‘Bitcoin is more than just money’

Brito is executive director of Coin Center, a new think tank and advocacy center. Backed by the fledgling cryptocurrencies industry, Coin Center is working to ensure that the new technology of Bitcoin is integrated into the U.S. system of laws and regulations.

Bitcoin, a peer-to-peer, decentralized digital payment system, is so new that lawmakers and regulatory agencies are scrambling to catch up to its impact. Through cryptography and the use of a public ledger of transactions known as the “blockchain,” Bitcoin eliminates the need for a trusted third party to facility transactions.

Its early adopters believe it has the potential to transform payment systems, if not the entire monetary system. But lawmakers have looked askance at its early use in online crime.

Brito, an adjunct professor of law at George Mason University, has been one of the experts that Congress and Federal Reserve officials have relied on to explain the potential effects of the introduction of Bitcoin. He left the libertarian think tank Mercatus Center to focus on cryptocurrency-related issues at Coin Center earlier this year.

Brito agreed to an interview with the Washington Examiner to explain better how Bitcoin will soon be a major policy issue for Washington. The conversation has been lightly edited.

Washington Examiner: Coin Center describes itself as a “new voice for Bitcoin.” Why does Bitcoin need a voice in D.C.?

Jerry Brito: It’s quite simply that regulators at the federal but also at the state and international levels have been increasingly interested in Bitcoin, and where the use of Bitcoin and the operations of Bitcoin businesses might intersect with different regulations.

As government becomes more interested, there was nobody there to really be a resource to these regulators, to answer their questions, to make sure they understood how the technology works, to make sure they understood the consequences of the decisions they might make.

That’s what we wanted to do, to be that voice, not for any particular company, not for any particular cryptocurrency even, but just for the freedom to innovate around blockchain technologies.

Examiner: What are some of the real-world impacts of cryptocurrencies that we’ll start to see in the near term that will elevate their profile in Washington and raise the stakes for policy?

Brito: At the most basic level, cryptocurrencies like Bitcoin are useful as a way to transmit value or transmit money online, electronically. That’s very basic, but it improves on existing ways to do that because there is no need for a third-party intermediary.

Before the invention of Bitcoin, in order to transmit money online, you had to employ a third party, like a bank, or PayPal, or a credit card company. With Bitcoin there is no intermediary, it’s decentralized. As a result it can be cheaper and faster.

That’s great for merchants and it’s great for consumers, but as a result there are going to be all kinds of regulations that apply on money transmission that are going to come into focus.

These include things like anti-money laundering regulations, and consumer protection regulations of different kinds. That’s sort of at the most basic level.

We already see folks using Bitcoin to buy and sell goods, to remit money to their families overseas, etc. That’s already happening.

At a more advanced level, we’re going to see things like Bitcoin derivatives of different kinds to hedge against Bitcoin volatility. There, for example, you see the [Commodity Futures Trading Commission] regulating these derivatives, and we already have seen the first Bitcoin swap being regulated by the CFTC.

You have the Securities and Exchange Commission now looking at a Bitcoin [exchange-traded fund] so that folks who want to speculate on Bitcoin can do so easily, without having to actually hold Bitcoin.

As you engage in any of this, you’re going to have tax consequences, so the Internal Revenue Service is going to be looking at how different Bitcoin transactions are taxed.

Examiner: And what about over the longer term?

Brito: At an even more advanced level, Bitcoin is more than just money — I think that’s something that a lot of folks don’t understand yet.

At the end of the day, Bitcoin is a token, and it’s a way of securely and verifiably transferring tokens online.

These tokens to date have represented money. Today, one Bitcoin is worth about $400.

There’s no reason why these tokens can only represent money. This token could also represent a house, a car, an ounce of gold, a share in a stock.

When you conceive of it that way, you could use Bitcoin or blockchain technology that Bitcoin introduced to do property registries, stock exchanges, commodity exchanges, etc.

There’s a lot there related to financial regulation, consumer protection, tax — there’s plenty.

Examiner: When you talk to entrepreneurs, especially those working with cryptocurrencies, they tend to have an anti-establishment, disruptive mindset. How do you manage their expectations as to what is coming from lawmakers and regulators?

Brito: I don’t think you do.

Bitcoin is a new and disruptive technology. New and disruptive technologies tend to come from, and be embraced by — first — communities of enthusiasts.

Think about the PC: Where did the PC come from? It came from a garage, and two very countercultural guys, Steve Jobs and Steve Wozniak. But eventually they find themselves in the middle of a billion-dollar industry. And given Jobs’ wherewithal, he was able to manage that. If it just had been Steve Wozniak, I’m not sure you would get there.

The Internet’s the same thing. It was essentially grad students who built it.

Bitcoin is very similar, where there’s sort of a first generation of enthusiasts who really have shaped its initial growth.

Unlike Steve Jobs and Steve Wozniak, they find themselves now in the middle of a billion-dollar industry that’s extremely heavily regulated and heavily scrutinized. So there’s much less margin for error there.

You had this sort of 1.0 generation of enthusiasts, but increasingly the entrepreneurs who are building what will be the lasting companies that are building out the Bitcoin ecosystem are very serious entrepreneurs who understand regulation, understand that they need to comply.

These folks are backed by very serious venture capitalists in New York and in Silicon Valley. There’s no need to explain to them that regulation will happen, that if they want to have a successful company, they will need to comply with this regulation, and that at this moment they need to engage with the regulators to make sure that the regulation can accomplish regulators’ goals while preserving their freedom to innovate.

Examiner: For a lot of these regulators and lawmakers, their first exposure to Bitcoin was when it was in the news for being used in high-profile crimes, such as the Silk Road drug trade. Do you find that officials are predisposed to view cryptocurrencies as somehow sketchy?

Brito: I think it depends.

If that’s the first time you hear about it, you’re going to be skeptical.

But once regulators dig into it deeper and they can talk to someone who can answer their questions, they begin to see that there’s real value there.

If you think back to the early Internet, it was portrayed as an underbelly where there was a lot of pornography and online gambling, etc. And so folks were skeptical about the Internet as well.

But eventually people understood, “Oh, no — there’s a lot of potential here.”

It’s a technology, and all technology is neutral in nature. It’s kind of like fire. You can use fire to cook a meal, you can use fire to warm a home, but you can also use it to raze a village.

It’s not the technology itself, it’s the use it’s put to that you need to be concerned about.

As you explain that to policymakers, they get it.

Examiner: When you’re talking to people at the Federal Reserve, how do you address the fact that many of Bitcoin’s early adopters said pretty clear that they wanted to see it as a replacement for the existing monetary system?

Brito: John Perry Barlow, in ’94 I guess is when he wrote the Declaration of the Independence of Cyberspace, was saying how the Internet was going to be a replacement for physical space, and how the governments would not be able to reach and regulate there. We’ve seen how that’s turned out.

As far as Bitcoin being a replacement for the U.S. dollar, I just don’t see that. People can claim whatever they want, but they’re going to have to explain how that happens.

For that to happen, you need to have a world where prices are denominated in Bitcoin, where you’re taking your salary in Bitcoin, and Walmart is denominating its prices in Bitcoin, and I don’t see that happening anytime soon.

I don’t think the Fed is too worried about the threat that Bitcoin poses to the dollar.

Examiner: Obviously, you’re enthusiastic about Bitcoin. What is a realistic outlook for Bitcoin as a mechanism to effect change, setting aside wild apocalyptic scenarios? What do you think the ceiling is for it to change business, government or society?

Brito: I think it’s revolutionary.

Money has been Bitcoin’s first application. It’s the obvious application.

It allows for transactions that weren’t possible before. For example, think about micropayments.

You’re now seeing this with tipping services, where if I read one of your articles online and I like it I can send you 5 cents. And if enough people send you 5 cents, maybe you have enough for a cup of coffee or something.

Sending 5 cents online was impossible before the invention of Bitcoin, because the transaction costs would have been higher than the amount you were sending.

If you try to buy Wi-Fi at the airport, what are your options? It’s like, you can get an hour for $9.99, or two hours for $15, or 24 hours for $30, and you don’t even want that much, you just want to check your email for five minutes between gates.

The reason those are the options are the transaction costs. You can’t offer something when credit card processing fees are taking a fixed chunk of the transaction, you can’t offer less than that. Bitcoin could allow you to pay for Wi-Fi access or anything else by the minute, by the second, by the kilobyte.

These things were not possible before, now they’re possible.

But there are many more uses of Bitcoin that we haven’t yet begun to see that I think are going to be transformational.

You have folks who are thinking about how blockchain technology can be used in the Internet of Things. Bitcoin allows machines to have money and trade it without a human needing to be involved, and that opens up all kinds of possibilities.

You can have prediction markets that are completely decentralized, and that wasn’t possible before.

There are many, many uses that we are just beginning to try to think through. We will see what the killer apps are, but I really think it’s revolutionary.