to be the wiser. This would be like re-introducing a singular point of failure to the system because a majority of the people in the room would have the power over the message being sent. We can fix this by inviting one thousand ... no ... one million observers to watch the whisper transaction! *Good luck trying to coordinate a majority of that many people evil observers!* ![](http://blog.stackoverflow.com/wp-content/uploads/dr-evil-pinky.jpg) # Would You Trust This Network? If you had to get a message of value from point A to point B, would you trust the telephone game system I just outlined above? You ought to, because what I have outlined is essentially the Bitcoin **blockchain**. The blockchain is the irreversible ledger of all transactions that have ever taken place in the Bitcoin ecosystem, from one account to the next, and quite possibly one of the [most significant innovations in technology of all time](http://www.newscientist.com/article/mg22129553.700-Bitcoin-how-its-core-technology-will-change-the-world.html#.U-lnMfldU0M). From my telephone game analogy, each person trying to get a message to the next person relates to what are called **blocks** on the Bitcoin network. A block in Bitcoin is a combination of three elements: the [hash](http://letstalkBitcoin.com/blog/post/hashing-football-and-Bitcoin) of the previous Bitcoin block, the **Merkle root**, or the hash of all of the hashes of transactions that have taken place from one address to the next in the Bitcoin system, within about a ten minute time span, and the **nonce**, or a completely random number unknown to anyone at the time. ![](https://en.Bitcoin.it/w/images/en/7/75/Bitcoin-simplified-payment-verification.png) The observers of the new telephone game I proposed are what we know in the Bitcoin world as **miners**. Miners earn a **block reward** for their work in the process of hashing together approximately the last ten minutes of each transaction, in addition to any transaction fees from user to user associated with that block. Just like in the new telephone game where merely observing took little to no skill at all, hashing transactions together is just as arbitrary. Therefore, a Sudoku puzzle-like game that mandates the miners to essentially guess a very large random number was created. This very large random number is known as the **nonce**, and it is added to the end of the previous hash to mint a block. This nonce requires the miners to prove they dedicated a lot of computing power to work; and at the same time, introducing a little element of luck to the process. # Where Do Bitcoins Come From? In the beginning, no Bitcoin actually existed. Therefore, there were no coins to actually send from one address to the next, and no transaction messages to be broadcast. Just like the new telephone game, the Bitcoin network could not be started until an initial message existed to be sent. This initial message to be broadcast in Bitcoin is known as the **genesis block**. The reward for the first miner to observe this block, or any subsequent block for the immediate future, was 50 BTC (current value: approximately 27,000 USD). Even though there were no initial Bitcoin transactions in the genesis block, by default, every block that ever gets discovered on the blockchain has an unspent open-ended transaction called the **coinbase**, which is reserved for the miner who eventually wins the nonce guessing game. So, at minimum, there is one transaction that MUST happen every block, even if there are no other transactions on the network. Any other transactions on the network will be added on top of this and hashed down the size of one block. This coinbase reward that goes to the winning miner is known as the **block reward**. This block reward started out as 50 BTC, but subsequently has gone down over time at a [predictable schedule](http://Bitcoinclock.com), to match the idea of the value of Bitcoin eventually rising over time. For the first 210,000 blocks, the reward was 50 BTC, but this reward is cut in half for every 210,000 blocks after that. Currently, we are on [approximately block 315,000](http://blockchain.info), or a reward of 25 BTC per block. # Attack of the 51! The more miners who are playing the Bitcoin game, the more likely someone will randomly be lucky. On average, the difficulty is designed to take about 10 minutes to go block to block. If computing power gets better, difficulty is adjusted to maintain this ratio. What would happen if the majority of the miners pooled their brute force computing power together to attempt to disrupt the network? Could this feasibly happen? Think of it from the miners' perspective. When your Bitcoin wallet says 2 BTC, it does not mean that they are physically there, like paper currency actually sitting in a leather wallet. Instead, those 2 BTC represent a ledger of transactions that is traceable back to the genesis block and that prove the entire history of Bitcoin leads to you having that many BTC sent to your address. If a miner were to pool their power with a majority of bad actors on the network, they would be able to essentially go back in time on the blockchain, and forge forward an alternate history that could fake transactions and swing the ledger to their benefit. This is what is known as a 51% attack, and it can completely destroy the trust anyone has in a [cryptocurrency] (http://en.wikipedia.org/wiki/Cryptocurrency). If you have ever seen the movie [Back to the Future 2](http://www.imdb.com/title/tt0096874/), you have seen an a 51% attack. In the plot of the movie, the chief antagonist, Biff, overhears Marty McFly in the future year of 2015, talking about taking a sports almanac back with him to the past to earn a little extra money by betting on known sporting event outcomes. Thankfully, Doc talks him out of this, but this does not stop Biff from overhearing the idea and thinking to do this himself. Biff famously steals the Delorian time machine, travels back to 1955 with the magazine, and successfully creates an alternate reality past 1955. ![](http://www.wallpaperno.com/thumbnails/detail/20121028/people%20back%20to%20the%20future%20grayscale%20white%20hair%20doc%20brown%20christopher%20lloyd%20blackboard%202048x1303%20w_www.wallpaperno.com_68.jpg) So what exactly stops this from happening with Bitcoin? First, and foremost, there is not just one Biff mining Bitcoins. There are thousands of miners out there. It is true that some do merge their powers to become more powerful miners, but still, there are many of these groups. Thus, there is a distributed workforce working together in the honest process of mining Bitcoins. The probability of a single group, or even a distributed group, of dishonest miners forging past the honest miners to form an alternate reality is [nearly impossible](https://Bitcoin.org/Bitcoin.pdf). Of course, anything is theoretically possible, but very highly unlikely, as long as Bitcoin has financial incentive to a distributed miner workforce. # Why So Revolutionary? The blockchain accomplishes a complete, trusted flow of information that no one person is in charge of, GUARANTEED by mathematics to be genuine. In a world where one does not have to trust just one person to verify that something is true, there are truly no limitations to what can happen, or to the applications that can be created. This is why people truly get evangelical about Bitcoin, and truly believe in the power of cryptocurrency. Imagine any application where central points of failure create controversy: * Voting * Banking * Stock Markets * Government * Corporations * Law Now imagine the rules for these being completely rewritten with blockchain technology. The value of Bitcoin as a currency is important. However, the value of the protocol is limitless! -*Adam Terwilliger* **New to the LTB network? Follow [this link]( http://letstalkBitcoin.com?ref=9de4636b) to let them know I sent you! While here you can earn all kinds of LTBcoin for actions you would already take, like commenting on blog posts, participating in the forums, and listening to podcasts!** Read More
  • 59 Comments
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    Categories: General, Guest Blog

    Bitcoin Value and Mining Difficulty

    September 3rd, 2014 by Tron

    Original (dhimmel):

    It is no coincidence that the value of bitcoin goes up as the mining difficulty rises.  It is also no coincidence that the mining difficulty goes up as the value of bitcoin rises. There is a very tight linkage between the two.  To understand why, it is important to first understand how mining affects the difficulty.


    Mining for profit is very similar to a regular manufacturing business.  There are capital costs which include the mining hardware (ASICS -- Specialized mining hardware, GPUs -- Graphics cards, CPUs -- regular computers, and perhaps AC -- Air Conditioning).  Then there is the variable cost which is electricity.  The goal is to maximize the profit, which means getting the most out of the hardware, and then knowing when to stop mining and sell the hardware.  Most miners sell their newly mined bitcoin immediately to recoup their costs, which decreases the value of bitcoin because of the market sell pressure.  Those that hold bitcoin do better in most cases, and miners that hold also benefit the long-term value of Bitcoin -- more on this in another article.


    The difficulty goes up as more miners deploy more mining hardware.  The Bitcoin network automatically adjusts the difficulty up or down every 2016 blocks, or roughly every two weeks so that each mined block, worth 25 BTC, takes about 10 minutes to find.  Every machine, even a weak laptop, has a shot at finding the block on a pro-rata basis of how many hashes they calculate.  By joining a mining pool, miners can spread the reward in the same way that office workers get together and buy batches of lottery tickets to get a higher chance of getting a smaller payoff.  In a pool, if one of the miners finds a block, the bitcoin reward is shared with all his fellow pool miners.


    How and why is the bitcoin price correlated with the difficulty?  


    Every miner looks at the cost of equipment, the cost of electricity and then makes two educated guesses.  First, ‘How fast will the difficulty rise?’  And second, ‘How fast will the value of bitcoin rise?’  These two numbers are critically important and impossible to know in advance, but looking back at historical rates and projecting forward gives an idea of what they might be.


    Efficient market theory says that it will eventually be the same cost to purchase a bitcoin as it will be to mine a bitcoin.  Why is this?  Because if it’s cheaper to mine a bitcoin than to buy a bitcoin, miners will buy more hardware, burn more electricity, mine, and sell bitcoin into the market pushing the market rate down until mining is no longer profitable.  If it is cheaper to buy a bitcoin, then the money that might possibly go into mining will instead purchase bitcoin pushing the market price up.   


    Why mine at all?  Because the efficient market theory breaks down at the compressed timescales involved in bitcoin.  Rational market forces haven’t gone away, but they simply can’t adapt as quickly as the bitcoin ecosystem changes.  If you are prepared to mine when the price rockets on speculation and before the difficulty adjusts to compensate, there are significant profits to be made.


    We’ve all heard stories from the early Bitcoin days, literally only a few years ago, when mining bitcoin with a laptop would yield blocks of fifty bitcoin.  We’ve also heard stories of those same people turning off their computers because it just wasn’t worth it.  “WHAT WERE YOU THINKING?!”, you want to scream knowing that those same bitcoins are now worth tens of thousands of dollars.  But those folks were operating logically.  The cost of electricity exceeded the value of the bitcoins at the time.  It was better to buy bitcoin on the open market with the same money that would have been spent on electricity, although few did.


    So what changed from those easy, breezy, laptop mining days?  The difficulty has changed.  By design, half of all the bitcoins that will ever be mined were mined in the first four years.  Does this mean they were easier to find in the beginning?   Yes, but not because they were just laying scattered around somewhere.  The careful and considered design of the software by its creator, Satoshi Nakamoto, made them statistically easier to mine at the beginning and harder as more miners join the party.   These details are controlled not by smug elite bureaucrats, but by the Bitcoin software, and while software can easily be changed, it’s necessary that all miners use software that follows the same rules.  Since the rules are working well for the miners, it is nearly impossible to change the rules by getting most of the miners to switch software.


    Now there are fewer bitcoins left to mine, and the reduced number of bitcoins are distributed proportionately among the miners based on the resources they marshal for mining.  Add more miners and each miner gets fewer bitcoins until some miners drop out because their mining equipment is not as efficient or their electricity costs are too high.  Efficiency is the reason that mining with a laptop is no longer recommended.


    Mining is a great way to equitably distribute bitcoin and it does two other interesting things at the same time.  First, it takes value away from bitcoin because resources are spent on mining equipment and electricity instead of purchasing bitcoin on the open market.  Second, it increases the mining difficulty making each new bitcoin more expensive to obtain and therefore more valuable.   These two competing forces are in tension.


    In summary, value and difficulty are tightly correlated because when the difficulty rises to the point that mining is unprofitable, it makes more sense to purchase bitcoin which adds buying pressure to the market and vice versa.  The value of a bitcoin is dependent on a high difficulty and the mining difficulty is dependent on a high price.  With a few exceptions, like the recent exponential efficiency gains from improved hardware, the bitcoin value and mining difficulty will both go up, or both go down, but they will not separate - at least for very long.

    Read More
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    Categories: General, Legal Activity

    Long-Arm Lawsky, Part I: Statutory Authority

    August 30th, 2014 by wildjo
    Editor: Cheryl Original: There are a lot of reasons to dislike the BitLicense regulations proposed by Ben Lawsky and his New York Department of Financial Services (DFS). Two of the more potent arguments that have the greatest potential to strike down the proposed regulations, if they are not first withdrawn or extensively and materially modified, are: 1) lack of statutory authority, and 2) unreasonable interference with interstate commerce. Today, in this Part I, I discuss the issue of DFS statutory authority, or lack thereof, as it specifically relates to virtual currency and bitcoin. In order for a state agency like the DFS to take any action, it must have authority to do so. Typically, such authority comes from state law. If the agency seeks to act outside its statutory authority, it does so unlawfully. That is precisely the situation we face with the DFS and its BitLicense scheme. If you have read the proposed regulations, you may have noticed the phrase at the top (right after the table of contents and before the introduction); Statutory Authority: Financial Services Law, sections 102, 104, 201, 206, 301, 302, 309, and 408. This is a reference to the state law that the DFS believes gives it the power to propose the BitLicense. A closer look at this enabling legislation reveals that the DFS has been far, far too ambitious. Under the flawed proposed regulations, the DFS prohibits any unlicensed Virtual Currency Business Activity (VCBA) that involves a New York resident. VCBA is defined as receiving or transmitting virtual currency; securing, storing, holding, or maintaining virtual currency on behalf of others; buying or selling virtual currency as a business; converting virtual currency to fiat or any other store of value; or, controlling, administering or issuing a virtual currency. However, under its relevant statutory authority, the DFS has only been empowered to regulate financial products or services. We may, at first glance, assume we know what financial products or services means and conclude that virtual currency and VCBA sounds like it might fall within that assumed definition. However, state agencies lack the authority to assume. Instead, they must look to the exact language of their enabling statutes. So, what does this phrase financial products and services really mean? Not surprisingly, the statue is too vague. The phrase is tautologically defined in Section 104 of the Financial Services Law as: any financial product or financial service offered or provided by any person regulated or required to be regulated by the superintendent pursuant to the banking law or insurance law or any financial product or service offered or sold to consumers& Clear as mud, eh? Seeking clarification from New Yorks Banking Law is equally fruitless as it contains no definition of a financial product or a financial service. (it merely defines banks, bank-like institutions, and bank mechanisms such as demand deposits). It neither defines financial product or financial service nor mentions virtual currency or virtual currency business activity. Instead the statute is utterly silent. A common tactic in statutory construction or interpretation is to refer to definitions contained in similar statutes to help define a term used in a law or regulation that is otherwise silent or vague. We dont have to look far to find a relevant definition of a financial product or service under federal law. Section 5481 of Title 12 of the United States Code contains the definitions relevant to federal banking law. Section 5481(15)(A)(i)-(xi) defines a financial product or service as (paraphrasing): 1) extending credit and servicing loans; 2) extending/brokering leases of real or personal property that are essentially purchase finance arrangements; 3) check cashing, collecting, or guaranty services; 4) providing real estate settlement services; 5) providing appraisal services 6) engaging in deposit-taking activities or acting as custodian of any financial instrument; 7) offering stored valued instruments where the offeror controls the terms; 8) providing payments or financial data processing products; 9) providing financial advisory services; and 10) engaging in consumer credit reporting activity. In a nutshell, the definition describes a bank and traditional bank products and services. Since the definition defines the same phrase used in the New York statute and since both statutes regulate the banking industry, it is perfectly appropriate to assert that the DFS statutory authority is limited to this more specific definition. That is, the DFS is authorized to regulate certain traditional banking activity, and nothing more. This assertion is also strongly supported by the statutory purpose contained in New Yorks Financial Services Law. Section 102 is long, but is worth reprinting in full here: The legislature hereby declares that the purpose of this chapter is to consolidate the departments of insurance and banking, and provide for the enforcement of the insurance, banking and financial services laws, under the auspices of a single state agency to be known as the department of financial services and to accomplish goals including the following: (a) To encourage, promote and assist banking, insurance and other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state; (b) To establish a modern system of regulation, rule making and adjudication that is responsive to the needs of the banking and insurance industries and to the needs of the states consumers and residents; (c) To provide for the effective and efficient enforcement of the banking and insurance laws; (d) To expand the attractiveness and competitiveness of the state charter for banking institutions and to promote the conversion of banks to such status; (e) To promote and provide for the continued, effective state regulation of the insurance industry; (f) To provide for the regulation of new financial services products; (g) To promote the prudent and continued availability of credit, insurance and financial products and services at affordable costs to New York citizens, businesses and consumers; (h) To promote, advance and spur economic development and job creation in New York; (i) To ensure the continued safety and soundness of New Yorks banking, insurance and financial services industries, as well as the prudent conduct of the providers of financial products and services, through responsible regulation and supervision (j) To protect the public interest and the interests of depositors, creditors, policyholders, underwriters, shareholders and stockholders; (k) To promote the reduction and elimination of fraud, criminal abuse and unethical conduct by, and with respect to, banking, insurance and other financial services institutions and their customers; and (l) To educate and protect users of banking, insurance, and financial services products and services through the provision of timely and understandable information. In other words, the main purpose of the Financial Services Law was simply to consolidate the banking department and insurance department into a single agency (the Department of Financial Services) and to help these industries remain competitive in the state. Setting aside for now the cynical notion that the DFS just might be meeting these obligations by trying to kill bitcoin with the BitLicense, it is plain that the DFS authority extends only to the banking industry and bank-like financial products and services (as defined above). The authority to regulate virtual currency and virtual currency business activity outside the banking industry is found nowhere in the relevant New York statutes. Even if, for the sake of argument, the DFS did have the statutory authority to enter this new sphere of virtual currency business activity, the proposed regulations still go too far. Those who study bitcoin understand that its use as a virtual currency is only one of a multitude of actual and potential uses that are not inherently financial products or services (e.g. domain name registration, smart contracts, and notary services). Yet, the DFS does not distinguish between these non-financial uses of the technology. Instead, any business utilizing the blockchain could be found by the DFS to be engaging in the transmission of a virtual currency as defined in the proposed regulations. For example, if a New Yorker uses a service that assists him/her in transferring a fraction of a bitcoin to establish proof of existence on the blockchain for some digital creation, they have engaged in a transaction that would require a BitLicense, despite the fact that nothing about the business arrangement is financial in nature. Taking the example a step further, suppose that digital creation was valuable and worth over $10,000.00 at the time the transfer was made. Under the BitLicense scheme, the DFS could argue that the transfer requires compliance under the anti-money laundering provisions of the regulations due to the value ostensibly transferred on the blockchain. There are far more examples of this type of non-bank, non-financial use of bitcoin/blockchain technology than there are for virtual currency uses. Yet, the DFS, through its flawed proposal, is seeking to rake it all in. The DFS cannot unilaterally extend its reach into the virtual currency sphere without the New York legislature first authorizing it to do so through new legislative action. The state agency does not have the subject matter jurisdiction that the BitLicense proposal, as written, would require. Simply put, the DFS is utterly without statutory authority to proceed in the proposed manner, and the BitLicense would be ultra vires and unenforceable. Not only does the DFS lack statutory authority to issue BitLicenses, doing so would be an unreasonable interference with interstate commerce as every transaction on the blockchain is, by its very nature, an interstate activity. I will cover this argument next week in Part II. Read More
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    Categories: General, Legal Activity

    The Blockchain, the BitLicense, and the High Costs of Compliance

    August 22nd, 2014 by wildjo
    Editor and proofreader: Cheryl Copy of original: Since the release of the proposed New York Department of Financial Services (DFS) BitLicense regulations on July 23, 2014, the crypto community has been concerned, but there hasnt been enough discussion of the specific implications such regulation would have. Its about time we put some flesh on those bones. Specifically, what would compliance with the regulations as written actually cost? The goal of this post is to provide some answers, but, first let me tell you a quick story about how I started thinking about it. The other night found me alone, sitting in my favorite chair, watching transactions in the bitcoin blockchain. It was a slow night, but my expectations were low. I pulled up the Blockchain.info block explorer and focused my screen on the flow of current transactions. I have to admit, it was somewhat enchanting to watch the constant stream of bitcoin commerce. Satoshi really gave us something to marvel at here. It wasnt long before the first large transaction rolled through. And they kept coming, and they kept getting bigger. After about an hour, I had seen everything from a $0.00 transaction with a $0.10 transaction fee to a $775,000.00 transaction with a $0.05 transaction fee. The blockchain statistics indicate that $800.00 was the average transaction amount during the twenty-four hour period in which I was watching. This was far higher than I had previously assumed. Clearly, a lot of value is moving effortlessly (e.g. cheaply) through the blockchain, which is precisely why the DFS wants to get involved. And this brings us to one of the meatiest and costliest parts of the proposed regulations. Section 200.15 requires all regulated entities to implement a full Anti-money laundering (AML) and U.S. Treasury Office of Foreign Asset Control (OFAC) compliance program. In subsection (d)(2), the regulations require a licensed entity to report within twenty-four hours all transactions (whether individual or cumulative) that exceed $10,000.00 in a single day. Subsection (g)(4) goes further and requires that a licensed entity track single transactions that exceed $3,000.00, with the implication that such transactions are suspicious. Subsection (d)(3) requires the immediate reporting of any suspicious activity regardless of dollar amount. This may not seem that bad or that costly, but I assure you it is. During my night in the blockchain, I conducted a very informal and unscientific test. I set my timer for three minutes and counted all the transactions greater than three thousand dollars during that time. After multiple rounds, the average was fifteen, with half of those being greater than $10,000.00. This would theoretically translate into a total of 7,200 transactions per day that could be subject of either a Currency Transaction Report (CTR) or Suspicious Activity Report (SAR). Thats well over two and a half million reports per year, and bitcoin is just in beta! Its a staggering amount of paperwork for bitcoin businesses to produce and for the regulator to actually make use of. But what would it cost? There is very little detailed information in the literature regarding AML compliance costs. One 2005 study estimated that regulated entities in the United States spent $1.8 billion (yes, thats a b) in annual AML compliance costs.1 The Financial Crimes Enforcement Network (FinCEN), reports that there were 15.8 million AML compliance reports filed in 2005.2 Doing some simple math for a down & dirty estimate suggests that each report filed in 2005 cost regulated industry $114.00. That kind of makes you feel bad for the banks until you realize that they simply pass those costs on down to us, which is exactly what the bitcoin community would have to do with this potential $820,000 daily bill. While possibly generating the greatest financial burden on the bitcoin space due to day in and day out application, Section 200.15 is not the only section to impose significant costs on BitLicensees. Section 200.5 requires that each BitLicense applicant submit a nonrefundable application fee. The proposed regulations dont state any amount, leaving it up to the discretion of the DFS, but we can make an educated guess. Every other market-entry license issued by the DFS requires a $12,500.00 application fee. Its no stretch to assume that the BitLicense will cost an equal amount. Section 200.4(a)(4) requires background checks for each Principal Officer and Principal Stockholder. In the New York market, these background checks run $650 a pop. Sections 200.14(a) and (b) require the submission to the DFS of quarterly financial statements and audited annual financial statements. It is the latter one that is the most costly. I recently had a moderately sized corporate client contract for their first audited financial statement and the final bill was around $35,000.00. Recall that this would be an annual expense under the proposed regulations. From here on out, estimating costs get a bit more speculative. Section 200.8(a) requires that each BitLicensee be sufficiently capitalized to ensure financial integrity. The sufficient amount of capital is solely determined by DFS. It could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts. Section 200.9(a) requires that each BitLicensee maintain a bond or trust account in an amount acceptable to DFS. Again, it could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts. Section 200.13(a) requires that each BitLicensee submit to biannual examinations. It is not quite clear what this would exactly entail, but it is a safe bet that each BitLicensee will want to prepare, which means accountant and legal costs, as well as lost opportunity costs associated with staff devoted to compliance rather than engaged in direct market making activity. Last, but not least, Sections 200.16(c) and (f) requires each BitLicensee to employ sufficient cyber security personnel, including a Chief Information Security Officer. Sections 200.16(d) and (e) require an annual cyber security audit by a qualified and independent third-party. The way these regulations read, one person isnt going to be able to be a jack of all trades and wear multiple regulatory hats. These regs require dedicated cyber security staff and third-party consultants, and both are expensive. We have now covered all of the vaguely enumerated costs of compliance contained in the proposed regulations. These are big, daunting numbers: $12,500 just to apply; $35,000 annually for an outside audit; $114 for each AML report (and you better be liberal in your reporting so as not to miss something and risk being assessed a penalty); $650 for each background check of each executive staff or investor; obtaining sufficient capital; posting sufficient bond; and on and on. But, theres more to it. Each applicant will necessarily incur the general consulting costs of developing all of the policies and procedures required under the proposed regulations, as well as preparing all of the disclosures, background information, business practices and strategy descriptions, marketing plans, advertising samples, etc., etc. that are also required to be disclosed with the application. In other words, there will be significant costs for simply putting the multi-layered application together. Lawyers and accountants will charge a lot of money for their guidance. Industry data shows that the average associate attorney in the New York market charges $400.00 per hour (with partners pulling in $1,000.00 or more). In a specialized field such as bitcoin licensing, you can assume that the fees are going to be above average. Even the smallest of the potential BitLicensees should plan on thousands of dollars to simply put the application together, with larger ventures approaching six figures. These will be sunk costs with no guarantee that the application will ever be approved. It should be clear at this point that the proposed DFS regulations would not simply make business in the bitcoin space do a lot of unpleasant stuff; they are going to make businesses in the bitcoin space pay a whole lot of money to do Them. That will have two consequences: it will set up obstacles to entering the space that only the most resource rich players can afford; and, it will introduce financial friction into the system and increase transactions costs. There is a strong argument that these consequences are antithetical to the fundamental principles underlying the bitcoin protocol. The crypto community has cause for concern. Sources: 1. Yeandle, Mark, et al., Anti-Money Laundering Requirements: Costs, Benefits and Perceptions, June 2005 2. FinCEN Annual Report Fiscal Year 2005 Cover image courtesy of LittleShibe. Read More

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