feedback on preliminary draft of legal paper

[Timo Y]

What if Gavin and the rest of the developers just dropped out -- what would happen to the value of bitcoin? My guess is that it would plummet -- until and unless another group jumped up and took responsibility. And since bitcoin's value depends on some group of people continually improving it, there does seem to be a "common enterprise." It is an extremely close question though.

The chief developer, Satoshi Nakamoto, arleady has dropped out, and the value did not plummet.

It didn't matter because the bulk of the work had already been done and Gavin is just doing the fine tuning now.

I remember it was only about 9 months ago that Gavin was still struggling to understand the code, and now he is the chief developer. That's how fluid this community is.

Will Gavin still be the chief developer 2 years from now? Will the official Bitcoin client even be used by anyone but geek users? I doubt it.

The point is there is not one closed group working on Bitcoin, there are several independent groups.

Example: an entrepreneur in Zimbabwe might design a mobile Bitcoin client aimed at Zimbabweans. None of the developers could do anything to prevent this client from joining the Bitcoin network.  

Other example: Someone writes a client designed for storing DNS assignments or other non-monetary transactions in the block chain. Again, nobody could prevent that client from joining the network.

Other example: There might be several competing block chains in fututre, some deflationary and some inflationary, to cater for different ideologies.

We simply do not know Bitcoin will be used 3-5 years from now. If other disruptive technologies are any measure, it's likely to be used by a diverse group of communities, for diverse purposes, some very different from the original intent, some of which we can't even imagine right now.

It's unlikely though that there will still be a "common enterprise".  

[1713577023]

1713577023

[1713577023]

1713577023

[1713577023]

1713577023

[reubgr]

@spenvo: Thanks for reaching out to This Week in Law for me. I am a bit busy studying for finals and getting ready to move at this point, but I will reach out to her in a month or so. I also want to make sure I have done my research on one of the most important set of legal issues -- money transmitter registration, money laundering regulations, etc.

@forever-d: You make a very cogent and persuasive case. (BTW, has Satoshi actually dropped out? Can you post a link to something on the forums that confirms that?). I will incorporate your arguments into my next draft, although I'm still not convinced.

@moa: When I said that bitcoin is "meant to circulate broadly and to be used to buy real goods," I was looking at what people are actually doing with bitcoin (trading bitcoins for actual goods and services on bidding pond, the OTC market, and with businesses that take bitcoin) and what people are advocating for bitcoin on these forums and elsewhere (many are trying to encourage businesses to accept bitcoin; someone is taking a cross-country trip trying to use only bitcoins; someone else is working on a bitcoin-based point-of-sale system). Furthermore, I think if you look at Wei Dai's b-money proposal and statements attributed to Satoshi, you'll find that they evince an intent that bitcoin be used as competitor for fiat currencies in general, and not just, say, online.

[LightRider]

The protocol defines a BitCoin value as an int64, constrained by the following constants:

static const int64 COIN = 100000000;
static const int64 CENT = 1000000;
static const int64 MAX_MONEY = 21000000 * COIN;

As you can see, the maximum representable amount is 21000000 * 100000000 = 2.1*10^15, a very large number to be sure but by no means infinite.

Changing the int64 to something larger would be very difficult. Every single piece of software that speaks the BitCoin protocol would need to be upgraded. If IPv6 is any indication it'd be a extraordinary multi-decade effort, perhaps it'll even never happen. I wouldn't describe it as trivial even today ...

Fortunately, MAX_MONEY is a really huge number. According to Wikipedia the US "base" currency supply (notes and coins) is approximately a trillion dollars. A trillion is 1*10^12. The maximum amount of coins is 2.1 quadrillion BTC. So representing all the printed/minted dollars in the world would be no issue.

USDv6! I like that!

[John Kirk]

I don't know if it would be useful or not, but you may be able to draw some legal parallels between bitcoin and the recent development of an emerging market for IPv4 addresses.  See http://www.networkworld.com/news/2011/042511-ipv4-sales.html?hpg1=bn .

IPv4 addresses are starting to gain monetary value on their own, even though they are a purely virtual commodity, because they are in demand and there is a limited supply of them.  There will never be any more IPv4 addresses created, and the world has essentially run out of unassigned ones.

[marcus_of_augustus]

I don't know if it would be useful or not, but you may be able to draw some legal parallels between bitcoin and the recent development of an emerging market for IPv4 addresses.  See http://www.networkworld.com/news/2011/042511-ipv4-sales.html?hpg1=bn .

IPv4 addresses are starting to gain monetary value on their own, even though they are a purely virtual commodity, because they are in demand and there is a limited supply of them.  There will never be any more IPv4 addresses created, and the world has essentially run out of unassigned ones.

Very, very good point ... in many essential legal respects bitcoins are exactly like Ipv4 addresses.

There is a network of peers maintaining the assignations  (the DNS servers), they are limited in number, and now they are trading.

We just need a client well suited to swapping IPv4 addresses amongst users and some industrial strength security, to make it more bitcoin-like.

[The Script]

The second meaning makes no sense to me, as gold does not have intrinsic value, it's only useful as money because I know that I can trade something I have for gold, then trade gold for something I want.

That's not exactly true. Gold is a good electrical conductor and also does not oxidise, hence why it is used in electronics. It's also a good EM reflector and is hence used in satellites. NASA doesn't launch gold components into space because of its monetary value

Granted it's overvalued in respect to its intrinsic properties (except its scarcity), but it does have intrinsic value.

All value is imputed by human action.  Nothing has intrinsic value in the economic sense of the word.  Gold has value because human desires give it value.  This is the diamond/water paradox.

[Steve]

The one major issue I have is in calling bitcoin a fiat currency.  That is completely inaccurate...you might think people view that term to mean that it is not backed by a commodity, but even if that were the case (and I would strongly argue that it is in fact not the case), it does not make it correct.  A fiat currency is a currency that has value only because of government regulation or law.  Period.  And that absolutely is not the case for bitcoin.  In fact, one of the essential attributes of bitcoin is that no one is forced in any way to ascribe any value to bitcoin.  I would encourage you to start with a definition of fiat currency.  Then talk about commodity backed currencies.  And then describe bitcoin, which is neither a fiat currency, nor backed by a commodity (but which does have certain properties that, based on the evidence, does give it value).

Please correct this mistake.  Otherwise, I think it's a very good paper.

[xf2_org]

The one major issue I have is in calling bitcoin a fiat currency.  That is completely inaccurate...you might think people view that term to mean that it is not backed by a commodity, but even if that were the case (and I would strongly argue that it is in fact not the case), it does not make it correct.  A fiat currency is a currency that has value only because of government regulation or law.  Period.  And that absolutely is not the case for bitcoin.  In fact, one of the essential attributes of bitcoin is that no one is forced in any way to ascribe any value to bitcoin.  I would encourage you to start with a definition of fiat currency.  Then talk about commodity backed currencies.  And then describe bitcoin, which is neither a fiat currency, nor backed by a commodity (but which does have certain properties that, based on the evidence, does give it value).

You are mistaken.

Bitcoin is a fiat currency.  Call it software fiat, as I do.  Or satoshi-fiat.  Or community-fiat.  Or miner fiat.

But it is definitely fiat currency.

[deadlizard]

Bitcoin is a “fiat currency,” like the U.S. Dollar

stopped reading right there.
Fiat money is money that has value only because of government regulation or law
bitcoin is money by "consensus", U.S Dollar is money by "decree"

I didn't go to Yale Law or anything but aren't the meaning of words an important aspect of law?
In fact I would say law includes the interpretation of language

[BitterTea]

The one major issue I have is in calling bitcoin a fiat currency.  That is completely inaccurate...you might think people view that term to mean that it is not backed by a commodity, but even if that were the case (and I would strongly argue that it is in fact not the case), it does not make it correct.  A fiat currency is a currency that has value only because of government regulation or law.  Period.  And that absolutely is not the case for bitcoin.  In fact, one of the essential attributes of bitcoin is that no one is forced in any way to ascribe any value to bitcoin.  I would encourage you to start with a definition of fiat currency.  Then talk about commodity backed currencies.  And then describe bitcoin, which is neither a fiat currency, nor backed by a commodity (but which does have certain properties that, based on the evidence, does give it value).

You are mistaken.

Bitcoin is a fiat currency.  Call it software fiat, as I do.  Or satoshi-fiat.  Or community-fiat.  Or miner fiat.

But it is definitely fiat currency.

What exactly is your definition of fiat currency?

People are using two different definitions of the term - "currency given value by government decree" or "currency not backed by specie". Unless you can prove that your definition is the only correct one, why not try a little less arrogance?

The word fiat, on the other hand, is pretty unambiguous. Literally translated, it is "let it be done", and it implies the imposition of will by some sort of authority, such as a government. Fiat currency then implies to me a currency backed by threats of violence, such as government issued paper money. Even if you make an agreement with an individual that payment for services will be made by gold, he can still take you to court and force you to accept federal reserve notes. That is fiat.

I can't kind of see how "let it be done" could be taken to mean anyone declaring that something is of value, but if that is the case, everything has value only by fiat. Gold is fiat, Bitcoin is fiat, sea shells are fiat, and yap stones are fiat. Seems like kind of pointless stance.

[xf2_org]

It is the imposition of the software rules.  Try to change bitcoin's software rules, and you'll realize it's a fiat currency.

[BitterTea]

It is the imposition of the software rules.  Try to change bitcoin's software rules, and you'll realize it's a fiat currency.

I don't see how that has anything to do with the question of the source of Bitcoin's value, which is at the heart of the fiat question. Still, does the imposition of the rules of nature make gold a fiat currency?

[marcus_of_augustus]

It is the imposition of the software rules.  Try to change bitcoin's software rules, and you'll realize it's a fiat currency.

This is a valid point, what you are really arguing here though is that the software development group of bitcoin are somehow a recognised "authority" ... if you can classify them as an authority, then yes you are right, it is by their decree, or rules, that bitcoin is fiat.

Now how do you go about arguing that the software developer group of bitcoin are a legitimate authority?

Definition of authority, as used in the context of fiat, not quite a match but maybe ...

[Steve]

It is the imposition of the software rules.  Try to change bitcoin's software rules, and you'll realize it's a fiat currency.

This is a valid point, what you are really arguing here though is that the software development group of bitcoin are somehow a recognised "authority" ... if you can classify them as an authority, then yes you are right, it is by their decree, or rules, that bitcoin is fiat.

Now how do you go about arguing that the software developer group of bitcoin are a legitimate authority?

Definition of authority, as used in the context of fiat, not quite a match but maybe ...

The software development group isn't an authority in the manner in which you think.  They are only an authority in the sense that people have a certain amount of trust in the software they produce.  Also, there is no one software development group...there is different bitcoin related software and different bitcoin clients that completely unaffiliated people are creating.  They do not possess any unique position to influence the operation of bitcoins than anyone else.  The software development group does not have the ability to unilaterally change the bitcoin protocols without convincing the network of people using bitcoins of the merits of such a change.

It is in fact mathematics and physics that govern the bitcoin system.  You only have to trust that your computer runs the code correctly, that the mathematics are sound and that there aren't major flaws in the code.  And, you don't necessarily have to trust those things...to the extent you are knowledgeable in those subjects, you can verify it.

And, here are a few definitions of fiat money in case you are still unconvinced:
http://en.wikipedia.org/wiki/Fiat_money ("Fiat money is money that has value only because of government regulation or law.")
http://www.investopedia.com/terms/f/fiatmoney.asp  ("Currency that a government has declared to be legal tender")
http://dictionary.reference.com/browse/fiat+money ("paper currency made legal tender by a fiat of the government")
http://www.answers.com/topic/fiat-money ("Legal tender, especially paper currency, authorized by a government")
http://www.thefreedictionary.com/fiat+money ("Legal tender, especially paper currency, authorized by a government")

I think it would be a shame if you didn't at least devote a paragraph to the definition of fiat money (and preferably go on to explain how bitcoin is not a fiat currency, but has no commodity backing...but at a minimum, mention that there are many that would vehemently disagree with its characterization as a fiat money).

[marcus_of_augustus]

Steve:

Yes all very convincing arguments. Particularly that the bitcoin protocol is not dictated (decreed) by an authority but is rather a set of mathematical, programming standards.

The clincher for me is that bitcoin is not "Legal Tender", this is almost a necessary condition for a fiat money.

Surely, a fiat money has to have a "Legal Tender" legal classification?

I say bitcoin is not a fiat money.

[stillfire]

Many convincing arguments here that Bitcoin is neither fiat nor commodity backed. I'll let them speak for themselves. But I would like to underline that regardless of the definition of fiat, I would be careful about using it because there is a large group of people who connect fiat and 'debt based money' or 'inflate at will money' and specifically use the term to denote this inflation weakness.

Since BitCoin does not have the inflation weakness, it muddies the water a little bit to describe it as fiat, whether that's technically correct or not. Better to refrain from that particular term at all and just be explicit for maximal clarity in writing.

[xf2_org]

Bitcoin is democratic.

It does not have a central bank to inflate the currency at will -- but a majority of clients and miners can choose to inflate the currency at will, change the maximum from 21M to 1000M, etc.

Of course, most current bitcoin users like the 21M / 50 BTC / etc. software rules, so they are unlikely to change.

But the rules can change.

[stillfire]

It does not have a central bank to inflate the currency at will -- but a majority of clients and miners can choose to inflate the currency at will, change the maximum from 21M to 1000M, etc.

I should perhaps have said "easily inflate at will" rather than just "inflate at will" - indeed, if there was large and widespread will, BitCoin could inflate. None the less I am fairly sure "easily inflate at will" is what people think of when they hear fiat.

[marcus_of_augustus]

Bitcoin is democratic.

It does not have a central bank to inflate the currency at will -- but a majority of clients and miners can choose to inflate the currency at will, change the maximum from 21M to 1000M, etc.

Of course, most current bitcoin users like the 21M / 50 BTC / etc. software rules, so they are unlikely to change.

But the rules can change.

Yes, but not by a legislated decree.

I.e. not Legal Tender, not by fiat.

Drop the fiat terminology and all the baggage that goes with it and you're good. It's technically insufficient or misleading at best anyway

[reubgr]

Hi all,

Thanks for the continued discussion and sorry I haven't responded promptly. I'm in the middle of studying for finals.

Let me say that although I think there's a good argument calling bitcoin "fiat" (as I mentioned in an earlier post), that word seems to confuse more than clarify. I will probably not use that term in the next draft and may allude to the discussion (of fiat vs. not) in the footnote.

Best,
Reuben