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April 6, 2021

The Bitcoin Break-up

It’s not really prophecy if the writing’s on the wall. The signs of Bitcoin’s break-up were there
for all to see, and my predictions were intended more to prepare us for an inevitable future.

And now it’s upon us. On 19 March, the Financial Action Task Force (FATF), a powerful
policymaking body made up of almost every country in the world, published an in-depth
proposal to update its guidance on risk-based approaches to virtual assets and virtual asset
service providers (VASPs).

If you haven’t already, you can read up on the details, such as defining almost every
crypto-related organisation or developer as VASPs and requiring all VASPs to identify and
surveil their users. But forget the small print, because I want to talk about the big picture.
And – spoiler alert – I’m more sanguine about Bitcoin’s future than ever, not in spite of this
news but because of it.

We’ve all been prepared for the attempts by the traditional financial industry (including
governments, central banks, and regulators) to curtail the heady freedoms of the Bitcoin
ecosystem. Back in December I called it “assassin’s greed”, a craving to control Bitcoin and
bring it into the fold of the existing financial system.

But the FATF members are not “Bitcoin-killers”. Instead, their recommendations will lead, in
the words of one close Bitcoin-watching consultancy, to a bifurcation of crypto. We are
entering what Sir Terry Pratchett so wonderfully called the “trousers of time”, where the
present diverges into two parallel futures. On the one hand (or leg, rather), we’re about to
see the institutionalisation of Bitcoin: intermediated, compliant and regulated. At the same
time, the world of privacy-orientated and open Bitcoin will not only continue to flourish – its
progress will accelerate.

Many of the world’s largest financial institutions are inherently conservative; they’ve watched
other, bolder, nimbler investors seize the Bitcoin moment, but need regulatory reassurance
before they themselves dip their toes in the water. For traditional financial actors the FATF’s
proposals will be a lightning rod, attracting them into the wider ecosystem and augmenting
the monetary value of the Bitcoin network.

Be in no doubt: the rules-based Bitcoin ecosystem will be by its very nature a dull and sterile
place and the high barriers to entry will prevent access to those most in need of its power.
Like those in the global South, for example, who see Bitcoin not only as an investment but
as a necessity, not least because of the instability of their home currencies and the lack of a
strong centralised banking industry.

But regulated, exclusionary Bitcoin won’t just add volume. In fact, it will play a key role in
driving innovation and adoption of unregulated and open Bitcoin due to the high
philosophical, ethical, and financial rewards that will come from working on the other side of
the coin. Though the two worlds of Bitcoin ─ the dynamic and the mundane ─ may be poles
apart in approach, they will be inextricably linked by the shared blockchain, so we will
ultimately end up with a virtuous circle where the open world benefits from closed Bitcoin’s
institutional adoption. Meanwhile, regulated Bitcoin gains from the rapid innovation that can
only come from unregulated Bitcoin.

Bitcoin may be breaking up, but there’s no reason for the split to be acrimonious. What we’ll
see emerge is not two competing ecosystems, but a couple of complementary ones: Bitcoin
for the West and Bitcoin for the rest. For every person who adopts regulator-approved
crypto, there will be many more who will experience Bitcoin as it was always meant to be:
pseudonymous, self-custodied, decentralised and empowering.

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