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Bitcoin Beach BACKGROUNDER Bitcoin Beach Reforms to Attract Cryptocurrency Innovation and Investment in the Sunshine State Andrea O’Sullivan Director of the Center for Technology and Innovation, The James Madison Institute Introduction This value is well-earned: by overcoming two long-standing barriers in computer science that Florida can and should become a leader in the had prevented distributed data verification—called advancement of cryptocurrency. In one short de- the double-spending problem1 (which prevented cade, Bitcoin (the most widely known cryptocur- digital scarcity) and Byzantine general’s problem2 rency) has grown from a little-known computer (which prevented distributed consensus)—Bitcoin science project of dedicated hobbyists to a profes- generated a true paradigm shift by allowing direct sionalized financial industry boasting a currency peer-to-peer payments online for the first time. In market capitalization of well over $100 billion. other words, this technology has offered an alter- tical and concrete steps that legislators can take now to position Florida as a leader in cryptocurrency policy and industry, as well as future areas of analysis needed to continue along this path. A Bit About Bitcoin Bitcoin is a private (non-state) digital peer-to-peer currency that was created by a pseudonymous pro- grammer named Satoshi Nakamoto in 2009.5 It was the first “cryptocurrency,” and many others have been developed in this model with different features. The key commonality is that transactions are managed and verified by a distributed network of computers rather than a central entity like a bank or payment processor or credit card company. Many cryptocurrencies limit the total number of coins that can be mined in its code; native to many traditional financial institutions operat- Bitcoin, for instance, has a currency limit of 21 million. ed by central trusted third parties.3 Interested readers can find several in-depth expla- For these reasons, many regulations that were draft- nations on how the network works.6 Nevertheless, leg- ed to constrain or oversee centralized financial institu- islators do not need a degree in computer science to tions fit awkwardly if applied to cryptocurrency firms understand cryptocurrency basics and how they relate (and even private individuals) that operate in a partial- to state law. ly- or fully-decentralized manner. Legislators hoping Traditional centralized financial institutions both to encourage innovation and investment in Florida hold customer funds and actively move money when a therefore have ample “low-hanging fruit” to harvest customer makes a transaction. This means the institu- by reviewing and rationalizing our regulations to more tion must secure detailed records about each custom- appropriately take account of these technological ad- er’s identity, accounts, and transaction history as well vances. as the ability to move funds on a customer’s behalf—all Florida is in an especially fortuitous position to be of which would be disastrous in the hands of hackers a leader in cryptocurrency policy. The Sunshine State or criminals. boasts a large, highly-skilled, and creative labor force; Cryptocurrency requires no such centralized man- as the state looks to diversify our economy away from agement. Cryptocurrency users may hold complete hospitality and agriculture, technology is a promising control of their accounts and money at all times. To candidate. Our welcoming tax and regulatory systems make a transaction, they simply sign their private key are attractive to businesses who may be considering re- (which serves like a password) to broadcast the change locating from the more hostile environments of other to the network. The network then blindly moves the large states. We are also home to Miami, the unofficial money to the broadcasted recipient without needing capital of the Latin world. Cryptocurrency is especially direct control of any account or specific knowledge important to this population as a potential vehicle for about any party. Computers that run the network, remittances or savings in countries with poor mone- called “miners” or “nodes,” may receive newly mint- tary management.4 And our world class beaches and ed coins as an incentive to contribute their processing natural beauty are unparalleled, further enticing po- power to the network.7 At no point does any central tential investment. third party have access to or control of the money.8 This paper will briefly explain what cryptocurrency is Traditional centralized financial institutions keep and how it works before examining the current state of track of all transactions using internal records. These applicable Florida regulations and law. We will examine are necessarily secret, and may be a vector for fraud, how these rules impact cryptocurrency businesses and which motivates many existing financial regulations. how they compare to those in two other states: Wyo- With cryptocurrency, all base layer transactions ming and New York. We will conclude with some prac- (meaning transactions that take place on the block- BACKGROUNDER | Bitcoin Beach chain)9 are fully public for all time and immutable, communities with a reliable and secure means to send meaning that a criminal cannot retroactively cover money to relatives living in unstable or poverty-strick- their tracks. The public ledger of all cryptocurrency en countries.14 While governments may put pressure on transactions is known as the blockchain. traditional financial institutions to block transfers to or from certain countries, bitcoin transfers are next to im- What are the benefits? possible to prevent. For example, the government of Venezuela has im- Bitcoin’s impressive market capitalization is well- posed strict capital controls on its citizens, who are earned.10 By eliminating the need for a trusted third forced to suffer through their government’s monetary party to make transactions, cryptocurrency makes and fiscal mismanagement15 This makes it harder for many arrangements possible for the first time. Venezuelan Americans to help their families. Financial autonomy. First, it affords individuals Bitcoin and cryptocurrency provide a desperately complete control over their finances.11 They do not needed alternative to provide aid through remittances need to trust that a bank or payment processor will cor- and savings that cannot be blocked or confiscated by rectly manage their money or personal data. Given the any party. It is not surprising that Latin Americans liv- rise of problems like hacks on financial institutions,12 ing in unstable societies have been particularly enthu- this is an attractive option for technologically-savvy siastic Bitcoin users16 This also partially explains why cryptocurrency users. Miami has attracted so much cryptocurrency activity.17 In many ways, cryptocurrency is an inevitable prod- Next-generation data validation. Finally, Bitcoin uct of the internet age. An instructive comparison can and cryptocurrency are promising stand-alone tech- be made with digital communications. In the past, peo- nologies. Blockchains allow distributed computers ple who wished to broadcast a message would be lim- (numerous computers located all over the world) to ited to third-party managed platforms such as radio, agree on data without relying on a trusted third party television, and publishers. If that message was deemed for validation. To date, those “data” have represented unimportant or threatening to powerful groups, these money, but it is possible that such data could represent third parties might decline to publish it. The internet other things, like predictions or property. Blockchains afforded a more peer-to-peer option. Anyone can start can therefore be used to operate futures markets, track their own blog and shout their thoughts to the world ownership, or even allow automatically-enforced con- without permission. The end result was more liberty, tracts, called “smart contracts.”18 To realize the full ben- especially for those who may be unpopular among efits of next-generation applications like these, we must powerful groups. ensure that regulations intended to promote certain For the first time, Bitcoin allowed this same dynam- ends don’t end up accidentally quashing these novel ic with online money. People who use cryptocurrency and quite beneficial uses. don’t need to worry that their transactions will be de- nied because of a mistake or, in the extreme case, per- secution. This is a particularly important use case for What are the risks? Florida, which has welcomed considerable numbers of Lawmakers reasonably wonder what some of the victims of political oppression to our shores, many of downsides of cryptocurrency may be. Fortunately, the whom still have loved ones in dire political climates. most serious concerns about cryptocurrency, namely Bitcoin and cryptocurrencies are also useful as pri- that it is an especially attractive vehicle for crime or vate monies. Legacy financial institutions view Bitcoin money-laundering, have proven to be largely unwar- as a promising asset class in its own right.13 Because the ranted. total number of bitcoins is finite, it functions in a sim- Still, there are legitimate issues regarding user secu- ilar manner to gold. Unlike gold, bitcoins do not need rity about which public organizations would do well to to be lugged around and physically secured by people educate consumers. Furthermore, where cryptocurren- holding guns. Cryptocurrencies are trivially easy to cy businesses essentially function
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