Bitcoin: Can a Cryptocurrency Divided Against Itself Stand?

Vice’s “Motherboard” section skylarks about the possibility of
regulations destroying the fungibility of bitcoin by making it so
there
are “legal” bitcoin and “illegal” ones, for which it uses the
culturally traditional but kinda weird locution of “white” and
“black” bitcoin.

Here’s why some people think so:

The white coins would be currency that’s circulated through
the regulated system; black coins would be coins still off the
authorities’ radar…

….New York’s proposed “BitLicense,” rules for how businesses
should incorporate bitcoin, released last week, would ostensibly
purge illicit bitcoin-driven activity and security problems to
attract venture capitalists that were previously hesitant to invest
in the volatile technology. A “sanitized” bitcoin could finally
appeal to the masses, advocates claim.

But others
argue that as it stands, the strict rules could wind up
choking bitcoin startups throughout the state, and set a dangerous
precedent. At issue is the existing “know your customer” (KYC)
laws. Under these regulations, services must keep all customers’
physical addresses and identifying information. Third-party bitcoin
platforms like Coinbase and BitPay already comply with these
requirements.

But BitLicense takes it one step further, requiring that
companies also keep identity records of parties their customers
sell bitcoins to, or buy bitcoins from.
In other words, it would effectively mean customers can’t do
business with anyone unless the government knows who it is.

This raises a host of concerns, from the associated cost of
compliance to financial surveillance. It’s given rise to the
fear that these stringent conditions would produce two classes of
coins: those used by regulated institutions, adhering to
de-anonymizing rules, and those that continue to operate in the
crypto Wild West.

And once the currency is integrated into the regulated system,
it would be difficult, if not impossible, to get out. White coins
would be tied to institutions that require identifying information.
Law enforcement could ask to know where the bitcoins are headed and
where they come from. They’d bounce around inside these verified
institutions, but would have no means of escape. ….

Black coins would be the remaining bitcoins that don’t fall
into this loop—the unregistered coins operating free outside the
system. As the theory goes, these black coins would be harder to
maintain and more versatile to use, and could grow more valuable
than their traditional counterparts over time.

Like censorship and the Internet, one hopes that the blockchain
will recognize licensing as damage, and route around it.

I wrote the other week about the
proposed New York regulations that prompted these worries.

I wrote in April about how the cryptos and the legals would both
likely find
a usable future for themselves in the world of bitcoin, no
matter what the Feds do.