Tuesday, March 20, 2018

How resistant is Bitcoin to government regulation?

Excavated from the drafts folder. I composed this in December 2017 (although I can't prove it) and I am publishing it now because recent news has rendered the postscript timely.

Bitcoin depends on the following three types of infrastructure:

  • Semiconductor fabrication plants.
  • Electric power plants.
  • Transoceanic fiber-optic Internet cables.

It depends on the first two of these to an unusual extent; the third simply comes along for the ride because Bitcoin is a global Internet-connected system.

You can't access these things, or the stuff that comes out of them, when governments really don't want you to, because they are big, expensive works of physical infrastructure. A government, or coalition of governments, with sufficient motivation and resources could introduce regulation upstream or downstream of any of these choke points that simply makes further Bitcoin mining non-viable.

"The Internet interprets censorship as damage, and routes around it" is true only up to a point. It is instructive to compare Bitcoin with child porn, a category of online activity that most governments are already highly motivated to stop. Governments have mostly succeeded in eliminating it from the non-darknet parts of the Internet; even sites like 4chan, which revel in their own transgressiveness, aggressively police child porn, because these sites run on servers that sit in datacenters in the physical world that are governed by laws just like everything else. Those servers are hooked up to the power grid and connected to the Internet by physical wires that belong to some utility. To maintain these connections, money changes hands, and a paper trail is generated that ultimately leads to the server operators. If you decide to be a badass rebel and distribute child porn under these conditions, you are looking forward to jail time.

It is true that child porn exchange still occurs online, but it occurs mostly on obscure systems that are specifically designed to be censorship-resistant at the expense of widespread availability. Bitcoin could be shut down or marginalized just as easily (where "marginalized" simply means that it is used as a transaction processing system only in highly unusual circumstances, rather than as a pillar of the economy).

In fact, it could be shut down much more easily. The resource cost to produce and distribute child pornography is nearly fixed: the size of a collection of digital imagery is essentially constant, and can be produced and distributed with extremely modest equipment. Basically, individual criminals can sustain a cottage industry indefinitely. By contrast, the exponentially increasing computational power demands of Bitcoin make it particularly vulnerable to regulation. If you cannot get your hands on an ever-increasing supply of semiconductor chips and electricity, you cannot mine Bitcoin, at least not at the scale that today's largest miners operate. Bitcoin mining is not a cottage industry; it is a large-scale industrial process, with datacenters as the factories. Large capital equipment is inherently easy to regulate. And replacing all of today's gigantic mining operators with small-scale, individual miners suffers from economic and engineering problems similar to those that you'd confront if you tried to replace a Google datacenter with ten million mobile phones (let alone trying to do that while dodging mining regulations).

Bitcoin has not been regulated because governments mostly do not care enough to regulate it (yet). The starry-eyed anarchist fever dreams of the most anti-statist libertarian early Bitcoin proponents were always total fantasies. If Bitcoin does not fail completely, then either it will be tamed into just another boring part of the existing world financial system, or else governments will wake up and cripple it.

p.s. Incidentally, since it is possible to encode data on the Bitcoin blockchain, an attacker with sufficient motivation and resources could save an instance of child pornography on the blockchain. Since every node maintains a copy of the entire blockchain, and Bitcoin lacks the ability to erase transactions, the entire Bitcoin network would be transformed at a single stroke into a child porn distribution system, rendering all Bitcoin node operators criminals. This might cost an incredible amount of money — millions of dollars to stash a single image of a few KB — but once done, it would irrevocably taint Bitcoin forever. This is an aspect of Bitcoin that is obvious on inspection, yet almost never discussed.

p.p.s. It happened.

This post closed to comments because Bitcoin attracts an unusually high ratio of vocal kooks.