Policy & the p2p digital value transfer protocol

Policy makers in Europe welcomed the p2p digital value transfer protocol, which is public infrastructure, quite unambiguously as unwelcome. This is bad for Europe and bad for humanity.

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First, it is important to observe a few specifics around innovation and p2p technology:

• Innovation can typically be difficultly undone - knowledge is like fire, it amplifies as it is shared - this is even more the case for p2p technology, based on its network properties and permissionless nature

• p2p technology needs to be trustless & permissionless

  • If p2p technology is not trustless - it is not p2p

  • If p2p technology is not permissionless - it is not p2p

• Proof of work ensures trustless and permissionless operation - it is being debated if alternative mechanisms can enable p2p digital value transfer - so far no conclusive evidence exists

Policy makers have relevant concerns:

• Proof of work uses electric energy - as electric energy could be used for other useful purposes or its production can cause CO2 emissions - that is a valid concern that will soon be resolved

  • Soon proof of work mining will only be profitable with negative price electricity - or excess electricity - that means there will be no other relevant use for that electricity

  • A lot of negative price electricity will be produced as we need to build excess production capacity to cope with the intermittent nature of renewable electricity production

    • In Germany alone, some EUR 800 million of costs could be avoided through better electricity network balancing - as 1% of energy production or 6 TWh of renewable energy is in excess / cannot be used

  • Actually, proof of work mining will prove to be a catalyst for building sufficient renewable capacity - and avoiding CO2 emissions

  • Ample other climate friendly solutions in relation to proof of work mining will emerge - including gas flaring for example - it is only a matter of time for gas flaring companies to start selling CO2 certificates

  • A recent study compares the proof of work mining energy consumption with the energy consumption of the conventional banking system

  • The recent documentary “This Machine Green” puts proof of work energy consumption into perspective - even if it does not explicitly mention the upcoming negative electricity price requirement for profitable proof of work mining

• [new addition 2023/04/15] Proof of work requires computers - in most cases application specific integrated circuits or ASICs. The production and in particular the decommissioning result in electronic equipment waste - this is a valid concern that requires policy intervention.

  • The most appropriate solution is to tax raw material consumption

  • Some get happiness from scrolling through Instragram or Tiktok - others get a feeling of contribution from enabling digital p2p value transfer among unbanked people in the global south. Therefore, it would be appropriate to tax any CPU or ASIC in the same way - in other words: tax raw material consumption of rare materials. Policy makers have the possibility to throttle the tax level on raw materials, and in doing so, throttle the number of bitcoin mining ASIC in parallel the replacement rate of iPhones, many of which still are perfectly functional when their owners decide to replace them with a new device with the latest features

• Many consider the token supporting the p2p value transfer protocol as an attractive asset - which is volatile versus other asset prices

  • Some see obtaining access to a share of the value transfer token as a get rich quick scheme - it is a valid concern to warn investors for such volatility risk

  • Soon, the p2p value transfer protocol will enable structures that ensure stability versus other assets - users can then use the p2p value transfer protocol while holding stability versus another asset of their choice, including fiat units of account

  • So, this concern will soon be resolved.

• Permissionless technology can be used by anyone for every purpose, including illicit purposes - that is a valid concern

  • Unlike the perception driven by some influencers, most contributors to the development of the p2p digital value transfer protocol technology would prefer to avoid that the protocol is used for illicit activity

  • Unfortunately, there are no easy ways to control permissionless technology. Making it permissioned removes its p2p character

  • We can potentially be inspired by how the TCP IP protocol developers helped avoiding abuse of that information transmission protocol - spoiler: they didn’t

    • Actually, most often, even the network operators, such as telecom companies, bear no responsibility for any illicit use of the TCP IP protocol within their subnet network - [reference to respective legislation to follow]

  • Unlike nuclear technology - which will be covered in an interesting way in the upcoming Oppenheimer movie - or many other innovations, which can include very harmful use, digital value transfer technology seems barely harmful - it is probably more effective for policy makers to focus their attention on combatting the actual crime than digital value transfer technology which is barely an alternative to other payment technologies including cash, …

• The asset underlying the p2p value transfer protocol has a low inflation - today at 1.79% and declining. The parties that control our monies seem to see competition for currencies and seem to react in a fearful way. The risk of the p2p digital value transfer protocol asset replacing conventional currency is an invalid concern.

  • The fact that the asset underlying the p2p value transfer protocol has low inflation is not a coincidence - its developer(s) - beyond having the ambition to build a p2p digital value transfer protocol - were concerned about monetary policies which have resulted in the build up of a debt bubble and inflation

  • The fact that the asset underlying the p2p value transfer protocol has low inflation is also not a coincidence - imagine a p2p value transfer protocol conceived with another monetary policy - for example a high inflation policy - the underlying asset would not have been attractive as a store of value - and it would also not be attractive for value transfer - as no one would be interested to transfer back from the digital asset to another asset

  • Obviously, an attractive asset is a prerequisite for an attractive value transfer protocol

  • Is the risk of such asset replacing conventional currency real? No. The CHF has been a more reliable currency than the EUR - has it replaced the EUR? No. The USD has been a more attractive asset than many currencies - have all those currencies disappeared? No.

• Many perceive that p2p technology would do exactly what it’s description suggests - operate point-to-point - and as such disintermediate the conventional financial intermediaries - that is an invalid concern driven by lack of understanding

  • On the contrary, banks are uniquely positioned to support their clients in navigating financial technology - and protect them from unregistered security offerings

What can policy makers do?#

Study

The p2p value transfer protocol is conceptually new. It is radically decentralised - and requires radical decentralised thinking.

Tax raw material consumption [added 2023/04/15]

Tax raw material use to limit the volume of electric equipment waste. This would also incentivise mining equipment producers to build equipment that is as efficient as possible. Additionally, it will incentivise miners to deploy their (more expensive) equipment at locations with the highest excess electricity (the most negative electricity price). Lastly, it will incentivise all users of electric equipment, e.g. iPhones, to use the equipment during the full lifetime rather than replacing it early for a new device with more features - something which all people who hold a currency that increases in purchasing value over time would all do - towards a more sustainable future.

Embrace democracy

The development of the p2p value transfer protocol is completely open source - decisions are taken by the users of the protocol - through the choice of software they use. As such, any software evolution which is seen as relevant by users, not miners - if there are no users, proof of work miners have no incentive to keep operating, so users decide - will be adopted in the leading version of the protocol. The current protocol version is therefore the most relevant version available according to its users.

Policy makers can propose changes to the protocol code - if these changes are considered relevant by the protocol users, they will be adopted. As such, the protocol is the ultimate incarnation of global democracy - available for policy makers to embrace.

Enable banks

Many problems in the past in relation to digital value technology have been caused by trusted solutions - fraud or hacking of exchanges, such as MtGox and FTX, fraud in relation to centralised ‘crypto’ assets…

Banks are uniquely positioned to support their clients in navigating financial technology and protect their clients from unregistered security offerings. Moreover, banks are strongly positioned to act as exchanges (until the ultimate DEX will be available) or as issuers of balance sheet backed fiat assets on the lightning network.

Do we want Europeans rely on a US company like Circle or Tether for balance sheet backed fiat pegged digital tokens, or do we want Europeans rely on the balance sheet of European banks? Banks can issuing fiat pegged digital tokens on the lightning network with RGB or Taro, and, in doing so, play an active role in keeping the EUR or the USD relevant - as payment with these fiat pegged tokens will be as efficient as payment with satoshis over the lightning network. That means that there will be absolutely no reason for users to consider native bitcoin payments (under the hood bitcoin payments may happen, and no one cares, in the same way as no one cares how TCP/IP enables email or WWW). Beyond that, policy makers could see it as their responsibility to help educating citizens about the difference between trusted and trustless fiat peg token - as trustless p2p fiat peg is imminent - 10101 will likely implement by Q2 2023.

Contribute to protocol innovation

As indicated above, the p2p digital value transfer protocol is governed by its users. Therefore, policy makers can contribute to its evolution.

It is likely that many protocol users would be interested to adopt filters that help then avoiding interaction with terrorist or criminal counterparties. They would be open to adopting a soft fork that filters such addresses - provided the addresses are provided in a very transparent way.

As indicated above, policy makers can contribute to the protocol code and propose such features - if the proposed features are relevant, likely a majority of users will adopt the proposed soft fork - effectively helping AML / CFT.

Conclusion#

The p2p value transfer protocol comes in peace as public infrastructure at the service of humanity. There is no reason for policy makers to fear innovation - there is opportunity for policy makers to embrace innovation and support its development.

Policy makers can contribute by studying the protocol, embracing the democratic protocol development process, contributing to the protocol code and enabling banks to support their clients in navigating the value protocol.

Policy makers also have a role in warning for short term volatility - actually, enabling banks to support their clients in navigating the p2p digital value transfer protocol and its token is the best action to protect citizens against high risk investment - provided that policy makers trust banks.

The permissionless nature of the p2p digital value transfer protocol is difficult cope with in the conventional policy framework. A few considerations:

• Should the responsibility for CFT / AML reside with financial intermediaries, or is it reasonable to put a larger burden on merchants?

• Rather than relying on financial intermediaries, should societies make more extensive use of tax returns to prove ‘clean’ sources of money - and enable citizens to buy luxury goods or high value assets? What stops policy makers to provide zero knowledge proofs that someone paid a significant amount of taxes? Merchants could voluntarily or obligatory (that is a policy decision) require such zero knowledge proof to make certain high value goods or assets available to potential clients

• Decentralised technology requires decentralised thinking in relation to CFT / AML. Many p2p digital value transfer protocol users would embrace the ability to connect with trusted or reputable parties - maybe a zero knowledge ION DID solution could help identifying reputable parties, … Can policy makers contribute to the development of volountary open source anonymous DID reputation solutions?

• What role can adoption play? Today, many p2p digital value transfer protocol users have no parties (friends / family / merchants / … ) they can interact with in their network - as adoption grows, users can opt to interact only with trusted parties… effectively distributing KYC to KYP - Know Your Peer…

The developers and users of the global p2p value transfer protocol have an interest to recognise that illicit use of the protocol is a valid concern - similar to the use the TCP/IP protocol for illicit purposes. Joint reflection with policy maker can hopefully turn fear into opportunity and collaboration. It was already stated above - policy makers can find inspiration in the policies around the TCP/IP protocol to devise policy around the p2p value transfer protocol - for example network operators, such as telecom companies, bear no responsibility for any illicit use of the TCP IP protocol within their subnet network - policy makers could conceive similar protection for p2p protocol node operators.

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