By Bill Rounds, J.D.
Monday, January 17, 2011
Financial privacy is a fundamental right which the law does little to protect. In fact, the laws of any country with a central bank and strong bank regulations make financial privacy a very difficult right to exercise.Central Banks Are Anathema To A Free People
Dissatisfaction with central banks has grown in recent years, as evidenced by the large number of co-sponsors to Dr. Paul’s bill to audit the Fed. Even if the Fed is subjected to an audit, it is only the first of many steps needed to secure more economic freedom and the best financial privacy. That road to financial freedom and financial privacy is a long one. Since the law cannot adequately protect financial privacy, we must find alternative peaceful methods to protect our rights. No matter how dissatisfied we are with central banks, there are few viable legal alternatives.Financial Privacy Alternative To Central Banks: Gold and Silver
The most popular alternative has been to buy gold or to buy silver. The reality of using gold or silver has really only been to move savings and investments to gold and silver. Every-day transactions are still conducted in national currencies. I suspect this is due, in part, to the fact that very few merchants or service providers will accept direct payment of gold or silver coins. The premium for coining gold and silver money may also prevent widespread adoption of using gold or silver as common currency.Another Financial Privacy Alternative To Central Banks: Digital Currencies
Another alternative has been the use of digital currency. Since the 1990′s, many digital currencies have been created, separate from the national currencies of the world. Some of them were responding to the market need for easier online payment systems, many of them hoped to achieve what regulation and statutory law has not been able to achieve: true financial privacy. Most of those currencies have either vanished like e-gold, subjected themselves to regulation like GoldMoney, or have become a huge part of the system itself like PayPal. Even those digital currencies that continue to exist without regulation or prosecution, such as Pecunix or WebMoney, are at risk of the fates of their brothers because they all share a common attribute which prevents them from becoming a viable alternative to national currencies for transactions large and small. But many claim that digital currencies will eventually provide a viable alternative to national currencies.Centralization Has Prevented Digital Currencies From Replacing Central-Bank-Issued Currencies
The fundamental flaw that all prior digital currencies have suffered is centralization. Either all transactions must be verified by a central authority, like WebMoney, or when they are backed by a tangible asset such as GoldMoney, there is a physical location where the assets must be stored. Centralization creates an identifiable target for bureaucrats to attempt to prosecute, subpoena, regulate, impose political pressure, or bring a host of other attacks. Physical storage exposes those stored assets to many of these same risks, plus a risk of regime change, war, natural disaster, or some other threat to the physical location which can lead to reporting, regulation, or confiscation.
E-gold and Liberty Dollar faced prosecution and GoldMoney submitted to regulation. The fate of UBS bank account holders demonstrates the risk of relying on friendly governments for financial privacy and financial freedom. UBS defied hundreds of years of established constitutional law and revealed the names of account holders because of political pressure. Thus, systems like WebMoney and Pecunix, established entirely outside of the US, are not immune to the problems of centralization. Centralization is not only a risk for digital currencies. Napster was shut down because it relied on a centralized database. Wikileaks was temporarily shut down because its website was hosted on a single server.
A digital currency backed 100% by gold, like GoldMoney, may ultimately be the best model. But no digital currency has yet become widely accepted enough for the average person to use it to buy groceries, gas, a movie ticket, or a cup of coffee. It will take another kind of model to bridge the gap between the current worldwide monetary dictatorship to a world of financial freedom and privacy.Bitcoin Is The First Decentralized Digital Currency
One of the latest developments in digital currencies, Bitcoin, has solved the centralization problem. It is a very new development, but it has been gaining ground and may be sufficient to make central banks irrelevant to every day life and thus free mankind from the economic bondage that most of the world has been under for at least the last century.How Bitcoin Works As The New Best Financial Privacy Alternative
Bitcoin offers a verifiable store of value while maintaining a decentralized structure. It operates peer to peer, meaning there is no centralized authority to issue or verify Bitcoins. Free, open source software allows users to anonymously and securely generate their own Bitcoins and transfer any amount of Bitcoins anonymously and securely. The software specifically limits inflation and, because it is open source, anyone can audit it.
Rather than discuss the details of how Bitcoin works, I would rather focus on something that hasn’t been fully developed elsewhere. There are several economic and legal benefits and risks to any person who decides to use Bitcoin. I think, ultimately, the benefits far outweigh the risks. If Bitcoin is not the answer, hopefully a similar successor will eventually succeed in securing our financial privacy and thus our financial freedom.The Biggest Risk To Bitcoin
The biggest risk is the point at which Bitcoin users enter or exit the central bank economy from the Bitcoin economy. This is a risk because this is the point at which regulation by government is most likely to be created, most likely to be enforced, and most likely to have some effect. This would probably have the largest effect because many people are deterred from an activity if they would be breaking a law. If enough people were deterred, Bitcoin would be spread to fewer users. Without a sufficient user base, the success of Bitcoin is limited.
Another reason why regulation at the point of entry or exit from the national currency economy might be effective is due to the enhanced visibility of transactions at that point. Once transactions are conducted within the Bitcoin economy, they are very difficult to detect, audit, subpoena, and control.
So far there have been no real efforts to regulate Bitcoin. People can already exchange Dollars, and other national currencies for Bitcoins. The risk is currently very low that anyone who engages in the business of exchanging national currencies for Bitcoins within jurisdiction of US federal law will be subject to regulation as a Money Service Business. There are many other alternate currencies that circulate regularly throughout the US with no such regulation.
Disney is not listed as a registered Money Service Business for selling Disney Dollars. Washington D.C. area businesses trade in a local currency called Potomacs to support local businesses, but nobody is registered as an MSB to exchange those. Even virtual currencies like those used in World of Warcraft or Second Life, which regularly are exchanged for national currencies, have never given rise to registration requirements. But, none of those currencies ever posed a threat to the power of the money printing press that central banks now enjoy.
Even if at some future time, government decides to force Bitcoin exchangers to register, there will likely be many legal ways to avoid having to register as a Money Service Business when exchanging Bitcoins for a national currency.
Bill Rounds, J.D. is a California attorney. He holds a degree in Accounting from the University of Utah and a law degree from California Western School of Law. He practices civil litigation, domestic and foreign business entity formation and transactions, criminal defense and privacy law. He is a strong advocate of personal and financial freedom and civil liberties. This is merely one article of 75 by Bill Rounds J.D.