Tag Archives: Electronic money

Everyone Who Believes In Bitcoin Should Try To Answer This Question

scales of justice

Economist Brad DeLong poses a great question about Bitcoin:

Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).

Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?

Bitcoin bulls will usually respond with something like “cryptography” or “technology” or something like that, but these aren’t really satisfying answers.

Paul Krugman explains why:

I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.

There’s a good case to be made that Bitcoin is impressive technology for payments, but why a Bitcoin itself should be something of value is not easily answered. This isn’t damning to Bitcoin but it is problematic, and those with a big belief in the durability of the digital currency (or other digital currencies) should try to think it through. One way to think about it is not that the value of a Bitcoin has value per se, but that the network of Bitcoin speculators (people willing to trade them) provide a service of value to people who want to use Bitcoins as a product.

In other words, there’s a set of people who want to use Bitcoins for transactions (like people who want to get money out of China) and they rely on the set of people that is willing to take risk and swap Bitcoins for real currency and those two groups are distinct and symbiotic. That’s kind of the conclusion I worked towards in a post earlier this month. That’s still not 100% satisfying though, in part because there’s nothing guaranteeing that people will stay interested in trading Bitcoins (that’s not the case with real currency… by law there are people that have to hold US dollars).

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Richard Branson will trade you space travel for bitcoins

Richard Branson will trade you space travel for bitcoins

Richard Branson

Billionaire Richard Branson’s space tourism ventureVirgin Galactic now accepts Bitcoin, CNBC reported.

Apparently, the billionaire founder of the Virgin Group has sold a ticket to space to an early Bitcoin investor for $250,000 worth of the volatile digital currency. The woman was apparently a flight attendant who, in Branson’s words, made “quite lot of money getting into bitcoin early on.”

So here’s a sentence to read twice: A flight attendant bought a quarter-million-dollar ticket to space from a private-island-owning billionaire using a digital currency prone to weekly price swings of up to 80 percent.

Reality check. First off, these tickets to space are to suborbital space, which is nothing to scoff at, but it’s not the moon either. Second, lest we ratchet up our galactic expectations, none of these commercial space flights have actually happened yet. Third, Branson cashed in the Bitcoin immediately after the transaction, which makes the transaction more akin to a digital PayPal payment than an embrace of the new Fed-less currency.

So why the spin?

Who knows. But for one thing, Branson himself is an early investor in Bitcoin. One of the major criticisms of the currency is that few businesses actually accept it. In fact, most bitcoins—64 percent—aren’t spent at all, they just sit in wallets as their owners, including Branson, hope they will appreciate. In “accepting” bitcoins, Branson makes them seem like a viable form of payment, which will no doubt cause more people to buy them. And the more investors there are scooping up the coins, the fewer there will be on the market, causing demand—and thus the value of bitcoins—to rise.

Of course, the flip side of this strategy is that by cashing them in immediately, Virgin Galactic is not only showing that it doesn’t actually have all that much bottom-line faith in the currency, it’s also putting more Bitcoins back on the market which, on a large enough scale, causes their value to drop.

That said, it’s unlikely the billionaire takes all that much time away from his space entrepreneurship to sit on his private island and mull over how to game the Bitcoin market. He probably just thinks it sounds cool to trade space tickets for an Internet currency. And, of course, it does.

U.S. Government Nastygram Shuts Down One-Man Bitcoin Mint

Mike Caldwell spent years turning digital currency into physical coins. That may sound like a paradox. But it’s true. He takes bitcoins — the world’s most popular digital currency — and then he mints them here in the physical world. If you added up all the bitcoins Caldwell has minted on behalf his customers, they would be worth about $82 million.

Basically, these physical bitcoins are novelty items. But by moving the digital currency into the physical realm, he also prevents hackers from stealing the stuff via an online attack. Or at least he did. His run as the premiere bitcoin minter may be at an end. Caldwell has been put on notice by the feds.

Just before Thanksgiving, he says, he received a letter from the Financial Crimes Enforcement Network, or FINCEN, the arm of the Treasury Department that dictates how the nation’s anti-money-laundering and financial crime regulations are interpreted. According to FINCEN, Caldwell needs to rethink his business. “They considered my activity to be money transmitting,” Caldwell says. And if you want to transmit money, you must first jump through a lot of state and federal regulatory hoops Caldwell hasn’t jumped through.

Because the process is so complicated, Caldwell has stopped taking orders for his popular Casascius bitcoins — which have become one of the most recognizable images of the thoroughly intangible digital currency. In recent months, the feds have cracked down on many other bitcoin operations in similar ways, including Mt. Gox, the most prominent online bitcoin exchange. But Caldwell’s case is a little different. He doesn’t think he transmits money.

Caldwell doesn’t accept U.S. dollars or any type of fiat currency. You send him bitcoins via the internet, and he sends you back metal coins via the U.S. Postal Service. To spend bitcoins, you need a secret digital key — a string of numbers and letters — and when Caldwell makes the coins, he hides this key behind a tamper-resistant strip.

So long as you can keep your Casascius bitcoins safe, nobody can learn the key. To date, Caldwell has minted nearly 90,000 bitcoins in various denominations. That’s worth about $82 million at today’s exchange rate.

Caldwell takes a fee of about $50 on each coin he mints, but he argues that sending the coins through the mail is not a way of transmitting money. He thinks the coins should be viewed as collectibles.

But, clearly, that’s not how the federal government sees things. If he doesn’t verify or have a way of knowing whether the owner of the bitcoins is the same person he’s sending the coins to, that’s a problem, says Faisal Islam, the director of compliance advisory services with Centra Payments Solutions, a company that advises corporations on financial compliance.

Running afoul of FINCEN is a risky proposition. In the spring, the Department of Homeland Security seized two bank accounts belonging to Mt. Gox. The reasoning behind the $5 million seizure: Mt. Gox, like Caldwell, hadn’t registered itself as a money transmission business. FINCEN did not return a message left by WIRED on Wednesday, but according to the letter it sent to Caldwell, dated Nov. 15, the agency believes that Caldwell’s business is a “money services business,” that must be registered with FINCEN.

Because he runs a bitcoin-only business, Caldwell says there’s no Casascius bank account for authorities to seize. But he adds that he has no desire to anger the feds, whether he agrees with them or not. So he’s cranking out his last few orders and talking to his lawyer. He says this may spell the end of Casascius coins. “It’s possible. I haven’t come to a final conclusion,” he says.

Caldwell isn’t the only person who makes physical versions of bitcoins. You can also buy bitcoins that look like dollar bills or tickets or even other types of metal coins similar to Casascius.

Noah Luis, another virtual currency coin-maker who produces metal litecoins as well as bitcoins, says he has talked to Caldwell and is carefully watching his case. Luis and his company, Lealana, isn’t registered as a money services provider — like Caldwell, he doesn’t believe that swapping bitcoins for bitcoins qualifies — but he says he’d probably follow Caldwell’s lead if he receives a similar letter. “I’d probably stop production and sales, just to be safe,” he says.

Minting digital currency has been lucrative for Caldwell, but it’s not without its stresses. For one thing, as the value of bitcoins has soared, the value of Caldwell’s inventory has gone up too, making theft and fraud a bigger concern. “When the coins are worth $1,000 apiece, that’s a ridiculous amount of money,” he says. They might be worth even more now, as collectibles, should Caldwell get out of the business.

On Monday, someone forwarded him a photograph of tamper-resistant hologram labels made to look like the ones used on Casascius bitcoins. They were fakes. But now Caldwell is worried that someone may be out there counterfeiting his bitcoins.

And with his operations suspended, Caldwell is going to be taking a revenue hit, just as the holidays approach. He wouldn’t say how much he has made from his bitcoin business, but things really took off in 2013, he says. “It’s good money, but I went and spent $5,000 in lawyer bills in two weeks.”

Paper money is unfit for a world of high crime and low inflation

U.S. Currency Production At The Bureau of Engraving and Printing

Abolishing physical currency would achieve two valuable objectives, writes Kenneth Rogoff

Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes? Getting rid of physical currency and replacing it with electronic money would kill two birds with one stone.

First, it would eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash. Second, phasing out currency would address the concern that a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.

Yes, there are some important arguments in favour of the status quo. These include a likely loss of seigniorage revenue – the profit central banks make by printing money – even if anonymous paper currency is replaced with purportedly anonymous electronic government currency.

Even though central bank “profits” are turned over to national treasuries, the ability to skim off expenses without having to beg can help insulate central banks from political pressures. But the real costs to governments would be much less than the loss of seigniorage revenues might indicate, because they would gain revenue by making tax evasion more difficult. There would also be savings from crime reduction.

Another issue is that society may want to preserve the right for individuals to make anonymous payments in certain activities, even if it is desirable to strip away the cloak of anonymity from those engaged in tax evasion and crime. Anonymity, for example, facilitates experimentation at the fringes of society with activities that might ultimately become legal (buying marijuana, for instance).

The idea of finding creative ways to get around the zero bound on interest rates has been championed for more than a decade by Willem Buiter, a former UK Monetary Policy Committee member. Phasing out paper currency is by far the simplest. With electronic payments mechanisms becoming increasingly prevalent even in small transactions, and with the supply of paper currency overwhelmingly top-heavy with large-denomination notes, the case for keeping the currency status quo has weakened.

Without going into gory detail, in both the eurozone and the US there is roughly $4,000 in circulation for every man, woman and child, and it is not easy to find. In Japan the figure is almost double that. In the US and Japan, more than 75 per cent of currency is held in the largest denomination notes, the $100 bill and the Y10,000 note. The situation in the eurozone is different only in that there is a larger range of high-denomination notes going all the way to €500, but the basic point is similar.

In arresting Mexican drugs lord Joaquín ‘El Chapo’ Guzmán, authorities found more than $200m in cash – and this was not a first

True, it is likely that a significant share – perhaps half – of dollars and euros circulates internationally. Some portion of this is surely abetting illegal activity and tax evasion. (In arresting Joaquín “El Chapo” Guzmán, the Mexican drug lord, two months ago, authorities found a room containing more than $200m, and this was not a first.) Then again, dollars and euros, including large-denomination notes, are also used for legal purposes. Even so, there still appears to be a very large share circulating in domestic underground economies, estimated to be at least 7-8 per cent of gross domestic product for the USand considerably higher for Europe.

Of course, if governments could credibly issue an anonymous electronic currency, the problem of the zero bound would still be solved and central banks could keep pushing their product. Even if this outcome is feasible, however, it is hardly desirable. Note that if governments do stop issuing anonymous currency, then they would probably have to ensure that the private sector did not proffer a Bitcoin-like substitute. Otherwise, illegal activities would proceed unabated, and the government would forfeit even the small inflation tax revenue it gets now. Finally, a shift away from anonymous paper currency would ideally involve co-operation among governments.

Perhaps the right place to begin is by phasing out large denomination notes. This might be enough to accomplish the main objectives. It is time to consider whether paper currency is vestigial, or worse.

Bitcoins Have Never Been More Valuable Than Right Now

Bitcoins Have Never Been More Valuable Than Right Now

bitcoin

NEW YORK, Nov 27 (Reuters) – The price of the digital currency bitcoin soared above $1,000 for the first time on Wednesday, extending a surge this month after a U.S. Senate hearing on virtual currencies.

Bitcoin hit a high of $1,073 on Tokyo-based exchange Mt. Gox, the best-known operator of a bitcoin digital marketplace, compared with just below $900 the previous day.

Bitcoin Exchanges Shut Down in India After Government Warning

Bitcoin is once again feeling the squeeze from government regulators. This time, the crunch comes in India, where multiple online exchanges have suspended operations following a warning against the digital currency from the country’s central bank and, according to a local report, authorities have raided the home of the man who oversaw the largest of these exchanges.

Coming little more than a week after the Chinese government launched its own crackdown on Bitcoin exchanges, the news bathes the world’s most popular digital currency in an unflattering light, but these are the expected growing pains for a technology that is still less than five years old.

As first reported by The Hindu, India’s largest Bitcoin exchange, BuySellBitCo.in, a site where you could trade the popular digital currency for government monies, shut down on Thursday, two days after the Reserve Bank of India issued a public advisory detailing the risks of using Bitcoin and other digital currencies. Soon, other exchanges, such as INBRTC, followed suit.

“We are suspending buy and sell operations until we can outline a clearer framework with which to work,” reads a notice on the BuySellBitCo.in site. “This is being done to protect the interest of our customer.”

Following the shutdown, another local news outlet, DNA India, reported that the local Enforcement Directorate, or ED, had raided the home of BuySellBitCo.in operator Mahim Gupta in Ahmedabad. According to the story, the site may have violated local banking regulations by transmitting money across borders.

Though Bitcoin exchanges have thrived in some countries, they’ve had a tough time in others after failing to conform with the letter of the law. Most notably, the Tokyo-based Mt. Gox — traditionally the largest of the Bitcoin exchanges — has had a rough ride over past year, with the U.S. government seizing $5 million from its bank accounts, claiming it was operating a money transmission business without properly registering with federal and state authorities. Since then, the company has had trouble moving money to its customers here in the U.S.

The trouble is that so many Bitcoin operations are run by people with more expertise in computing than finance. But a new wave of Bitcoiners are now building businesses on firmer footing.

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