With increasing government scrutiny on Bitcoin and blockchain assets, it’s encouraging to see that the most recent governance of the network comes from within the community itself.
By suspending a contentious network update, the Bitcoin community just proved its ability to self-regulate when faced with challenges to investor security.
This month, a proposed scaling update to the Bitcoin network known as Segwit2X, or “2X” for short, threatened to split the existing Bitcoin blockchain and create another version of the currency in a process known as a “fork.” The new version would allow twice the amount of information to be processed in each “block” of the network, lowering fees and confirmation times for transactions.
This 2X version, pioneered by many of the corporate participants and mining operations in the Bitcoin community, sparked controversy among developers and users who worried that updating the network without proper consensus could allow special interests to manipulate the currency.
Regardless of the proposal’s merits, not enough of the community was convinced that this was the proper way to scale. After many months of sometimes vitriolic debate, the proposal’s backers decided to indefinitely suspend the update.
The suspension of 2X is a win-win. The first clear benefit is that the multi-stakeholder method worked. Community interest took precedence over minority interest. This indicates that keeping the community whole is more important than short-term scaling updates to the Bitcoin network, countering external arguments for government regulations providing consumer protection.
Consumers have enough motivation to protect themselves, and rightfully so; real money is on the line and every individual participating in the network has something at stake should the currency split. The Bitcoin community opted for the consistency of one chain and one currency.
In this way, the community exercised self-control, allowing debate and reflection on issues critical to its continued success, a far cry from the animal spirits some claim dominate the space.
So what can policymakers glean from this 2X experiment? As it stands, Bitcoin continues to operate in “a legal grey area,” leaving much uncertainty as to its classification and its legitimacy as an investment.
According to Robert Graboyes, senior reserach fellow at George Mason University's Mercatus Center, regulators have two methods of introducing policy, described as “frontier” and “fortress” approaches.
The frontier approach allows for innovation and exploration in the market with limited or hands-off regulation, akin to the open approach to the internet in its early days. The fortress approach proposes limiting risk-taking in favor of more control or even the status quo. The 2X decision represents a victory of frontier over fortress thinking.
Nobody knows which direction Bitcoin will trend, only the market will determine that course. Stakeholders are in the best position to determine this future because they have skin in the game. Thus, policymakers should consider allowing for market solutions to emerge rather than attempting to impose their own.
We should encourage discovery and entrepreneurship through policy, even if that means not regulating too quickly or not regulating at all, as Bitcoin expert and author Andreas Antonopoulos recommended to the Canadian Senate in 2014.
Digital assets are poised to fundamentally alter the internet landscape, innovating across industries to better solve problems in a growing global digital economy. Regulators should view this nascent industry with increasing optimism, opting for unhindered exploration and creativity rather than stifling development in its early stages.
The Bitcoin community’s rejection of the 2X hard fork shows that it can police itself. No market is without problems, though regulators should think critically as to whether they should provide solutions to one that is increasingly showing the ability to self-correct.