Could Eroding Net Neutrality Hurt Bitcoin?

by: CoinDesk

By Danny Bradbury

Bitcoin is a payment mechanism designed to level the playing field, driving out unnecessary costs and making it possible for even the lowest income members of society to participate in the economy. But it relies on a free and open Internet to do so.

In the U.S., the rules governing Internet access are changing, threatening net neutrality -- the principle that lets everyone use the Internet in the same way. Where would that leave bitcoin and other cryptocurrencies?

It helps to think of the Internet like a giant switched city road system, with packets of information traveling along it from different sources. The roads have a finite capacity, so digital traffic lights must switch the traffic, enabling everyone's packets to get through at roughly the same rate. Net neutrality principles keep everyone's packets whizzing through the network with the same priority.

"But," say telecommunications companies, "we built those digital roads, and the likes of Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) are using them to make money for themselves. How about we charge some companies for the right to get their packets through ahead of others?"

It seems to make economic sense -- unless you're one of the companies providing those services, or one of the people using them. Unless those deals are cut for your online services, you might find them slowing down because other traffic is prioritized. But if the deal is cut, someone has to pay those extra costs.

That's not fair, say net neutrality advocates, some of whom would like the Internet to be regulated as common carriers, in a category known as Title II. This would force them to act in the public interest, making it impossible for them to cut backroom deals with content providers.

New rules

That kind of regulation doesn't appear likely now. The Federal Communications Commission (FCC) lost a battle with Verizon earlier this year -- and with it, the right to stop ISPs from throttling others' traffic. Instead, the agency (now incidentally headed by former telco industry lobbyist Tom Wheeler) promised to introduce new rules that would once again prevent ISPs from throttling traffic. It is in a 120-day public consulting period on that right now.

But those rules may still allow ISPs and content providers to cut deals to make each others' traffic faster in exchange for payment. This angered net neutrality advocates, who saw it as a way to push a two-tier system through the back door. It angered congresspeople too, a few of whom launched a bill this month to try and preserve net neutrality.

But what does all this have to do with bitcoin? Not much, if you listen to cryptocurrency software engineers. Potentially lots, if you listen to businesspeople and lawyers.

Net neutrality and bitcoin

Bitcoin developer Mike Hearn waves away suggestions that a system allowing ISPs to discriminate between different kinds of internet traffic could be used to throttle bitcoin:

Of course, it's technically possible. Bitcoin does not try to hide its network traffic. But I do not think ISPs have any interest in doing so, as there's no 'Bitcoin, Inc.' that they could try to ransom. Besides, bitcoin doesn't need much bandwidth the way most regular end users run it.

But Marvin Ammori, a first amendment lawyer and Internet policy expert at Stanford Law School's Center for Internet and Society, warns that there could be problems ahead for payment systems like bitcoin.

If you need to pay AT&T, Comcast, etc for quality of service (the 'fast lane'), you might end paying per transaction or a percentage of revenue and you have to pass on those costs.

That means that paying AT&T etc adds transaction fees where the bitcoin network and cryptocurrency would have otherwise eliminated it.

Ammori, who studies net neutrality policy closely, is a strong advocate. Today, he filed a letter with the FCC on behalf of mobile payment firm Dwolla, the Internet payment processor that shuttered its bitcoin business in November.

The letter warns that the proposed rules could scupper payments by harming competition and innovation, and by making it more difficult to conduct real-time fraud detection.

"When it comes to payments, net neutrality represents a powerful equalizer for small businesses that do not have the volume or frequency to negotiate reduced interchange fees with payment processors," says the Dowalla letter.

Without neutral access to the Internet, such businesses would face higher costs or competitive disadvantages in reaching users, and therefore might not even be in a position to take advantage of low ­cost payment processing.

This isn't the only letter complaining about the possible effect of a "non-neutral" Internet on payments. Ammori also points to a letter, signed by what looks like half of the US tech venture capitalist community, warning the FCC of a chilling effect on innovation if net neutrality were to be threatened.

We've been here before

Nick Grossman, a partner at Union Square Ventures with several bitcoin firms in his portfolio, warns that this kind of thing has happened at the time.

'We've seen cases where ISPs have historically degraded and blocked service for certain protocols (bittorrent) and services (Google Wallet), so bitcoin is certainly in the realm of technologies that could be threatened if ISPs are able to block and degrade technologies at will,' he muses.

He's referring to December 2011, when AT&T Wireless, Verizon Wireless, and T-Mobile (NASDAQ:TMUS) all blocked Google Wallet from reaching subscribers. They were also, coincidentally, developing a mobile payment service of their own, called ISIS. There may not be a "Bitcoin, Inc." for ISPs to go up against, but it is possible that under the right legal conditions, they could use a non-neutral Internet to protect their own interests.

How could the bitcoin network protect itself against disruption from incumbent ISPs? The Bitcoin Foundation's chief scientist Gavin Andresen thinks that it could all be done in software.

"I don't worry about net neutrality. Bitcoin runs nicely inside Tor and other censorship-resistant networking technologies," Andresen says.

If some governments or ISPs did decide to try to censor crypto-currency network traffic I'm sure we'd see pull requests to make running over Tor or I2P even easier than it is today.

Hearn is already building Tor-style support into BitcoinJ, the Java implementation of bitcoin.

Routing around censorship

Another option might be to create an alternate network, providing a different physical layer altogether for sending packets to and from bitcoin users. Jeff Garzik's BitSat network, currently under development, could be one solution. The network, which will see tiny cubesats in orbit, can distribute an accurate version of block chain data to notes on the ground, although this is really designed to protect against Sibyl attacks, and other attempts to disrupt the integrity of the block chain on the ground.

The Bitcoin Card, proposed by the team behind the Mycelium wallet, was originally to have included wireless meshed networking, enabling bitcoin users to communicate with each other directly. However, this would require a critical mass of users, and the blog for the project hasn't been updated since mid-2013.

Other alternate networking concepts include the FreedomBox, an attempt to facilitate private, secure networking via the use of a hardware box installed residentially. There are also some community networks, which provide networking links to local communities using open wireless links and optical fibre. Guifi.net is a good example of a community network.

These networks would still have to use an upstream provider that was sympathetic to net neutrality, but these do exist. Guifi connects directly to an Internet peering point, the Catalunya Neutral Internet Exchange Point (CATNIX).

Such alternative networking initiatives seem far-fetched, however, in a world dominated by the likes of Comcast and Verizon. Building up community meshed networks is an ad hoc process, requiring significant critical mass to be effective.

Still, according to some, the erosion of net neutrality is a clear and present threat for payment systems like bitcoin. Alexis Ohanian, a co-founder of reddit and east coast ambassador at San Francisco-based incubator Y Combinator, is an activist for open Internet causes.

"Payment systems need speed. And bitcoin in particular needs low transaction costs. My chief concern is that without Title II reclassification, ISPs either crush competitors or impose a tax on all online transactions that'd upset even Walmart and Target," he says.

"Given all the innovation we're watching (and investing in) around cryptocurrencies and the future of payments, the free market should pick the winners and losers," he concludes. "Not cable companies."

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Disclosure: None.