Part 5: David Andolfatto, Legal and Illegal Trading of Bitcoin

March 31, 2014 | St. Louis Mo.

Does bitcoin facilitate illegal trading? Sure, he says, but so does the U.S. dollar, gold, etc. Bitcoin transactions travel wallet to wallet, where the wallet identities are disguised. In this sense, using bitcoins is like using U.S. cash in facilitating illegal trades. On the other hand, he points out, wallet histories are publically available (unlike U.S. cash transaction histories). He also notes that bitcoins support a great deal of legal trading.

Can bitcoin be regulated? Some countries have issued an outright ban on the use of bitcoin and other virtual currencies. Can bitcoins be taxed? In the U.S., the IRS has recently ruled that, for tax purposes, bitcoins will be treated as property and not as currency. For example, when you buy then sell bitcoins, you must report the resulting capital gain or loss—compliance means added record-keeping costs. The effect of this and similar rulings serves to diminish the attractiveness of bitcoins as a currency—but enforcing a ban is close to impossible, Andolfatto says.

Presentation (pdf)

Transcript:

David Andolfatto: Does bitcoin facilitate illegal trading? Yeah, probably, but you know, so does the U.S. dollar, so does gold. Remember, bitcoin transactions travel wallet to wallet, where the wallet identities are disguised, so in that sense, they're very similar to like using U.S. cash in facilitating illegal trades. But on the other hand, remember what I told you. The wallet histories are publicly available. So the identities aren't quite linked up, but with enough forensics, you could potentially... who knows what you could possibly uncover? You've got the whole history of transactions. If you discover somebody has a wallet on their computer, I can link you to that wallet, and I can see these transactions. If I'm some government authority, you're going to have some explaining to do. That's not a property of a U.S. cash transaction.

In any case, these type of currencies, they're just tools. They can be used for good or evil. They also support a lot of legal trading.

Can bitcoin be regulated? Some countries have issued an outright ban on use of the bitcoins and other currencies. So in fact these currency controls are nothing new. You see this all the time in history. Countries are always imposing... ‘It's illegal for you to own U.S. dollars.' You cannot open a U.S. dollar bank account in some countries. They do this all the time obviously to protect their local currency.

Something different about bitcoin, though, is that there's no centralized authority that governs the creation, that manages the value of this object. How do you regulate something that has no central head? It's like trying to slay the hydra. You cut off one head, and three other heads appear. I mean, it's this distributed network out there in the world. How are you supposed to regulate something like that? That might either frighten you, or you might find that very exciting, depending on your point of view, but it's a fact.

Can bitcoins be taxed? Well, just the other day, in the U.S., the IRS has ruled that for tax purposes bitcoins will be treated as property and not currency. When I first looked at that, I went ‘What are they talking about?' But this is what they're talking about. When you buy or sell bitcoins, now you must report the resulting capital gain or loss on your tax form. If you choose to comply and I'm sure everybody in this room will, compliance means an added recordkeeping cost. And remember, if these other currencies start to circulate, you can expect similar rulings. Now if you want to comply, now you not only do you have to manage the exchange rate risk,... and remember, the price volatility. You are going to experience capital gains and losses, and you're going to have to keep track of them and report them. So this makes it more difficult. The effect of this and similar rulings serve to diminish the attractiveness of bitcoins as currency.

Does anybody use Ripple? I think you guys might be the winners, because Ripple is a currency agnostic protocol. Bitcoin relies on... bitcoin wants to be the money. Ripple, they have their native currency, but they'll... Ripple is a protocol that works very similarly to bitcoin, but it's more interested in facilitating and processing payments. But it'll process U.S. dollars, euros, bitcoins, its native currency. It's currency agnostic. And so it's quite possible that this ruling actually benefits the payments processors, as opposed to the virtual currencies that really want to be competing currencies. But of course, enforcing an outright ban is close to impossible. If people want to use bitcoin, they're going to use bitcoin, and it's just going to drive it underground.