Saturday, October 31, 2009

The New Cryptography Behind Anonymous Digital Cash

By Jon Matonis

In the prolonged adoption of a true digital currency, it is the political and central banking implications that have become the real barriers, not the growing availability of privacy-enhancing encryption protocols. Governments and monetary authorities have aggressively beaten down any sprouting online currency innovations that actually attain market share and critical mass.

Witness the federal government's concerted effort against e-gold which, at its peak, equaled one-third of the transactional value of PayPal, but allowed for anonymous account ledger transfers. Obviously, it threatens the State's monopoly of issuance, not to mention their eroding power of taxation. So, the world waits patiently for a business model that will deploy the work of mathematicians and cryptographers in the online monetary realm.

Cryptographers routinely assemble around the world to present various theories and protocols that will allow a digital currency unit to emulate the privacy features of a $100 bill. An understanding of these ongoing protocol debates and a partnership between entrepreneurs, scientists, and economists will advance the theoretical field of digital cash towards implementation.

The burgeoning field of applied cryptography drives the mathematical science that makes digital anonymous value, and its transfer, possible. Culled from the leading cryptography conferences and focusing on the anonymous, untraceable digital cash protocols, this overview is a comprehensive summary of the scientific papers that have been advanced in the Chaumian tradition since 1990 (see David Chaum, Amos Fiat, Moni Naor, "Untraceable Electronic Cash," Advances in Cryptology - CRYPTO '88, LNCS 403, pp. 319-327, 1990).

The following articles represent works in the fields of online anonymity, transaction untraceability, coin divisibility, double spending, offline convertibility, and blind signatures. For additional research, Cryptographer's World is an excellent resource for cryptography and its authors. In many of the academic citations below, an abstract and the full article text will be available via the link provided, in reverse chronological order:

Academic Papers 2000-2009

Shaghayegh Bakhtiari, Ahmad Baraani, Mohammad-Reza Khayyambashi, "MobiCash: A New Anonymous Mobile Payment System Implemented by Elliptic Curve Cryptography," csie, vol. 3, pp.286-290, 2009 WRI World Congress on Computer Science and Information Engineering, 2009

Aline Gouget, "Recent Advances in Electronic Cash Design," CARDIS 2008, LNCS 5189, pp. 290-293, Smart Card Research and Advanced Applications 8th International Federation for Information Processing Conference, London, UK, September 8-11, 2008

Shangping Wang, Zhiqiang Chen, Xiaofeng Wang, "A New Certificateless Electronic Cash Scheme with Multiple Banks Based on Group Signatures," isecs, pp.362-366, 2008 International Symposium on Electronic Commerce and Security, 2008

Man Ho Au, Willy Susilo, Yi Mu, "Practical Anonymous Divisible E-Cash from Bounded Accumulators," FC 2008, LNCS 5143, pp. 287-301, Financial Cryptography and Data Security 12th International Conference, Cozumel, Mexico, January 28-31, 2008

Sebastien Canard, Aline Gouget, Jacques Traore, "Improvement of Efficiency in (Unconditional) Anonymous Transferable E-Cash," FC 2008, LNCS 5143, pp. 202-214, Financial Cryptography and Data Security 12th International Conference, Cozumel, Mexico, January 28-31, 2008

Debasish Jena, Sanjay Kumar Jena, Banshidhar Majhi, "A Novel Blind Signature Scheme Based on Nyberg-Rueppel Signature Scheme and Applying in Off-Line Digital Cash," icit, pp.19-22, 10th International Conference on Information Technology (ICIT 2007), 2007

Ling Zhang, Jian ping Yin, Yu bin Zhan, "An Anonymous Digital Cash and Fair Payment Protocol Utilizing Smart Card in Mobile Environments," gccw, pp.335-340, Fifth International Conference on Grid and Cooperative Computing Workshops, 2006

Chun-I Fan, Yu-Kuang Liang, Bo-Wei Lin, "Fair Transaction Protocols Based on Electronic Cash," pdcat, pp.383-388, Seventh International Conference on Parallel and Distributed Computing, Applications and Technologies (PDCAT'06), 2006

Yoshikazu Hanatani, Yuichi Komano, Kazuo Ohta, Noboru Kunihiro, "Provably Secure Electronic Cash Based on Blind Multisignature Schemes," FC 2006, LNCS 4107, pp. 236-250, Financial Cryptography and Data Security 10th International Conference, Anguilla, British West Indies, February 27-March 2, 2006

Hyun Ju Lee, Mun Suk Choi, Chung Sei Rhee, "Traceability of Double Spending in Secure Electronic Cash System," iccnmc, pp.330, 2003 International Conference on Computer Networks and Mobile Computing (ICCNMC'03), 2003

L. Jean Camp, "An Atomicity-Generating Protocol for Anonymous Currencies," IEEE Transactions on Software Engineering, vol. 27, no. 3, pp. 272-278, Mar. 2001

Moses Liskov, Silvio Micali, "Amortized E-Cash," FC 2001, LNCS 2339, pp. 1-20, Financial Cryptography and Data Security 5th International Conference, Grand Cayman, British West Indies, February 19–22, 2001

H. Wang, Y. Zhang, "Untraceable Off-Line Electronic Cash Flow in E-Commerce," acsc, pp.191, Australasian Computer Science Conference (ACSC '01), 2001

Hua Wang, Yanchun Zhang, "A Protocol for Untraceable Electronic Cash," WAIM 2000, LNCS 1846, pp. 189-197, Web-Age Information Management First International Conference, Shanghai, China, June 21–23, 2000

Academic Papers 1990-1999

Tomas Sander, Amnon Ta-Shma, "On Anonymous Electronic Cash and Crime," ISW'99, LNCS 1729, pp. 202-206, Second International Workshop, ISW’99, Kuala Lumpur, Malaysia, November 6-7, 1999

Tim Ebringer, Peter Thorne, "Engineering an eCash System," ISW'99, LNCS 1729, pp. 32-36, Second International Workshop, ISW’99, Kuala Lumpur, Malaysia, November 6-7, 1999

Shingo Miyazaki, Kouichi Sakurai, "A More Efficient Untraceable E-Cash System with Partially Blind Signatures Based on the Discrete Logarithm Problem," FC 1998, LNCS 1465, pp. 296-308, Financial Cryptography and Data Security Second International Conference, Anguilla, British West Indies, February 23–25, 1998

Markus Jakobsson, Ari Juels, "X-Cash: Executable Digital Cash," FC 1998, LNCS 1465, pp. 16-27, Financial Cryptography and Data Security Second International Conference, Anguilla, British West Indies, February 23–25, 1998

J. Orlin Grabbe, "Stefan Brands' System of Digital Cash," 1997

J. Orlin Grabbe, "Cryptography and Number Theory for Digital Cash," October 10, 1997

Khanh Quoc Nguyen, Yi Mu, Vijay Varadharajan, "A New Digital Cash Scheme Based on Blind Nyberg-Rueppel Digital Signature," ISW'97, LNCS 1396, pp. 313-320, Information Security First International Workshop, Tatsunokuchi, Ishikawa, Japan, September 17–19, 1997

Stig F. Mjølsnes, Rolf Michelsen, "Open Transnational System for Digital Currency Payments," hicss, vol. 5, pp.198, 30th Hawaii International Conference on System Sciences (HICSS) Volume 5: Advanced Technology Track, 1997

Osamu Watanabe, Osamu Yamashita, "An Improvement of the Digital Cash Protocol of Okamoto and Ohta," Algorithms and Computation, 7th International Symposium, ISAAC '96 Osaka, Japan, December 16–18, 1996

Daniel R. Simon, "Anonymous Communication and Anonymous Cash," CRYPTO ’96, LNCS 1109, pp. 61-73, Advances in Cryptology — CRYPTO ’96 16th Annual International Cryptology Conference, Santa Barbara, California, USA, August 18–22, 1996

Hua Yu, Zhongtao Wang, "Final Report on Anonymous Digital Cash," 1995

Tatsuaki Okamoto, "An Efficient Divisible Electronic Cash Scheme," CRYPTO ’95, LNCS 963, pp. 438-451, Advances in Cryptology — CRYPT0 ’95 15th Annual International Cryptology Conference, Santa Barbara, California, USA, August 27–31, 1995

Ernie Brickell, Peter Gemmell, David Kravitz, "Trustee-Based Tracing Extensions to Anonymous Cash and the Making of Anonymous Change," Proceedings of the Sixth Annual ACM-SIAM Symposium on Discrete Algorithms, 1995

Stefan Brands, "Electronic Cash on the Internet," sndss, pp.64, 1995 Symposium on Network and Distributed System Security (SNDSS'95), 1995

Yacov Yacobi, "Efficient Electronic Money," ASIACRYPT'94, LNCS 917, pp. 151-163, Advances in Cryptology — ASIACRYPT'94 4th International Conferences on the Theory and Applications of Cryptology, Wollongong, Australia, November 28 – December 1, 1994

Tony Eng, Tatsuaki Okamoto, "Single-Term Divisible Electronic Coins," EUROCRYPT ’94, LNCS 950, pp. 306-319, Advances in Cryptology — EUROCRYPT '94 Workshop on the Theory and Application of Cryptographic Techniques Perugia, Italy, May 9–12, 1994

Stefan Brands, "Untraceable Off-line Cash in Wallet with Observers," CRYPTO ’93, LNCS 773, pp. 302-318, Advances in Cryptology — CRYPTO ’93 13th Annual International Cryptology Conference, Santa Barbara, California, USA, August 22–26, 1993

Tatsuaki Okamoto, Kazuo Ohta, "Universal Electronic Cash," Advances in Cryptology — CRYPTO ’91, LNCS 576, pp. 324-337, 1991

Barry Hayes, "Anonymous One-Time Signatures and Flexible Untraceable Electronic Cash," AUSCRYPT '90, LNCS 453, pp. 294-305, Advances in Cryptology — AUSCRYPT '90 International Conference on Cryptology, Sydney, Australia, January 8–11, 1990

This article was also published in Digital Gold Currency Magazine (December 2009).

Friday, October 30, 2009

Fekete and Hugo Price Hinder Free Market Development

By Jason Hommel
Silver Stock Report
Thursday, October 29, 2009

With "free market" advocates like these, we'll never return to honest money!

Sometimes well meaning "experts" do more harm than good.

Antal Fekete explains "free coinage of gold" -- to New Zealanders

Antal Fekete wants government to open their mints to the people, for free coinage of precious metals, to allow people to turn scrap gold, or newly mined gold, into gold coins for free.

Thus, he wants government to provide free (subsidized) services of four different businesses: assaying, refining, minting, and retail coin shops.

As he says, "the proper role of government is to provide coins for the realm".

He also wants no seigniorage nor any tax nor cost associated with such conversions. Seigniorage is the extra value of precious metal in "official" coin form.

Antal is living in a fantasy land.

Government "help" can never be free. Subsidies and bail outs always come at a cost, it's only a matter of who pays.

What's especially troubling about Antal's advocacy is that government subsidies are inconsistent with free market theory!

Since we handle three of those four services ourselves (all but refining) I think I'm qualified to speak on this topic.

Government bail outs are uneconomic, don't work, and always come at a much higher cost than when provided by businesses in a competitive free market.

Government minted Silver Eagles already cost more than privately minted 1 oz. rounds, showing that government is not providing the service better or cheaper than private industry already does.

Furthermore, the US government's current minting program sells retail "collectible" silver and gold to the public at the mint's web site, but only at extremely high prices. The mint sells cheaper bullion to about 15 major wholesalers, who then re-sell to other dealers, like ourselves, who then sell to the public. This private-industry re-sale market is more efficient, and less costly, than direct purchases from the US Mint.

Assaying gold, refining, minting, and selling retail gold coins are all businesses that involve advertising a place of business, hiring skilled employees, paying for equipment, installing security systems, and training skilled people. Also, such businesses need to know how to offset the risks of price movements in the metal such as avoiding taking a short position in a bull market, and providing these services more efficiently than the competition.

Assaying requires a skilled and trained assayer making a quick and accurate estimated value of the underlying bullion. That estimate must also include all such costs of the business, such as advertising, rent, salaries, time taken away from other customers, etc.

One time, I needed to cover a silver order, and I was talking to some customers. Due to my 10 minute delay, I lost $150, because the silver price went up.

It is simply impossible for any government or any entity to sustainably pay everyone 100% of the bullion value for their bullion. Doing so would only create another government program that is open to being scammed and defrauded, at the ultimate cost to the taxpayers.

There are simply not enough real world resources, such as fire crucibles, to give every customer an individual 100% accurate fire assay, and it would be completely uneconomic to melt a single $25 pair of earrings in a special melting pot, which could cost well over $25 in energy just to melt, if melted individually, to obtain 100% accuracy. 100% accuracy would come at a loss of efficiency, and only businesses are able to understand this, and allocate resources to most appropriately meet these real world trade offs in the most efficient way. In some cases, it might cost 100% or more to give a 100% accurate assessment, which could result in offering nothing to the customer, or costing the government everything.

We pay from between 60% to 85% of our estimated bullion value when we buy scrap gold, which is higher than all other locations that we have heard of in the Sacramento Area. The difference is explained by the amount of time it may take to do an assay, and also by the accuracy of our assays, and also by the amount brought in by the customer. If a customer can bring in over 5 ounces of gold, we are simply able to pay more. If the quality of the gold is difficult to determine such as is the case with placer nuggets, or smaller 10k-18k jewelry items, we must offer less. Scrap gold comes in many forms, with many contaminants, and refining is a real, added cost.

Refining is a separate business which must aggregate, or pool together, enough scrap or placer gold to melt them economically. Our current refiner only works with established businesses like our coin shops, who will bring in repeat business of about 30-50 oz. of scrap gold per month. Refiners operate on the slimmest of margins. A man called us this week to sell us a new $1 million dollar machine to refine gold, so we could do our own refining, instead of using our current refiner. I said, "Great, we can pay for that machine, given our current refiner's costs, in about 100 years!" At $1 million in start up, compared to our current great prices from our refiner, it's just not economic for us to try to do it ourselves!

Minting coins is a business that today requires a minimum of 10 different machines and processes. We have a pre-melt bucket, a continuous caster, a rolling mill, a slitter mill, a punching machine, a rimming machine, an annealing oven, a burnishing vat, die making machines, and stamping mills. We are looking to buy a wrapping/tubing machine. All of those machines cost money, the installation costs money, the rent costs money, employees cost money. And we are still not yet set up to mint a single thing! How can it be provided for free?

Bottom line is this: Antal's position assumes that these services should be provided by government for free, or essentially, at prices substantially less than the prices charged by existing, sustainable, competitive businesses in the free market today. Antal is thus claiming that the prices charged by businesses today are too high for his theoretically optimum scenario. It he accusing these businesses today of price gouging?

If current assaying, refining, minting, and retailing prices are really too high, then Antal should go into the market, and provide those services cheaper than industry is already providing. Go ahead Antal, start up your own scrap gold buying business if you think prices charged are too high. Nobody is stopping you. There is little government regulation, thank God, so the market is already free, and highly competitive in this area.

Many investors who could provide these services instead choose to buy mining stocks, as real business involves real work!

But Antal should not claim to be a free market advocate, while asking for government intervention and subsidy. That kind of rank hypocrisy can win no support from the public, who is sick of seeing government handouts, and can easily see they hypocrisy of a "free market" gold advocate who seeks government handouts.

The gold market does not need government welfare. We need government to get out of the gold business, and stay out.

What's especially ironic about Antal's position is that the government is already providing gold at "below market" costs, as they are dumping gold onto the market through the leasing of government central bank gold to bullion banks, who dump it into the market at opportune times, which is helping to manipulate prices lower than they should be.

In essence, Antal is already getting what he wants, that is to say, cheap gold provided on an uneconomic basis, but those of us who can see this correctly, are correctly identifying this as market manipulation, and we recognize that it is unsustainable, and is ending, which is leading to the higher gold prices we are seeing.

Another advocate of using precious metals as honest money is billionaire Hugo Salinas Price, in Mexico. Here's some of his work:


Hugo wants the Mexican Central bank to provide a price quote that would be a virtual nominal currency value for a 1 ounce silver round, a value that will never go down, just as nominal values on notes and engraved values on coins never go down. It sounds elegant at first glance. Hugo maintains that this "price floor" for a silver coin is essential for helping it circulate as currency, since money holders should not be taking on the role of speculators.

But expecting to be able to ask the Mexican central bank for a favor that works against its own interests is self-defeating. Would I ask any of my customers to shoot themselves in the foot? Of course not!

Nobody expects the dollar, or any other currency, to "never move down" compared to other currencies of the world! There might be an exception. True, China is trying to let the value of their currency "only move up" against the dollar, but this is after they already devalued their own currency by 40% against the dollar a few years ago. Such attempts are normally and appropriately called price fixing, and are widely recognized as totally contrary to free market principles.

Nobody should expect society to return to free market money by violating free market principles!

Why should silver investors, or silver holders, get a government guarantee that the nominal value of the silver coins they hold will never go down? No other investor gets such a guarantee. No other currency holder gets such a guarantee. Why should silver investors be so special?

Hugo is just another billionaire looking for a government hand out or bail out.

When silver is already the lowest valued thing on earth you can buy, value for value, why would a "price support" system even be necessary?

The problem here is that asking for government intervention hinders what Hugo could already be doing if he simply decided to do it himself.

Hugo could already mint his own 1 oz. rounds privately. He could reduce the spread if he wants, all on his own. He owns a chain of Mexican electronics stores, and he could sell 1 oz. privately minted rounds emblazoned with his own store's logo, and he could sell the coins at 10% over spot, and even accept them at up to 10% over spot, or 9% over spot, or whatever he may choose, in return for his store merchandise.

But he will never even think to develop his own plan, as long as he wastes his time and money on seeking a handout from the Mexican government. Or, as he said to me a few years ago in his own words, "It's too late in the game now to try and change tactics. I've already gotten so many on board with the current plan, I don't want to confuse anyone."

And so, his refusal to change, and his insistence on seeking government handouts, prevents the actual implementation of real world silver as money that could be issued by his own stores directly, within a few weeks!

No government is preventing Hugo Salinas Price from issuing silver as money.

No government is preventing Antal Fekete from buying scrap gold as from the public.

Both of these men are hindered only by their own hypocritical cries for government intervention.

Two warnings:

The firearms manufacturing industry, after WWII, fearing the dumping of surplus military weapons onto the market, pushed for gun restrictions, or "government protection" for their businesses, as if they didn't make enough money during the war years! Today, those gun restrictions have mutated into nearly destroying the firearms industry who has been beset with lawsuits for selling "assault" weapons.

Another story: Over 100 years ago, silver advocates pushed for a government handout. They wanted the silver price to be guaranteed to be set at a 15 to one ratio with gold. Western states wanted to be able to pay their debts with silver. This would be price fixing, completely contrary to free market theory, and would have cost the government their entire gold hoard. The compromise? Silver advocates (Democrats) lost to Republicans, who demonetized silver, and made the paying of all debts greater than $5 due in gold only. The 'gold standard' advocates ended up being the champions of the banking industry, who eventually demonetized gold as well.

Moral? Government subsidies backfire! They always do.

Yes, I advocate silver and gold to be used as money, as Hugo and Antal do. But I'm not asking for the government to do anything.

I'm doing it.

I'm using silver and gold on a daily basis. We buy scrap and sell to a refiner. We have coins minted. We sell bullion to the public.

I'm helping people to use gold and silver as a form of savings, since I sell it to them. I'm helping others liquidate it, both of which help to monetize it.

Nearly every day I explain to people why we can pay 99% of the spot price for a gold Eagle, but only 60% to 85% of the spot price for jewelry. One is fungible, the other is not. One is money, the other is not. One is similar enough to be like any other similar piece of gold as to be easily exchangeable and interchangeable. The scrap stuff is not. Scrap must be assayed, then refined, then minted, and then it can be sold in a coin shop (yes, at one more small mark up), as a stable form of money.

Warning, numismatic silver and gold items are not fungible, despite the claims of many numismatic dealers who attempt to make them fungible with quote books, and grading slabs, etc. It can cost up to $60 just to grade a silver Eagle. What a rip-off market! if you spend $300,000 on numismatic investments you "ARE" the numismatic market! It's a horrible trap.

Those who ignore the danger of non-fungible gold have to pay the price.

Asking government to pay, really just gives the government a license to steal from others to be able to pay for it. Gold and silver stand in the way of such government theft, if properly used and understood.

Besides, when silver was money in the USA, the markup on silver coinage was up to 400%. The government bought silver for 29 cents per oz., and turned it into $1.40 of coinage! ($1 of 90% silver coinage contains .72 of an oz. of silver. $1.40 x .72/oz. = 1 oz.).

So if the government gets into this game of "FREE" coinage, you will likely trade 1 oz. of scrap silver to the government, and get maybe a 1/5th of an oz. of silver back in an "official" silver piece! That's not free at all!

Jason Hommel is the publisher of Silver Stock Report and he lives in Grass Valley, CA in the heart of gold country.

For further reading:
"Forgotten Anniversary: One Hundred Years of Legal Tender", Antal Fekete, October 28, 2009
"Opening the Mint to Gold and Silver - Then and Now", Hugo Salinas Price, September 7, 2009

Thursday, October 29, 2009

Turkey to Drop Dollar in Trade with Iran, China

RIA-Novosti, Moscow
Wednesday, October 28, 2009

ANKARA, Turkey -- Turkey is switching to national currencies in trade with Iran and China, ending dependence on the U.S. dollar and the euro for about 20 percent of its commodity turnover, local media reported on Wednesday.

Turkey has already switched to settlements in national currencies with Russia amid weakening confidence in the greenback as the world's major reserve currency. The move was initiated by Turkish President Abdullah Gul during his visit to Moscow in February.

Turkey's decision to make settlements with Iran and China in national currencies was announced during a visit to Iran by Turkish Prime Minister Recep Tayyip Erdogan. The Turkish premier told a Turkish-Iranian business forum on Tuesday that the countries had prepared a legal framework for transition to settlements in national currencies.

"We have adopted a necessary legislative act and are prepared for the transition," the Turkish newspaper Milliyet quoted Erdogan as saying.

According to the paper, Turkey's trade with Russia, Iran, and China exceeds $65 billion a year. Russia is Turkey's largest trade partner, with $37.8 billion commodity turnover registered last year.

Russian Prime Minister Vladimir Putin said on October 14 that Russia was ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings.

"We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

Britain's Independent newspaper reported in early October that Russian officials had held "secret meetings" with Arab states, China and France on ending the use of the U.S. dollar in international oil trade.

The countries are reportedly seeking to switch from the dollar to a basket of currencies including the euro, Japanese yen, Chinese yuan, gold, and a new unified currency of leading Arab oil producing countries.

The Independent said the meetings have been confirmed by Chinese and Arab banking sources, although Russian officials said they had no knowledge of the talks.

Wednesday, October 28, 2009

Black Market Has Nearly 75% of U.S. Notes in Circulation

By Nguyen Anh Thu in Vietnam, Darcy Crowe in Venezuela, and Will Connors in Nigeria
The Wall Street Journal
Wednesday, October 28, 2009

Globally, the Greenback Remains King

BEHIND THE SCENES: The U.S. dollar, despite its beating this year, is the currency of choice in black-market exchange shops like this one in Hanoi, Vietnam.

The U.S. dollar, once universally accepted as the world's strongest currency, has been trounced in recent months by everything from the euro to the Brazilian real to the South Korean won. But in the back-alley markets where business is done in many of the world's developing economies, the dollar still reigns.

In jewelry stores in Vietnam, taxicabs in Venezuela and outdoor markets in Nigeria, black-market money-changers say the dollar is still the currency of choice, even though its value has fallen in some cases.

"The U.S. dollar is losing value, but not here in Vietnam," said Vu Manh Quynh, an auto trader who regularly exchanges dong for dollars in the winding streets of Hanoi's Old Quarter. "Vietnamese people still keep U.S. dollars and gold." While the U.S. dollar fetches 17,858 dong on the official rates, the black market rate is closer to 18,600. Hai Duong, a currency trader, said he had 20 or more customers buying U.S. dollars on a recent Wednesday, compared with two customers buying euros.

While their true size is unknown, black markets in currencies are key to greasing the wheels of commerce in countries that have tight currency controls. They provide residents and companies with protection against inflation or a possible devaluation of the local currency, and give companies a source of dollars with which to buy and sell goods abroad. In most countries, the markets are illegal, while in others they are tacitly condoned.

"Typically, dollars are king in the black markets of the world," says Kenneth Rogoff, professor of economics at Harvard University and former chief economist at the International Monetary Fund.

Prof. Rogoff estimates that as much as 75% of U.S. notes in circulation, or more than $600 billion, are held outside the U.S. Most of that is likely in what he calls the underground economy, where transactions are made beyond the oversight of government -- much of which is juiced by the black market.

"This money is not in cash registers, it's not in bank vaults," Prof. Rogoff says.

In the world's official foreign-exchange markets, where turnover totals about $3 trillion each day, according to the Bank for International Settlements, the dollar's luster has diminished. The dollar, for example, has fallen about 6% against the euro this year. The dollar has dropped about 15% against a basket of currencies since early March.

The ballooning U.S. deficit and a move by investors away from the haven of the dollar as world economies recover have sparked worries that the currency may be headed for a years-long swoon. It also has opened the door for renewed questioning of the dollar's future as the world's reserve currency.

For Venezuelans, where the black market plays a crucial role in the financial system, the dollar has retained its status. Residents seeking protection against inflation or a devaluation of the bolivar turn to currency traders. Large companies that need dollars for operations abroad also visit the unregulated market.

"Having dollars is like a barricade," says Arnaldo Morales, a cabby who moonlights as a currency trader, buying dollars from travelers as they enter the country, then selling them to Venezuelans.

Mr. Morales says he has been trading dollars since 2003, when President Hugo Chávez imposed a currency peg. Residents can purchase only $2,500 for travel abroad each year at the official rate of 2.15 bolivars.

The economy has become so heavily dependent on the so-called parallel exchange rate for greenbacks that the government was recently forced to intervene after the dollar traded as high as seven bolivars in August. The government is flooding the domestic market with dollars by selling bonds to locals who then trade them abroad for U.S. currency.

"The dollar will always be strong," says Andrea Martinez, a trader who dismissed as temporary the recent decline in the black-market rate. Ms. Martinez operates inside a tiny, nondescript mall where shotgun-carrying private-security guards wearing bulletproof vests watch over rows of pawn shops that serve as a front for dollar traders. On a good day, she says, she still sells as much as $5,000.

In Nigeria, sub-Sahara Africa's second-largest economy, currency traders still deal predominantly in American currency. The black-market traders even have their own trade group, the Association of Bureaux de Change Operators of Nigeria.

"The dollar still has dominance in Nigeria," said Alhaji Farouk Suleman, the president of the group. "The exchange rate might not be good, but you know what you're dealing with and that you can use the dollar anywhere you go. I don't see any real shift towards the pound or euro."

The Nigerian naira, after plummeting late last year and earlier this year, has stabilized against the dollar, thanks to renewed confidence after harsh banking reforms undertaken by a new central bank governor. The dollar was fetching 183 naira in the spring, but now buys about 153 naira.

But the dollar's descent against the world's biggest currencies hasn't gone unnoticed.

On the streets of Mumbai, illegal currency traders that swap wads of cash from bags behind their shops in the bustling back alleys of Colaba, a neighborhood popular with tourists, say business has been slow recently. The dollar's decline has sellers waiting for a rebound and buyers waiting for a better deal.

"Business is way down," says one trader, spitting a stream of red betel-nut juice in the alley behind his shop and wiping his moustache. "People still want to wait." The dollar buys 47 rupees at licensed currency-trading companies and 46.70 rupees on the black market.

And at the Super Rich currency exchange near one of Bangkok's busiest downtown thoroughfares, Thaweesak Kanchanakorn says he and his girlfriend are planning to vacation in the U.S., and that he thought it might be a good idea to invest in dollars now, because they're "cheap." In the long run, "I don't think the U.S. dollar will still be a major currency for reserves anymore," he said. China's yuan "will take its place."

For now, those seeking to exchange bolivars or dong are choosing the U.S. dollar, if only because it remains the most recognizable of the world's currencies.

In Iraq, where legal currency exchanges have become common, the U.S. presence since 2003 has kept up demand for the dollar at the expense of the euro.

Ali Mohammed of the Al Nasir currency-exchange company said that although the world market value of the euro has risen, it is difficult to exchange in Baghdad. And the dollar likely will be Iraq's unofficial second currency for some time to come. The dollar fetched about 1,190 dinars in September, according to central bank figures, little changed from 1,220 dinars at the beginning of 2008.

"It's the only thing used, besides the Iraqi dinar, for commercial business and trade," he said. "As long as it stays pretty stable, we don't mind this."

Carlos Denis, who trades in the Venezuelan mall alongside Ms. Martinez, insists that the dollar is still the only currency that matters. "Take out a dollar bill in the remotest place in world and people will recognize it," he said.

Eric Bellman in India, Gina Chon in Iraq, and Wilawan Watcharasakwet in Thailand contributed to this article.

Asian Leaders Ponder Common Currency

By Karen Percy
ABC News
Monday, October 26, 2009

It may never happen but the idea of having one Asian currency is being floated as part of a greater Asia Pacific community.

As leaders got together in Thailand to discuss regional issues, the idea of combining the Association of South-East Asian Nations (ASEAN) and APEC was again talked about.

The idea is to bring more countries together to cooperate on issues of regional security and trade, but it is still a long way off.

ASEAN and its partners are promising to work closely together on economic integration, climate change and disaster management.

And they discussed the long-term future of the group and the East-Asia summit forum as Australian Prime Minister Kevin Rudd outlined his ideas for creating a bigger and bolder grouping.

His idea is to meld the APEC and ASEAN groups to create a far-reaching alliance that would have security issues at its heart.

"It reflects the fact that in this dynamic region, which is so much the centre of global economic activity in the 21st century, but with still genuine and continuing security challenges in the 21st century that we must always work to improve our regional coordination and cooperation systems and institutions into the future," he said.

Japan has floated a similar proposal, going even further - pitching for a common currency amongst East Asian nations.

Thailand's Prime Minister, Abhisit Vejjajiva, ASEAN 's current president, has reinforced his colleagues' desire to build on the ASEAN framework.

"We continue to practice open regionalism and we know that with the evolving circumstances and environment of our times, our cooperation and arrangements too must evolve and we have had good responses from our dialogue partners," he said.

"I am confident that in doing so we will preserve ASEAN centrality and make vital contributions, not just to our own region but to the Asia-Pacific region and to the whole world."

ASEAN charters 'hollow'

Despite adopting a charter in the past year aimed at ending the perception of ASEAN as a country club and committing the 10 members to a more rules-based system, ASEAN is still seen as being weak and ineffective.

A case in point is the region's first human rights body, which was formally established during this weekend but it is going to be an instrument of the 10 governments, many of which are accused of abuses.

The leaders talk up their aims to be there for the people, yet input from outsiders, whether it is ordinary citizens or non-governmental organisations, into how ASEAN should grow has been poorly received, as seen in Friday's people's meeting where a number of NGOs were turned away from their own discussions.

Political commentator Thitinan Pongsudhirak says there are worries now about what happens next year when Vietnam assumes ASEAN's presidency.

"Vietnam is not going to be very receptive to civil society activism, human rights organisations and so on and this is going to cast a cloud over ASEAN because ASEAN has come out with this ASEAN charter," he said.

"Human rights provisions, the fundamental freedoms in the ASEAN charter will come under pressure during Vietnam's chairmanship.

"If Vietnam does not allow some opening, some abidance of this human rights and fundamental freedoms in the ASEAN charter, the ASEAN charter will be hollow. It will look like a joke. It will be bankrupt."

One thing will not be at issue in Vietnam and that is security. While Thailand has had to contend with threats of protests and a disruption to one summit, there is no chance that Vietnam's meetings will be disrupted by protesters or anything else for that matter.

For further reading:
"Asian Community: It’s time to act on currency plan", New Straits Times, October 27, 2009
"Plans of Asia-Pacific Integration through Single Currency", Jose Roy, October 27, 2009
"The Dethroning of the U.S. Dollar Will Happen Sooner Than You Think", Keith Fitz-Gerald, October 27, 2009

Crashing Russia's All-Cash Culture

By Julia Ioffe
Fortune Brainstorm Tech
Tuesday, October 27, 2009

Electronic money purveyors make it easy for Russian consumers to make micropayments. Now they’re seeking legitimacy.

Because building an entire banking sector from scratch in 20 years makes for some wild swings, Russians put their trust in cash. In Russia, the first thing you do when you get your monthly salary is withdraw it all, and pay for everything with tangible, fungible cash.

You buy your groceries with cash, pay for your winter boots with cash; heck, you even pay for real estate in cash. But how do you use cash for amorphous things like Internet service or to prepay your cell phone?

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

Their problem? There isn’t any. However paradoxical, this is an understandable fear in a country where government pressure on businesses is becoming more and more suffocating, and where legal gray areas can be used to bring a business to its knees. (Often, this also depresses the market valuation of these companies.)

And now that the Kremlin and the Russian Central Bank have noticed these legal blind spots, the need to mold regulation right is even more urgent for the various e-money players. This month, they have banded together to form the Electronic Money Association (AED) in order to lobby the Russian parliament (the Duma) for clear – and favorable – legal definitions of their business.

The association’s goal is regulation based on the flexible and nuanced European model, which outlines six types of e-commerce entities. To date, Russia has zero.

In fact, e-commerce is barely described in the Russian legal system, partially because of the natural lag time before law catches up to fast-moving technology, partially because there is no consensus here on how to regulate this industry. For instance, because e-commerce uses the language of banking – checks, currency – some in Russia have suggested that it be brought under the preexisting banking framework. But these companies are no banks.

Here’s how it works: Say you want to pay your web provider for a month’s worth of service. You take your cash and feed it into one of 200,000 ATM-like terminals scattered all over the country. (Qiwi, which owns the largest network of these, is a member of AED.) Then, depending on which company you use, you either direct your money for an on-the-spot payment to your provider (WM Transfer Ltd.’s WebMoney service is popular in Russia), or fill up a virtual “wallet” from which the funds can be distributed later to merchants of your choosing. (Search engine Yandex operates a digital wallet called Yandex.Money payment system. For more on Yandex, see "Google's Russian Threat.")

WebMoney and Yandex.Money account for more than 90% of the e-money market and account for hundreds of thousands of daily transactions, some for sums as low as $7, to, say, play a round of World of Warcraft.

These are small transactions, usually topping out at $250 for bigger-ticket items like air or train tickets, but the need for them is evident: WebMoney, which controls 54% of the Russian e-money market and deals with several currencies (including a gold-based one), has doubled in size every year since its creation. Overall market growth rates have slowed a bit but given that Russian internet penetration is still low and growing faster than anywhere in Europe, it only means there’s room to expand.

And as more Russians get online, they’re bound to turn to the web to handle some of their basic transactions. First, there are the convenience and trust factors. Banks in Russia have been known to vanish overnight with the savings of millions, yet opening an account in one is extremely difficult. (“My 18 year-old son tried to open an account and the bank demanded to see a real-estate deed – for a debit card!” says Peter Darahvelidze, an executive with WebMoney.)

Furthermore, in a country sprawling across six time zones and bound together with an infirm infrastructure, even getting to a bank might be difficult. E-money services, points out Mikhail Mamuta of the National Partnership of Microfinance Market Participants, “are also a form of economic development and fighting poverty.”

E-money has also become extremely popular with Russian and international merchants (Telecom company Skype gets most of its Russian payments through Yandex.Money) because it cuts down on fraud and false “charge-backs” (when a customer declares a credit-card purchase to have been made without his knowledge), which are rampant in Russia.

E-money companies have put in place various measures to deal with this. Yandex.Money, for example, does not allow a charge back if there was no technical problem with the transaction. (Some players in this business – like some terminal operators and mobile micropayment companies — are less than legitimate and have raised suspicions of money laundering. It is yet another reason that the bigger players are looking for careful regulation.)

But as the sector continues to grow, some natural foes have started to trouble the waters. Many banks, for example, are reluctant to see any inroads made into their market share yet who are too unwieldy and uninterested to build any e-commerce interfaces of their own. The Association of Russian Banks, for instance, viciously fought recent reforms targeting payment terminals.

And certain conservative members of parliament have begun speaking openly about the illegality of e-money, demanding that these companies apply for banking licenses – which means would require them to have at least 5 million euros in assets.

Rather than wait for the anvil to fall, however, the Electronic Money Association has taken a proactive approach, pushing for legislation that will spell out, exactly, what kinds of legal entities companies like WebMoney are. To that end, they have formed a working group in the Duma to hammer out legislation and to resolve some key dilemmas. Who, for example, will be allowed to participate in this sector: just banks? Just internet companies? Both? And who will regulate the industry: an industry association or the Russian Central Bank? What kind of documentation will a virtual system need to provide this regulator? Will the new regulation significantly raise operating costs?

The law is rumored to be passed before the new year, but, “so far, there is no ready text,” says Maria Panferova, a member of the Duma working group. “The goal at this stage is to work out the conceptual framework of the legislation.”

Victor Dostov, an e-money pioneer and head of the Association, hopes that this legislation will pass more smoothly this time and that banks recognize that this is not a natural niche for them.

“These companies collect all the crumbs, make a roll out of them, and then put it in the bank,” Dostov says. “The bank still gets the money.” He points out that Deutsche Bank and Citibank tried to get in on this business in the United States and then quickly figured out that it wasn’t worth the hassle. “No one is interested in killing the hen that lays – well, maybe not the golden egg, but the little silver eggs,” he says, adding. “At the end of the day, we just want to sleep soundly at night.”

Julia Ioffe is a freelance writer living in Moscow.

Saturday, October 24, 2009

Leftist Regimes Agree to New Currency

By Alex Newman
The New American
Tuesday, October 20, 2009

Adding to pressure mounting against the U.S. dollar, left-wing Latin American leaders gathered in Cochabamba, Bolivia, over the weekend for the seventh Bolivarian Alliance for the Peoples of Our Americas (ALBA) summit and agreed to create a new regional currency in a bid to stop using American Federal Reserve Notes, according to foreign news reports.

Initially the new fiat money will be used to settle foreign and commercial payments among member nations, with the goal of eventually creating a unified monetary system. “That this may be the start of creating a new currency that will serve between the countries, a currency at the Latin American level, and for this to succeed, it is necessary to bring about other conditions which we evidently do not yet have today,” said Bolivian Economy and Finance Minister Luis Acre, noting that it took the European Union 40 years to create a true monetary union.

The new “sucre” — short for Unified System of Regional Compensation in Spanish, but also named after South American independence leader Jose Antonio de Sucre who fought against colonial Spain with the more well-known Simon Bolivar — aims to challenge the hegemony of U.S. Federal Reserve Notes. It will go into effect in early 2010, though some Caribbean island members will reportedly remain in the Eastern Caribbean Currency Union rather than adopt the new sucre.

“It is an important step for the sovereignty of our people and in liberating ourselves from the dictatorship of the dollar, from the neo-liberal dictatorship and the dictatorship of the transnational [corporations],” said the self-declared socialist President of Venezuela, Hugo Chavez. He called the new currency a “revolution of paradigms.”

This most recent attack on the U.S. dollar’s global-reserve status comes on the heels of a report about a secret plot against the dollar involving Gulf Arab states, Russia, China, France, and Japan. According to the U.K.'s Independent, the Gulf countries are planning to create their own regional currency and stop pricing oil in dollars. The United Nations recently called for an end to the dollar’s position as well.

At the summit ALBA also agreed to implement further sanctions on Honduras because that country's government ousted its leftist President when he sought to unconstitutionally extend his term in office. It also called for the unconditional return of deposed President Manuel Zelaya while urging world nations to reject the results of a planned presidential election there. "No electoral process held under the coup-installed government, or the authorities that emerge from it, can be recognized by the international community," read a joint statement.

According to the final summit statement, leaders also condemned Colombia’s military base agreement with the United States, though they failed to adopt Chavez’s proposition to form a military alliance for defending against the “Yankee empire.” The organization also said it would consider the creation of state-owned multinational corporations to compete globally in mining, trade, energy, agriculture and other sectors.

The assembled leftist regimes called for a UN declaration of rights for “Mother Earth” against the capitalist system and the creation of an “International Tribunal for Climate Justice” to force America and Europe to hand over more money for having emitted carbon dioxide. They also agreed to bypass the World Bank’s International Center for Settlement of Investment Disputes by creating their own international arbitration court. The next ALBA meeting is scheduled for December and will be held in Cuba.

The organization, first proposed in 2001 and renamed this year from Bolivarian Alternative for the Peoples of Our America, consists of Venezuela, Cuba, Bolivia, Ecuador, Nicaragua, Honduras, Antigua and Barbuda, Dominica, and Saint Vincent. It seeks to promote regional and economic integration while providing an “alternative” to U.S.-led “free-trade” agreements.

Russian news reports noted that Russian National Security Council chief Nikolai Patrushev was present at the meeting. President Dmitry Medvedev also promised closer Russian cooperation with the organization. Delegations from several other countries including Haiti, the Dominican Republic, Guatemala, and more attended the summit as well.

“Let’s not kid ourselves. This is a subtle step to bring about a global fiat currency by the people who are planning to create a One World Government,” opined blogger David Kramer. “The ‘retaliation’ for the Sucre will be a push for the ‘Amero.’ (That’s the US/Canada/Mexico single fiat currency that has been in the planning stages for decades.) By gradually having fewer and fewer fiat currencies in the world, eventually our One World Government planners will claim that we might as well have a global fiat currency to really ‘facilitate’ global trade.”

The news about the new currency went virtually unnoticed by the American media, with only a half a sentence at the end of an Associated Press article even mentioning the agreement. Foreign press, however, gave widespread coverage to the sucre and its implications.

The ALBA agreement is yet another attack on the U.S. dollar, which combined with others represents a serious threat to American standing in the world. While the radical leftist regimes may account for only a small percentage of the global economy, international pressure on American Federal Reserve Notes and reckless monetary policy by the U.S. central bank may culminate in the perfect storm against the American economy, causing massive inflation and devaluation that will wreak havoc on the dollar’s purchasing power.

Of course, such a scenario will eventually require a “solution.” But the proposals currently being contemplated by “world leaders,” including the Amero or even a global fiat currency, would be a complete disaster for America and for human freedom. The constitutional and proper solution is to abolish the non-federal reserveless central bank and institute sound money. This will require a dedicated effort by a significant portion of Americans, but it must be accomplished or the consequences will be dire.

For further reading:
"End of the Dollar 'Dictatorship'? Hugo Chávez and Latin Leaders Hope to Bury the Greenback", Nikolas Kozloff, October 23, 2009
"Antigua-Barbuda government denies signing on to the SUCRE", Caribbean Net News, October 21, 2009

Friday, October 23, 2009

Digital Currencies Declared Central to Underground Economy

By John Leyden
The Register
Thursday, October 22, 2009

FBI and SOCA plot cybercrime smackdown
White hats get proactive on e-crime

RSA Europe 2009, London -- The FBI and the UK’s Serious and Organised Crime Agency have drawn up a program for dismantling and disrupting cybercrime operations. The effort relies on a better understanding of the business models of carders, malware authors and hacker groups which have increasingly come to resemble those of legitimate businesses.

The three prong strategy aims to target botnet and malware creators, so-called bullet-proof hosting providers that offer hosting services to cybercrooks, and digital currency exchanges. Digital currency exchanges such as WebMoney and Liberty Reserve are central to the operation of the black economy, according to Andy Auld, head of intelligence at SOCA’s e-crime department.

During a keynote presentation at the RSA Europe Conference, Auld and FBI special agent Keith Mularski used the Russian Business Network (RBN) cybercrime network as an example of the type of criminal enterprise they were targeting. The now disbanded group used an IP network allocated by RIPE, a European body that allocates IP resources, to host scam sites, malware and child porn.

RIPE actions might lend themselves to interpretation, viewed in the harshest terms, as being complicit with cybercriminals and "involved in money laundering offences".

"We are not interpreting it that way. Instead we are working in partnership to make internet governance a less permissive environment," Auld said.

The RBN – described as a purpose-built criminal ISP – allegedly paid off local police, judges and government officials in St Petersburg.

"This was a well organized organization not a cottage industry,” Auld explained. “RBN was the e-crime component in a wider criminal portfolio.

“There were strong indications RBN had the local police, local judiciary and local government in St Petersburg in its pocket. Our investigation hit significant hurdles.”

Auld said that although western law enforcement efforts were frustrated, the group was put under surveillance for a short time, during which the group travelled around the Russian city in an Armoured Audi A8 that was always escorted by a Range Rover.

As the heat was turned up on RBN, the group applied a disaster recovery plan, activated in November 2008. However, foreknowledge allowed the FBI and SOCA to shut down new systems before RBN was able to complete its migration.

“All we achieved was disruption, not a prosecution,” Auld explained. “We believe RBN is back in business, pursuing a slightly different business model.”

Zombie botnet taxonomy

The well attended presentation also included a comprehensive taxonomy of botnet types. Network of compromised PCs can be used for multiple purposes include proxies that supply anonymity (based on machines infected by malware strains such as Xsox), credential stealing (the notorious banking Trojan ZeuS and Torpig being the chief irritants in this category), web hosting (ASProx), spam distribution (Srizbi, Storm worm) and malware dropping botnets.

Another vital component of the cybercrime economy is carder forums, described by Mularski as e-crime “supermarkets” for exploits, tools and stolen data that have adopted a mafia-style organisational structure. These forums have splintered after law enforcement efforts that led to the demise of forums such as Shadowcrew and Carderplanet in 2004.

New generation forums are split between Russian and English language sites. Each have hierarchical structures with administrators who take a percentage for running escrow services and control membership at the top. Below these bosses are reviewers who handle site management (capos).

Hackers, carders and data thieves occupy the rung below with mainstream members (associates) below them. The quality of stolen credit card data, for example, is reviewed before a vendor is allowed to sell through these forums.


SOCA and the FBI intend to infiltrate groups or cultivate inside sources. The law enforcement agencies will also go after the money by targeting electronic exchanges that are used to transfer funds between criminals. Working with internet governance organisations, such as groups that allocate IP addresses to crooks without realising that the address space will be used for cybercrime, also form part of the clampdown.

The two law enforcement agencies also want to encourage the targets of cybercrime to improve their security while going after locations where crackers upload and store stolen data.

“Traditional policing is reactive,” Auld explained. “Cybercrime enforcement, by contrast, has to be pro-active.”

For further reading:
"FBI and Soca need help", ComputerWeekly, October 22, 2009

Wednesday, October 21, 2009

Icelandic Currency Crisis: Is the Euro Iceland's Answer?

By Michael Marr
Financial Services Technology
Monday, October 12, 2009

In late September 2008, over the space of just several short weeks, Iceland's three major banks collapsed. Now, as other nations begin to show signs of recovery, Iceland is trying to rebuild itself.

Reykjavik, Iceland

The Icelandic economic crisis, the largest suffered by any country in economic history relative to size, has completely rocked the small nation - once, bolstered by foreign investment, one of the most successful economies in the world.

Now though Iceland's currency - the króna - has halved in value, and back in January, at the height of the crisis, protests, escalated by conflict between anti-government campaigners and the police, finally led to the resignation of the government in power.

In their place now is the new government - a coalition between the Social Democratic Alliance and the Left-Green Movement - led by Jóhanna Sigurðardóttir , and some people live in hope that the new government will look to usher in a return to more traditional Icelandic values, such as thrift and hard work.

However, a year on from the meltdown, many analysts are beginning to ask whether Iceland real solution is to ditch its fragile currency and join Europe and the euro - a notion backed by Sigurðardóttir and her party.

And yet, its not all bad news for Iceland, with reports showing that both the nation's fishing and aluminium industries are doing notably well. In fact, there are already three major aluminium plants in the country, with a fourth currently under construction, and a fifth already in the planing stages.

But, the plants, once majorly apposed by government group (and now junior-partners in the coalition) the Left-Greens, has led Iceland's finance minister - and Left-Green party member - Steingrímur Sigfússon to express doubt over joining the eurozone.

"The flexibility and adaptability that having your own currency gives may turn out to be very helpful when it comes to recovery," he told BBC News.

The real concern is that, a year on from the crisis, while many Icelanders now display a sense of shame over the get-rich-quick schemes the country once adopted, they have only resulting in one thing: a hefty bill that Icelanders will be paying off for years to come.

The fact is, with politicians across Europe seemingly paying lip service to the notion of "recovery," the eurozone is fast becoming political priority.

As such, while Iceland's prime minister believes the euro will help with recovery and others believe independence will serve them better, the debate looks set to continue.

But as short-sighted calls to set up pan-European banking regulations has already been proved, the EU is sometimes the root of the problem and not the solution.

As such, perhaps Iceland should cling onto to its current status of independence: it did - after all - make them rich in the first place.

For further reading:
"Iceland and the EU 'Shakedown'", James Heiser, October 21, 2009
"Warnings from Iceland", BusinessWeek, October 13, 2009
"Between the Lines: Currency freedom sets Iceland and Latvia apart", The Scotsman, July 28, 2009
"Iceland’s currency stays afloat online", Klint Finley, July 16, 2009
"The party's over for Iceland, the island that tried to buy the world"
, The Guardian, October 5, 2008
"Iceland's Deep Freeze", The New Yorker, April 21, 2008

Tuesday, October 20, 2009

Why the Euro is Not the Next Global Currency

By Jean Pisani-Ferry and Adam Posen
The Financial Times
Monday, October 19, 2009

The explosion of debate on the demise of the dollar has been instructive, though vastly premature. What is striking, however, is the absence of the euro from talk of alternatives as the global currency. Currency baskets, SDRs, even internationalisation of the renminbi, have been mooted, but not the obvious alternative.

This should have been the euro’s moment. It is already the second global currency. The gap between the overwhelming role of the dollar and the size of the US economy has long been recognised. The crisis is accelerating the fall of the US share of global gross domestic product and the apparent neglect of fiscal sustainability is eroding the dollar’s relative attractiveness for the longer term.

Over its 10 years, the euro has been a huge success for its member states. Its attractiveness in the economic storm has never been higher to European Union members and neighbouring economies. Momentary currency appreciation aside, however, there is no sign of a move to the euro as a global currency. The share of dollars in global reserves remains almost three times that of euros. During the worst of the crisis, dollars were demanded by institutions in trouble and it was the US Fed that provided up to $600bn in liquidity to non-US residents through swap lines. Nothing of this sort happened with the euro. It is a huge success in Europe, but it remains a regional currency.

There is speculation about pricing oil in something other than dollars, but no evidence of that across the range of traded goods invoiced in dollars – and certainly no switch into the euro. Companies trading goods outside the immediate euro region rely on dollars as the invoicing and settlement currency, reflecting inertia, but also liquidity, availability and legal clarity. No economies seem to be leaving dollar pegs for the euro.

One reason for this is that the euro has not overcome its own self-imposed limits on usage and adoption abroad. By strictly maintaining the ERM-II exchange rate stability requirements and the Maastricht deficit, inflation and interest rate criteria for euro area entry, it has kept new applicants at a distance. By discouraging euroisation and unilateral pegging to the euro – even in its neighbourhood – it has widened the gap. By channelling the response to the crisis in eastern Europe through the International Monetary Fund it has reinforced the defensive view that stability for the euro area is fragile if extended.

This lack of leadership is a shame because the alternatives when the dollar’s role recedes are worse. Baskets are notoriously hard to make work, especially if they include an inconvertible currency. Their stability is also in doubt as they rely on uncertain political agreements. As to the SDR, it is not a real currency either.

It would be better to have a period of co-dominance between currencies, allowing for a smooth transition to a multi-currency regime. This happened between sterling and the dollar, although the unwillingness of the US government to ease this process in the 1920s and 1930s led to a leadership vacuum and financial instability. We fear the euro area’s reticence to take on a global currency role could lead to similar instability in the future.

In fact, the measures needed to secure the euro’s wider role are in the area’s own economic and political interest. Financial integration should be completed and underpinned by solid European supervision; second, the economic governance of the EMU should be strengthened, especially as regards crisis management; third, the euro area should adopt a more proactive strategy to enlargement and stand ready to provide liquidity support to partner countries where its currency is used; fourth, it should strengthen its economic base by raising the rate of sustainable growth.

Does this sound familiar? It is no accident: limitations on the euro area’s productivity, openness and governance are also the factors that limit the euro’s global role. By dodging some of its duties as a regional currency, the euro area constrains the euro’s wider adoption globally. The absence of the euro from talk of dollar alternatives shows that these internal failures also put at risk future monetary stability for the broader world.

Jean Pisani-Ferry is director of Bruegel, the Brussels think-tank. Adam Posen is senior fellow at the Peterson Institute for International Economics. They are editors of The Euro at 10: The Next Global Currency? (Bruegel/PIIE, 2009)

For further reading:
"The Message of Dollar Disdain", Judy Shelton, The Wall Street Journal, October 13, 2009

Monday, October 19, 2009

ALBA Member States Plan New Currency

Jesse's Café Américain
Sunday, October 18, 2009

This is not the first time ALBA, Bolivarian Alliance for the Peoples of the Americas, has discussed plans for a regional currency, and the proposal does not yet seem to be concrete to us. The countries have agreed in principle to proceed, with the details to be worked out over the next year.

Nevertheless, it does start to chip away at Wall Street's usual answer to any dollar challenge, "Where else will they put their reserves, what else will they use for trade if not the US Dollar?" This has always seemed to be among the most arrogant, self-centered observations of an empire in recorded history. "Without us, who will tell them what to do, who will lead them, who will manage their money?" Were even the British at the turn of the 19th century that self-deluded, so blinded by the rationale of the white man's burden to manage other people's affairs?

Ecuador’s currency was called the sucre before it shifted to the US dollar nearly a decade ago. Jose Antonio de Sucre was an early 19th century South American Independence leader who fought alongside Simon Bolivar. Sucre is also the capital of Bolivia.

In this proposal, it is known as the Sistema Único de Compensación Regional (SUCRE), a new currency for intra-regional trade, to replace the US dollar in trade among several countries: Venezuela, Bolivia, Cuba, Ecuador, Nicaragua, Honduras, Dominica, Saint Vincent and Antigua and Barbuda.

Most of these countries have already withdrawn their participation with the World Bank, and it's Center for International Trade disputes, which had sought to arbitrate disagreements among the countries and several western energy firms.

This may be important because Venezuela is a major source of oil imports to the US market. Will Chavez start demanding payment for his oil in the SUCRE? Will the US begin to discover the nuclear threat from Venezuela? Or merely encourage its neighbors and internal groups to challenge its sovereignty?

The exact composition of the SUCRE has not yet been disclosed, if it has been decided. Until that happens, and a firm timeline is disclosed, this is merely a proposal that has been discussed before.

The proposed sucre does not affect any discussions (if any are still continuing) with regard to the amero, which as we understand it is a potential North American regional currency amongst Mexico, the US, and Canada. If we were Canadian, we would resist that proposal with all the resources at our disposal.

But make no mistake, there are alternatives to the dollar and they are being discussed around the world. A broader based alternative that would include China and Russia among others would have more 'teeth.' Some composition including gold and silver backing of some sort, if it is sufficiently revalued higher, would give any regional currency a greater international acceptability.

It made an impression, by the way, that this news story was first picked up here out of China, and not from any US mainstream news outlets.

And speaking of strategic moves, the US recently sought to obtain seven military bases in Colombia, strategically located in the midst of the ALBA countries.

For further reading:
"New ALBA Trading Currency Dawns at Bolivia Summit", Carin Zissis, October 16, 2009
"Pacha, a new currency of Latin American countries to replace dollar", Ecommerce Journal, October 16, 2009
"International Financial Crisis and End of the Dollar Hegemony: USA versus ALBA", Jutta Schmitt, September 19, 2009
"The Case for the Amero: The Economics and Politics of a North American Monetary Union", Herbert Grubel , Fraser Institute, 1999

Iran to Drop Dollar From Forex Reserves

Tehran Times Economic Desk
Saturday, October 17, 2009

TEHRAN -- The Trade Promotion Organization of Iran (TPOI) announced this week that it plans to exclude the U.S. dollar from Iran’s foreign exchange reserves.

In line with this plan, Iran has informed Japan that it should use the yen instead of dollars to pay for the oil it buys from the Islamic Republic.

In addition, Iran has decided to open a bourse for oil and gas transactions in currencies other than the U.S. dollar, especially the euro.

Although the opening of the new bourse has been postponed several times, the plan shows the country’s determination to replace the dollar in its oil and gas transactions.

The TPOI has also announced that since October 2007 Iran has sold 85 percent of its oil exports in currencies other than the U.S. dollar and is determined to sell the remaining 15 percent in other currencies such as the UAE dirham.

During his first term, Iranian President Mahmoud Ahmadinejad ordered that the dollar should be replaced by the euro in the transactions of Iran’s currency reserve fund.

For further reading:
"Iran and Russia propose oil trade without U.S. dollar", Tehran Times, October 19, 2009
"Putin Prepared To Avoid Dollar In Chinese Commodity Transactions", Zero Hedge, October 16, 2009

What a Run on Gold Looks Like

By Patrick A. Heller
Monday, October 19, 2009

Rob Kirby of Kirby Analytics in Toronto has reported details of a recent “run on the bank” in the London Bullion Market Association Gold Exchange.

The London Bullion Market is the world’s largest gold exchange with daily turnover now running almost equal to a year’s global gold mine output. Since this market theoretically is trading contracts for actual delivery of physical metal, gold sellers are supposed to be ready to deliver the real thing and not paper.

Kirby attributes his information to impeccable reliable sources that on Sept. 30, the last trading day for the LBMA September 2009 futures contracts, deep pockets buyers “bought” substantial tonnage worth of September 2009 gold contracts. The buyers then told the sellers that they wanted to take immediate delivery of the physical metal.

This created a panic for at least two of the sellers – JPMorgan Chase and Deutsche Bank – because they did not possess sufficient physical gold to deliver. This “naked short” by these banks was technically illegal under exchange rules.

As the banks did not have the physical gold, one or both of them asked the buyers if the contracts could be settled quietly for cash. Kirby reports that the buyers were offered at least 25 percent above the gold spot price to accept cash in lieu of the metal, so that the matter could be kept private. The purchasers continued to insist on physical delivery and agreed to give the banks five business days to come up with the gold.

At least two central banks jumped in to lease gold to help the banks deliver physical metal. One has been identified as the Bank of England because the gold it provided was of too low a purity to meet the good delivery standards of the LBMA.

The crisis caused by these purchases has been managed for the time being. However, this run on the bank indicates that physical gold supplies are much tighter than has been reported. There are other indicators that gold supposedly stored in reliable locations may not all be there.

For instance, in March 2008 a story that was reported in Europe, but not in the United States, detailed how Ethiopia’s central bank had shipped some consigned gold to South Africa’s central bank, only to learn that much of it was gold-plated steel. The Ethiopian central bank sustained losses in the millions of dollars. A number of people were prosecuted, including the assayers who reported that the bars were genuine.

There is a story now circulating that I have to classify as a rumor. Supposedly it has been discovered that some of the gold bars (maybe including some that the Bank of England provided to help JPMorgan Chase and Deutsche Bank) that have come out of bonded warehouses for delivery on LBMA contracts are filled with tungsten. Tungsten is the only metal whose density matches that of gold, so that one could not detect it by weight or physical dimensions. The only way such counterfeit bars could be detected without destroying them is to check for their electrical conductivity.

Curiously, tungsten, which currently trades for about $100 per metric ton, is a metal that has had few new applications developed for some time. Typically, its demand has fluctuated right in line with overall economic growth. However, since 2002, demand has increased on the order of 10 percent a year. A new Far East buyer for a large quantity of tungsten appeared last week, who is suspected of being a front for the real buyers. It is conceivable that some of the rising demand for tungsten is to manufacture counterfeit gold bars.

Should there turn out to be any truth to the rumor of counterfeit gold bars in the “guaranteed” inventories of the LBMA, that would spark a public clamor for audits of all gold bars held by all of the world’s gold exchanges and exchange traded funds. Such an event would almost certainly lead to panic buying of other forms of physical gold such as coins and smaller ingots.

Already known is that some of the U.S. gold reserves are in the form of bars of around 90 percent purity. These were made from U.S. gold coins melted down in the 1930s. Some have been liquidated in the London market over the past few years.

Either tightness in supply or the revelation that some supposedly secure physical gold kept for backing paper contracts is either counterfeit or of lesser purity would spark a surge in physical gold demand. If both turn out to be fact, the effect would be magnified. In the most extreme circumstance, it could literally happen that people could wake up some morning and find that virtually all of the world’s available physical gold had been bought up as they slept.

In another significant development last week, Barrick Gold Corporation announced that it would be issuing $1.25 billion of 10- and 30-year bonds for the purpose of redeeming more of the company’s open gold hedges. The speed with which this followed the company’s $4 billion stock issuance for this same purpose implies that Barrick is even more concerned about the price of gold rising in the near future. In addition, it also indicates that the huge loss that Barrick booked last month for its hedge contracts was not large enough, as I wrote at the time.

Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Reprinted with permission.

Sunday, October 18, 2009

How Much Imaginary Gold Has Been Sold?

By Adrian Douglas
Gold Anti-Trust Action Committee
Friday, October 16, 2009

On October 10 I published an article that postulated that the gold market is a Ponzi scheme because it sells gold that doesn't exist by implementation of the principles of fractional reserve banking. (See Since writing that article further information has come to light that supports this claim and allows an estimate of how much gold has been sold that doesn't exist if the owners of the gold ask for it.

In other words, there are several owners for each ounce of physical gold.

By complete coincidence Paul Mylchreest of The Thunder Road Report has just written an in-depth study into the daily trading volumes of gold on the London over-the-counter market, which can be found here:

The London OTC market is where most physical gold is traded. This market is a wholesale market where trades are conducted only between the bullion trading houses on behalf of their clients. About 95 percent of the trading is by way of gold that is held in unallocated bullion accounts.

The unique characteristic of gold is that about 50 percent (80,000 tonnes) of the above-ground stocks are held as a store of wealth (investment). The other 50 percent exists as jewelry. When gold is bought as a store of wealth it can perform that function for you wherever it is in the world. Given this unique characteristic many large investors in bullion prefer to leave their gold with the bullion dealer from whom they bought it so that it can be stored in their vault and easily resold. This is identical to the situation with stocks, where most stock certificates are held by brokerage houses, not by individuals.

That people are buying and selling gold without ever taking delivery means that there is the opportunity for bullion houses to sell gold that doesn't exist.

Now the bullion houses probably don't view this as illegal or dishonest because they will operate a fractional reserve type of system, just as the banks do with fiat currency, and will make sure they have enough gold on hand for what would be the maximum estimated volume of gold that could be called for delivery. After all, trading is done with unallocated gold, so how much more unallocated can it get if it doesn't exist at all?

This is what caused bank runs in the days of the gold standard. People would deposit gold in a bank and receive bank notes (dollar bills) in exchange. At any time the depositor could return and hand over his bank notes and receive from the bank the same quantity of gold he deposited. The banks realized that under normal circumstances a maximum of about 10 percent of the gold deposited could be requested. So the banks saw an opportunity. They could issue up to 10 times as many bank notes in loans as there was gold in the bank and they could earn interest on the bank notes. The system worked until there was difficulty meeting withdrawals. Then word spread quickly that the bank was insolvent, and as holders of the banknotes rushed to the bank to redeem them for gold, the bank would admit it had insufficient gold and would declare bankruptcy.

The origin of the word "bankruptcy" is from the Latin words "bancus" and "ruptus," which means literally that the bank is broken. Banks have gone bust frequently enough to have earned themselves the ownership of the word to describe the phenomenon. Isn't that ironic when banks are meant to be a safe store for money?

This basic scam is at the center of modern gold market manipulation. Instead of real gold, paper substitutes for gold are sold through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each actual physical ounce of gold has multiple ownership claims to it.

For the scam to be sustained there must always be plentiful physical gold for those who want it. The market is, in effect, a giant inverted pyramid with a huge paper gold market being supported by a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If all the claimants of each ounce of real gold demand their gold, then there is the potential for a squeeze such as has never been seen before.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling non-existent precious metals. Morgan Stanley even had the audacity to charge storage fees. The firm settled the class-action lawsuit out of court but no criminal charges were ever filed. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.

Paul Mylchreest has done fabulously detailed research into data on the daily trading of gold on the London OTC market. He concludes that 2,134 tonnes of gold are traded each and every day. That is a shocking number because this is 346 times larger than all the gold that is mined in the world each day.

But this on its own is not sufficient evidence to indicate that the market is fraudulent. For example, if I have a 1-ounce gold coin and I have a hundred friends I could sell the coin to a friend and then he could immediately sell it back to me or sell it to one of my other friends, who could sell it back to me. If I were to transact with all my friends in the same day in this way, I could have turned over a volume of 100 ounces in trading transactions but no fraud would have occurred because the last friend I traded with owns the 1-ounce coin, even though it went through a hundred sets of hands before it got to him. There are no multiple ownership claims to the coin because the trades were sequential, not simultaneous.

But if I were to sell 1 ounce of gold to all my friends and promise I would keep the gold for them, the trading for the day would be 100 ounces but now fraud has been committed because I have a liability of 100 ounces while I have possession of only 1 ounce. If they never ask for the gold and I can pay them cash when they want to sell their gold, then there is a good chance my friends would be none the wiser ... until the day when at least two friends insist on receiving the 1-ounce coins they each supposedly own.

The daily gold trading in London is simply humongous. We talk of the gold market being a tiny market. It is anything but. It has a daily turnover of $70 billion. To put this in perspective, the world consumes 86 million barrels of oil each day. The total cost of the global daily oil consumption is a mere $6 billion!

But as discussed above, the daily volume traded does not in and of itself prove that a fraudulent fractional reserve operation is being conducted. Mylchreest did some more work using statistics from the GFMS metals consultancy to determine the maximum quantity of gold stock the OTC market could be holding with which it can back the huge daily trade volume. The gold that is traded has to be in the form of London Good Delivery (LGD) bars, which are 400-ounce bars. Mylchreest estimates that there can be only about 15,000 tonnes of such bars in the world. Let us assume that the London OTC market holds them all. We will show that by comparison with the trading of other unallocated gold products that 15,000 tonnes is nowhere near enough gold stock for the gold not to have more than one ownership claim to each ounce.

The purpose of buying investment gold is for it to store wealth. This necessarily implies that it is held for a long time. If gold is bought and traded quickly it would destroy wealth, not store it, because there would be a large loss due to transactional fees. The figures we have so far suggest that the entire stock of gold of the London gold market could be turned over every seven days (15,000 / 2,134 = 7). That would hardly be characteristic of a market that is supposed to be selling a "buy and hold" product. For the purposes of illustration, in a town of 15,000 houses would you expect 2,134 houses to be sold each day? Or that each house on average would have 52 owners during the year?

Let's compare how much of the inventory of the precious metal exchange-traded funds are traded each day to get a good idea about how frequently investors trade something they have bought as a store of wealth. The most liquid and highly traded ETF is GLD. It has 325 million shares outstanding and the fund trades on average 11.9 million shares each day. This means it trades one share each day for each 30 shares outstanding. Central Fund of Canada trades one share for each 140 shares outstanding, while the Gold Trust Unit trades one share for each 300 shares outstanding.

The GLD ETF is a way of buying, holding, or selling unallocated gold. One would expect the investors' behavior in this ETF would be similar to those trading the unallocated accounts on the OTC. If the investor trading mentality on the London OTC is similar, then 2,134 tonnes should be 1/30th of the gold stock held by the OTC. This equates to 64,000 tonnes of gold. But Mylchreest estimates that the OTC can hold no more than 15,000 tonnes because that is the entire global stock of LGD bars. If we use the CEF example, the stock would have to be 298,000 tonnes, or by the GTU example it would have to be 640,000 tonnes.

Probably the GLD comparison is the most relevant, as that exchange-traded fund claims to hold 1,100 tonnes gold, which is comparable to the maximum 15,000 tonnes that could be held by the OTC participants. However, the OTC is restricted to wholesale traders and has a minimum trade limit of 1,000 ounces. In GLD the minimum trade is a tenth of an ounce and trading is open to everyone. Considering these limitations it is likely that OTC participants would turn over a lot less than 1/30th of the inventory in a day. But even taking the GLD estimate, the OTC participants should be holding 64,000 tonnes when according to what can be deduced from GFMS statistics they can be holding only 15,000 tonnes.

This means that each ounce has at least four owners. I think this is probably very conservative because the GLD vehicle is set up to be easily traded and in units as small as a tenth of an ounce. I would guess that it is more likely to be as high as 10 or even 20 owners to every ounce, particularly when the banking world has used a 5-10 percent reserve ratio with fiat money for a long time and bankers are creatures of habit.

This would imply that the liability for unallocated gold that has been sold is probably closer to 150,000 tonnes (taking the more conservative 10 percent figure), but the liability is backed by a totally inadequate maximum of only 15,000 tonnes of physical gold. So it's likely that between 45,000 and 135,000 tonnes of unallocated gold has been sold that does not exist.

This is between 50 and 170 percent of the entire existing investment gold stock that has taken 6,000 years to mine and accumulate.

We are hearing of more and more cases of gold investors wanting to take physical delivery or have allocated gold.

In my recent article I said:

"A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in GLD to physical gold bullion. ... Apparently Germany has requested that its sovereign gold held by the New York Federal Reserve Bank be returned to Germany. Hong Kong has requested the same of the Bank of England, which stores its sovereign gold. Robert Fisk, a respected journalist for the UK's Independent newspaper, reported this week that the Arab oil-producing states, Japan, Russia, and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for trade. He reports that the basket of currencies they propose instead of the dollar would include gold. If gold is going to regain its monetary role, then you can understand why those in the know want actual physical bullion. There are some very real and significant signs that a run on the Bank of the Gold Cartel for physical gold is commencing."

Talking of runs on the bank, Rob Kirby of Kirby Analytics in Toronto, a GATA consultant, did some brilliant sleuthing work. His sources have told him that there was panic in the London gold market around September 30 as participants in the market wanted to take delivery of their purchased gold and refused generous cash settlements that were offered instead. Central banks had to come to the rescue to provide the gold via leasing. Apparently even the central banks could not provide bars that met LGD standards, which indicates that an acute shortage of physical gold is developing and that perhaps already many OTC clients have drained a large proportion of the 15,000 tonnes of gold stock from the London OTC market.

This supports what I have been discussing above.

Paul Walker, CEO of GFMS, recently said that gold was going up because of some "large lumpy transactions in a market with a degree of illiquidity."

If the OTC was selling only gold that the participants own, there could never be a lack of liquidity. The panic that occurred at the end of September confirms that there is a chronic lack of liquidity. This necessarily implies that there is multiple ownership of the same ounce of gold and it is, therefore, fraudulent. Leasing of gold from central banks provides only temporary liquidity, because the central banks want their gold returned at some later date, and it looks as if the bullion bankers may have dipped into that well one too many times already.

The gold market is in a precarious position. Just as in the days of the gold standard it requires only one customer not having his deposit returned to bring down the bank, because a domino effect results in all depositors asking for their deposits to be returned. If my estimates are correct, that somewhere between 64,000 and 150,000 tonnes of gold have been sold against a reserve of only 15,000 tonnes.

But how much of even this 15,000 tonnes remains?

The panic at the end of September suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account will blow up the gold market and expose the scam -- a scam that has been repeated time and time again throughout history. Why should this time be any different?

If you think you own gold, you should take a few precautions.

If you have unallocated gold in some sort of pool account that does not have a satisfactory audit or you own shares in an ETF that does not have a reliable audit, take action. Take delivery of gold or move your investment to reliable and audited allocated storage.

If you do nothing about it and when the music stops you are left with just a piece of paper that says you own gold but no one is able to give it to you, then perhaps you will be able to take comfort in your having dismissed the German government, the Hong Kong government, Greenlight Capital, and many others as a bunch of nuts who don't know as much as you do about counterparty risk in the gold market. But the "nuts" who are realizing that there are multiple claims to each ounce of gold will at least have their gold if they ask for it first.

Adrian Douglas is a member of GATA's Board of Directors and editor of the Market Force Analysis letter. Reprinted with permission. "How Much Imaginary Gold Has Been Sold? Part 2", October 18, 2009, can be found here.

For further reading:
"The Gold Basis is Dead - Long Live the Gold Basis!", Antal E. Fekete, October 18, 2009
"Don't ease up yet on MorganChase, CFTC", Adrian Douglas, August 22, 2009
"Getting to the bottom of negative gold-leasing rates", Izabella Kaminska, July 15, 2009
"Remobilize Gold to Save the World Economy!", Antal E. Fekete, July 10, 2009
"The gold backwardation theory", Izabella Kaminska, December 9, 2008