- Published: Sunday, 16 February 2014 08:13
- Written by Editor
Thousands of people discovering Bitcoin every month quickly realise that the first thing they need to participate is a Bitcoin wallet.
The vast majority of these new users will probably not know or even care about the different wallet options available, beyond the broad choices of an offline software wallet or online web based wallet. This lack of research and understanding however could prove very costly in the not too distant future, here is why.
Governments in many countries and jurisdictions are now seriously considering regulating, actually controlling, Bitcoin exchanges and organisations that "transmit" Bitcoins such as online wallet services. If and when these regulations are imposed, those who have Bitcoin in certain types of wallet and exchanges are seriously at risk of having Bitcoin frozen or confiscated in the same way that cash in a bank can be frozen or confiscated.
There are many reasons why and how this could happen, but an obvious such reason is that Bitcoin transactions are one way only - from sender to receiver - and cannot be reversed unless the receiver chooses to send back the same amount voluntarily. This of course has considerable ramifications for people using Bitcoin to buy goods or services in that if the goods or services are not as described or not delivered at all, there is zero accountability - the Bitcoin is lost. It is not difficult to envisage therefore regulations that compel online wallet services and/or exchanges to freeze Bitcoin deposits under some sort of order, and return them to the sender, in the same way a credit card chargeback would work. This type of regulation is inevitable along with many other forms of regulation that have nothing to do with consumer protection and everything to do with governmental interference and control.
So is regulation of Bitcoin to protect consumers justified? The answer is no. It is for every person, buyer or seller, to be sure of the nature of goods or services being purchased and of the seller, putting any necessary safeguards in place such as using an escrow service.
Bitcoin users have an absolute right to privacy, anonymity and freedom which no government or authority can violate for any purpose providing it is not being used for overtly criminal purposes that threaten safety or security.
Ver: We have a world-class legal team working hard to ensure we don’t fall under any of those regulations. The way our wallet is designed means we never have access to anybody’s bitcoins. We don’t have the ability to freeze accounts or block transactions or control anybody’s bitcoins.
So it is for Bitcoin users to protect their own privacy, anonymity and freedom.
This really is as simple as choosing the most appropriate technology and services that are out of reach of external interference or a service provider that is immune to such interference by, for example, being located offshore where there is no regulation. The first and probably most important place to start is with choices or Bitcoin wallet. There are fundamentally three types of wallet:
1. Offline or software wallet on a computer, smartphone or other device. Examples: Bitcoin-QT, Armory and Multibit.
2. Web based online/on-blockchain wallets. Example: Blockchain.info.
3. Web based online/off-blockchain wallets/exchanges. Examples: Coinbase, Kraken, Mt. Gox.
Of these, 3. above, are the wallets that are most at risk from regulation and external interference because Bitcoins are stored off the blockchain in a discreet identifiable account that can be frozen, confiscated or even stolen.
By contrast, in offline software wallets, Bitcoin is stored on a local device such as a computer or smartphone, where it is the responsibility of the owner to keep their Bitcoins safe.
Web based on-blockchain wallets, notably Blockchain.info, are seamlessly integrated with the blockchain itself, and therefore enjoys the same security and anonymity of the distributed blockchain itself.
So clearly the increasingly risky option is to use web based, off-blockchain wallet/exchange services such as Coinbase, Kraken and Mt. Gox with discreet accounts that can easily be lost for any number of reasons, especially when subject to regulation, unless these services move to a jurisdiction that is free of such regulation.
The best choice of regulation-free wallets therefore are Blockchain.info for a web based wallet, and Armory or Multibit for offline, software based wallets. Blockchain.info also has a software wallet for Android smartphones.
At some point, because of the way that systems like Coinbase are designed, it’s just a matter of time before the regulators come in and say “freeze this account” or “undo this transaction”.
At the instant people realize that their bitcoins can be seized or frozen while stored in a Coinbase wallet, they will flock to a service like Blockchain where accounts can’t be frozen. In the long-run, we think that will be the strongest selling point of Blockchain. We can’t help you recover your password, but nobody on the planet can take your bitcoins if you use a secure password and don’t forget it. ~ Roger Ver, Blockchain.info
Given that for now, until Bitcoin becomes the de-facto global monetary system, exchanges are still required, the sensible course of action is to not keep Bitcoin in off-blockchain services such as Coinbase, Kraken and Mt. Gox, but to immediately transfer all residual Bitcoin to either Blockchain.info or local device running Armory, Multibit or Bitcoin-QT.
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