The Bitcoin Regulation Paradox

Following the implosive death of the Mt.Gox Bitcoin exchange, a number of key players in the cryptocurrency space banded together to release a statement condemning the rogue and failed member of the larger Bitcoin economy.

The price of Bitcoin, falling below the $500 mark, has since rebounded slightly.

Views on the mishap come in various forms, but I think we can condense the lot into a few simple perspectives:

  1. Investing in, and/or using Bitcoin has always been ridiculous. If you lost money today, shape up.
  2. Mt.Gox has long been a weak actor, and one that was not to be trusted. If you lost money today, shape up.
  3. Bitcoin remains very strong, and Mt.Gox itself was never a real part of the larger Bitcoin economy. If you lost money today, shape up.

The above aren’t likely much comfort to those holding on to what they thought were actual Bitcoin, when in reality they were trading non-existent coins for real dollars. That, and the three listed points are undergirded by the fact that as Bitcoin is an unregulated currency, a networked system of monetary exchange, and store of financial value, you have to accept higher risks as compensation for the implied benefits of using the stuff.

More simply, the cost of pseudoanonymity and lack of a central authority and protective regulation is that Mt.Gox won’t be the last Bitcoin meltdown.

It’s simple to argue that banks fail as well, and that national currencies appreciate, and depreciate, and so forth. Correct. And such has it always been. But regulation was put in place over time to, if not stem, blunt those swings and devaluations. And laws and insurance provide legal and monetary redress abilities that Bitcoin lacks.

Could Bitcoin be regulated by a non-governmental body, let alone a government effort? I don’t think so, which means it will remain inherently more interesting — you can do more things with it than you can with dollars, say, in certain cases such as Silk Road — and far more risky to hold.

If you tried to regulate Bitcoin, you would need some sort of voluntary participation from the key players; lacking a quorum your regulation would have no market impact, and a general leading no army is just someone on a walk. Would the Bitcoin economy submit to an even self-selected Bitcoin arbiter? They could fund it, naturally.

But to add rules such as mandatory disclosure of holdings, the keeping of exchange logs that involve names, the providing of deposit insurance, and so forth would, in my estimation, change the usability of Bitcoin sufficiently, and its value would drop quickly. At a reasonable point of regulation Bitcoin becomes unmoored from the core values that built it and sustain its use.

The above are a few thoughts on what is certain to be a bloodbath of a week for Bitcoin in the media. If you want a look into the heart of Bitcoin’s current psyche, I suggest this thread

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