submitted 8 days ago by whitslack
There is a schism coming in Bitcoin, due to bureaucratic overreach such as we're now seeing from NYDFS. This schism will not manifest as a fork in the block chain, but we are going to see two classes of bitcoins emerge, differing only in color. We'll have white bitcoins and black bitcoins. Both will exist on the same block chain and will move on the same P2P network, but they won't be interchangeable.
The "white" bitcoins will be those held at addresses for which personally identifying information has been registered in a state-mandated database. Bitcoins held at licensed depository institutions will be white bitcoins, as will all bitcoins moving through licensed payment processors (e.g., BitPay, Coinbase, etc.).
The "black" bitcoins will be all the rest — those held at addresses for which no identity information has been entered into the state's registry. Almost all bitcoins today are black bitcoins, but this will change. There will be incentives for converting black bitcoins into white bitcoins. The opposite conversion will be illegal.
What do I mean by converting? Well, converting black bitcoins into white bitcoins will be easy: just register your bitcoin addresses with the state, either by directly submitting your addresses and identifying information to the government or by importing your private keys into your account at a licensed depository institution.
Converting back the other way (from white bitcoins to black) will be tricky at best and practically impossible for most. The catch is that white-market businesses will be forbidden by law from receiving black bitcoins and from sending white bitcoins to unregistered addresses. Since the block chain is public, the regulators will be able to monitor for violations of this law and will prosecute companies and individuals who break it.
What this means is that there will be two incompatible classes of bitcoins. White-market businesses will not be able to accept black bitcoins; they'll be required to bounce any received black bitcoins back to the sender. Also, they will not be allowed to send bitcoins to unregistered addresses.
Black-market businesses and individuals (i.e., those operating outside the law — not necessarily immorally) will not be able to trade with white-market businesses and individuals. This will cut them off from a large part of the market. They will be under a strong incentive to convert their black bitcoins to white (necessarily paying any taxes due at the time of registration), just so they can do business in the white market.
Once a black bitcoin is converted to white, making it black again won't be legally possible. For this reason, the supply of white bitcoins will grow, and the supply of black bitcoins will shrink. As long as the demand for black bitcoins (for purposes such as use on anonymous online marketplaces) remains strong, there will develop a disparity in price between white bitcoins and black bitcoins. Black bitcoins will have fewer everyday uses but will become much more highly valued than white bitcoins. Black bitcoins will be the only bitcoins with which anonymous transactions will be possible.
The only way for white bitcoins to become black bitcoins will be through theft from white-market institutions. Regulators will shut down such an institution upon observing the theft (which will appear as a movement of bitcoins from registered addresses to unregistered addresses), but in many cases the theft itself would have doomed the institution to failure anyway.
There will be a great incentive for criminals to steal white bitcoins (thereby converting them into black bitcoins) because black bitcoins will be worth so much more. It'll be like an instant multiplier on whatever the thieves can take. Of course, subsequently converting the black bitcoins back into white bitcoins will incur a tax, which will sap the added value back out of them, but if the thieves are smart, they will trade the stolen (black) bitcoins for goods and services on the black market where they can get the most bang for their bit.
TL;DR: If you have the option, don't register your bitcoins. Keep your bitcoins "black." They'll be worth more in the future than if you color them white.