This is the text of my comment on an article on Bitcoin and Taxation from the AVC blog of venture capitalist Fred Wilson.

There are very few people around today who can successfully predict what inventions will or will not work. This is especially true of software, where the complexity is very high. Add to this the cryptography element, and Bitcoin is still incomprehensible by most people on the level of how it works under the hood. This is a big problem, because in order to understand Bitcoin, rules of thumb and conventions have emerged that are absolutely wrong and potentially damaging to the rapid spread of Bitcoin

Bitcoin is not a “new form of money” all the emerging applications built on the blockchain show that it is nothing like money at all, but is more like a dynamic programmable secure public ledger. If this had been the description of Bitcoin from the beginning, no one would have been interested in it. Sadly, in order to get things moving with computer illiterates, a simple explanation was needed to get the ball rolling. Now that ball is snowballing into absurd regulations and low brow thinking that threatens entrepreneurs.

Bitcoin is often mischaracterised as either a store of value or a medium of exchange. These are not the only two uses of this technology. Its just as absurd as saying a browser is either a picture viewer or a text displayer. There is an infinity of uses that the blockchain can be put to, and there is no reason whatsoever to limit its use to two cases, and then base legislation on those two cases, that are put forward mostly by people who are not developers and who are simply users of this new tool.

Taxation policy is not applicable in any way to Bitcoin, in the same way that it is not applicable to Mozilla Firefox. There is no reason to categorize Bitcoin as money, when it can be used for literally any purpose that has to do with digital signatures and public proofs. A small number of influential people, none of which have the capacity to invent Bitcoin are now placing themselves as the the men at the helm of an invention that they did not create, advocating that other men who they do not know should be restricted in what programmes they write on their computers. This is the very definition of unethical.

I assure you that a legal challenge is coming to utterly destroy the misconceptions about Bitcoin, and there is legal precedent for this. The PGP munitions export case proved once and for all that software is not a device or munitions, and is fully protected by the first amendment of the constitution. Bitcoin is no different in any way. It can be printed out, just like source code can, and this is a first amendment protected act. Bitcoin is not money; it is speech, and in the USA, no law can be made controlling or restricting it.

You could carry a book of Bitcoins with you, and scan and unlock them on a page by page basis and be absolutely immune from interdiction or prosecution, or taxation for that matter. Its either that, or throw out the constitution.

What happens in other people’s countries is not the business of Americans, so their laws are moot when it comes to Bitcoin in the USA. Whatever the American government decides, it doesn’t matter. Bitcoin is a peer to peer system, where the smallest unit is two people with mobile phones, trading. There is no way that this can be stopped when there are a billion Bitcoin users. The State is going to have to adjust to the new reality of Bitcoin as money, just as it has adjusted to the free internet.

In the meantime, it strikes me as completely insane that entrepreneurs seek to be shackled by regulation. No other wildly popular internet protocol needed regulation to succeed, and yes, Bitcoin is a protocol, it is not money. BitTorrent is the best example of the most wildly successful client/server/protocol project the creator of which never sought permission to develop. Not a single developer of a BitTorrent client asked permission to write and release their software, and lo and behold, these clients, like Azureus are installed on millions of computers, transferring billions of files.

The same will be true of Bitcoin.

The clients will spread everywhere, to every device, and the Bitcoin will flow between them. There is no way to stop it, and no legislation can do anything about it.

The question then becomes, what entrepreneurs are going to profit, and which jurisdictions are they going to be based in?

These are the true problems of Bitcoin; how to simplify the software and interfaces so that even a semi literate man can use and understand it. This can be done; look at all the mobile phones that have spread all over the earth, used by everyone, at every socio-economic level.

The other problem is that of the on ramps to get Bitcoin to the people. We are solving that one ourselves.

These are the problems that Bitcoin faces. They are hard problems to solve, and mischaracterising Bitcoin as money will not make it easier.