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What's to stop a government, say the U.S. government, from saying "Hey, it's okay if you want to use Bitcoins, but you have to use at least version 0.6.3".

And then a year later changing the law to "Hey, it's okay if you want to use Bitcoins, but we're going to make sure you're using the most up to date version of the Bitcoin client through the XYZ Act."

Then another year, a new bill: "Hey, you love Bitcoins, right? How about this new bill that 'improves' security by requiring any Bitcoin clients to include features ABC."

Yet another year goes by and: "Woah, hey, we can't let you use a non-licensed bitcoin client, that wouldn't be very responsible! Make sure you use one of the clients on this list!"

365 days later: "Hey man, how are you liking your Bitcoins? Oh, great, well, we just wanted to let you know we're going to put out a client of our own. Oh no, no major differences, we just want to make it more secure. You can still use 3rd party clients, this just gives you more choices! GO USA!"

Another year goes by and Bitcoin is in large use by PayPal, Amazon, Ebay, NewEgg and thousands of other big name companies as well as millions of small-time mom-and-pop sites. The government regulation and licensing requirements continue to develop and change the nature of the Bitcoin algorithm and blockchain (having the innumerable thousands of businesses using government licensed clients allows a higher than 51% control over the algorithm and blockchain rules).

Pretty soon the government dictates new code and rules that allows the easy creation of new coins by government machines. It could also allow the insertion of a tax that strips a very small percentage away from each transaction that is sent to a central government address. It could introduce anti-privacy changes to track geographical location or IP addresses attributed to each transaction and address.

My question is, what can we or the developers do to stop the slow year-by-year encroachment of seemingly "harmless, even helpful" laws and regulations?

If Bitcoin ever seems legitimate to Big Business and is used on very common basis, many business will gladly give in to government demands to use regulated clients if the law says they must. A large scale switch to a government corrupted client could gain a greater than 51% control over the Bitcoin network. All the government needs to do is wait for those willing to acquiesce to its demands to grow to more than 51%.

What can be done to prevent this?

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Nice question, and welcome to Bitcoin SE! –  Highly Irregular Aug 9 '12 at 4:12
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Was this keeping you awake one night? It's very well thought through. ;o) –  JW. Aug 10 '12 at 13:29
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3 Answers

The scenario you name would be great for cryptocurrencies as it would make them mainstream. As soon as people got sick of govt intervention with Bitcoin in such a scenario, it would probably be relatively easy to get enormous numbers of people to switch over to a very similar (but independent) Altcoin.

The nature of the cryptocurrency technology is such that it is very difficult to stop people running the software, but a govt could have success in closing down businesses that accept unofficial versions such as the fictional Altcoin. If that happened, it could however still thrive outside of the region being regulated.

Prevention would probably need to occur at a political level, but I'd hope market forces as I've just described will be sufficient prevention as long as no organisation gains too much power over international law. Agreements negotiated in secret like the TPPA are something to watch out for though.

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Actually the Altcoin would be the one of the Government, while the original Bitcoin would be what the users would keep using. If the opposite happened, several 0-security altcoins would spawn and the project would be dead. –  Lohoris Aug 9 '12 at 19:28
    
@Lohoris, I'm not so sure you're right. If mainstream acceptance came before govt intervention, then it's likely a majority of people would continue to run (and upgrade) their client without caring about the "minor" changes taking place. Remaining miners of the mainstream chain would briefly make a bigger profit if some people stopped mining for political/ethical reasons, and the network would simply adjust, as it does. People caring about the decentralised nature of Bitcoin would no longer be involved, and it may take a political effort to shift mainstream users to a new Altcoin. –  Highly Irregular Aug 9 '12 at 21:54
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The most important thing you could do is inform everyone of the dangers of running said software. It would be similar to saying "hey, that music album installs malware on your computer to prevent you from copying it". With enough publicity you could potentially make people rally against such changes.

You also have to keep in mind that for the time being the government has enough money to just overwhelm the Bitcoin network by introducing either a large amount of computing power or a lot of controlled nodes. Such a thing could destroy any Bitcoin-like cryptocurrency at a whim.

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Uh? No, I'd say. bitcoin.stackexchange.com/questions/366/… –  Lohoris Aug 9 '12 at 19:30
    
@Lohoris bitcoin.stackexchange.com/a/371/323 - Bitcoin can be controlled if you control the majority of the computational power. Currently it would "only" take a couple million dollars to control the network - a petty cash for most governments when money is involved. –  ThePiachu Aug 9 '12 at 21:59
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Excellent question and premise thank you. How would I defend it? Skip to the end of my rant or don't and read on.

This is a very real scenario and it is definitely coming and sooner rather then later. I am a 100% supporter of bitcoin. However, regulation is coming because bad people are using it, we aren't self regulating so the government will step in- guaranteed.

Cash has been regulated and watched over for decades and yet bad guys still use it. The criminal element will ALWAYS take advantage of the hard work and efforts of bright people who work hard through issues to produce something cool like btc. Child pornographers will use btc and cash to accept payments for porn involving toddlers, drug dealers will use it as they lay waste to many of their customers, terrorist will use it in their desire to harm innocent people.

Why Regulate? The gov't looks at bitcoin and since many of them are more comfortable with a #2 pencil than they are with a website they will fear it, they will listen to those around them that espouse the evils of anything and everything. Remember, negativity is a strong thing and when a Senator's staff tells him or her all the horrible things you can do with btc. They'll see anonymity... they will see efforts to make it even MORE anonymous, they'll sit back and say oh well, look at them, they are creating mixers and tainters etc to cover their tracks. Why would any legit person want to use a tainter?

Well, Sir or Ma'am because we can or because we want to use them. Because legitimate people will in fact use those things and they'll do it for the most simple of reasons. But so will child pornography producers, folks will use it to cover their online gambling which is still illegal here in the States. And like it or not, what we regulate here in the US will eventually and sooner rather then later be regulated in the rest of the world.

So how do we avoid government intrusion? How do we show the government that we are keeping our own house clean and that we are generally doing what we need to do the reduce the attraction to the criminal element. And why shouldn't we? What do they add as a benefit? what does the criminal element do except basically use and abuse and screw it up for everyone?

So along with tainters and mixers etc. We need people to work on ways to show that Bob or Jane isn't buying their fancy shoes or cool new gaming PC with the proceeds of a crime.

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