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You’ve heard a lot about decentralization lately, but what exactly is decentralized internet? And what do people want when they seek it? The internet comprises a network of networks, and if one piece fails, the internet as a whole still continues to function. You may have experienced times when you could not log into your internet account, for example.

Perhaps a server crashed. Or maybe a cable disconnected. But when you logged in again you saw the internet continued to function without you. And so the world turns. The internet exists as a decentralized structure, to begin with.

Some aspects of the internet operate under a centralized authority, however. If you want to publish a new website, for example, you have to purchase a domain name from a provider because a central authority controls domain names.

But do people clamor for the peer-to-peer administration of domain names? Do people even think about domain name administration? Let’s take a closer look.

Infrastructure

The internet defines an infrastructure, similar to plumbing or an electric grid. A plumbing system maintains a reservoir of potable water and a network of pipes and controls. If a new house desires running water, a protocol exists to bring that house water. Thus it is with the internet.

Are users demanding new plumbing, though? When people turn their computers on, the internet connects, business transacts, everything functions normally, and that appears to be sufficient for most of the population.

The World Wide Web

When people talk about a decentralized internet, sometimes it sounds more like they’re referring to the world wide web. Tim Berners-Lee created the web in 1989, and it operates as a layer on top of the internet. It functions primarily as a user interface and provides browsers and links so people can navigate to websites.

You may be thinking that a decentralized internet could bring a better user interface then. But anyone experiencing the user interface of typical cryptocurrency wallets and blockchain sites might well be skeptical.

The web implemented a number of design choices reasonable people might well argue against. But centralization hardly ranks as an issue. Users freely choose their own browser. They decide if they want a browser from a large centralized corporation like Microsoft or Google or from a smaller product like Tor.

The Tor Project

Tor Browser

People who ask for a decentralized internet look for privacy and control of their own data.

Computer scientists founded the Tor Project in December of 2006 with the mission of enabling anonymous communication. Obviously, anonymous communication enforces privacy. Tor, an acronym for “the onion router,” protects against network surveillance and traffic analysis.

The onion router provides anonymity with an algorithm of layers along the route of communication. Each layer only knows about the layer before it and the layer after it. The origin and final destination remain unknown to the intervening layers. In cryptocurrency, some privacy coins such as Monero implement a similar algorithm.

Tor publishes many products, including the Tor browser. The Tor browser builds on the same foundation Firefox uses, and Tor provides it as free and open source software. But nothing ever really comes for free.

Users of corporate browsers pay by allowing those corporations to harvest user data. Users of the Tor browser pay primarily with slower response times and a generally more cumbersome user experience. Besides, some websites require user login accounts, so you provide your identity to them anyway.

OpenBazaar

Open Bazaar Marketplace

Targeted advertising arises as one of the more annoying aspects of providing your personal information on the internet. Every purchase you make defines an exploitable aspect of your personality, and advertisers hound you ever after.

OpenBazaar provides an online peer-to-peer marketplace with no middlemen and no fees for using the platform. You buy and sell on OpenBazaar by downloading their app. This makes you a node on the network, and unlike traditional e-commerce sites, no central authority rules.

You can make payments with over fifty different cryptocurrencies. And your transactions are secure and anonymous.

To avoid scams and ensure customer satisfaction, OpenBazaar utilizes a feature of Bitcoin known as multi-signature escrow. The buyer and seller agree to a mutually trusted third party before transacting business. The payment goes to an escrow account. If the transaction satisfies both buyer and seller, the funds are released. In the case of a dispute, the trusted third party settles the matter.

Floating Above the Cloud

The internet reigns as a platform for conducting business, and consequently businesses move to decentralization through cloud computing. The cloud services organizations by providing virtual, configurable computing resources. This means companies don’t need to own their own servers and mainframes (known in the industry as “big iron”), and they do not need to purchase resources from a physical data center.

Cloud providers allow users to create and configure virtual computers in software. Users thereby create servers as powerful or modest as their needs dictate.

But the cloud providers like Amazon Web Services (AWS) and Microsoft Azure own the massive amount of equipment required for this task. And although the cloud frees businesses of the need to purchase and maintain their own big iron and servers, cloud services are expensive.

Can Decentralized Blockchain Computing Replace the Cloud?

The simplest service provided by cloud computing has to be disk space for file storage. Put a file on a system on the cloud, then retrieve it later.

In a blockchain file storage scenario, a peer-to-peer network exists. Nodes with excess disk capacity lease disk space to customers. Customers then upload, store, and download files as needed. Users pay with cryptocurrency on a blockchain. Customer files are encrypted, preventing the host or anyone else from reading private data. The files are also broken into multiple parts and distributed across multiple nodes. This distribution also enforces privacy since a host only has a fragment of the user’s information.

Note that in this process, no centralized authority controls or sells the disk space. Peers sell available disk space to other peers.

Multiple companies now provide platforms for storage using decentralized blockchains. The Sia Storage Platform launched in 2015, and Siacoin powers commerce on their network. Similarly, Storj also provides decentralized storage and uses Storj coin. Finally, the Filecoin project developed by Protocol Labs represents another popular choice.

Decentralized Internet – Concluding Thoughts

To some extent, decentralization resides in the eye of the beholder.

The blockchain network for Bitcoin is decentralized in terms of the consensus algorithm. But given the cost of hardware resources and electricity, wealth is required to mine it. And simple common sense tells us the majority of Bitcoin wealth is centralized in a relatively few affluent early adopters.

When people speak of a decentralized internet, the gist of the matter seems to be the lack of privacy on the web, the lack of control over our personal data, and the desire for affordable resources.

No one product defines the decentralized internet, but blockchain technology provides at least some capabilities to achieve these goals in a variety of functional areas. Time will tell if the products on offer meet user expectations or not.


This article by Wilton Thornburg was previously published on Coincentral.com

About the Author:

Wilton Thornburg is a software engineer, currently based in the greater Boston area.

Cryptocurrency

The meteoric rise of cryptocurrencies has taken the world by storm. Innovators, investors, users, and governments are scrambling to wrap their heads around cryptocurrency and the blockchain technology that they rely upon. The emergence of a new market and business model has created great opportunities for participants, but it also carries significant risk.

Cryptocurrencies present an inherently unique challenge to governments because of their new technology, cross-jurisdictional nature, and frequent lack of transparency. Governments are struggling to develop new ways to regulate cryptocurrencies, adapt existing regulations, and identify fraudulent schemes. Cryptocurrencies and their regulations are evolving before our eyes, and this article will provide a brief background on cryptocurrencies and an overview of where cryptocurrency regulations currently stand.

What are cryptocurrencies?

Cryptocurrency is, by any other name, a currency—a medium of exchange used to purchase goods and services. Or, as some have suggested, cryptocurrency is a “peer-to-peer version of electronic cash.” However, this currency has two qualities that distinguish it from traditional bills and coins.

First, cryptocurrency is a virtual currency that is created through cryptography (i.e. coding) and developed by mathematical formulas through a process called hashing. Second, unlike traditional bills and coins that are printed and minted by governments around the world, cryptocurrency is not tied to any one government, and thus is not secured by any government entity. The fact that cryptocurrencies are not secured by a government authority has led to concerns from critics that this is the second coming of Tulipmania, because we are ascribing value to an otherwise valueless item. However, the potential for cryptocurrencies as a medium of exchange remains enormous.

What is blockchain?

Blockchain is the technology at the heart of most cryptocurrencies, and explaining the technology in detail would require a blog post of its own. What is important to know is that blockchain is a record of peer-to-peer transactions categorized into blocks on a distributed ledger. Despite the obtuse terminology, blockchain functions similarly to a local bank authorizing and recording a transaction, but instead of only one party holding the entire ledger book, the transactions are recorded communally by member nodes, with each node being a computer in a peer-to-peer distributed network.

The blockchain can confirm a transaction within minutes, removing errors that exist when trying to reconcile and audit separate ledgers and transactions. Whenever a transaction takes place, the miners on the blockchain develop a new hash and digital signature to update the ledger and create a new “block.” This block, or recorded transaction, is time-stamped and encrypted and will remain on the blockchain for life.

lockchain is the technology at the heart of most cryptocurrencies

Regulation in the US – Utility Tokens v. Investment Tokens

In the United States, there has been no federal regulation of cryptocurrencies. Instead, cryptocurrencies are often grouped into two non-binding categories: (1) investment tokens that fall under the purview of already existing U.S. securities laws like the Securities Act of 1933 and the Securities Exchange Act of 1934, and (2) utility tokens, which remain largely unregulated (for now).

Security Tokens

Whether the tokens being offered in connection with a particular cryptocurrency are security tokens is decided on a case-by-case basis that even experienced securities lawyers can disagree upon. Tokens are usually analyzed under the four-part Howey Test below to see if the token is in fact a security. Securities must meet the following criteria:

  1. An investment of money
  2. In a common enterprise
  3. With an expectation of profits
  4. Predominantly from the efforts of others

Each characteristic of the token is analyzed against this framework to see if the cryptocurrency is in reality functioning as a new-age security. If it is, then regulators treat it as such, and cryptocurrencies must then be registered and handled with all of the same disclosures and precautions as any other security sold in the United States or to U.S. investors.

Utility Tokens

Cryptocurrencies can also be categorized as non-security utility tokens. These tokens purport to offer intrinsic utility and value, and are typically instrumental in powering the blockchain technology. These tokens function more like commodities than securities, and while they may act like currency in a fully functional network, they also have other values.

However, having a utility token with a properly formed and functioning network does not preclude said token from being labeled a security by the SEC. In In the Matter of Munchee, Inc., a purported utility token with a non-functioning network was labeled a security by the SEC. While labeling a token without a functioning network as a security – as it has no present utility – is not unexpected, the SEC also concluded that: “even if [Munchee] tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”

After analyzing the Munchee Tokens under the Howey test, the SEC concluded that they were investment contracts because purchasers of the tokens had an expectation of profits predominantly from the efforts of Munchee and its staff. The SEC further concluded that Munchee had primed such expectations through its marketing efforts.

While this new case does not eliminate the distinction between utility and security tokens, it does caution that, when deciding whether a given token is a security, the SEC will look beyond utility at the character of the instrument, and base their conclusion based on the terms of the offer, the plan of distribution, and the economic inducements held out by the token issuer.

State Regulation

So far only the state of New York has issued any kind of regulation specifically regarding cryptocurrencies: the BitLicense. The BitLicense is New York’s attempt to control cryptocurrencies within its borders by requiring cryptocurrency businesses to register and comply with several different disclosure and financial obligations. The regulation has been divisive, and many businesses have rallied against its high costs. While a few companies have applied for and received the license, most other companies have simply left the state or stopped offering services to its residents.

Regulation Abroad – The Ever-Shifting Jurisdictional Question

The United States is not the only country grappling with how best to regulate cryptocurrencies. Many cryptocurrency businesses face daunting questions regarding in which jurisdictions to form and to do business in. In the end, the question is quite difficult and fact-specific, requiring communication between legal counsel in different jurisdictions and taking into account nebulous and piecemeal country-by-country regulations. It is impossible to do a detailed analysis without knowing how a country’s existing securities laws, financial regulations, and banking regulations will operate (or will be adapted to operate) with cryptocurrencies. The fact that cryptocurrency-specific regulations are still developing does little to add clarity, and makes the analysis even more challenging. Yet a few global trends are noticeable:

Suspending Cryptocurrencies

Some notable countries, like China, and South Korea, have suspended cryptocurrencies. These countries have cited the risk of fraud and the lack of adequate oversight in suspending cryptocurrencies and their exchanges, forcing cryptocurrency companies and exchanges to relocate.

Regulating Cryptocurrencies

Other countries, like Japan and Australia, have adopted disclosure and regulatory measures, or have companies register with the applicable government authority. Several countries have also tried to implement disclosure or registration regulatory regimes when it comes to cryptocurrencies, but such regimes are cumbersome and expensive to fledging companies.

Cryptocurrencies as Commodities

On the other hand, Switzerland and Singapore, two of the countries at the forefront of the cryptocurrency market, have simply stated that cryptocurrencies are assets not currency, and that they will treat them as such under existing regulations.

Conclusion

Ultimately, cryptocurrency regulation remains in its infancy. Piecemeal regulation has already begun around the world as governments enact new regulations to control and legitimize cryptocurrencies, fold cryptocurrencies into existing regulations, or ban them outright. These splintered attempts at controlling a global phenomenon will keep the cryptocurrency market volatile, and pose a challenge to innovators, investors, and users. They will continue to work in the cryptocurrency space while pushing for legislation and regulation that will remove ambiguity and legitimize cryptocurrencies. At the same time, they must grapple with the possibility that new regulations may be confusing, detrimental, or have negative inadvertent effects.


Written by Gary Ross

This article was originally published on UpCounsel.

Experienced corporate & securities attorney eager to help you and your business reach its goals. My services range from fund formation and capital raising (e.g. Reg D offerings, crowdfunding) to contract negotiation and compliance with securities and other regulations. I have extensive experience with cryptocurrency and non-U.S. companies.

Prior to co-founding my firm, I worked in the law firms of Sidley Austin, Alston & Bird, and Holland & Knight. From 2009 to 2012, I served in the U.S. Department of the Treasury, where I oversaw financial agents engaged by Treasury to provide asset management and other services relating to the Troubled Asset Relief Program (TARP).


Featured Image Credits: Pixabay

 

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