Wednesday, October 26, 2011

Virtual Currency: Beyond Fun and Games

Karen Epper Hoffman writes in the September 2011 issue of Digital Transactions, "Beyond Fun and Games":
"A fixture in online gaming, virtual currencies are moving into other digital markets and may break into the physical world. But will acceptance costs and regulatory concerns stymie their growth?"

"'Online gaming has been a key driver for virtual currency,' says Beth Robertson, payments research director for Javelin Strategy & Research, Pleasanton, Calif. 'But that's beginning to change because of the move to broaden the use of virtual currency... potentially even to physical goods.'"
After briefly mentioning the decentralized bitcoin and a previous centralized online currency provider, Karen Epper Hoffman provides some insight on potential challenges for the regulators:
"Government oversight could put boundaries around usage in individual countries. But since virtual currency, like the digital goods it pays for and the platforms on which it operates, is global in nature, it's hard to say if that alone would quell any risk."

"In developing a system where users exchanged different currencies for a virtual one, it had created an unregulated foreign-exchange marketplace."

For further reading:
"Facebook currency takes to the web", Paul Dantanus, October 25, 2011
"Getting the Goods on Virtual Items: A Fresh Look at Transactions in Multi-User Online Environments", Justin A. Kwong, William Mitchell Law Review, Fall 2011
"Virtual Currency and Social Network Payments – The New Gold Rush: How Emerging Virtual Transactions Will Alter the Payments Landscape Forever", Javelin Strategy, June 2011

Saturday, October 22, 2011

Bitcoin: Dangerous to Surveillance State

By Hack This Zine, V.13
Fall 2011

BitCoin is an online crypto-currency, computer program, and peer-to-peer network that has been called “the most dangerous open-source project ever created”. Politicians, bankers, and police alike have become terrified that people may be able to untraceably send money to each other through the internet. For those in control of the financial and political systems, this is scary and not without reason: the system they depend on to keep them at the top of the pyramid may very well be replaced by one written by some rebel programmers. So what is this crypto-currency and why should anybody care? Let’s take a look. This article is targeted towards an audience that isn’t technically savvy so please keep reading even if you have no idea what cryptography, peer-to-peer networking, or distributed hash tables are.

Bitcoin, unlike traditional payment methods such as cash, debit cards, or Paypal is decentralized, censorship-proof, provides strong anonymity, and can easily traverse large geographical areas without incurring significant transfer fees. You have hopefully heard about the banking blockade that is currently taking place against Wikileaks. Currently PayPal, Visa, MasterCard, and Bank of America are all refusing to allow their customers to send money to the organization[blockade]. Paypal in particular has a long history of suspending accounts and stealing hundreds of thousands of dollars for no reason from organizations such as Cryptome, Tortoise SVN, a Katrina relief fund, Courage to Resist/Bradley Manning Support Network, and Minecraft just to name a few [paypalfreeze]. BitCoin is one example of a technology that can prevent this type of situation from happening in the future.

So, how is Bitcoin different than current online payment systems? Let’s take a quick look at some of the things that make it so unique and useful for activists.

About Bitcoin Anonymity

In the past couple of years, we’ve seen a number of organizations such as local copwatch programs, groups that support political prisoners, and online news sites for activists start to accept donations through Paypal (and consequently debit/credit cards). This nice as it allows groups and causes to quickly and easily receive money from all over the world. Unfortunately, we’re also taking quite a hit in terms of security.

In the same ways that email communication and Facebook give the state an incredible tool for mapping and supressing social movements, so do our current methods of sending money to each other. If your area is lucky enough to have a fundraiser for your favourite political prisoner, then you can just donate cash but chances are this may not be the case and the organizers of this event are probably sending the money via bank wire or paypal anyways. The FBI, Department of Homeland Security, and other organizations in charge of repressing dissent know the biggest threat to U.S. power comes from decentralized, leaderless, geographically dispersed groups of people who we call activists, dissidents and revolutionaries. These types of threats are most easily countered by finding important nodes in the network, and removing them. To do this requires a detailed map of the social network. When you see the police coming down on a comrade or an organization in your movement, this is because their social network intelligence has lead them to believe that they are the ‘key players’ whose removal will deal a below to the movement’s effectiveness. Often times their analysis of who/what is important and difficult to replace is true and the data they use to reach that conclusion is given to them by our poor security culture, the methods through which we communicate, and how we send money.

Bitcoin transactions provide you with payment anonymity. There is no central site or organization with whom you must register or send the transaction through. Instead, you simply run the BitCoin software which creates a pseudononymous address for you on the network which is randomly generated and looks something like this: (1QFnuvD5jK6JMVG4PtDv4GUmDrCnpBRShq). Your address is like your bank account, anybody can send and receive money to it. You can create as many addresses as you like which can each have their own BitCoin balances. This identity is not associated with your real name unless you post it on your Facebook or somewhere else that would be. This is comprable to the name you would use on a web forum or a chat room.

Each BitCoin spent is uniquely tracked through the network, so if you receive a bitcoin or send a BitCoin, anybody can see that transaction. This has to be part of the network to insure that any individual bitcoin isn’t spent twice. Since your real identity is not tied to your BitCoin address, this shouldn’t theoretically be a problem.

So let’s take an example: At a large demonstration, a bunch of people are arrested and a group which we’ll call the Defense Committee quickly forms to raise some legal fees. They set up a website with some information on how to donate. Some people live close enough to the events such as parties, fundraisers, and skate nights they are putting on to simply go there and donate cash. Since there is so much repression going on, the group needs to solicit money from outside their local area so they set up a Paypal account. Over 800 people donate a little under $10,000 which covers most if not all of the legal fees (yay!). A couple days after the legal fees have been paid, Agent Smith comes along and decides to see just who donated all this money. He asks Paypal who happily hands the information with no or barely any legal justification and he now has a list of everybody who donated. He has just been given a powerful tool for mapping the social networks of these dedicated activists which he can use to launch campaigns of repression against them. He also has the justification he needs to perform additional surveillance on these individuals who otherwise may not have even appeared on the radar. These are the same reasons that informants attempt to become administrators on mailing lists, get people’s cell phone records, take video cameras to protests, and become treasurers for fundraising groups: so that they can map out who are the ‘key players’ and neutralize them.

Let’s say that instead of PayPal, the defense committee prefers BitCoin and posts their BitCoin address online. Luckily for them, a number of people and groups in their movement are already familiar with BitCoin and send them a bunch of BitCoins (which they exchange for real cash from a BitCoin exchanger which we’ll get to in a bit). Agent Smith now has a problem on his hands: He has no idea how BitCoin works because it’s a new technology, which means his agency has probably never heard of it. He has to send a frantic email to somebody in another branch of the agency asking what the hell BitCoin is. After some investigation, he is able to see all the BitCoin addresses which sent BitCoin to the Defense Committee’s BitCoin address. Like many organizations, the Defense Committee encourages people to contact them for a “private” BitCoin address. Agent Smith has no idea what those addresses are or who sent BitCoins to them. He spends a couple days researching all these addresses and finds that only a couple of them have ever been posted online before and most of those happen to belong to other legal defense groups so he’s at a dead end there. In the end, Agent Smith is left pretty much empty-handed after exhaustive investigative work which he now decides he probably won’t even be doing in the future.

Lack of Intermediaries

When you wire money through a bank, use a credit card, or use an online payment system like Paypal, you usually pay a transaction fee in exchange for the service they provide you. Depending on which method you use to transfer money, the fees may be small or large and the general rule is that if your money has to cross national borders then the fees go up exponentially. You also end up paying an exchange rate so you can convert your money to some other currency.

With BitCoin, you transfer your money through the BitCoin network (which is run by volunteers and anybody who runs the BitCoin program) and there’s no mandatory fee for transfers. Transfers only take a few seconds but take longer for the network to “confirm” in the same way that you might have pending charges on your bank account/debit card. The lack of intermediaries also makes BitCoin extremely resistant to censorship and the ups and downs of many national economies. The latter feature is particularly useful if your country is financially unstable or in the middle of a political crisis. A BitCoin is a BitCoin and it will be worth the same amount no matter who you send it to or where you send it from. This also means you don’t have to trust your bank or its investment decisions.

BitCoin also can’t freeze your account, has no minimum balance or monthly fees, etc.

Actually Using Bitcoin

1. Download BitCoin

This step is pretty easy. Whether you’re on Windows, Linux, or Mac you can get BitCoin running in less than five minutes (think of how long it takes you to open a checking or paypal account if this seems like a long time). Download BitCoin from

2. Get Some BitCoins

Now that you have BitCoin set up and a BitCoin address, we need to get you some BitCoins. You can either buy BitCoins or have somebody give them to you. If you’re setting up BitCoin for an organization that is accepting donations, simply copy your “receiving address” onto your website, blog, or wherever you solicit donations from people. If you have no friends who use BitCoin yet but want to see what a transfer looks like, you can get some free BitCoins at the BitCoin Faucet You do not need to have the BitCoin program open to receive BitCoins. The network will remember the transaction and it will appear in your program when you start it next. If you don’t see a transaction you expect, keep waiting until the number of blocks at the bottom of the program stops going up. If you’re looking to buy things using BitCoin such as web hosting, pre-paid debit cards, or clothing then you’ll need to buy some BitCoins first. There are a number of places online (and in real life) that will sell you BitCoins which are called “exchangers”. They all offer a certain rate which is pretty close to the actual value of a BitCoin and cheaper in bulk. Depending on which exchanger you go with, you can buy BitCoins with cash, money orders, paypal, credit cards, or checks.

There’s a frequently updated list of currency exchangers at: The big exchanges at the moment are Mt. Gox and BitCoin7 but there’s plenty of smaller ones, some of which may be physically near you such as the London BitCoin Exchange.

Since BitCoin is fairly new, the price of BitCoins isn’t incredibly stable at the moment so unless you’re trying to invest in them, just buy enough for whatever transaction you’ll be doing. Keep in mind that your BitCoin exchanger may record your IP address and your BitCoin address, removing much of the anonymity BitCoin

3. Convert Your BitCoins to Cash!

If you have BitCoins left over or just got a bunch of ‘em and want to turn them into your currency of choice, you’ll need to sell them. You can do this through the same exchangers that you bought them through.

Common Questions

Below are a couple common questions about BitCoin. There are a whole slew of myths out there, so please research them before dismissing this online payment system. For a list of a bunch more (or more technical explanations of the ones below), see

How Anonymous is BitCoin?

When used properly, BitCoin can provide you a very high degree of anonymity. The way it is configured by default, it provides you with more anonymity than any major payment system but you probably shouldn’t publicly do anything with it that would get you in hot water. There’s a good explanation of what anonymity it
provides and how it can be improved at There’s an article about an interesting study into the level of anonymity most BitCoin users have at If you want to maintain a high degree of
anonymity, you should use a “mixing service” and proxy your BitCoin connection but that’s beyond the scope of this article.

Can’t Anybody Just Make Fake BitCoins and Spend Them?

This simply isn’t true. BitCoins are made by doing very intensive computations (which become more and more difficult as the network grows). In the same way that counterfeiting money is extremely difficult, counterfeiting BitCoins is because of the cryptography used in it. The “minting” of BitCoins is done by part of the network who donate their spare CPU cycles in order to support it (called mining). In exchange, they get a small amount of BitCoins which often times is less than they spend on electricity and hardware. In other words, you can’t just make a bunch of BitCoins and spend them because you’d have to do the cryptography first which you can’t fake as it’s verified by the rest of the BitCoin network. The more computation that is done, the stronger the network will be.

BitCoin is a Giant Ponzi Scheme/Early Adopters are Unfairly Rewarded

A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value while risking time and money. Late adopters profit from the usefulness of a stable and widely accepted p2p currency. The vast majority of the 21 million possible Bitcoins still have not been distributed. By starting to mine or acquire bitcoins today, you too can become an early adopter.

Isn’t BitCoin Illegal? Don’t People use BitCoin to do Illegal Things?

HELP! THE WORLD IS SCARY! If the in-game currency in World of Warcraft, Gold, and coupons become illegal then BitCoin will be as well. BitCoin is simply a commodity you can buy and sell just like precious metals, jewelry, or cardboard. Their value is determined by what others are willing to pay for them. People use BitCoin to do all sorts of things, the majority of which are legal. Of course people will do illegal things with BitCoin just like they do with cash, cell phones, or knives. Cash is actually more anonymous than BitCoin in many ways and less likely to get you caught. BitCoin also can’t be shut down as long as the internet still exists and is decentralized so the government trying to do so isn’t a huge issue.

Where can I spend BitCoin?

You can spend it at all sorts of places to buy things from web hosting to design services to music and books. Here’s a quick list of places that accept it:

What happens if my computer crashes?

If you lose or have your “wallet” stolen, which is a file on your computer that BitCoin stores your information in, then you will indeed lose access to all of your BitCoins. This is why if you’re going to have a lot of them or use it frequently then you might want to consider making backups and securing your computer. You can also use an eWallet service, which is a site that runs BitCoin for you and holds your wallet. If you do this, make sure the service has a good reputation and is worthy of your trust.

Links and additional resources:

[paypalfreeze] Paypal Freezes Bradley Manning Support Network/Courage to Resist:
paypal-cuts-off-account-bradley-manning-support.shtml http://

Paypal freezes Katrina aid:

Paypal freezes Cryptome:

Paypal freezes Minecraft:

Paypal Freezes TortoiseSVN:


Getting started with BitCoin:

Some BitCoin FAQs:

A good discussion on the Anonymity of BitCoin:

Reprinted with permission.

For further reading:
"Cryptocurrency", James Surowiecki, MIT Technology Review, October 2011
"The World's First Bitcoin Conference", Morgen E. Peck, IEEE Spectrum, October 2011
"An Analysis of Anonymity in the Bitcoin System", Fergal Reid and Martin Harrigan, September 30, 2011
"Easily Anonymous Bitcoins", Michael Hendricks, September 30, 2011
"Anonymizing Bitcoin", Andrew Badr, September 10, 2011
"Why Bitcoin is not as anonymous as most users think", Jacob Aron, July 26, 2011
"Bitcoin: A Technical Introduction" (video), Brian Warner, July 21, 2011
"Bitcoin: More Covert than it Looks", Thomas Lowenthal, July 14, 2011
"Bitcoin, gold and the demise of fiat money", Detlev Schlichter, June 30, 2011

Friday, October 21, 2011

Cash Transactions Banned by Louisiana

By Thad D. Ackel, Jr. Esq.
Ackel & Associates L.L.C.
Tuesday, October 11, 2011

Government Takes Private Property Without Due Process

This summer, the State Legislature and Governor of Louisiana passed a law that bans individuals and businesses from transacting in cash if they are considered a “secondhand dealer”. House Bill 195 of the 2011 Regular Session (Act 389) broadly defines a secondhand dealer to include “… Anyone, other than a non-profit entity, who buys, sells, trades in or otherwise acquires or disposes of junk or used or secondhand property more frequently than once per month from any other person, other than a non-profit entity, shall be deemed as being in the business of a secondhand dealer. ” The law then states that “A secondhand dealer shall not enter into any cash transactions in payment for the purchase of junk or used or secondhand property. Payment shall be made in the form of check, electronic transfers, or money order issued to the seller of the junk or used or secondhand property…” The broad scope of this definition can essentially encompass everyone; from your local flea market vendors and buyers to a housewife purchasing goods on ebay or craigslist, to a group of guys trading baseball cards, they could all be considered secondhand dealers. Lawmakers in Louisiana have effectively banned its citizens from freely using United States legal tender.

The law goes further to require secondhand dealers to turn over a valuable business asset, namely, their business’ proprietary client information. For every transaction a secondhand dealer must obtain the seller’s personal information such as their name, address, driver’s license number and the license plate number of the vehicle in which the goods were delivered. They must also make a detailed description of the item(s) purchased and submit this with the personal identification information of every transaction to the local policing authorities through electronic daily reports. If a seller cannot or refuses to produce to the secondhand dealer any of the required forms of identification, the secondhand dealer is prohibited from completing the transaction.

This legislation amounts to a public taking of private property without due process or compensation. Regardless of whether or not the transaction information is connected with, or law enforcement is investigating a crime, individuals and businesses are forced to report routine business activity to the police. Can law enforcement not accomplish its goal of identifying potential thieves and locating stolen items in a far less intrusive manner? And of course, there are already laws that prohibit stealing, buying or selling stolen goods, laws that require businesses to account for transactions and laws that penalize individuals and businesses that transact in stolen property. Why does the Louisiana State Legislature need to enact more laws infringing on personal privacy, liberties and freedom?

Motivating the introduction of this legislation was an increase in criminal activity, necessitating law enforcement to develop additional tools in tracking potential criminals. Thefts of copper and other precious metals have risen recently with higher commodity prices and mounting pressures from the economic downturn. The added restrictions under this recent legislation have come about under the pretense of cracking down on crime and helping the government take care of you, all at the cost of your individual privacy, economic, civil liberty and freedom.

Interestingly enough, although Pawnshops are still required to obtain clients personal information and transmit their client database information to law enforcement, they are exempt from the restriction of cash payments. A jeweler next door to a pawnshop cannot offer clients the same payment method offered by its competing pawnshop neighbor.

Act 389 passed by unanimous consent of the Louisiana House of Representatives and only mustered one nay vote (Senator Neil Riser) from the State Senate. The governor signed the legislation into law on July 1, 2011.

Thad D. Ackel, Jr. serves as lead counsel at Ackel & Associates L.L.C. and Broker of Tribute Real Estate. Reprinted with permission.

For further reading:
"Tool Time: LA Bans Cash For 2nd Hand Goods" (video), Russia Today, October 21, 2011
"Repealing the Ban on Cash / Constitutional Amendment" Thad Ackel, October 21, 2011
"Louisiana Law Bans Cash for Second Hand Transactions," Chuck Wolk, October 20, 2011
"Turn In Your Bin Ladens", Jonathan Lipow, The New York Times, December 17, 2010

Monday, October 17, 2011

Why the State Demands Control of Money

By Hans-Hermann Hoppe
Mises Daily
Thursday, October 13, 2011

Imagine you are in command of the state, defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax, i.e., to unilaterally determine the price that your subjects must pay you to perform the task of ultimate decision making.

To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief. Not from your point of view, of course, but mischief from the point of view of those subject to your rule as ultimate judge. Predictably, you will use your position to enrich yourself at other people's expense.

More specifically, we can predict in particular what your attitude and policy vis-à-vis money and banking will be.

Assume that you rule over a territory that has developed beyond the stage of a primitive barter economy and where a common medium of exchange, i.e., a money, is in use. First off, it is easy to see why you would be particularly interested in money and monetary affairs. As state ruler, you can in principle confiscate whatever you want and provide yourself with an unearned income. But rather than confiscating various producer or consumer goods, you will naturally prefer to confiscate money. Because money, as the most easily and widely saleable and acceptable good of all, allows you the greatest freedom to spend your income as you like, on the greatest variety of goods. First and foremost, then, the taxes you impose on society will be money taxes, whether on property or income. You will want to maximize your money-tax revenues.

In this attempt, however, you will quickly encounter some rather intractable difficulties. Eventually, your attempts to further increase your tax income will encounter resistance in that higher tax rates will not lead to higher but to lower tax revenue. Your income — your spending money — declines, because producers, burdened with increasingly higher tax rates, simply produce less.

In this situation, you only have one other option to further increase or at least maintain your current level of spending: by borrowing such funds. And for that you must go to banks — and hence your special interest also in banks and the banking industry. If you borrow money from banks, these banks will automatically take an active interest in your future well-being. They will want you to stay in business, i.e., they want the state to go on in its exploitation business. And since banks tend to be major players in society, such support is certainly beneficial to you. On the other hand, as a negative, if you borrow money from banks you are not only expected to pay your loan back, but to pay interest on top.

The question, then, that arises for you as the ruler is, How can I free myself of these two constraints, i.e., of tax-resistance in the form of falling tax revenue and of the need to borrow from and pay interest to banks?

It is not too difficult to see what the ultimate solution to your problem is.

You can reach the desired independence of taxpayers and tax payments and of banks, if only you establish yourself first as a territorial monopolist of the production of money. On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. (Normally, no one would accept worthless pieces of paper as payment for anything. Pieces of paper are acceptable as payment only insofar as they are titles to something else, i.e., property titles. In other words then, you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing.)

Under competitive conditions, i.e., if everyone were free to produce money, a money that can be produced at almost zero cost would be produced up to a quantity where marginal revenue equals marginal cost, and because marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into "real values") — and the more so the cheaper the money commodity.

In a way, you have thus accomplished what all alchemists and their sponsors wanted to achieve: you have produced something valuable (money with purchasing power) out of something practically worthless. What an achievement. It costs you practically nothing and you can turn around and buy yourself something really valuable, such as a house or a Mercedes; and you can achieve these wonders not just for yourself but also for your friends and acquaintances, of which you discover that you have all of a sudden far more than you used to have (including many economists, who explain why your monopoly is really good for everyone).

What are the effects? First and foremost, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. There exist just as many other goods around as before. This immediately refutes the notion — apparently held by most if not all mainstream economists — that "more" money can somehow increase "social wealth." To believe this, as everyone proposing a so-called easy-money policy as an efficient and "socially responsible" way out of economic troubles apparently does, is to believe in magic: that stones — or rather paper — can be turned into bread.

Rather, what the additional money you printed will affect is twofold. On the one hand, money prices will be higher than they would otherwise be, and the purchasing power per unit of money will be lower. In a word, the result will be inflation. More importantly, however, all the while the greater amount of money does not increase (or decrease) the total amount of presently existing social wealth (the total quantity of all goods in society), it redistributes the existing wealth in favor of you and your friends and acquaintances, i.e., those who get your money first. You and your friends are relatively enriched (own a larger part of the total social wealth) at the expense of impoverishing others (who as a result own less).

The problem, for you and your friends, with this institutional setup is not that it doesn't work. It works perfectly, always to your own (and your friends') advantage and always at the expense of others. All you have to do is to avoid hyperinflation. For in that case people would avoid using money and flee into real values, thus robbing you of your magic wand. The problem with your paper-money monopoly, if there is one at all, is only that this fact will be immediately noticed also by others and recognized as the big, criminal rip-off that it indeed is.

But this problem can be overcome, too, if, in addition to monopolizing the production of money, you also set yourself up as a banker and enter the banking business with the establishment of a central bank.

Because you can create paper money out of thin air, you can also create credit out of thin air. In fact, because you can create credit out of nothing (without any savings on your part), you can offer loans at cheaper rates than anyone else, even at an interest rate as low as zero (or even at a negative rate). With this ability, not only is your former dependency on banks and the banking industry eliminated; you can, moreover, make banks dependent on you, and you can forge a permanent alliance and complicity between banks and state. You don't even have to become involved in the business of investing the credit yourself. That task, and the risk involved in it, you can safely leave to commercial banks. What you, your central bank, need to do is only this: You create credit out of thin air and then loan this money, at below-market interest rates, to commercial banks. Instead of you paying interest to banks, banks now pay interest to you. And the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still submarket interest rates (to earn from the interest differential). In addition, to make the banks especially keen on working with you, you may permit the banks to create a certain amount of their own new credit (of checkbook money) in addition and on top of the credit that you have created (fractional-reserve banking).

What are the consequences of this monetary policy? To a large extent they are the same as with an easy money policy: First, an easy credit policy is also inflationary. More money is brought into circulation and prices will be higher, and the purchasing power of money lower, than would have been the case otherwise. Second, the credit expansion too has no effect on the quantity or quality of all goods currently in existence. It neither increases nor decreases their amount. More money is just this: more paper. It does not and cannot increase social wealth by one iota. Third, easy credit also engenders a systematic redistribution of social wealth in favor of you, the central bank, and the commercial banks within your cartel. You receive an interest return on money that you have created at practically zero cost out of thin air (instead of on money costly saved out of an existing income), and so do the banks, who earn additional interest on your costless money loans. Both you and your banker friends thereby appropriate an "unearned income." You and the banks are enriched at the expense of all "real" money savers (who receive a lower interest return than they otherwise would, i.e., without the injection of your and the banks' cheap credit into the credit market).

On the other hand, there also exists a fundamental difference between an easy, print-and-spend money policy and an easy, print-and-loan credit policy.

First off, an easy credit policy alters the production structure — what is produced and by whom — in a highly significant way.

You, the chief of the central bank, can create credit out of thin air. You do not have to first save money out of your money income, i.e., cut your own expenses, and thus abstain from buying certain nonmoney goods (as every normal person must, if he extends credit to someone). You only have to turn on the printing press and can thus undercut any interest rate demanded of borrowers by savers elsewhere in the market. Granting credit does not involve any sacrifice on your part (which is why this institution is so "nice"). If things then go well, you will be paid a positive-interest return on your paper investment, and if they don't go well — well, as the monopoly producer of money, you can always make up losses more easily than anyone else: by covering your losses with even more printed paper.

Without costs and no genuine, personal risk of losses, then, you can grant credit essentially indiscriminately, to everyone and for any purpose, without concern for the creditworthiness of the debtor or the soundness of his business plan. Because of your "easy" credit, certain people (in particular investment bankers) who otherwise would not be deemed sufficiently creditworthy, and certain projects (in particular of banks and their main clients) that would not be considered profitable but wasteful or too risky instead do get credit and do get funded.

Essentially, the same applies to the commercial banks within your banking cartel. Because of their special relationship to you, as the first recipients of your costless low-interest paper-money credit, the banks, too, can offer loans to prospective lenders at interest rates below market interest rates — and if things go well for them they go well; and if they don't, they can rely on you, as the monopolistic producer of money, to bail them out in the same way as you bail yourself out of any financial trouble: by more paper money. Accordingly, the banks too will be less discriminating in the selection of their clients and their business plans and more prone to funding the "wrong" people and the "wrong" projects.

And there is a second significant difference between a print-and-spend and a print-and-loan policy and this difference explains why the income and wealth redistribution in your and your banker friends' favor that is set in motion by easy credit takes the specific form of a temporal — boom-bust — cycle, i.e., of an initial phase of seeming general prosperity (of expected increases in future incomes and wealth) followed by a phase of widespread impoverishment (when the prosperity of the boom period is revealed as a widespread illusion).

This boom-bust feature is the logical — and physically necessary — consequence of credit created out of thin air, of credit unbacked by savings, of fiduciary credit (or however else you may call it) and of the fact that every investment takes time and only shows later on, at some time in the future, whether it is successful or not.

The reason for the business cycle is as elementary as it is fundamental. Robinson Crusoe can give a loan of fish (which he has not consumed) to Friday. Friday can convert these savings into a fishing net (he can eat the fish while constructing the net), and with the help of the net, then, Friday, in principle, is capable of repaying his loan to Robinson, plus interest, and still earn a profit of additional fish for himself. But this is physically impossible if Robinson's loan is only a paper note, denominated in fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because he has consumed them all.

Then, and necessarily so, Friday must fail in his investment endeavor. In a simple barter economy, of course, this becomes immediately apparent. Friday will not accept Robinson's paper credit in the first place (but only real, commodity credit), and because of this, the boom-bust cycle will not get started. But in a complex monetary economy, the fact that credit was created out of thin air is not noticeable: every credit note looks like any other, and because of this the notes are accepted by the takers of credit.

This does not change the fundamental fact of reality that nothing can be produced out of nothing and that investment projects undertaken without any real funding whatsoever (by savings) must fail, but it explains why a boom — an increased level of investment accompanied by the expectation of higher future income and wealth — can get started (Friday does accept the note instead of immediately refusing it). And it explains why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory.

But what's a little crisis to you? Even if your path to riches is through repeated crises, brought about by your paper-money regime and central-bank policies, from your point of view — from the viewpoint as the head of state and chief of the central bank — this form of print-and-loan wealth redistribution in your own and your banker friends' favor, while less immediate than that achieved with a simple print-and-spend policy, is still much preferable, because it is far more difficult to see through and recognize for what it is. Rather than coming across as a plain fraud and parasite, in pursuing an easy-credit policy you can even pretend that you are engaged in the selfless task of "investing in the future" (rather than spending on present frivolities) and "healing" economic crises (rather than causing them).

What a world we live in!

Hans-Hermann Hoppe, an Austrian School economist and anarchocapitalist philosopher, is professor emeritus of economics at UNLV, a distinguished fellow with the Ludwig von Mises Institute, and founder and president of The Property and Freedom Society. Reprinted with permission.

Thursday, October 6, 2011

U.S. FinCEN Director Expands Prepaid Access Regulations

The following remarks were made by James H. Freis, Jr., Director of Financial Crimes Enforcement Network on October 5, 2011 at the Money Transmitter Regulators Association Annual Conference.

The full transcript is published here, but I highlighted the "prepaid access" regulatory changes below:
"Let me first discuss the most recent expansion of FinCEN’s AML/CFT regulations to establish a more comprehensive regulatory approach for prepaid access. Because prepaid access is a type of money transmission, FinCEN issued a final rule in July of this year, that puts in place suspicious activity reporting (SAR), and customer and transactional information collection requirements on providers and sellers of certain types of prepaid access similar to other categories of money services businesses.

The final rule:

- Renames 'stored value' as 'prepaid access' to more aptly describe the underlying activity.

- Adopts a targeted approach to regulating sellers of prepaid access products, focusing on the sale of prepaid access products whose inherent features or high dollar amounts pose heightened money laundering risks.

- Exempts prepaid access products of $1,000 or less and payroll products if they cannot be used internationally, do not permit transfers among users, and cannot be reloaded from a non-depository source.

- Exempts closed loop prepaid access products sold in amounts of $2,000 or less.

- Excludes government funded and pre-tax flexible spending for health and dependent care funded prepaid access programs.

- Clarifies that a 'provider' of 'prepaid access' for a prepaid access program can be designated by agreement among the participants in the program or will be determined by their degree of its oversight and control over the program – including organizing, offering, and administering the program. Providers are required to register with FinCEN."
In closing, Director Freis referenced an even broader international objective focused on money service businesses located in foreign jurisdictions:
"Finally, I would like to build upon the closing point in my speech at this event last year. Now that FinCEN has established a solid regulatory framework for prepaid access in the United States, we must continue to promote analogous steps in foreign jurisdictions to mitigate risks of criminal abuse while still facilitating legitimate consumer demands. I welcome industry and governmental cooperation to that end."

For further reading:
"Regs Would Require Travelers To Declare Prepaid Cards At Border Crossings", Joe Palazzolo, WSJ Blogs, October 5, 2011
"FinCEN's New rule adaptable to 'internet system'", Bitcoin Money, October 5, 2011
"U.S. aims to track 'untraceable' prepaid cash cards", M. Alex Johnson,, September 1, 2011
"FinCEN Brings KYC Requirements To Bitcoin?", Bitcoin Money, August 5, 2011
"Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to Prepaid Access", Federal Register, July 29, 2011

Monday, October 3, 2011

Insolvency Risk in the Network-Branded Prepaid-Card Value Chain

Philip Keitel of the Payments Cards Center at the Federal Reserve Bank of Philadelphia published "Insolvency Risk in the Network-Branded Prepaid-Card Value Chain", September 2011.

From the summary:

The value chain for network-branded prepaid cards involves more parties than those commonly present in credit- or debit-card issuing arrangements: the merchant acquirer, processors, a payment network, and a card-issuing bank. These additional participants may include a program manager, a distributor, and a seller. Since a number of independent businesses make up the chain, each one, as well as cardholding consumers, could be exposed to losses resulting from the insolvency of another party in the value chain. This risk is both real and manageable, as illustrated by two recent incidents involving network-branded prepaid cards: the failures of Silverton Bank, N.A.. and Springbok Services, Inc.