Interview with Andreas Antonopoulos on the Future of Bitcoin and Digital Currencies

What would be the ideal regulatory and tax system at the moment for Bitcoin, digital currencies, and blockchain technology in general?

I think the tax system really doesn’t need any special consideration whatsoever. There’s nothing different about using Bitcoin then there is about using Euros while in the United States, or using Yen while in Europe. If you’re a professional who operates a business that receives income from multiple countries, then you treat foreign currencies according to how you receive it. So for example, I’m in the United States, if I get paid in Euros I declare income at the point of sale at the price that I charge. Usually the price is quoted in US dollars, but if not I can convert it, and I pay income tax on it. If instead, I buy Euros in my brokerage account, hold onto them for a year and then sell them, then I pay capital gains. So depending on the use and contexts in which it was used I would either declare income or capital gains on a foreign currency if it was used as an investment. There’s no need to introduce any tax regime because you can do the exact same thing with Bitcoin, just treat it as a foreign currency. The only difference is it’s a foreign currency to every country. But other than that, you just do a currency conversion and pay income tax.

And I guess the Australian way of having GST, whatever it’s called, the sales tax, is incredibly damaging right?

Absolutely. It makes no sense. If you were trying to design a way to negatively affect the use of Bitcoin, block chain technologies, and the developments of innovation in a local industry in a country, probably the most effective way you could do that is to introduce such an arcane and illogical for taxation on something that is being used as a means of exchange. Most currency in the world is charged GST. I don’t see why Bitcoin would be. It makes no sense whatsoever. It’s burdensome, it leads to essentially making it impossible to use these currencies as means of exchange, they can only be used as long-term investments. Which arguably is a function that they’re not very good at because of volatility. It really means that only speculators can use Bitcoin in Australia. And if you wanted to create payment mechanisms, or retail, or e-commerce solutions on top of Bitcoin it would be wholly unsuitable. So that’s a terrible way to approach it.

Which countries or jurisdictions would you say are taking the most forward looking approach to this area at the moment?

Really no jurisdictions are taking a forward looking approach and the reason for that is quite simple, the most forward looking approach you can take towards a thing such as Bitcoin is to leave it the hell alone, because this isn’t something that requires government permission or blessing or endorsement or anything like that, it doesn’t require any additional regulation, it’s a self regulated mathematical system. So the most forward thinking thing the governments can do is recognise that they have limited power, limited understanding, and should stay the hell away from regulating things that they need to understand don’t have power over. Because any type of regulation at this point would probably be both premature and damaging to this technology. The most effective way to address this is the way most countries addressed the internet in the early days, which was just let it be and see how it evolves over a decade, and if things need to be changed in existing laws to address new realities then you change those things in existing laws. But to assume that you need to build some kind of special purpose regulatory framework for this new technology is really a bad way to start with this.

The UK and Switzerland seem to be doing less badly than some of the others. Which ones would you say are doing the least bad approach, if I could put it like that?

Probably the ones that have done absolutely nothing and haven’t really had any formal response to Bitcoin and are staying out of the fray, are probably doing the best. It’s hard to tell right now. I think that the US is doing a very poor job. The action that is being taken is being taken at the state level, which fragments the treatment of Bitcoin into 50 different jurisdictions, which makes the barriers very very high, and where those jurisdictions did take action, they took action that was entirely in favour of the incumbent banks and their methods of doing things. So they introduced regulations that treats Bitcoin as if it’s a banking system, which it isn’t. Which give full advantage to the banks, but really doesn’t give any opportunity for Bitcoin to disrupt the competitive environment.

Here we have an industry banking that has had almost no technology competition in the last 50 years. And the reason for that is because the regulators have effectively shielded the banking industry from technology competition. And along comes Bitcoin and you have an opportunity here to benefit customers by competitively disrupting one of the most entrenched insular corrupt and expensive industries, and backwards industries that exists, and what do the state regulators in the US do? They give them a helping hand to avoid competition from Bitcoin. That’s exactly what’s happened here.

In the UK there has been a lot of back and forth of the exact tax regiment in which creates a lot of uncertainty, which is completely unnecessary and damaging. But at the same time you’ve got this other situation whereby the banks have been able to essentially create an environment where none of the Bitcoin companies can open a bank account, or if they do open a bank account it gets closed. So the UK banks have frozen out Bitcoin from the banking system, and if anything, one of the things the governments could do is compel the banks to do business with Bitcoin companies, where there’s no justification for doing that, for shutting down the bank accounts. Essentially the banking industry is acting as a cartel and it’s trying to freeze out its only competition in the last 50 years and the government’s letting them get away with it.

If you look at the medium term, how do you think banks will adapt? Are their days numbered or do you think they’ll adopt block chain technology and carry on going? How do you envision that happening?

It’s a bit more complex than that. This isn’t simply a matter of banks saying, “Okay, let’s adopt Bitcoin technology and then we’ll continue,” or “Let’s not adopt Bitcoin technology and then it’s going to compete with us and take us out.” The very structure of banking, the architecture of banking changed irrevocably in 2008 when Bitcoin was launched. The fact that it is now possible to do the things that you can do with Bitcoin including transact across borders for very little cost in a way that doesn’t require intermediaries challenges the very poor architecture of banking. So banks as we know them are not going to continue to exist, and in fact you can say that about any industry. No industry as we know it will continue to exist perpetually. All industries are subject to the forces of competition and change and technological advancements. The fact that banking has managed to avoid those forces for 50 years doesn’t really mean much other than it was a temporary reprieve.

What will this development mean for national monetary policy? We generally adhere to the Austrian School of Economics. So we’re against the idea that central banks should set interest rates, we think it’s highly damaging. Will this type of monetary policy just become impossible if Bitcoin and other digital currencies become more wide spread?

I would argue that regardless of whether digital currencies become widespread, the interventionist central banking era is coming to a end in a most spectacular fashion. This is the week when the federal reserve acknowledged that it simply can’t raise interest rates. The illusion of control is beginning to crack and so the idea of all powerful central banking institutions that can define monetary policy. The big question here is not whether for example the federal reserve or the bank of Japan or the bank of England will raise rates, the big question now among most of commerce is can they raise rates? Can they even control rates? So Bitcoin is interesting in that it has arrived on the scene at a time when central banking in itself is facing its most serious existential crisis since the introduction of central banking. And Bitcoin is almost an afterthought, but certainly it’s going to hasten whatever crisis is happening in central banking, because the one most powerful tool that central bankers have right now is that they have complete monopoly over national policy and currency and that monopoly is now broken.

Did you see Andy Haldane, the Chief Economist at the Bank of England, gave a speech about banning cash so that radical measures like negative interest rates can be implemented? And he actually specifically said that it can be achieved by the Bank of England issuing their own digital currency. So they’re actually thinking along these lines of–

Is this a person who has a degree in economics?

Sorry?

Is this a person who has a degree in economics?

Not only that, but his tutor was one of our contributors, Professor Kevin Dowd who is a top economist.

I’m not an economist but I would start questioning the– My arguably non-professional grasp of economics says very simply that cash as a means of exchange– tokens, abstract tokens that operate as a means of exchange in an economy arise spontaneously and have arisen spontaneously throughout history in every culture, including among primates. Even monkeys eventually can be taught to use cash, and cash is a cultural artifact that arises spontaneously. To ban cash is to assume that people will not simply substitute the paper money with another form of cash. And in times of low liquidity, we’ve seen that, in fact, other things take the place of cash. Famously, in some parts of the United States and urban population areas, Tide detergent became a means of exchange for short periods of time in concentrated areas, we’ve seen gold take on that role.

This is the paradigm they’re working in. Some of the others– who is it? I think Rogoff, and there’s a few others that have talked about this. Essentially what they’re moving towards now is, because ZIRP hasn’t worked, they’re talking about NIRP, that is negative interest rates.

The problem is, what’s to stop people just putting their cash under a mattress. So in order to have sustained negative interest rates–

Yes.

A classic example is people who have their wages garnished or under some kind of court order, will take their cash earnings and go into the bank every week and instead of using a bank account they’ll have a safe deposit box. And they’ll go in and literally just stack piles of cash in there so that it’s outside of the purview of the economic system. The idea that the solution to a monetary crisis has become so extreme that you would have to implement totalitarian measures of control over finance and that that doesn’t strike people as indicative that you have an extreme crisis, that you have to take such extreme measures– I just find that astonishing. I find it astonishing how easily British politicians can take totalitarian positions in many aspects of life, and I find it astonishing that they’re not challenged when they propose totalitarian measures as a solution to a monetary crisis. If it’s gotten that bad, don’t you think that you have to address some of the root causes rather than plastering over the symptoms?

Absolutely. So back onto Bitcoin and the block chain, What types of innovations will happen on the Bitcoin block chain or versus people setting up their own block chains, whether it’s Etherium or also some of the more small scale ones or even some of the things that the banks are doing for themselves. How would you say the Bitcoin block chain can be used for a lot of those?

This is a really important point that I think we’re going to see play out in the next several years. But there’s a balance to be had here, which is that the effort required to create a secure block chain is enormous. And so far we’ve only had one block chain arguably that has reached the point where its security is of a scale that it can withstand global level attacks against it, and that’s Bitcoin. Now the idea that you can bootstrap a second currency to the same level of security requires a big leap of faith, and there may be some that achieve that, but in order to do so they have to be so strongly differentiated from Bitcoin and it must be really difficult to implement those same features on Bitcoin because the cost of bootstrapping another whole block chain is very very high. So for anybody who is designing such a system or deciding whether to adopt such a system, the question becomes, “Should I spend the extra effort to try to bootstrap a global security infrastructure for this, or is it worth sacrificing some efficiency or finding a way to somehow piggyback it onto the existing secured block chain, and then benefit from that existing security.”

What do you think the effects of the fork are going to be?

While we don’t know if there will be a fork– I think a lot of people who have a limited understanding of Bitcoin find these really academic worst case scenarios and emphasis them endlessly and look at it and say, “If there is a 51% attack, that’s going to be the end of Bitcoin,” or whatever. The truth is that Bitcoin is a dynamic, adaptive, anti-fragile ecosystem that is extremely broad, that has enormous levels of support from somewhere between half a million and a million and a half people who are invested and involved in it. And within that system we’re going to see equilibrium reached dynamically. So what that means is that I expect that even if you have very acrimonious debates over the size of the blocks and things like that, eventually these are all going to converge on a commonly accepted answer.

What would you say are the most exciting blockchain innovations that you’ve come across so far? First of all using the Bitcoin blockchain and then second using other blockchains.

I think the thing we’re seeing right now is that a lot of the innovations that are most interesting to me as a computer scientist are technical innovations that enable features, and not applications. Meaning that the things that excite me the most in the last year or two have been things like hierarchical deterministic wallets, multi-signature technology, delayed execution transactions, lock time and sequence based transactions. Those three capabilities together have opened the door for a vast array of possible applications where designers can take these core capabilities of the network and mash them together to create completely new applications. So for example, the combination of those three technologies has been used to create payment channels which are a mechanism for implementing extremely fine grains, micro-transactions, both in terms of the size of the transaction and in terms of the timing of the transaction for the delivery of metered services. Meaning for example, streaming video, wifi services, or any other type of service where you can meter by the minute, a second or even the hundreds of microseconds or milliseconds sorry.

Thanks, Andreas. Was there anything else you wanted to talk about that you think would be interesting for our newsletter?

To me, the interesting and fundamental question that arises with digital currencies is this, we’re now facing a future in which two possible outcomes will exist. One is– or rather I’m going to rephrase that. The future of money is a digital currency. That’s a fact that I think is clear and evident. No matter what happens, 10 or 20 years from now, digital currencies will be the dominant form of currency. The question is what kind of digital currency it will be. So there we have a choice as a society. We can either have a digital currency that is centrally controlled, that is controlled in terms of institutions and has built in a level of surveillance and totalitarian control that we’ve never seen before, that is unprecedented in history that essentially gives governments and banks the tools to be able to see every single financial transaction happening by every single person in the country or beyond in real time, and at the same time be able to, without really any control over that power, freeze, confiscate, seize the money of any individual. That’s one possible future. But we’re heading very quickly in that direction. And at the moment, the only thing that escapes the grasp of that kind of system is cash, and clearly you’re seeing people who are already toying with the idea of trying to ban cash. And they seem very comfortable with this idea of totalitarian finance.