Recently I spoke at State of the Net (0), a large DC conference that brings together telecom lobbyists, reporters, entrepreneurs, policymakers and even an academic or two to speak on developments in the Internet ecosystem. One of the most riveting keynote speakers (1) was Fred Ehsram, co-founder of Coinbase, who spoke on the future of the Bitcoin financial market.
Bitcoin, it seems, is growing up. Exciting things are on the horizon for this “peer-to-peer (2)” digital currency, which allows individual users to transact directly, without an intermediary like a bank or credit card company. The details for how one can “earn” Bitcoins are intricate, but for the uninitiated, the emphasis of the system is on facilitating a “peer-to-peer” relationship. If this sounds familiar, it should; it harkens back to the ancient tradition of bartered exchange.
Barter is a simple concept: why pay cash to the hairdresser when you can exchange your plumbing skills for a haircut? But barter for differentiated goods and services is hard. How many haircuts equals one fixed faucet leak? Barter across great distances is also hard. How can you barter for a product or service from someone who lives across the country? The answer, traditionally, has been to develop a recognized exchange medium – gold, for example, then currency backed by gold, then fiat currency (backed by the guarantee of the centralized government that issues it).
With Bitcoin it is now possible to decentralize that process once again, bringing back the peer-to-peer element of barter. But Bitcoin’s future hangs in the balance as regulators contemplate imposing hundred-year old statutes that will heavily regulate Bitcoin’s development. Concern regarding Bitcoin’s overregulation was reflected by Mr. Ehsram as well as in panel discussions (3) on Bitcoin issues. Speakers were hopeful that any regulatory choice would be analogous to the productive light-touch regulation of the Internet. But the Internet’s light-touch regulation is itself being threatened.
At this very moment, a highly successful peer-to-peer, decentralized barter system is on the regulatory chopping block. That system involves the complex interconnection of thousands of ISPs, transit, content-delivery networks, backbone and backhaul providers. Until now, the interconnection of these thousands of agents has largely been done using a free-flowing, peer-to-peer barter system with its own name – “peering.”
For example, you may get your interconnection from Time Warner or Verizon, but your uploaded data or download request doesn’t stay on your ISPs system for long – it gets broken into pieces and transferred as quickly as possible. How do you follow the data on all these different, privately owned systems? As an investor in one of these multibillion dollar infrastructures, how do you know who to charge for use of your system? Fascinatingly, these infrastructure innovators use an amazing, well-established barter system to answer these questions. If Cogent has roughly as much data to send to Comcast customers as Comcast sends to Cogent customers, these companies don’t sweat the details (99.5% (4) of interconnection deals are done on a “hand shake”); they just carry each other’s traffic and call it a fair trade. If there are sustained, noticeable discrepancies in traffic levels between or among companies, then a one-for-one exchange is not possible (e.g. one haircut does not equal the installation of a sink), so the barter system is supplemented by a currency system; payment for transmission to Cogent, Verizon or other third party. The currency of choice for Internet backbone providers is US dollars rather than Bitcoin – at least so far.
For the first time, these bartered (and negotiated) interconnection contracts may, without public comment, be subjected to 1934 telephone regulation through Title II reclassification. The FCC is set to micromanage, second guess and permit private trial attorneys to sue over every contract viewed by one party as “unfair.” Claiming “unfairness” will simply become a negotiating tactic so that a company favored by the government can extract what it wants from a company not favored by the government. The government will pick the winners and the losers, and consumers will pay the price. Here’s a small view of how it will work in the new centralized Internet as stated by FCC Commissioner Pai (only the five unelected Commissioners and the FCC’s administrative staff have so far seen the proposed rule):
The plan states that the FCC can determine when a broadband provider must establish physical interconnection points, where they must locate those points, how much they can charge for the provision of that infrastructure, and how they will route traffic over those connections. That is anything but light touch regulation. And the plan extends the FCC’s interventionist gaze well beyond this part of the network.
Imagine if every Bitcoin transaction was subject to approval by an agency in DC and also had to survive a litigation gauntlet – in other words, imagine a world without bold innovations like Bitcoin.