Dear Erik,
I would like to respond to your letter titled "Some words for my friends".
It's been almost 10 months since we filmed you for our production of The Bitcoin Phenomenon. You were very gracious in taking the time to sit with us. Thank you again. We are getting ready to release our documentary along with full-length interviews in a couple of weeks. I wanted to address a couple of issues.
I specifically recall questioning you on how decentralized Bitcoin really is considering that exchanges served as central points of liquidity. In my view, this imposed a systemic risk to Bitcoin. In your response to the question, you countered this notion by stating that market-based centralization is nothing to worry about as market actors that abuse their position will quickly find their business erode.
Here is the clip pulled by our editor: http://ift.tt/1hJ6U44
Based on Mt. Gox, it seems that certain markets do not respond that quickly or efficiently. Mt. Gox had substantial issues at the time of our interview back in May 2013. Yet, consumers didn't leave; you didn't either. Natural monopolies when combined with network effects, as exchanges are, have market power and a gravitational pull that is very difficult to erode organically. Based on the reaction, it seems that the majority of Bitcoiners did not sufficiently understand or know the risks of doing business with Mt. Gox.
Another example: As the founding publisher of ALL IN Magazine between 2003-2006, I had a front row seat to the poker boom. Several years ago, a few big poker players at Absolute Poker and UltimateBet suspected certain other players of being able to see the cards held by opposing players. These big players kept losing money in highly improbable ways to the same players. When the players that felt cheated raised the issue in the community, the poker community laughed away these notions of cheating at major poker rooms. Not only did the customers not leave in droves at the allegations of cheating, they laughed at the whistle-blowers instead. Then there was a smoking gun that proved cheating by certain owners on a scale of tens of millions of dollars. And guess what? Most people still did not close their accounts. Even with the ease of the Internet, even with low switching costs of going to another vendor, people generally stayed. Markets are not nearly as responsive nor as efficient as you think even when confronted with a fraudulent operator.
When it comes to money, consumers need protection. Consumers are not sophisticated enough to assess the strength of balance sheets or the veracity of representations made by financial operators. As a result, modern societies have developed regulatory safeguards around financial services. How many people lost money with bank deposits during the financial crisis? Zero.
In fact, in my view, consumer protection means less friction in the marketplace, not more. It means more efficiency, not less. If I had to read the full car rental contract every time I rented a car, it would not be more efficient for the market. If I had to read a terms of service or every return policy or the fine print of every account I opened, it would not make commerce more efficient. Instead, I rely on basic government safeguards to ensure fairness and standardization. In exchange, market operators get the benefit of the doubt from most consumers as a result of regulation. I know that my liability with credit cards is almost nil based on regulation. As such, online commerce and electronic payments are ubiquitous. If I cannot be liable for credit card fraud, I can be freer in my habits and purchases than being continually paranoid. I can trust vendors that I otherwise would not trust.
Regulation is justified when the following condition is met: The value gained from increased trust in the marketplace is greater than the cost imposed by regulation.
Complicated contracts and risks are better socialized rather than individually assumed and monitored. One way to socialize risk is through regulation. In a regulated financial marketplace, a consumer does not need to be that careful. I don't have to judge the safety of my local bank as it is FDIC-insured. A simple rule is that the more math it involves and the less hard goods are given in exchange, the more it needs to be regulated. (Like life insurance.)
The other aspect is that consumers are horrible at assessing the fair value costs of deferred or unseen risks. People cannot properly compute the odds and costs of unlikely events in the future. If they could, the car rental counter would not try to sell comprehensive insurance at the counter to people who already have insurance. I might not need as much consumer protection in finance, but I may need more protection in healthcare or in building codes than a doctor or an engineer respectively would. The vast majority of people cannot assess every risk in every complicated area of their lives, myself included. It is not efficient for the market either. Certain things need to be standardized through regulation.
As such, as the old saying goes that there are no atheists in foxholes, there are few libertarians when defrauded.
In fact, I would be willing to wager that 80-90% of Mt. Gox customers would welcome a Japanese government bailout if it means a full return of their coins. Your ideology is lost on the majority of today's Bitcoiners. Most people that own Bitcoin want to get rich or make their lives financially easier. That's it. The pursuit of principal is their guiding principle. Now, people love the idea of getting rich and doing good at the same time, but given the choice of only one or the other, the former will suffice for most.
And there is nothing wrong with wanting to make some money. There is nothing wrong with speculating. The prospect of making money is fun, exciting, and thrilling. It's fine to enjoy it. For some reason, your argument seems to be that there has to be a greater purpose for Bitcoiners other than just the prospect of making money. Why require this? This should be legitimate enough of a purpose and goal. Ironically, you're the one playing into the hands that being mission-driven is what legitimizes money-making and Bitcoin.
Lastly, I cannot help notice your reference to Mt. Gox account holders as "brothers" in your note "Some words for friends". (The other day, Defcon at Silk Road 2 referred to his community as "comrades" in his note.) Calling for shared sacrifice among the recently devastated for the benefit of the greater good has a certain collective ring to it. Asking people to suffer from "falling towers" and repeated devastation wreaks of calling for martyrdom (of a dot-com variety.)
If the Bitcoin movement actually requires enormous sacrifice, of the devastating variety no less, merely for the future benefit of humanity, one may counter that the ongoing minor tragedy of one's annual tax bill seems like far less of a sacrifice. This is also a sacrifice that many times accrues to the benefit of others. What's the difference?
I am more confused by the philosophical tenets of the Bitcoin movement than ever. Does it require shared sacrifice for the collective good or is it to enable the present, profitable pursuit of self-interest?
Either way, the fact remains that Mt. Gox is a failure of a private company. It's not the fault of the government's, nor the media's, nor the banker's, nor Bitcoin naysayer's, but of a for-profit company with a once dominant market position.
Yet, you offer not one word against the perpetrators of a possible loss of $300+ million, 6%+ of all outstanding Bitcoins. Even Alan Greenspan, a personal friend of Ayn Rand, came to terms with the limitations of an absolutist ideology post-financial crisis. I'm surprised by the vehemence of your position because you are both brilliant and eloquent.
Sincerely,
Bhu Srinivasan
Producer, The Bitcoin Phenomenon for SQ1.tv
P.S. -
Some aspects of the reaction to Mt. Gox remind me of the episode of the Wire when one of Marlo's crew blames Omar, NASDAQ, 9/11, and the government for why he can't pay Marlo. Marlo responds: "Omar ain't no terrorist. And you ain't no Delta Airlines neither. You are just another n----- that got his shit took." Classic. Marlo on Mt. Gox:
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