Bitcoin attracts its fair share of scams and hucksters, but so does any new enterprise — and that’s no reason to judge the virtual currency itself. Recent events, however, raise hard questions about who is overseeing the currency as it moves into the mainstream. Is it time to replace Bitcoin’s loosely organized governance structure with something more formal?
The latest controversy, in case you missed it, involves MtGox, the earliest and most famous exchange for people to buy and sell bitcoins. The Tokyo-based company has been mired in liquidity problems ever since the feds seized one of its bank accounts last year, but things became even more serious this month upon reports that MtGox would not let customers access their own bitcoins.
A flurry of press reports and a fall in prices led MtGox to issue a statement placing the blame on a defect in Bitcoin itself — specifically, a “bug” that allows scammers to dupe the ledger that tracks all Bitcoin transactions. One of Bitcoin’s core developers shot back, saying that Bitcoin is sound and that the MtGox problems arose as a result of the company’s wallet software.
The developer, Gavin Andresen, appeared to offer the more convincing explanation. Or, as the title of an article posted to Hacker News phrased it, “Why Mt. Gox is full of shit.”
The Face of Bitcoin
It would be easy to write this off as yet another one-time incident. We could say that the people behind MtGox are like the Dread Pirate Roberts (aka Ross Ulbricht), who allegedly used bitcoins to do very bad things but whose actions shouldn’t reflect badly on Bitcoin as a whole. But it’s not that simple.
First, the CEO of MtGox, Mark Karpeles, is also a board member of the Bitcoin Foundation, an organization that purports to speak for Bitcoin as a whole. It’s the same group that sent representatives to Washington last year to vouch for the currency before Congress.
And Karpeles isn’t the only Bitcoin Foundation board member under a cloud. In January, another member, Charlie Shrem (pictured at right), was arrested at JFK airport on federal money laundering charges; he has since resigned. Meanwhile, board chairman Peter Vessenes’ name has come up in a murky bankruptcy lawsuit involving a failure to deliver Bitcoin payments (though Vessenes’ role is unclear).
Together, these people represent a very small group that regularly appears as the public face of Bitcoin. As its website explains, the Foundation is dedicated to “standardizing,” “protecting” and “promoting” Bitcoin. And based on recent news, it’s hard to say its leaders are doing a good job of that.
The issue isn’t just one of public relations. It’s also that MtGox-style shenanigans spook ordinary Bitcoin users, many of whom lack the technical chops to understand what a given controversy is all about — they only sense that something bad is happening. And while Bitcoin insiders can be quick to deride newbies and normals, the fact is that the currency’s ultimate success will depend on the confidence of everyday consumers and merchants. Which brings us back to the governance issue.
Communities and corporations
Jeremy Allaire, whose company Circle raised $9 million for Bitcoin-related ventures, wants to help the virtual currency become a mainstream payment mechanism. At a Bitcoin dinner discussion in December, Allaire wondered if the norms of the open-source software community — which currently inform Bitcoin’s culture and governance structure — will prove to be the best model for overseeing every big decision about the currency in the future. The open source model, by its nature, is decentralized, consensus-oriented and doesn’t have a formal structure or hierarchy.
Allaire didn’t endorse a different model, or even propose changing the current one. But his remark does raise the question of whether Bitcoin will one day be overseen by something akin to the Federal Reserve or a corporate board of directors. This idea may appall many members of the Bitcoin community, who see the lack of a central authority (government or otherwise) as one of the virtual currency’s prime virtues. They would point out (correctly) that central banks and corporate boards did not prevent the recent financial crisis, and even helped create it.
That’s not the point, however. Central banks and company boards at least have to explain their activities in the first place; they issue statements and hold conference calls, and their executives are subject to confirmation votes and held accountable when something goes wrong. In the world of virtual currency, where does the buck — or the bitcoin — ultimately stop? Who is able to assure everyday bitcoin users that the tool is in good hands?
According to Mike Hearn, a former security engineer at Google (s GOOG) and a leading developer of the Bitcoin software, the current arrangement is working fine. In response to an email query about the Foundation and the limits of open source governance, he sent the following response, which I’ve quoted in full:
“I guess I don’t see any problem with the current structure. The Foundation has little to no influence over the technical direction of the project. The current set of founders/board members that are currently experiencing controversy also do very little with respect to the Foundation.The comparison with Mozilla is interesting, because Mozilla Corporation is actually a company that’s funded largely by Google, and Firefox is a commercial product. Bitcoin is very far from that model — it’s a very loose collection of different projects united by a common protocol, and many of those projects are simply not funded at all, they’re still volunteer driven.I don’t think the public needs any protection from Bitcoin. If they don’t want to be exposed to it, they just don’t use [it]. Governments can be tempted to rush to ‘protect’ people but in this case, most democracies have realized that the people experimenting with Bitcoin can easily take care of themselves and in many cases might be sharper than the people who would be doing the protecting anyway.”
Hearn makes a forceful case but, once again, if Bitcoin is going to become a mainstream phenomenon, this “trust us, we know what we’re doing” position may not be enough. People who have a stake in Bitcoin may come to expect more explanations when something unusual or unexpected befalls the currency.
The solution here, as with most things related to governance, lies in more transparency, and it can begin with the Bitcoin Foundation.
The Foundation may not be able to claim an official mantle, but it’s still the closest thing Bitcoin has to a governance mechanism. And it’s clear that Foundation members and Bitcoin users in general deserve better than what its Board has delivered this year. Fortunately, the Board’s term expires in July — providing an excellent opportunity to choose leaders who can deliver a sense of accountability in a community that, until now, has lacked that concept. Circle’s Allaire notes that a wave of new entrepreneurs and innovators are entering the world of Bitcoin; some of them may have ideas about how to introduce accountability while preserving the decentralized character of the currency.
Since the mysterious Satoshi released the first version of the Bitcoin software in 2009, the currency has evolved and improved dramatically. In 2014, it’s time for Bitcoin governance to do the same.