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    Why Bitcoin May One Day Split Into Black and White Coins

    Written by

    Alyssa Hertig

    Image: Shutterstock

    Rumors are swirling that as governments move to integrate and legitimize bitcoin, it could have a divisive and lasting effect on the virtual payment system. Forcing regulations on bitcoin could divide the digital currency into two camps: coins that are regulated and managed by a government or central agency, and coins that remain pseudonymous and decentralized. White coins and black coins.

    That future forecast was discussed last week in a Reddit threat on r/bitcoin, shortly after New York became the first state to draft proposed rules establish a regulatory framework for the virtual currency.

    “We are going to see two classes of bitcoins emerge, differing only in color,” wrote the original Reddit poster. “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.” 

    That doesn’t mean literal "color" of course, but rather using color as an indication of how secure and anonymous the coins are. The white coins would be currency that's circulated through the regulated system; black coins would be coins still off the authorities' radar.

    Already the crypto community has been slowly dividing between bitcoiners pushing for mainstream adoption and those that want to honor bitcoin’s cyberpunk, anti-establishment roots. A white and black coin dichotomy would be the ultimate expression of this ideological divergence.

    Both camps are likely to be watching New York carefully, as the finance hub could become something of a boilerplate model for other states. New York’s proposed “BitLicense,” rules for how businesses should incorporate bitcoin, released last week, would ostensibly purge illicit bitcoin-driven activity and security problems to attract venture capitalists that were previously hesitant to invest in the volatile technology. A “sanitized” bitcoin could finally appeal to the masses, advocates claim.

    But others argue that as it stands, the strict rules could wind up choking bitcoin startups throughout the state, and set a dangerous precedent. At issue is the existing “know your customer” (KYC) laws. Under these regulations, services must keep all customers' physical addresses and identifying information. Third-party bitcoin platforms like Coinbase and BitPay already comply with these requirements.

    But BitLicense takes it one step further, requiring that companies also keep identity records of parties their customers sell bitcoins to, or buy bitcoins from. In other words, it would effectively mean customers can't do business with anyone unless the government knows who it is.

    This raises a host of concerns, from the associated cost of compliance to financial surveillance. It’s given rise to the fear that these stringent conditions would produce two classes of coins: those used by regulated institutions, adhering to de-anonymizing rules, and those that continue to operate in the crypto Wild West.

    And once the currency is integrated into the regulated system, it would be difficult, if not impossible, to get out. White coins would be tied to institutions that require identifying information. Law enforcement could ask to know where the bitcoins are headed and where they come from. They'd bounce around inside these verified institutions, but would have no means of escape.  

    As the Reddit poster speculated: “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.”

    Black coins would be the remaining bitcoins that don't fall into this loop—the unregistered coins operating free outside the system. As the theory goes, these black coins would be harder to maintain and more versatile to use, and could grow more valuable than their traditional counterparts over time.

    Meanwhile, if a schismatic white-black paradigm does emerge, it could place a burden on young bitcoin startups, many pundits anticipate. Or even destroy the ease of financial transactions, a big incentive to use digital currency in the first place.  

    This discussion about a bitcoin split actually kicked off long before the BitLicense draft release. When Coin Validation launched late last year to to help bitcoin companies achieve regulatory compliance, people expressed similar concerns that it would effectively whitelist certain addresses, making some bitcoins more equal than others.

    But it's still speculation, and what will happen next is very much up in the air. For one, none of the proposed regulations have been implemented yet, and for this kind of schism to occur, a specific set of regulations would need to prevail on a large scale. Some diehards, commenting in the Reddit thread, doubt it would ever be possible to track and keep a centralized database of bitcoin user identities at all. Others pointed out that if bitcoin gets usurped by the establishment, people will simply turn to altcoins to assure anonymity and decentralization and for cryptocurrency’s less above-board uses.

    It's interesting to ponder though, as countries and towns around the world hesitantly hover over the next-generation currency. As the authorities attempt step in, the fate of the currency lauded for being stateless and decentralized could rest in the hands of the government—or the people trying to avoid it.