Bitcoin and Regulation: Lessons from the Early Days of Skype
Published on May 26, 2014 at 15:17 BST
Michael Jackson, former COO of Skype and current venture capital investor at Mangrove Capital Partners, explores how bitcoin companies can learn from the early struggles Skype had with regulators across the globe.
For all the differences between Skype and bitcoin, there are many similarities.
Both products use fundamental changes in technology to enable new opportunities, and they both remove the existing organizational hierarchy of their respective industry. As such, parallels can be made and valuable lessons can be learned from the early days of Skype.
The bitcoin industry seems to be adamant that bitcoin is a currency and bitcoin companies are financial institutions. This was very much in evidence at Bitcoin2014, where all major actors were describing their progress to ‘regulatory compliance’. But is this necessary?
From the inception of Skype, we could have said that the firm is a telco (telecommunications company). We could have decided to apply for telecoms licences all around the world and customize the product to both match and support the vagaries of different rules and directives.
It would have been the logical thing to do and it is similar to the route many bitcoin actors are taking today. However, if Skype had done so, it would have been the worst strategic mistake it ever made.
At that time, the world had changed from large, government-owned telcos to a new paradigm. Had we tried to establish Skype as a telco, rules and perversity would have appeared, driven by a dangerous combination of lack of knowledge, good intentions and political pressure.
We would have entered the same world that many bitcoin operators appear to have chosen, a world in which our ideals would have been suppressed by forces outside our control.
Let’s try and learn from previous successes. Let’s see if we can navigate the complexities of the legal and regulatory situation, using some of the experiences and techniques that were adopted by Skype – techniques that could help reduce any regulatory influence or restrictions on bitcoin.
Regulation is not a given
As a congressman in the US told me one day, something that looks like a duck and quacks like a duck must be treated like a duck. If Skype looked like a phone company and sounded like a phone company, then it must be a phone company. But Skype was never a phone company, and never will be.
There are many technical arguments as to why this was so, but the most relevant here is that Skype was simply a piece of software. It was a piece of software that was developed by a company and released directly to the users.
The users created the network and the existence of Skype as a network was independent of Skype as a company. Skype simply provided a part of the network.
To argue otherwise would be to argue that anyone who makes cables, or handsets, or even the bricks and mortar and relays and batteries for telephone exchanges is also a phone company. This would be truly absurd. If Skype, the company, closed down, the software would still be in the wild and the whole world would still be able to talk for free.
We, the bitcoin community, need to make these arguments better. The default position of the products and services derived from bitcoin must be that they are not to be regulated. They need not be, and the existing rules need not apply. They may apply in intent, but often the wording is poor, unsuitable and can be argued to be irrelevant.
To put it bluntly – every bitcoin actor should be reading the law very carefully and finding the loopholes. You should all invest a great deal of time in this – it is hugely important. For example, are you really moving ‘currency’ or are you simply exchanging some sort of token?
Life is going to be a lot easier if we take the latter position, as there are no rules that prevent the exchanging of keys. Likewise there are no rules that say keeping a string of data in a cold storage vault makes a business a bank.
So far, many of the proponents of bitcoin have been taking entirely the wrong approach – making claims that attract a raft of unwanted rules and regulations.
Untouched by regulation?
The anonymity of the Internet provides a nice place to exist. Yet, almost everything needs to touch the real world from time to time and Skype was no exception.
We chose to connect to the existing phone network. Similarly, some parts of the bitcoin ecosystem need, at least for the time being, to interface with existing financial systems. However, the minute these interfaces exist, the same minute the product becomes touched by existing rules and the need for partners arises.
In any world, these partners are worried too. The first companies that connected Skype to the phone network took risks. These partners need clear arguments around why they are safe and why the service they provide is in compliance with the rules.
These arguments need to be clear and based on fact and legal opinions. Rhetoric has no place. Banking institutions, burnt by the financial crisis and subsequent AML (anti-money laundering) and KYC (know your customer) fines need solid facts, not lofty ambitions.
Skype is not a replacement phone service, it doesn’t claim to be, and in fact it emphatically tells users that it is not. This positioning is important. It tells users not to expect certain things and, as a result, some people may choose not to use the product.
At Skype, we would have loved to have had incoming numbers for everyone all over the world and to have provided an amazing 911 service based on text, video and status messaging, but the existing rules don’t permit that. So we provided none, and forewent the opportunities of a seamless interface into the existing world – all the time. Though for the greater good.
How can it be made easier?
Firstly, those in bitcoin companies should make sure that any regulated activities are headquartered and operating in one place – that way, there should only be one set of folk to deal with.
Business owners can also use these rules to their advantage – the rules of international commerce, taxation and regulation. Well-intentioned bitcoin businesses exist to provide great services to the mass market and to unlock the huge potential of the transformations provided by cryptographic tokens.
For all the negative press the NSA gets, it isn't the enemy to bitcoin businesses. The enemy is the bureaucracy, which asks for volumes of data, licence requirements and bad old-fashioned paperwork. Bureaucrats, trying to understand a new technology and with plenty of time on their hands.
The enemy is time and getting the product to market early. Businesses should also be open to engaging with regulators, simply to keep the debate on the right side. It should be no more than that and certainly shouldn’t be central to any company’s external communications.
These arguments need to be consistent across a company: if the firm believes its activities shouldn’t be regulated, it should be able to argue this point and stay true to it. Companies should not make any allowances, but realise there will always be people who want them to make an exception.
In some countries, companies may only be asked to fill in the simplest of forms, but even the simplest of exceptions can be used by others. The biggest challenge of the industry is consistency. The clear message that must be sent from the entire community is that most activities are not regulated.
Some businesses in the bitcoin space will find they require some crossover with existing regulated services and they may find these services operate rules they don’t want to obey. Tough luck. Try and change the rules instead – it isn’t that difficult.
As an example, the 'Pulver order’ moved VOIP regulation in the US from state level to federal. Jeff Pulver ran a small company – and he won. I changed mobile access rules in Europe myself, as a single individual and without the help of lawyers. It takes time and patience, and you might have to buy a suit, but it can be done.
Reducing the impact of regulation
There’s a reason many of the most well-known companies are split into various operating units, and it isn’t tax – it’s regulation.
Bitcoin firms should make sure they put the parts of the business that are going to be controlled into one company and everything else in another. It’s an awful lot easier to manage a regulated entity if it has virtually no employees and few activities.
“If companies can make a case for themselves that they don’t need regulation, they shouldn't even go near it.”
Let’s say you run an exchange, for example. It exchanges fiat for cryptocurrency and then sends the proof of ownership of these tokens to the other side of the world.
Some regulation requires that any company doing monetary transactions needs to report all transactions.
The answer is to split the company: perhaps one part does the fiat to crypto transaction and the other part sends them on. Then you only have to apply the regulations to a smaller part of the company, and can maintain the flexibility of the other half. If the egress point needs regulation in a specific country, set up a small entity to do that there.
Efforts should be made to ensure that a regulator doesn’t need to consider what happens in a different country over which they have no jurisdiction.
Don’t ask permission
Companies need to just carry on doing what they are doing, if they can make a case for themselves that they don’t need regulation, they shouldn't even go near it.
People do what they love best: regulators like regulations and want to apply them. If they didn’t, they would have a different job. So, asking for advice is framing the discussion. Once again, companies should read the rules, argue why they are not covered by the rules and use that analysis as a defence, but they should only ask for permission if they are sure it is necessary.
Furthermore, companies shouldn’t ask a lawyer. Expecting a lawyer to find a loophole in the law and to state it on paper simply won’t happen. People should read, understand and learn it themselves. They can test their argument on a lawyer, indeed on anyone, but should not expect anyone else to come up with it.
These principles allowed us to operate Skype across the whole world, with minimal legal costs and no effect on the main parts of the business – yet fulfil the legal responsibilities that we all have when we are running a company and have employees that rely on the company to feed their children.
Most importantly, these lessons enabled Skype to become one of the leading tools that people use to communicate and forged the way to achieving our original dream. A dream that has become reality.
Today, the whole world can indeed talk for free. Bitcoin companies have the potential to make the same waves in the financial sphere.
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