Friday, November 26, 2010

Imagine Your Computer As a Wallet Full of Bitcoins

By Danny O'Brien
The Irish Times

Friday, November 26, 2010

WIRED: A strange and notional currency is creating a provocative and disruptive new economy

Occasionally there comes along a technology idea so strange that not only can I not tell whether it’s doomed or bound to succeed, I can’t even tell what either of those futures might look like.

One example was Linux. When I first saw it, I had real trouble imagining what would happen if it took off. But, at the same time, I couldn’t visualise how it could fail. How would it compete with Microsoft? How would anything compete with a perfectly usable, yet entirely free operating system?

I’m currently peering at an idea that is mystifying me in exactly that manner. It’s called Bitcoin.

Here’s the elevator pitch, as they call it: imagine a banking system, but distributed over thousands or hundreds of thousands of computers. The computers together hold a database of transactions, similar to the database clearing banks or credit card companies hold: X transferred something to Y, Y transferred the same thing to Z.

No one computer manages this database; they all run the same software, which collectively distributes the knowledge and procedures that make up this set of accounting books.

As well as this database, the computers also generate unique numbers, at a slow but adjustable rate. These unique numbers make up the only “things” that can be recorded in that transaction database. So when X is recorded as transferring a thing, it can only really transfer one of these numbers.

There aren’t many of these numbers around to begin with, because they’re so hard to create. You create them by doing the work of checking and recording the latest transactions in the database. If you do that, you get one or maybe more of the unique numbers as a byproduct.

Read the rest of the article.

QE4: A Fictional Account

The first 12 hours of a U.S. Dollar collapse...

Thursday, November 25, 2010

China, Russia Quit Dollar

By Su Qiang and Li Xiaokun
China Daily
Wednesday, November 24, 2010

St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

"That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries," he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.

The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.

Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China's Tianwan nuclear power plant, the most advanced nuclear power complex in China.

Putin has called for boosting sales of natural resources - Russia's main export - to China, but price has proven to be a sticking point.

Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia's energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.

Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.

Wen's trip follows Russian President Dmitry Medvedev's three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world's biggest energy producer with the largest energy consumer.

Wen said at the press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other's enemy".

Over the past year, "our strategic cooperative partnership endured strenuous tests and reached an unprecedented level," Wen said, adding the two nations are now more confident and determined to defend their mutual interests.

"China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power," he said.

"The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries."

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a "fair and reasonable new order" in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.

For further reading:
"Currency settlement benefits Sino-Russia traders"
, China Daily, November 25, 2010
"China-Russia currency agreement further threatens U.S. dollar", International Business Times, November 24, 2010
"Official promotes yuan in place of reserve currencies", China Daily, November 15, 2010

Wednesday, November 24, 2010

Virtual Currency Exchanges Moving Virtual Currency Closer To Wall Street

By Kevin Flood
Kevin's Corner
Monday, November 15, 2010

I have been writing about virtual currency for some time and have witnessed its emergence from an obscure form of monetization and reward system in role playing games(RPG), virtual worlds(VW), airline and hotel bookings to a world class currency system challenging the valuation of the Yuan and the creation of the Facebook credit universal virtual currency. I have also suggest that regulated and sophisticated virtual currency trading is inevitable given the proliferation of virtual currency in gamified business applications and the popularity of online games using virtual goods and currency as a proxy for conventional e-commerce transactions. It is estimated that virtual goods/virtual currency revenue will reach 2.5 billion USD by 2013. This is a difficult number to ignore considering the worldwide slow down in traditional commerce. Virtual currency is international and becoming common appearing in retail stores in the form of virtual currency cards and as a bonus and award system for shopping. This is causing currency trading business(real and virtual) to take a much closer look at the viability of legitimate virtual currency exchanges.

We are now seeing Wall Street style monetary exchange trading systems specifically designed to handle virtual currency exchange. Startup companies, traditional currency traders and online game related businesses are stepping up their efforts to seriously integrate virtual currency trading into their business models. The ultimate goal is to establish valuation for virtual currency based on transaction activity and to allow for the free flow of goods and services between virtual currencies and eventually traditional virtual currencies such as the Dollar and Euro. Yes , these currencies are virtual as well because they are not backed by any physical assets and derive their valuation based on the amount of currency in play and their value relative to other economies and currencies.

The following are a few companies that have either contemplated launching virtual currency trades or are already up and running.

-Hi5 is a social network that has moved from a generalized social network to a focused online gaming social network. Hi5 is encouraging online game operators and providers to offer their games within the Hi5 environment. Hi5 helps these game companies by promoting and advertising the game providers content to the HI5 community providing a virtual currency exchange system between Hi5 virtual currency and the game providers virtual currency. The currency valuations are calculated everyday based on the volume and amount of virtual currency in the Hi5 system. The level of sophistication of Hi5's valuation system mimics the way currency traders and governments value traditional currencies. Hi5 has an interesting model allowing a business or game property to maintain their currency(and branding) and co-exist in the Hi5 environment. This trading system could easily exist outside of HI5 on its own platform.

FirstMeta - First Meta is a relative new comer to the virtual currency trading world. It is unique because it is a distinct trading platform divorced from the business of generating virtual goods or virtual currency. This business model comes closest to a traditional independent currency trading company. It is also interesting because the co-founders are not gamers they are bankers, investors and Wall Street type traders.This is significant because the company's model does encourage the exchange trade business to take a closer look at how virtual currency can and will be traded on open exchanges.
- My Year Book is the grand daddy of virtual currency exchange. They started this exchange to move players and consumers form one property to another increasing the player pool for gaming companies and to increase their membership. This is similar to the airline game with the exception that My Year Book has been more aggressive offering virtual currency exchange between online game properties and their business.Companies such as IMVU and Wee World are just a few of the companies that are in the MyYearBook system. Although the virtual currency exchange system is not currently a separate business it will not take much of an effort to move it out of My Year Book and into an open public exchange.

PlaySpan - In the true sense PlaySpan is not a virtual currency exchange platform. However, it is not far from it. . Playspan let's individuals buy and sell virtual currency for a number of different game sites. The relationships that PlaySpan has established with various virtual game and currency providers has positioned PlaySpan to launch a fairly robust virtual currency exchange with a wide array of virtual currencies.

Forex - I have to mention Forex, the traditional monetary exchange big boy on the block for traditional currency exchange. They have been considering virtual currency exchange for at least two years. Unfortunately, I can not reveal my sources. There has been reluctance to move forward because of the quasi legal opinion on virtual currency trading and the lack of real volume. With the emergence of Facebook credits as a virtual currency and billions of USD virtual currency transactions we have to believe that Forex is going to give this another look. Obviously, they are very well positioned.

The mentioned green shoots of activity in virtual currency trading are only a few of the total number of startups and conventional companies either considering or already in this space. Virtual Currency Exchanges(VCE's) are like so many previous online trends they start slow almost unnoticed by the general public and all of a sudden they become big really fast. Virtual currency trading will be no different. The early movers that stake a claim to the space will be winners and future common brand names in the financial services industry.

Kevin Flood is the CEO of Gameinlane, Inc. and writes extensively about gamification, online games and the impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Reprinted with permission.

For further reading:
"The Rise of Virtual Economies", Max Miller, November 16, 2010
"Virtual Money in Electronic Markets and Communities", Levent V. Orman, June 7, 2010
"Cosmetic Real Money Trading in World of Warcraft", Jennifer Martin, Virtual Economy Research Network, May 12, 2010
"Linden Dollar and Virtual Monetary Policy", Philip Ernstberger, January 23, 2009

Saturday, November 13, 2010

The FED’s Real Monetary Problem: Bitcoin

By Thomas Luongo
Friday, July 23, 2010

Since being "converted" to both libertarianism and, by extension, Austrian economics I have developed a passion for money. The monetary regime lies at the heart of so many symptoms of societal conflict that studying the nature of money seems axiomatic to me. In our current mixed economy of Keynesian Shamanism and Monetarist Voodoo reading through even poor synopses of the Austrian business cycle was like finding the Rosetta stone. The money promulgated by the Federal Reserve and backed the full force and aggression of the U.S. Government could easily be seen as the motive force for all manner of secondary and tertiary effects, especially after a reading of Hayek’s The Road to Serfdom. There is nothing in the FED’s arsenal of monetary tools to combat this problem; the rejection of their basis for existence.

Since those moments of awakening I’ve spent much of my time thinking about how
to inject a new currency into an existing regime without using force like with the Euro. I was an adopter of The Liberty Dollar, which was an interesting idea until the raid by the FBI in 2007. It highlighted the growing concern with the US Dollar; giving people the illusion of a silver-backed currency while hedging against its own success or failure by buying their coins and storing them away.

E-Gold’s troubles with The Man were equally predictable; thieves hate competition. The Liberty Dollar was being persecuted over a broad interpretation of counterfeiting laws (irony duly noted) while E-Gold was harassed over their customer’s actions, not any actions of their own. The Federal Government is allowed to run the twin Ponzi Schemes of Social Security and Medicare but U.S. citizens are not allowed to engage in commerce with those engaging in similar activities while not actively engaging in those activities themselves.

In other news, water is wet.

E-Gold is still in business, as are others like GoldMoney. They are all solutions for overcoming one of the real problems with hard currencies; the physical movement of metal from point A to point B in a speed of light economy. Unfortunately, they are all built on the same poor foundation, which the modern banking system exploits ruthlessly; trusting a third party to manage your property from a remote, central location. For GoldMoney, this is a feature not a bug, having vaults located outside the U.S.; a hedge against potential flight-of-capital diktats issued from Mordor-on-the-Potomac.

I have been tempted by these systems, but I have not placed funds with them. I’m willing to believe that many of them are legitimate in both their intentions and business practices, but I can’t afford to take that risk.

I prefer the promise of my dogs to someone I’ve never met.

It’s funny that I have no issue with using PayPal linked to my checking account but am unwilling to fund a GoldMoney account for the same purpose. Of course, I can hear Gary North on my shoulder whispering in my ear like a fiscally savvy Iago saying, "Obviously, you have a problem with that. Gold isn’t money." He is right. Because of Gresham’s law I value it more highly than its notional value. Why would I transact in it, when people will take these stoopid federal reserve notes? Gold is insurance against the depredations of the central bank upon the dollar. It may trade on the COMEX like a currency, but a medium of exchange it is not. As this hilarious video shows, the people of Harvard Square do not even know what to do with silver being offered to them for practically nothing; no less conceive of a use for it as a monetary instrument.

This is a warning to the hard money crowd that a return to commodity money will happen organically or not at all; an outgrowth of a loss of confidence in the dollar and the institutions that circumscribe our daily reality. Without any kind of fundamental shift in mass perspective, I see no future for a commodity exchange standard that bears any resemblance to the International Gold Standard.

People are more trusting of digits than physical gold.

To that end, I came across something the other day that piqued my curiosity. It was called Bitcoin. Compared to the systems mentioned previously, to call this idea a currency would do violence to the idea of a currency. It is, as of right now (vers. 0.3.2 beta), an exercise in what a digital currency could look like that is not dependent on third-party trust or centrally issued by a monopolistic agent of force.

Quoting from the FAQ Bitcoin is:

…a peer-to-peer network based anonymous digital currency. ''… there is no central authority to issue new money or to keep track of the transactions. Instead, those tasks are managed collectively by the nodes of the network.

Yes, but what is it? In deference to Dr. North again, the answer is simply, "Digits."

But, they are digits with a twist. New bitcoins are generated via lottery within its proof-of-work system where the records of previous time-stamped transactions are hashed into a chain, which is verified by all the members of the P2P system. There is planned inflation of a known and slowing rate up to a point. After that, deflation is built into its structure. It is currently in this early phase of development. The longer the chain the more secure the system is by nature of the algorithms at work. For details, see the white paper. They are currently divisible to 8 decimal places. Transactions can be completely anonymous.

Seriously, Tom, digits? These are intriguing digits, though.

It’s obvious to see (after translating the geek-speak) that the system was designed to be a digital analogue to gold and silver mining. The rate of generation is normalized to a set rate regardless of the number of people (CPU’s) working on it. The cost to generate digits is the electricity used by the CPU and the opportunity cost of using your computer for something else. Increasing the network size increases the rate at which independent verification of the transactions is performed.

How resistant to attack this is has yet to be seen. There is one underway right now. How successful can this be? I have no earthly idea and could care less. For me watching the rate at which new ideas are spawned when people are motivated to produce solutions to ancient problems is what is important.

So, yes, digits, which I said I believe to be the future of money, sadly. But, these are digits whose movements are verified by hundreds of incentivized auditors 24/7/365. Hell, the FED won’t submit to a one-time audit by those for whom they supposedly work! Yet we are loath to stop using their product.

I see Bitcoin as a metaphor for the Web itself. It is what happens when people of common tastes are able to find each other over vast distance to find their niche in the division of labor. Synthesizing cryptography, programming and monetary theory into a unique offering could not have happened without the Web; itself that which subverts attempts at control as a natural consequence of its own structure. Any success Bitcoin enjoys exists as a means to an end (improving how humans interact via mutual exchange), not the end itself (adoption in the marketplace). All knowledge is fractal; each new exploration implying a completely new host of questions that need answers... and right now we need answers.

I know that the current system is not only immoral but also failing. I’m fond of saying that the two most abundant things in the universe are hydrogen and the human capacity for self-delusion. Hyperinflation always occurs after a mass awakening from the delusion about the issuer’s ability to protect a currency’s value. We are flying into the monetary equivalent of "coffin corner" and will eventually stall. If, as Gary North has been saying for years that gold is not money, digits are, then digits that are designed to be "as good as gold" may be one way to disabuse us of our delusions.

And, if the empire does strike back at us for doing so, so what? Someone is working on that problem as well. It’ll be in version 2.0.

Thomas Luongo is a professional chemist, amateur economist and obstreperous recovering Yankee residing in North Florida. Reprinted with permission.

For further reading:

"Bitcoin And The Electronic Frontier Foundation", Bitcoin Blogger, November 13, 2010

Tuesday, November 9, 2010

Jekyll Island: 100 Years Later

By Michael T. Snyder
The Economic Collapse Blog
Wednesday, November 3, 2010

The Federal Reserve is going back to Jekyll Island to celebrate the 100 year anniversary of the infamous 1910 Jekyll Island meeting that spawned the draft legislation that would ultimately create the U.S. Federal Reserve. The title of this conference is "A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve", and it will be held on November 5th and 6th in the exact same building where the original 1910 meeting occurred. In November 1910, the original gathering at Jekyll Island included U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and many representatives from the upper crust of the U.S. banking establishment. That meeting was held in an environment of absolute and total secrecy. 100 years later, Federal Reserve bureaucrats will return to Jekyll Island once again to "celebrate" the history and the future of the Federal Reserve.

Sadly, most Americans have no idea how the Federal Reserve came into being. Forbes magazine founder Bertie Charles Forbes was perhaps the first writer to describe the secretive nature of the original gathering on Jekyll Island in a national publication....

"Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written... The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York's ubiquitous reporters had been foiled... Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry... Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality."

It was a system that was designed by the bankers and for the bankers. Now, the bureaucrats running the system are returning to Jekyll Island to congratulate themselves. Those attending the conference on November 5th and 6th include Federal Reserve Chairman Ben Bernanke, former Fed Chairman Alan Greenspan, Goldman Sachs managing director E. Gerald Corrigan and the heads of the various regional Federal Reserve banks. You can view the entire agenda of the conference right here. It looks like that there will be plenty of hors d'oeuvres to go around, but should the Federal Reserve really be celebrating their accomplishments at a time when the U.S. economy is literally falling to pieces?

Today, 63 percent of Americans do not think that they will be able to maintain their current standard of living. 1.47 million Americans have been unemployed for more than 99 weeks. We are facing a complete and total economic disaster.

For further reading:
"Has the Fed Been a Failure?", George A. Selgin, William D. Lastrapes and Lawrence H. White, Cato Working Paper, November 9, 2010
"Beware the Fed Tide", John Browne, November 5, 2010
"Bernanke's Squeeze Friday", The Daily Bell, November 05, 2010