Is the ‘Two-Bitcoin Problem’ a Serious Risk for the Cryptocurrency?

alex gladstein on stage
Photo via CY, Meng
Posted on September 17th, 2020 by Kyle Torpey and filed under Bitcoin.

During day one of the Fidelity Center for Applied Technology’s Crypto Privacy Conference on Tuesday, Human Rights Foundation Chief Strategy Officer Alex Gladstein presented his view on the importance of Bitcoin as a privacy-enhancing technology for the betterment of human rights around the world. In his presentation, Gladstein touched on the issue of the so-called “two-bitcoin problem,” which has recently been brought up by various pundits as a potentially-serious issue for the world’s most popular cryptocurrency.

What is the Two-Bitcoin Problem?

Near the end of his talk, Gladstein answered a few questions that representatives of Fidelity specifically wanted him to discuss. One of those questions was about the two-bitcoin problem.

“[The two-bitcoin problem] essentially talks about a future where, let’s say in the United States, these big companies like Coinbase and Square are forced by the government to eliminate private withdrawals, thereby kind of creating two different bitcoins,” explained Gladstein.

The implementation of the sort of policy outlined by Gladstein could have the side effect of creating a situation where there are basically two different realms in the Bitcoin network. There would be the KYC realm connected to centralized financial institutions where every Bitcoin transaction is completely traceable and there would be the black market realm where users are not attaching their real-world identities to their transactions.

“It’s probably one of the biggest risks to Bitcoin,” Gladstein added. “I don’t think it would kill Bitcoin. There’s just way too much desire for a relatively-private, permissionless, [and] scarce asset.”

Will We See a KYC Bitcoin in the United States?

Based on the level of respect for civil liberties in the United States and direct discussions with regulators, Gladstein does not think that exchanges and other financial institutions located in the United States will be forced to block withdrawals to addresses that do not belong to some sort of regulated whitelist.

“I don’t think that will happen in the United States,” said Gladstein. “I actually spoke to some folks recently in one of the government agencies who said that is probably unlikely at this point, but you never know.”

According to Gladstein, the evolution of bitcoin as an investable asset also helps protect it from scrutiny from financial regulators around the world.

“There’s so much investment interest, in the United States even, that it seems unlikely that it would happen, but it’s something to keep an eye on,” said Gladstein. “The investment and scarcity and value piece of bitcoin is the platform through which we can achieve privacy in the future. If bitcoin becomes increasingly valuable because of its model [and] the way Satoshi built it with its decentralized, digital scarcity and continues to become more valuable and more people learn about it and want to invest in it as a store of value, then it leaves not a whole lot of room for governments to ban it because those governments are going to want some themselves. If you all of the sudden in the future have this scenario where some governments are trying to ban it but other governments are trying to acquire it to store in their reserves, that’s not super-tenable.”

According to Gladstein, Bitcoin can become a very powerful tool for civil liberties if better privacy features can be added to the cryptocurrency network in the coming years.

How to Guard Against the Two-Bitcoin Problem

For those who wish to assist with the development of Bitcoin into a powerful tool for civil liberties, Gladstein recommended that people support various organizations that lobby the government on behalf of Bitcoin users, such as Coin Center (not mentioned by Gladstein by name), and the development of the open-source codebase around the Bitcoin network itself.

“I think we’re one of the few countries in the world where we can actually, conceivably have victories in terms of lobbying for human rights and privacy,” Gladstein added. “Ultimately, we need to support the open-source developers. This is why the Human Rights Foundation has started a Bitcoin development fund. Because, at the end of the day, it’s about the open-source software. It can’t be stopped.”

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