The title of this piece is a line from Mirror Mirror an episode of the original series of Star Trek. It is appropriate, given the inevitable outcome of the British government rejecting the truth about Bitcoin, and what is going to happen to Britain as Bitcoin becomes the world-changing global standard for e-commerce.

In a parallel universe, coexisting with ours in the same space, the law is logical. There is a distinction between packs of cards, poker chips, hamburgers, SMS credits or video games that feature an in-game money mimicking points system and money; money is something that you use to buy those things, and things are things, not money. A thing cannot suddenly become money just because someone says so.

In this universe however, the one that you unhappily inhabit, there is no distinction between money and randomly selected things; anything can be declared money by consensus. And this money by fiat phenominon is the problem and grave danger you are facing.

There is a belief in this universe that Bitcoin, because its designer cast it in the role of money, is actual money, and not just data, which it actually is, indistinguishable from any other form of data.

Essentially, what a small number of governments in a King Cnut fashion are attempting to do, is stop the flow of progress and history, rather than surf its inevitable once in a century tsunami wave. They are the same as loom smashing Luddites, who want all progress to be stopped. The Luddites failed and no one who is rational thinks that it is a bad thing they were defeated with 20/20 hindsight.

Bitcoin, like any other data, can spread globally unrestricted. This is going to happen, no matter what anyone wants. It is now universally conceded without uncertainty, debate or doubt that on a technical level Bitcoin actually works as described. This is a sea change in opinion; for a long time (as measured on the internet), there were doubts amongst many people that Bitcoin could do what its users demonstrated it was doing. Now that these doubts have evaporated (without any additional proof that the detractors can understand), the fear of Bitcoin as advertised, which is the fear of the new and unfamiliar, is setting in as the scale of potential disruption begins to dawn on anyone who can think. That this disruption is entirely beneficial is irrelevant to these people; they are terrified of any change to their routine.

The fact that data is frictionless and fluid, means that anyone anywhere can send and receive it. Data flowing everywhere is a fait accompli. The only thing the State can do to “address” Bitcoin’s spread is to integrate with it fully as a peer on the network. They are already doing this with other internet tools. They act as peers on the network by using the web to communicate their messages and (badly) administer their compulsory services. Integrating Bitcoin for them means accepting it as settlement for taxes, and allowing all Bitcoin businesses free reign to develop their software and products in their jurisdiction. There is no other rational option for them.

There are some interesting ideas floating around about Bitcoin, and how it should be addressed as a matter of law. There is however not much variation to these ideas; they all revolve around a small set of mistaken ideas or themes, and they all are essentially interchangeable, as are the people who say them.

I will address some of these ideas now.

Bitcoin “Regulation”

Some men are claiming that there can be such a thing as “Sensible Bitcoin Regulation”. This is a non sequitur; Bitcoin regulation is not at all and cannot ever be “sensible”. There is nothing sensible or rational about it, from the standpoint of Bitcoin’s nature, and from the practicality of trying to control how people use it. Both of these things make controlling Bitcoin impossible, so it is absolutely not sensible to try and regulate Bitcoin. This is a fact.

There is no such thing as “light touch regulation”. What one person believes is a light touch, is a death blow to another. It simply is not ethical to regulate something that it is your right as a human being to do, and in the case of Bitcoin that means transmitting and making speech, by performing mathematical calculations. In the thinking of these men, it would be illegal to use a spreadsheet to do a government restricted calculation. This is precisely what they are advocating; some forms of math are to be made illegal to perform without a license.

You should be aware by now of Brainwallets, and how they work. A light touch regulation of Bitcoin actually means implementing RIPA for all people who will not release their Brainwallets on demand. That means for those of you who are not familiar with “The Crypto Wars, you will be locked up until you divulge your Brainwallet pass phrase. This is an unambiguous and unacceptable violation of your fundamental rights.

This is the end game of “light touch” Bitcoin regulation; the imposition of some of the worst laws ever enacted. As I write this, encrypted email has heavier penalties attached to it than Bitcoin; do you really imagine that the State is going to allow this glaring disparity to persist? If they are willing to interfere with freely available encryption tools, and your use of them, they will certainly extend this same power to Bitcoin, without a doubt, absent a eureka moment revelation and the enacting of special rules that exempt Bitcoin from RIPA and other bad legislation, which they are clearly not minded to do.

Razzle Thinking

There is another gaping hole in the “light touch” mind set. To say that fiat to Bitcoin should be subject to KYC/AML but not crypto to crypto is illogical. If you are asserting that Bitcoin is money, then whether or not exchanges are crypto to crypto is irrelevant; Bitcoin is money, and Anti Money Laundering laws should apply to it by your own logic, whether you are doing crypto to crypto or fiat to crypto.

Bitcoin does not change its nature just because you are not “touching fiat” this sounds like the off the cuff determination of a lawyer, and not original thought or an opinion based on the spirit of the law. Bitcoin is still usable as money for all purposes even in the crypto to crypto application. This very wrong headed idea exposes the incomplete “Razzle Thinking” that is swirling around Bitcoin.

Then there is the mistaken idea that regulation will spontaneously cause banks to allow Bitcoin businesses access to their services. Essentially its adherents believe this law will transform bankers into Bitcoin advocates. This is a painfully naïve opinion. Banks are the direct competitors of Bitcoin businesses, and they do not want Bitcoin to succeed. Secondly, there is nothing in these proposals that puts any obligation of any kind on banks to offer accounts to Bitcoin businesses. It is pure magical thinking to imagine that banks will suddenly welcome Bitcoin businesses if light touch regulation is enforced.

Legitimizing Math and Logic

I have said before, and it bears repeating; Bitcoin is legitimate by default. It is math, and nothing more. No other software technology or internet messaging service needs to be “legitimized” or licensed, they just need to work. Twitter, Facebook, Gmail and every other service works, does not need to be “legitimized”, and they are used by hundreds of millions without any problems. The word “legitimized” is nothing more than a pavlovian response to stock questions about what Bitcoin needs to suceed. It is false, and only offered by people who don’t have a complete understanding of how software products and services spread now or how they have spread historically.

By their logic, every piece of software sold should be subject to light touch regulation, “to keep people safe”. Microsoft Windows is the cause of billions in losses due to hacking and intrusion, and yet, that software is not subject to any regulation of any kind. Why is it that using Bitcoin, which is only software just as Windows is, should be subject to regulation, but not Windows? If consumer protection is the motivating idea behind the move to regulate, then there can be no argument against regulating all operating systems. After all, they are the universal access points to all commerce, and key infrastructures in the economy, are they not? Insert the sound of chirping crickets here.

Anyone who is sensible will agree with the suggestion of “reasonable guidance” but that guidance should not ever and literally cannot come from the State. Every IT system they have ordered is broken, and just recently there has been yet another abandonment of a hugely expensive government IT system, this time, the software tool used to process EU subsidy payments, that simply did not ever work:

[youtube http://www.youtube.com/watch?v=BzJRH_QbcLs]

Are you really going to attempt to claim that the State, that cannot procure even the most simple IT service, that is tiny in scale compared to Bitcoin, Facebook or Twitter, which all work perfectly on a global scale, with stellar up times (the amount of time the service is “up” without interruption or failure) has the knowledge and expertise to determine what is best for Bitcoin or any other software based service? The answer is that they cannot possibly know what the correct approach is, and this fact is indisputable.

Its one thing to waste the scant money that the State has in its own coffers on IT fiasco’s but its quite another to put irrational restrictions on the innovators in the private sector, who know what they are doing, and who are able to make a profit and serve the public doing it.

Legislation Cannot Write Software

Best practice standards emerge from collaborative software development, not from irrational bureaucrat drafted arbitrary rules that are not expressed in software. The Linux Kernel is a world class example of this. No government anywhere is involved in managing, specifying, aiding or guiding the Linux Kernel development. and the entire process and product produced by it works perfectly.

Bitcoin Multisignature Transactions (Multisig) is a perfect example of this. Multisig could not have come from the State or any of its software contractors, quangos, bureaucrats or advisory boards; it has come from the market solving its own problems, and it did so elegantly and very powerfully. You need no other example than Multisig to demonstrate that regulation and “Government Help” is not needed.

The limited resources of Bitcoin companies mean that any expense that is not directly related to security and software is wasted money. To mitigate this, the logical move is to incorporate in another jurisdiction, and avoid those toxic countries where irrationality is the law. It will give the companies that move a great advantage, as they can pour resources into software development, that in other companies is being wasted on filling out forms and collecting and storing worthless data.

The time and cost of maintaining records and processing users will make the UK unattractive as a place to run a Bitcoin business. HMG has openly admitted this in its proposal to create Bitcoin “Start Up Sandboxes” where the proposed rules will not apply while new software is being written. What they have admitted with this absurd “Start Up Sandbox” idea is that the burdens of regulation make it impossible to start a company when they are in force. If this were not so, and they really were “light touch”, sandboxes would not be needed at all. They are making the argument against regulation, whilst calling for it!

Any company that Sandboxes in the UK, upon completion of the software and successful field trial and VC funding will immediately make an assessment of whether or not they will gain more money and grow faster if they incorporate in another jurisdiction. I am sure that many will move jurisdiction, rather than accept the unnecessary burdens, but will physically remain in the UK as a developer base. They will rent offices, which is perfectly legal, staff it with developers, which is perfectly legal, and the business will be incorporated in another country. Which is perfectly legal.

This will mean that another jurisdiction will benefit from British innovation. A sad and tired story that we have seen repeated again and again over the 20th century, and now into the 21st.

Another downside of the ridiculous KYC/AML requirements is the effect it will have on customer satisfaction. Businesses that incorporate in the UK will be slow and unresponsive compared to services offered from outside it. You will download your Bitcoin client, and then wait three weeks to be “verified”. This is not an exaggeration. And it is absurd. Furthermore, any new software that enhances Bitcoin security with new ground breaking features like Multisig will inevitably be subject to a “compliance impact review”, wasting yet more time and resources. Companies not burdened by British regulation will simply innovate and be first to market with better security and features, beating companies in the UK.

The Pure Play Can’t Stay Exempt

The motion away from involving the money of the State as a solution to the imaginary “fiat touching crypto” problem is interesting and a short term solution. The current superstition is that if a business does not touch fiat, it is not subject to any laws. This is patently absurd of course, since the same people are making the claim that Bitcoin is money. If Bitcoin is money, then its treatment under the law does not change simply because you are not exchanging it for another type of money.

Eventually the State must come after “pure play” crypto to crypto Bitcoin business models because Bitcoin is being used to buy goods in the real world. Indeed, this has already happened, where Bitcoin was silently declared money in a criminal case. The same restrictions and rules will be held to be applicable to these pure play services, and the boosters of the absurd crypto to crypto fallacy will not be able to explain why this particular money should not be regulated in the “pure play” context.

This problem is the direct result of the mischaracterisation of Bitcoin from the root. If Bitcoin had been characterised correctly, as we have done, then none of these logical culs-de-sac could emerge. Bitcoin messages would be simple texts and Bitcoin companies nothing more than another Twitter, Telegram or WhatsApp, sending messages to and fro without restriction. This is the only way to defeat the inevitable legal attack on pure play business models. And the incentive to attack them is very large. These businesses are frictionless, have the potential to go viral and be extremely disruptive.

Part of the problem here is an inability to define words correctly. The government is not “supporting” Bitcoin by regulating it, it is harming it. The same misuse of words is responsible for calling Bitcoin money, and is the source of the problem; without a correct characterization of Bitcoin it is impossible to think about it correctly and determine how it should be treated under the law.

For the record, Bitcoin companies should be subject to the law, just like any other service provider is. When you buy a piece of wrapped Brie de Meaux and take it home to find cheap Cheddar, you have been defrauded. All the existing laws to do with fraud and misrepresentation are not made moot by Bitcoin, and they are sufficient to cover every possible contingency and criminal use of it.

Now here is a really wild one. There is an idea that these new regulations will remove the necessity for compliance officers and legal advice. There is nothing more absurd than this, in both universes. New regulations will in fact, make compliance officers mandatory for all Bitcoin businesses based in the UK. This means another exorbitant salary for a highly trained and completely superfluous legal practitioner, making it even more difficult to profit. Quite how anyone gets to, “compliance is now a legal requirement, therefore there will be no need for compliance officers” is anyone’s guess.

Clearly as Multisig and Linux has demonstrated, voluntary standards set by the industry itself is the best way to mitigate risk. The State’s abysmal record with IT projects shows that they have zero expertise in the area, and cannot possibly add anything useful. The conclusion to this report is a clear demonstration of their hammeresque, “Every problem is a nail” approach to Bitcoin.

Self regulation (also known as “The Market”) will promote innovation, better software, satisfied consumers, and a thriving ecosystem in the UK, and Elliptic are completely right in this regard. Sadly, their voice is not very loud, but fortunately for them, they can easily choose another jurisdiction to store Bitcoin in, should it become impossible for them to remain incorporated in the UK. It simply means transmitting Bitcoin to a man in an office in another jurisdiction, and printing the keys out there for storage by a single member of staff near the vault. There is absolutely no reason or advantage whatsoever for Eilliptic or any other company to remain in the UK and suffer losses because the State does not understand Bitcoin.

Elliptic, by voluntarily insuring their deposits as a product feature, is an example of using the market to protect itself and its customers. Rather than stupidly obey laws that do not exist, or even worse, call for bad laws that will have no effect on security, and that offer no protection of any kind to the customer or business, they take practical steps that achieve real world goals and which have real world beneficial results. This is because they are actual innovators, and not hangers on trying to squeeze 20th century thinking into Bitcoin.

It’s Already Too Late

Finally, everything you need to know about this announcement is made crystal clear by the official statement of a bank mimicking company that wants to pull the ladder up so that no agile start up can threaten them. If anyone can start a Bitcoin software company and release a service without permission, this makes the landscape extremely precarious for incumbents. At any moment, an upstart can enter the market and wipe them off the face of the map, which today, means a rectangle the size of an iPhone screen.

Two Bitcoin apps can coexist on the same iPhone. If one of them is more expensive, slower or artificially restricted in any way, all you have to do is move your Bitcoin from the bad service to the good service inside the same phone. In ten minutes, you will have a new Bitcoin service that respects your rights and which has no restrictions.

This is why the incumbents, the Crony Capitalists, want BitLicense and BritBitLicence. With these heavy restrictions in place, it will be much more difficult for their positions to be successfully challenged.

Now the die is cast. We will see whether or not the banks suddenly open their doors to businesses that threaten to destroy their remittances revenue, or whether the State will step in and legislate that banks must serve Bitcoin business. We will see whether or not there is a mass rush to incorporate in the UK’s new profit sapping BitBritLicense regime. Bear in mind also, that even without the imposition of illogical Bitcoin specific rules, companies (even ones that have nothing to do with Bitcoin or even software) are avoiding the UK in any case and incorporating in places like Ireland thanks to the toxic and swinging UK taxation regime, so there are many reasons not to incorporate in the UK even without BritBitLicense, and not so many to do so. Bitcoin companies from Turkey to Thailand to Spain are operating customer facing services that do no KYC/AML and are opening thousands of outlets. Other countries are already racing ahead of Britain and this will accelerate.

The facts remain the same. The world is changing, and there is nothing anyone can do to stop it. There is essentially, no more bad news to be had, because Bitcoin’s revolution and spread is inevitable and unstoppable, just as BitTorrent has forever changed the way people obtain and consume and think about movies and music. No one thinks twice about copying music and films; its completely normal and accepted. BitTorrent takes up an extremely large amount of the internet’s bandwidth. No one talks about this; it just is. The same thing will happen with Bitcoin; it will become a fact of life. Bitcoin will become as normal as email and file sharing and this hysterical illogical KYC/AML fad will be silently dropped, just as France quietly dropped its crypto restrictions in the 1990s. No cheering or applause, it just happened, and became the new reality.

An absence of irrational Bitcoin specific regulations could have made the UK at least somewhat attractive in the near term, and signalled that it was ready to lead the world in the coming transformation to a Bitcoin mediated internet commerce standard. Sadly the absolute opposite is now the case, and it looks like other jurisdictions are going to “hoover” up all the profits, entrepreneurs, side effects and benefits.

What is most nauseating of all is the cheering for this abject failure.