Why Non-Compliance is Key to Bitcoin’s Success

Coinbase CEO Brian Armstrong argues that privacy advocates could gain the most from compliance since it will make them rich. But could non-compliance be even more lucrative for Bitcoin?

Also read: Kraken Adds Ethereum Classic, Coinbase Slammed for Funds Freeze

Compliance Will Make Who Rich?

Armstrong defines compliance as “working with regulators, law enforcement, banks, etc.” and touts the fact that as much as 20% of Coinbase staff work on compliance “in some form.”

But why is Coinbase putting so many resources into regulatory compliance?

This is because for industry heavyweights such as Coinbase compliance offers a very attractive competitive advantage opportunity. As previously reported, it is usually the smaller startups that are most affected by regulations. Legal costs push non-compliant firms out of the market through prohibitive red tape, time-cost, and legal costs. These costs would also translate into more expensive service for customers.

Manfred Karrer, CEO of the decentralized exchange Bitsquare, explained to Bitcoin.com:

The problem with centralized exchanges is not only the risk for loss of funds and privacy. That model will likely end up in a highly regulated and expensive system.

Meanwhile, the bigger fish are more than happy to oblige and obtain a license that their smaller competitors simply won’t have.

Armstrong, however, argues that every Bitcoin user should be supportive of people buying bitcoin any way they can because network effect will make its value go up. “Or to make it even simpler: compliance will make you rich!” he writes, in the hope that compliance critics will see the bigger picture as a rising tide, he believes, will raise all ships.

Toll Bridge Ahead

Armstrong sees his exchange as a “bridge” between the new cryptocurrency “island” and “mainland” traditional finance. But the problem is that this not only creates a chokepoint for law enforcement but also effectively turns Coinbase into a toll bridge operator. Continuing with the analogy, Coinbase would give law enforcement the green light to set up a roadblock on said bridge upon request.

In other words, the police can stop, search and even confiscate your assets if any suspicion arises. Thus, users should understand that a compliant exchange will share your personal information with law enforcement and will freeze your funds at request of the authorities because they are required to do so by law. This is also the reason why some exchanges refuse to do business with US customers or in some states. 

Therefore, while most Bitcoin users have no problem with compliant exchanges since more buyers equate to higher prices, the downside is that some of Bitcoin’s biggest advantages, namely privacy and pseudo-anonymity, are eliminated.

So why use Bitcoin at all if the friction of traditional finance is re-introduced into the payment network? 

“Many people in the world prefer to buy digital currency with a common payment method such as a credit card, wire transfer, or bank transfer,” he explains. “These payment methods remind them of services they already use (like Amazon.com, Paypal, or Fidelity) and lower the barrier for new people to take their first step.”

But lowering the barrier for ‘banked’ US-based users, who already have access to financial services, may be a misdirected strategy since Bitcoin’s creator and many in the community believe Bitcoin has loftier goals.

You see, the US and Europe have some of the highest rates of people in the world that are banked. Only around 7.7% or 1 in 13 of households in the United States were unbanked in 2013, representing nearly 9.6 million households, according to the FDIC.

Now, compare this to the 2.2 billion people in Africa and around 4 billion across the world who are unbanked and one might start to question Armstrong’s vision and where the real potential for Bitcoin lies.

So will we be more rich by expanding access to financial services, adding billions of people to the global economy with Bitcoin? Or by restricting its access via identity verification and giving a handful of ‘toll bridge’ exchanges the ability to skim fees? 

The Future of Bitcoin is Non-Compliance

Such trade-offs present a dilemma for Bitcoin users. On one hand, more users certainly does strengthen Bitcoin. On the other, the border-less, open-access, P2P, decentralized currency is effectively sterilized and relegated to a mere “digital currency” (as Armstrong refers to it) counterpart to the US dollar. He also stresses:

Enabling convenient payment methods requires digital currency companies to comply with existing laws. We can’t have one without the other.

But the rise of decentralized exchanges like Bitsquare and Coinffeine could also prove Armstrong incorrect as this model would theoretically be resistant to shut down and could have more leeway for non-compliance.

Granted, a traditional business like an exchange must comply with existing laws. Otherwise, a centralized organization can be shutdown by the authorities at anytime. So Brian Armstrong is partially correct in that compliance is key, but to Coinbase’s digital currency future.

Bitcoin, on the other hand, still doesn’t care who uses it and will grow only stronger if all types of bridges, tunnels, causeways etc. are built by the community to connect everyone to the world’s first borderless, neutral, open-access monetary network.  

And if you still believe Bitcoin needs a sanitary image to enter the mainstream then consider that the $10 trillion global black market is the world’s fastest growing economy. As Justus Ranvier puts it, “The regulated, above the table, law abiding economy is a shrinking minority, a dying paradigm.” 

Do you agree with Armstrong or will new non-compliant exchanges trump his argument? Let us know in the comments below! 

Images courtesy of bluesbrotherscentral.com, walesonline.co.uk

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