Bitcoin, like most digital crypto-currencies, is misunderstood and maligned. This is due to a fundamental misunderstanding of Bitcoin’s nature. It is a digital commodity and virtual currency, best understood from a software perspective. Being software-based, decentralised, distributed, peer-to-peer (P2P) and developed on open source lines, like BitTorrent, renders it highly resistant, if not immune, to regulation. But it’s the business entities of the Bitcoin ecosystem that will be regulated, not Bitcoin itself.
The Bitcoin protocol and the Bitcoin system, like most files on the internet, are distributed across multiple nodes. This makes the network durable, resilient and under no central control. It doesn’t answer to a single authority and runs on the basis of democracy – as decided by mining groups that produce Bitcoins and maintain the blockchain. Software resists regulation, by simple virtue of the fact that it’s intangible digital code, easily copied and distributed. However, the business entities of the Bitcoin ecosystem – the exchanges, brokerages and POS (point-of-sale) systems – are subject to regulations, as any business is.
If Bitcoin is to gain mainstream acceptance and use, regulations for its entities is a necessity. The majority of consumers don’t need, nor want, to understand Bitcoin, nor do they care about the philosophy, ideologies, features and processes that underlie this elegant digital commodity. They simply care that it benefits them. To this end, issues such as consumer protection, security and volatility require resolution, in order to increase traction and grow mainstream use. And that requires industry regulations.
Also Read: Echelon 2014: What you need to know about Bitcoin
Bitcoin’s market structure
Nadia Huschke, a Singapore-based management consultant with Droege Capital, engaged in a research suggesting market structures evolved towards oligopolistic structures over time, using the EU to exemplify this. In the IT sector, the same was seen with Microsoft throughout the 1990’s and early 2000’s, where it used its market leadership to dominate and monopolise the desktop PC market. Something it still maintains today, though to a lesser degree. The introduction of tablets, smart devices and other technical innovations significantly eroded Microsoft’s market dominance, as did the rise of Apple and Google.
The software and IT markets are in an oligopolistic situation, with overall market leadership divided among Google, Apple, Microsoft and other MNCs able to compete in niche areas against them. This results in a situation, where the market is dominated by a small number of sellers (the oligopolists). More obvious example is the gaming console market, which is dominated by Sony, Microsoft and Nintendo. The accountancy sector, for example, is dominated globally by PWC, KPMG, Deloitte Touch Tohmatsu and Ernst & Young.
In a standard interpretation, the Bitcoin sector will evolve towards oligopoly. Due to the diminishing returns in Bitcoin mining, which sustains the Bitcoin network, mining pools, exchanges and other entities will consolidate and merge as Bitcoin matures. As overall traction and market capitalisation increase, entry barriers will increase and high interdependence will occur.
However, unlike a standard oligopoly, Bitcoin is an open source digital commodity. A better predictor would be the development history of Linux and its numerous distributions.
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Linux and Bitcoin compared
Linux and Bitcoin are both large, distributed, open source projects. Linux began in 1991, with the Linus Torvalds developing it as a kernel for an operating system, as well as the basis for his Master’s thesis in 1997. Since then, the kernel has served as the basis for a number of successful distributions – operating systems that are modifications of the basic Linux kernel. The most notable of these are Red Hat Enterprise Linux, Ubuntu and Android.
Red Hat Enterprise Linux is the basis for the trading platforms of the Singapore Exchange, Tokyo Stock Exchange, Chicago Mercantile Exchange, London Stock Exchange, NYSE Euronext and the Deutsche Borse. Ubuntu is used by the Wikimedia Foundation, Google, the French Parliament and the French Gendarmerie. Android, unsurprisingly, is deployed by Google and used in smartphones and embedded devices. Linux spans the corporate, organisational, governmental and personal spheres.
Linux is open source, free to download and deploy, and open to development. However, the companies that have developed their businesses around it are subject to regulations. No one regulates Linux, though corporations and coders contribute to the code via the Linux Foundation. Based off the Linux kernel, companies have developed viable commercial products and services.
Bitcoin’s development trajectory will be similar, evidenced by the development of Ethereum and colored coins. Resembling the emergence of Linux distributions, these are built upon a Bitcoin core or are inspired by its concept. The blockchain is the core of Bitcoin, just as the kernel is the core of Linux. Bitcoin’s development will have many parallels to Linux’s own, though likely at an accelerated rate.
And perhaps this will hold true for its regulations as well. You can’t regulate software, but you can always regulate the ecosystem.
Also Read: What you may not know about Red Hat, Linux and Open Source