Innovation in America, and Silicon Valley in particular, has never waited for permission. The ease of starting companies, the low barriers to accessing capital, and (of course) the existence of an open and free internet on which anyone can build anything have all been major contributors to the vitality of Silicon Valley and the wider tech industry, which permeates nearly everyone’s daily life. The most successful companies of our time — Apple, Google, Facebook, Twitter and more — didn’t have to ask anyone for permission to innovate. They didn’t have to explain their businesses and get special licenses. They just came up with an idea and built it.
This is important.
Innovation only exists when those who have ideas can go out and try to execute them, quickly, with as few barriers as possible. Each hurdle weeds out more and more innovators before they have a chance to breathe the open air of the marketplace, and find out whether or not they’ve truly created something useful.
So we should be concerned when governments create unnecessary “permission” requirements without clear benefit.
Back in March we wrote about a problematic bill in California that would regulate Bitcoin-related business, effectively requiring them to ask the state government for permission to operate. A few months ago, the bill moved forward. And now it’s on the move again, passing the House and heading to the Senate for a vote.
The bill has improved quite a bit since the initial version, but there are still serious concerns about the framework it sets up. While there’s a reasonable argument that an absence of rules is problematic, mainly for the uncertainty it creates, the rules that are put in place could have a tremendous impact on future innovation. We should be exceptionally careful when implementing rules that have the potential to shape — or strangle — the very roots of innovation. New York, for instance, has already established BitLicense regulation, chilling Bitcoin innovation in the state that is the financial center of the world.
The proposed California bill does not go that far, but still revolves around obtaining special licenses — i.e. permission — before innovating. As the bill itself says:
This bill would enact the Virtual Currency Act. The bill would prohibit a person from engaging in any virtual currency business, as defined, in this state unless the person is licensed by the Commissioner of Business Oversight or is exempt from the licensure requirement, as provided. The bill would require applicants for licensure, including an applicant for licensure and approval to acquire control of a licensee, to pay the commissioner a specified nonrefundable application fee and complete an application form required to include, among other things, information about the applicant, prior virtual currency services provided by the applicant, a sample form of receipt for transactions involving the business of virtual currency, and specified financial statements. The bill would make these licenses subject to annual renewal and would require a renewal fee paid to the commissioner in a specified amount. The bill would require licensees to annually pay the commissioner a specified amount for each licensee branch office. The bill would require applicants and licensees to pay the commissioner a specified hourly amount for the commissioner’s examination costs, as provided. The bill would also require the commissioner to levy an assessment each fiscal year, on a pro rata basis, on licensees in an amount sufficient to meet the commissioner’s expenses in administering these provisions and to provide a reasonable reserve for contingencies.
The authors have clear and reasonable intentions. They’re worried about the kind of virtual currency-related fraud that has shown up in several recent and troubling stories. The bill strives to limit the licensing requirement to companies that are engaged in moving around currency — an area already covered by many existing laws.
But Bitcoin, and (even more importantly) the blockchain technology that underlies it, does much, much more than just move money around. It’s sometimes difficult to understand this if you’re not immersed in the Bitcoin world, but Bitcoin and the blockchain are two separate but deeply intertwined concepts. They exist because of each other, and they need each other — but Bitcoin is just the currency aspect, and the blockchain itself is much more powerful. And there’s a real risk that when you set up a permission-based system for Bitcoin you slide down a very slippery slope towards regulating all blockchain-based innovation, even things which are wholly unrelated to “moving virtual currency around” despite their ability to do so.
At this stage of the game, creating licensing regimes and putting permission barriers on innovation is very, very premature. Everyone is still figuring out just what the blockchain is good for, and it’s a long and varied list. Blockchain technology was crafted to solve a difficult currency problem, but it has enabled all sorts of powerful new apps and services that are often much more secure and useful than the alternatives. But it’s still too early in the rise of this core infrastructure technology to say for certain what those “killer apps” will be.
On top of that, because Bitcoin is programmable, many of the biggest concerns that regulators are expressing can be dealt with in the code itself. Rules can be built into the code without having to rely on a centralized bureaucracy. In fact, that’s one of the key features of the blockchain concept.
Blockstream, Bitgo and a few other companies that are innovating heavily in this space already have now sent a letter to the California Senate, which we at the Copia Institute helped them put together and advised them in writing. As Blockstream notes in a related blog post, we should be careful about requiring permission without a clear reason:
A key topic at issue in any of the legislative debates underway in California and elsewhere is licensing. In systems like Bitcoin, which establish a trustless and decentralized infrastructure, licensing offers little upside in terms of consumer protection and security, yet imposes substantial costs and burdens on innovators. We strongly believe the California law should not require licensing of entities that don’t hold unilateral custody of digital currency. And even when an entity is a custodian of users’ digital currency, we see value in alternative policy approaches like safe harbors or the UK’s voluntary consumer protection standards in striking a balance between consumer safety and innovation.
Again, the intentions here are good. The authors of the bill want to prevent truly bad actors from doing dangerous things, while at the same time laying out the ground rules under which companies in this space can act. But the bill is still a step down the path towards requiring permission to innovate, and that’s something to be very careful about, especially when other jurisdictions aren’t erecting the same barriers. We should also be wary about deciding to put layers of government bureaucracy on things that can be accomplished in the code itself. As the quote above notes, the UK has taken an innovation-friendly approach that does not require permission, and is thus becoming a welcoming home for innovators.
Let’s look at a counterexample from the rise of the internet itself. One of the most powerful factors in fostering online growth was Section 230 of the CDA, which set up a “safe harbor” for intermediaries of internet content. The key was that it set out useful ground rules, and said “if you follow these rules, you are free from liability.” It did not require you to ask for permission first. As we enter an age of innovation in the blockchain, we should be looking for similar solutions. It’s great to define a safe harbor where open innovation can occur, but requiring a specific “license” only creates headaches for everyone involved.
It builds up bureaucracy. It becomes a weapon wielded by incumbents to block competition. And, worst of all, it repels innovation.
Silicon Valley was built on permissionless innovation, especially on the internet. Saddling new core infrastructure like Bitcoin and the blockchain with a permission-based framework sets the wrong tone entirely, and virtually ensures that Silicon Valley won’t be home to the leading innovators in this new and exciting space.