Friday, March 30, 2012

The US Government's War on Cash

By Joseph Salerno
The Circle Bastiat
Wednesday, March 28, 2012

By repeatedly refusing to print money in larger bills, the Feds make it harder to make huge financial transactions and can more easily monitor the financial maneuverings of citizens.

Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. One symptom of the war is that the largest denomination of US currency is the $100 note, whose ever-eroding purchasing power is far below the purchasing power of the €500 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). There was even a $100,000 note issued for transactions among Federal Reserve banks. The United States stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation. Since then the largest currency note available to the general public has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!

Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals

Now the war on cash has begun to spread to other countries. As reported a few months ago, Italy lowered the legal maximum on cash transactions from €2,500 to €1,000. The Italian government would have preferred to set a €500 or even €300 maximum limit but reasoned that it should permit Italians time to adjust to the new limit. The rationale for this limit on the size of cash transactions is the fact that the profligate Italian government is trying to reduce its €1.9 trillion debt and views its anticash measures as a means of cracking down on tax evasion, which "costs" the government an estimated €150 billion annually.

The profligacy of the Italian ruling class is in sharp contrast to ordinary Italians who are the least indebted consumers in the eurozone and among its biggest savers. They use their credit cards very infrequently compared to citizens of other eurozone nations. So deeply ingrained is cash in the Italian culture that over 7.5 million Italians do not even have checking accounts. Now most of these "bankless" Italians will be dragooned into the banking system so that the notoriously corrupt Italian government can more easily spy on them and invade their financial privacy. Of course Italian banks, which charge 2 percent on credit-card transactions and assess fees on current accounts, stand to earn an enormous windfall from this law. As controversial former prime minister Berlusconi noted, "There's a real danger of crossing over into a fiscal police state." Indeed, one only need look at the United States today to see what lies in store for Italian citizens.

Meanwhile the war on cash in Sweden is accelerating, although the involvement of the state is less overt. In Swedish cities, cash is no longer acceptable on public buses; tickets must be purchased in advance or via a cell-phone text message. Many small businesses refuse cash, and some bank facilities have completely stopped handling cash. Indeed in some Swedish towns it is no longer possible to use cash in a bank at all. Even churches have begun to facilitate electronic donations from their congregations by installing electronic card readers. Cash transactions represent only 3 percent of the Swedish economy, while they account for 9 percent of the eurozone and 7 percent of the US economies.

A leading proponent of the anticash movement is none other than Bjorn Ulvaeus, former member of the pop group ABBA. The dotty pop star, whose son has been robbed three times, believes that a cashless world means greater security for the public! Others, more perceptive than Ulvaeus, point to another alleged advantage of electronic transactions: they leave a digital trail that can be readily followed by the state. Thus, unlike countries with a strong "cash culture" like Greece and Italy, Sweden has a much lower incidence of graft. As one "expert" on underground economies instructs us, "If people use more cards, they are less involved in shadowy economy activities," in other words, secreting their hard-earned income in places where it cannot be plundered by the state.

The deputy governor of the Swedish central bank, Lars Nyberg, gloated before his retirement last year that cash will survive "like the crocodile, even though it may be forced to see its habitat gradually cut back." But not everyone in Sweden is celebrating the dethronement of cash. The chairman of Sweden's National Pensioners' Organization argues that elderly people in rural areas either do not have credit or debit cards or do not know how to use them to withdraw cash. Oscar Swartz, the founder of Sweden's first Internet provider, a supporter of the phasing out of cash, argues that without the adoption of anonymous payment methods, people who send money and make donations to various organizations can be "traced every time." But, of course, what the artless Mr. Swartz does not see is that this is the whole point of a cashless economy — to make even the most intimate economic affairs of private citizens transparent to the state and its fiscal and monetary apparatchiks, who themselves hate and fear transparency like vampires do sunlight. And then there are the benefits that accrue to the government-privileged banking system from the demise of cash. One Swedish small businessman shrewdly noted the connection. While he gets charged 5 kronor (80¢) for every credit-card transaction, he is prevented by law from passing this on to his customers. In his words, "For them (the banks), this is a very good way to earn a lot of money, that's what it's all about. They make huge profits."

Fortunately, the free market provides the prospect of an escape from the fiscal police state that seeks to stamp out the use of cash through either depreciation of central-bank-issued currency combined with unchanged currency denominations or direct legal limitation on the size of cash transactions. As Carl Menger, the founder of the Austrian School of economics, explained over 140 years ago, money emerges not by government decree but through a market process driven by the actions of individuals who are continually seeking a means to accomplish their goals through exchange most efficiently. Every so often history offers up another example that illustrates Menger's point. The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts (for wheat, soybeans, corn, and sorghum) priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.

As has been widely reported recently, an unlikely crime wave has rapidly spread throughout the United States and has taken local law-enforcement officials by surprise. The theft of Tide liquid laundry detergent is pandemic throughout cities in the United States. One individual alone stole $25,000 worth of Tide detergent during a 15-month crime spree, and large retailers are taking special security measures to protect their inventories of Tide. For example, CVS is locking down Tide alongside commonly stolen items like flu medications. Liquid Tide retails for $10–$20 per bottle and sells on the black market for $5–$10. Individual bottles of Tide bear no serial numbers, making them impossible to track. So some enterprising thieves operate as arbitrageurs buying at the black-market price and reselling to the stores, presumably at the wholesale price. Even more puzzling is the fact that no other brand of detergent has been targeted.

What gives here? This is just another confirmation of Menger's insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions — but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell. But why is laundry detergent being employed as money, and why Tide in particular?

Menger identified the qualities that a commodity must possess in order to evolve into a medium of exchange. Tide possesses most of these qualities in ample measure. For a commodity to emerge as money out of barter, it must be widely used, readily recognizable, and durable. It must also have a relatively high value-to-weight ratio so that it can be easily transported. Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. It is true that Tide is somewhat bulky and inconvenient to transport by hand in large quantities. But enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.

Just like the highly publicized war on drugs that the US government has been waging — and losing — for decades, it is doomed to lose its surreptitious war on cash, because the free market can and will respond to the demand of ordinary citizens for a reliable and convenient money.

Reprinted with permission.
For further reading:
"The end of the cash era", The Economist, February 15, 2007

Thursday, March 29, 2012

Bitcoin Doesn't Need a Dongle

By Jon Matonis
Saturday, March 24, 2012

There's a lot of talk about dongles recently. Square has always relied on a dongle and now PayPal is sporting a fancy triangle-shaped dongle, nicknamed the 'Blue Dorito'. Both of these dongles equip your mobile phone to accept and process credit cards securely by inserting the device into the smartphone's 3.5mm audio input jack. Apparently, this passes for financial innovation in mobile payments but I file it under the 'not-disruptive-enough' category. Truly-disruptive financial innovation is already here with decentralized bitcoin. And, bitcoin doesn't need a dongle!

Bitcoin bypasses the need for an external dongle because it bypasses the existing railroad tracks of the entrenched legacy players like VISA and Mastercard. Just as the newly-funded VC favorites of Boku, Jumio, and CardSpring layer on top of the legacy network, Square and PayPal repeat the strategy of keeping the banks and credit card processors in the transaction loop, and the lion's share of the revenue loop as well. This might be a good short-term bridge but the real action is taking place with solutions that route around the legacy networks by replacing the unit of account, or numéraire. The easiest way to circumvent the high-fee transaction networks is to utilize a different currency unit since it does not come with the same handicaps and legacy restrictions of a political currency unit. Erik Voorhees states that we need to advocate "the separation of money and state."

"The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010," according to research and advisory firm Aite Group. With massive new opportunity like this coming into the mobile payments arena, why not harness it into meaningful paradigm shifts rather than expand and enrich the existing processors and centralized networks?

The mobile payment landscape for lightweight bitcoin android apps includes Bitcoin Wallet, Bitcoin Android, and BitcoinSpinner, with Paytunia on the horizon. With the more difficult to obtain approval from Apple, the App Store offers BitPak as the first bitcoin wallet for the iPhone -- that is if you're willing to wait for the entire block chain to download. Amazingly, these functioning wallets allow you to send and receive bitcoin from your smartphone today. For instance with Bitcoin Wallet, you can send bitcoin between phones just by scanning the QR code that is displayed, by invoking the application, or via NFC (Near Field Communication).

So, what is a typical bitcoin transaction flow without involving banks or credit card networks at the point of sale? As a merchant solution provider, U.S.-based Bit-Pay bills itself as the world leader in bitcoin payment processing and they have produced a simple mobile checkout demonstration video. Merchants enjoy no risk of chargebacks, no costly PCI compliance, global acceptance from any country, and low .99% pricing compared to 2.75% and 2.7%, for Square and PayPal respectively. Of course, the .99% pricing applies only if merchant maintains the balance in bitcoin rather than instantly converting out to US Dollars. Bitcoin 24/7 is an alternative merchant services provider based in Ireland.

A bitcoin processor can be beneficial for a number of reasons including overall risk mitigation and managing the process for adequate block chain confirmations. Some third-party innovators are even making advancements in "green address" techniques that enable secure, zero-confirmation transactions. However, without a third-party processor, which is entirely possible because no special hardware is required other than a smartphone or merchant deposit card, transaction fees can be at or near zero.

Mobile wallet security in general is constantly improving and it is already more secure than a physical wallet due to the nature of passwords and remote back-ups. Bitcoin certainly has a slot in the digital mobile wallet of the future. Frictionless mobile phone remittances to a worker's home country, such as Africa, may just be the killer app for bitcoin. I'm sorry but fancier buggy whips and dongles are not disruptive.

Wednesday, March 28, 2012

Why the P2P Foundation is Paying Its Salaries in Bitcoin

By Michel Bauwens
P2P Foundation
Wednesday, March 28, 2012

The P2P Foundation thinks that readers may be interested in the following recent development.

First, one word about the structure of the P2P Foundation. The Foundation is first of all a virtual and physical community of contributors, people who volunteer content for our wiki, blog and other resources. This is entirely a non-remunerated activity and creates our knowledge commons, which people in the world can access for free.

Our wiki has about 17,000 articles which have been viewed more than 18 million times, with an average daily readership of 23,000 for our domain, which includes the blog.

The Foundation is also a nonprofit association legally situated in the Netherlands, and the Foundation ‘enables and empowers’ the collaboration infrastructure of the community. The legal structure allows us to pay and receive income for activities that are related for this purpose.

The Foundation also has a cooperative, with a separate legal status, which will allow us to undertake activities for third parties. The cooperative is conceived as being a global phyle, a community-oriented enterprise that aims to generate income for the contributors to the commons and the Foundation, so that we become financially sustainable. As a phyle, we operate globally with cooperators located in different parts of the globe. The coop is dedicated to the common good of humanity and the p2p knowledge commons in particular, and is aimed to sustain it, and those who work for it. It is not a profit-maximising entity, but a product-maximising entity. It operaties in the market, but ‘for’ the commons.

However, because of administrative delay issues in the registration process, our first external contract is undertaken under the aegis of the P2P Foundation as an association.

In the context of our first contract with external parties, we believe Bitcoin to be a major development, pregnant with symbolic meaning about the future structures of the world-system.

First of all, Bitcoin is the first operational, socially-sovereign, digital currency. While there have been many other local complementary currencies, they always have issues of scaling them to a global plane. Bitcoin exists, not through the creation of money by private banks and national states, but because a digitally literate global community decided to trust a particular instantiation of a protocol for the distributed creation of money. It is part of the general trend of the social design of p2p systems, to enable trust with strangers on a global scale, and to align, instead of to oppose, individual and collective interests.

The Bitcoin protocol started running, and generating Bitcoins, in January 4 2009. It has been over three years now, and yet these are still the very early days. Bitcoin already has developed and impressive, if experimental, ecology of operational support infrastructures and services. These initiatives are autonomous, driven by no authority other than that which emanates from the needs of the community of users and the nature of the Bitcoin protocol. At this point, it is already working as a small-scale global reserve currency, arguably a better storage of value than the dangerously burdened Euros and Dollars. Indeed while the value of national currencies is expected to decline in times of geopolitical dislocation, including catastrophically at times, the value of Bitcoin is expected to rise because of its inherent ‘deflationary’ design.

Value storage through Bitcoin has profound political implications, as it is the first currency that decentralises the creation of new units (or, ‘mining’ in Bitcoin terminology), rather than the current system where new money is created as a byproduct of new debt. The whole world’s ‘formal’ economy is backed by debt, and debt is backed by violence. This can be verified by defaulting, and subsequently resisting eviction: state force will be used sooner rather than later. Bitcoin value storage is revolutionary as it deflates the dark power of debt, and allows to envision a world where this power of debt is no longer at the origin of economic activity. Bitcoin draws its value from peer-to-peer network dynamics, and mints new currency not through debt but through raw computational activity. Moreover, this essential difference from the current system, we argue, is actually in itself the most powerful claim to value of the Bitcoin monetary system.

You can buy many different goods and services with Bitcoin, exchange it with other currencies, etc… It works on a global scale. Hence, it is symbolic of the shift of our world system to a ‘post-Westphalian’ phase, a phase that goes not only beyond the dominance of the nation-states, but also beyond the private global powers that have hijacked global governance, such as the financial system of the 1% . Indeed, this new currency can be created, under conditions set by the protocol, by any participating computer. It is a true p2p monetary system. A socially sovereign currency that can scale globally will be, and is, a vital part of the emerging distributed infrastructure of value creation that the P2P Foundation calls for. This does not mean that Bitcoin is necessarily the final and perfect answer to our needs, but it is an important step in demonstrating that it CAN be done. We envisage the development of future ‘forks’ and currencies that have other qualities embedded in them, and call for monetary bio-diversity.

It is to demonstrate our commitment to such developments, that we will now pay our collaborators in a mix of currencies, and part of it will be in Bitcoin. The first of the members of the P2P Foundation to be paid Bitcoin honoraries is our in-house researcher Nicolás Mendoza. This first income was payed 50% in Bitcoin, and we are committed to offer all of our cooperators the possibility to receive Bitcoin payments at their convenience.

Starting today, the P2P Foundations will accept Bitcoin donations to the following address:

Thank you for your support!

Reprinted with permission.

Saturday, March 24, 2012

Could Bitcoin Become the Currency of System D?

By Jon Matonis
Monday, March 19, 2012

If zeros and ones are outlawed, only outlaws will use zeros and ones.

Cryptography shall always have a place in securing our digital future and most especially in securing our digital value. Advanced public-key encryption for the masses cannot be eliminated nor denied -- the genie is out of the bottle and mankind is the better for it. The unintended consequence of regulating or restricting decentralized cryptocurrencies such as bitcoin is that their use as a currency will have been 'recognized' officially and that usage will be driven largely underground.

However, underground may not be so bad anymore as Robert Neuwirth points out in his brilliant Foreign Policy article, "The Shadow Superpower". If aggregated, this $10 trillion global black market is the world's second largest economy after the United States and it is also the world's fastest growing economy. The OECD (Organisation for Economic Co-operation and Development) projects that, by the year 2020, fully two-thirds of the world's workers will inhabit this shadow economy, or "System D." As Neuwirth elaborates, it refers to the entire untaxed, unlicensed, and unregulated cash-based economy:
"System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of "l'economie de la débrouillardise." Or, sweetened for street use, "Systeme D." This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy."
Enter bitcoin. All kind of vibrant economic activity is occurring in this informal economy, which in some regions is between 20-60% of GDP or more, and every economy needs a currency. Essentially, bitcoin is the 'System D' of currencies -- global, decentralized, and non-state sanctioned. It is still early days but as bitcoin bypasses traditional banking and financial institutions, it is a currency off the grid just as System D. To deny the existence of System D is to deny the fact that economic participants find ways to survive even during prolonged times of hardship. According to Neuwirth "it asserts an important truth: what happens in all the unregistered markets and roadside kiosks of the world is not simply haphazard. It is a product of intelligence, resilience, self-organization and group solidarity."

It is inconceivable to think of those in under-developed countries and the developed economies of the eurozone coping without System D activity given the recurring recessions that are exacerbated by the violent central bank-induced business cycles. Despite increasing consumption taxes like VAT (value-added tax), the informal economy can still provide relief through various markets and bazaars. Americans too will need black markets to survive. System D represents the future.

Currently, transactions within the shadow economy have to be made face to face, but an electronic System D currency would enable remote and even cross-border transactions. This could significantly broaden the entire informal ecosystem because consumers would have an international reach and merchants would have vast new choices in selecting suppliers. Not all bitcoin transactions require a standard computer and if the mobile payment prognosticators are correct, the mobile phone equipped with applications like Bitcoin Android could end up originating the majority of bitcoin transactions. Contrary to the thesis of anti-cashist David Wolman, the unbanked and the System D traders will not migrate away from cash unless its replacement offers similar privacy features.

Bitcoin is barely three years young. Any bootstrapped currency initially will have a chicken-and-egg problem due to the fact that a currency's overall success is determined by its network effect and pervasive spread. Critics of bitcoin as a currency are quick to point out that not many merchants accept it as a payment type yet. That will change. And, they also point out that the total available market is severely limited. Oh, how wrong!  Bitcoin's first potential mega-market just so happens to be the second largest economy in the world and its sole competitor in that sphere is depreciating government paper cash. Game on.

Tuesday, March 20, 2012

Esquire Editor Fined for Promoting Silk Road

From this March 15th, 2012 Russia Today broadcast, it is amusing to watch the news anchors struggle around trying not to mention something that they are not allowed to mention.

According to realhuman on the Reddit site, "Police called it 'promotion of drugs'. The magazine published buyers' reviews about different sellers and how to log in with tor and buy with bitcoin. The fine was about $1300."

For further reading:
"Russian Esquire magazine fined for writing about Silk Road", Amir Taaki, Bitcoin Media, March 15, 2012
"Silk Road: A Vicious Blow to the War on Drugs", The Austin Cut, January 2, 2012
"Bit Coins for Black Markets", Virginia Prescott, New Hampshire News, November 16, 2011
"Using Silk Road",, June 2011

Saturday, March 17, 2012

Brainwallet: The Ultimate in Mobile Money

By Jon Matonis
Monday, March 12, 2012

For as much as I am fascinated by the societal and political implications of bitcoin, I must admit that I am equally fascinated by the implications of Brainwallet. Quite simply, a brainwallet, or thoughtcoin, refers to the concept of storing bitcoin in one's own mind by memorization of a special and unpredictable phrase. No, you are not actually storing the bitcoin in your mind but you are storing the access mechanism, or seed, to your stash's private key.

For example, the phrase must be sufficiently long (12 words or more) to prevent a brute force guessing attack, such as "I went seeking freedom, but all the world's islands were already taken." It is further suggested not to use a simple phrase or a phrase taken from existing literature because it is more likely to be hacked by a computer that systematically attempts all phrases, similar to a dictionary attack. You want a high level of word entropy. Seemingly random modifications of the phrase would aid in strengthening brainwallet, such as "I went seeking freeeedom, but all the world's issslands were alreaDy taken." These simple changes make the entire phrase very difficult to predict.

Next, the phrase itself without the quotation marks is turned into a 256-bit private key with a hashing or key derivation algorithm. Completing this process turns my secret phrase into the 64-character hexadecimal key shown below (this should be kept secret also):

You are basically creating your own public Bitcoin address by personally determining the private key and that single instance is sufficient for our brainwallet. With larger deterministic wallets, multiple public/private key pairs are generated using a 'root key' derived from a starting seed and a 'chaincode', thus allowing a continual creation of different key pairs based on the same root node. So the final step in our process is to use this hexadecimal key to compute a standard bitcoin address with a utility such as one provided by Casascius or Electrum. Additionally, you can perform this function on bitaddress, a JavaScript client-side bitcoin wallet generator, and even run a stored version locally on an offline computer for security. The testing-only site is Bitcoin Tools. I add the serious disclaimers that hashing/address generation should not be performed online and, although possible, the importation of private keys is not yet standard functionality on most bitcoin clients. Given that, my hexadecimal key computes into the following base58 Bitcoin address:


Now, you are ready to receive bitcoin from anywhere in the world and have the peace of mind that the corresponding private key to unlock, access, and transfer those bitcoin resides solely in your brain. If you forget the phrase or if you die suddenly, the bitcoin is lost and unrecoverable just like if you had burned cash. You can even memorize multiple phrases for multiple accounts, like casual spending and nest egg savings. Why is this so profound?

For starters, it represents the ultimate in mobile money. You have complete financial privacy and asset protection combined with the ability to have those assets fully accessible from anywhere in the world provided there is Internet connectivity or a telephone. You are also protected from theft or confiscation unless a legal jurisdiction can force you to reveal your bitcoin private key that isn't even known to exist. Possible applications include revealing the secret phrase to a loved one for inheritance reasons or even splitting the phrase into segments with each family member possessing a portion of the total phrase. Off-grid transactions are also possible by simply conveying the phrase via voice or encrypted email. It would also be possible to send bitcoin immediately to someone without an existing address because one could easily be created based on a selected phrase.

It may be awhile before this practice is commonplace since most people do not use bitcoin on a regular basis and most of those do not generate deterministic keys holding $1 million. But, it sure beats lugging around 17 kilos of gold bullion.

Sunday, March 11, 2012

Virtual Currencies and Roach Motels

By Jon Matonis
Tuesday, March 6, 2012

According to Google's Eric Schmidt at the recent Mobile World Congress in Barcelona, the company once considered issuing its own digital currency for use and circulation across its expanding global platform. After reviewing various proposals for the proposed Google Bucks, the company decided not to proceed, citing 'legal concerns' which most likely implies the strict licensure and compliance regulations for quasi-financial institutions.

They probably realized that Google Bucks could end up like Facebook Credits and become a virtual currency roach motel where your money checks in, but it doesn't check out. Facebook does not provide two-way convertibility and person-to-person payments due to the potential for fraud and the emergence of a secondary market beyond Facebook's control. For the moment, that is good news for Facebook shareholders but it could quickly lose appeal for users and game developers that are locked into the self-serving paradigm. Although with money transmitter licenses in at least 15 states now, Facebook Credits is further along than previously thought in competing more directly with banks.

Google probably also realized that they could not improve upon the elegance and resiliency of bitcoin, a three-year-old decentralized P2P digital currency with an independent floating exchange rate of about $5.00 per bitcoin. In March 2011, Mike Hearn, a Google engineer, released an open source java client for bitcoin called BitcoinJ so obviously the protocol did not go unnoticed at Team Google. A true, and ideal, virtual currency will have the attributes of two-way convertibility, an independent floating exchange rate, and a nonpolitical unit of account. Consequently, it is those core features that stoke direct competition against national currencies and bitcoin possesses all three.

Renowned gamer and welfare economist Edward Castronova rejects bitcoin as the ideal virtual world gaming currency because, according to him, good game currencies should be based on controlled 'productive work', promote mild inflation, and rely upon a strong central authority for enforcement and repudiation. The freedom-loving, Libertarian gaming world of World of Warcraft and Eve Online was aghast. How could a PhD in economics think that a Keynesian currency system that has failed so badly in the real world be the desired path for currencies like WoW Gold and EVE Online ISK in the virtual world? Is the range-bound Linden Dollar of Second Life the future model of virtual currency and virtual monetary policy? Not only was Castronova rejecting bitcoin as a gaming currency, he was condemning the unregulated virtual world to a gray, inflationary future of State-sanctioned centrally-managed currency roach motels.

Castronova misses the point here and misses it badly. Bitcoin is the perfect virtual game currency precisely because it is not controlled by any State authority or virtual world company. It also facilitates the many other currency features that are so important to users, but not to governments, such as unrestricted person-to-person payments, user-defined anonymity and untraceability, near-immediate bearer settlement, transaction irreversibility, reliable store of value, multi-grid capable, and decentralized processing. You can think of bitcoin as the distributed digital representation of a real world physical casino chip also making it extremely suitable for online casinos and social betting. We are fast approaching a time when currencies will be serious differentiators and competitive wedges for companies simply because customers demand a particular payment type. The virtual gaming environments will be forced to adapt in order to survive.

Gamers and virtual world avatars don't want the corporations controlling their money anymore than they want central banks debasing the value of their real world money. Certainly, the regulations will be there for the digital currency exchanges that provide the conversion into and out of bitcoin; however, once the bitcoin is in the gaming and virtual world environment, it can function as gold coins and paper cash to stimulate and drive economic activity. No other virtual currency will even come close to that kind of vibrant liquidity and building walls to ring fence a virtual environment will turn out to be a counter-productive strategy. The bearer nature of these digital instruments like the cryptocurrency bitcoin will keep transaction costs low by eliminating third-party processors and counter-party risk. Electronic commerce will flourish.

Contrary to utopian social planning, free-market virtual economies will emerge spontaneously rather than through design and the ultimate victorious currency will be a market-based competitor that can move seamlessly across multiple grids. The virtual world is the perfect crucible for launching unrestricted currency competition and that competition will enable further opportunities for transporting virtual world earnings to real world value. This bridging of the two worlds could be the sought-after "killer app" for open-loop digital cash. Now, there will be three different mega-places for income and wealth generation -- the traditional taxable economy, the informal shadow economy, and the virtual world economy. However, with the virtual world bitcoin wealth being selectively anonymous and practically untaxable, it may just decide to stay there.

Note: The Virtual Policy Network has a podcast to accompany this article.

Thursday, March 8, 2012

Doug Casey on Cashless Societies

Interviewed by Louis James, Editor
International Speculator
Wednesday, March 7, 2012

L: Doug, we've had a lot of questions from readers about the apparent push governments are making to go to paperless currency – all electronic, no cash. Do you think that's likely, and what would be the implications?

Doug: I think it's probably inevitable. It's not just cash, but the whole world is becoming increasingly digital. Credit cards already work very well all around the world, and everyone in the world, it seems, will soon have a smartphone – or at least everyone who might have any cash.

But it's not just a question of evolving technology. Governments hate cash for lots of reasons, starting with the fact it costs a couple of cents to print a piece of paper currency, and they have to be replaced quite often. As the US has destroyed the value of the dollar, they've had to take the copper out of pennies, and soon they'll take the nickel out of nickels. Furthermore, with modern technology, counterfeiters – including unfriendly foreign governments – can turn out US currency that's almost indistinguishable from the real thing. And the stuff takes up a lot of space if it's enough to be of value. So sure, governments would like to get rid of tangible currency. They'd like to see all money kept in banks, which are today no more than arms of the state. But it's not so simple: increasing numbers of people trust neither banks – most of which are insolvent – or currencies – most of which are on their way to their intrinsic values.

L: Hm. On the technology front, when I was in central Africa a few weeks ago, plastic money was accepted happily everywhere I went – Rwanda, Burundi, the DRC, and Kenya – though not by street vendors yet. And I had access to the Internet everywhere I went, even in the middle of the jungle…

Doug: Yes, the move towards digital currencies is already happening, and not just as a result of government efforts. Remember Bitcoin. And, as you know, I'm a big fan of, which is leading the way to a sound digital currency. Although has bowed to government pressure and has suspended its service allowing customers to transfer funds among one another, it's another sign of the times…

L: Yes, and is not the first attempt, nor will it be the last. We should mention to new readers that you are an investor in

Doug: The world's going to digital currencies is in part a good thing, because it's convenient. But it's definitely a double-edged sword, because of government involvement in the field. If it were a strictly market phenomenon, I'd have no problem with it. It'd be just another choice. But if the state runs it, it would reduce people's choices – and privacy. But that's entirely apart from the fact that government – and I know this assertion will be shocking to most readers – has no business creating currency or minting money. Money, of all things, should be a purely market phenomenon. Government, as an institution, inevitably and necessarily corrupts everything it touches. Money is far too important to be left to the tender mercies of the state.

L: Sure. A completely digital currency would be an unlimited license to print and spend. Need to give people more welfare? Just tap a few keys, and it appears in their bank accounts. Need to buy more missiles? Just a few more taps on the keyboard… But the privacy issue is even scarier: digital money would seem like Big Brother's dream come true. They wouldn't even have to send their minions out to go through people's trash. They could see everything anyone ever spent money on and where they were physically when they did it, search for activity nearby, and much more, just by having computers report the details of people's accounts.

Doug: Exactly. They would justify it with a host of phony excuses ranging from the so-called War on Terrorism to the so-called War on Drugs. Maybe they'll tie it in to their disastrously failed War on Poverty. As the War on Islam heats up, one front will be an attack on the excellent Muslim hawala system, which allows cheap and reliable transfer of money between countries; that system, which is kind of a private SWIFT network, is excellent for evading FX controls. Ironically, Islamic countries are some of the very worst perpetrators of currency controls.

L: Maybe that's why the informal network exists in the first place? But yes, they gotta stop those evil money launderers from washing their money and hanging it out to dry…

Doug: Don't get me started on "money laundering." It's a completely artificial crime. It wasn't even heard of 20 years ago, because the "crime" didn't exist. Now, everyone speaks of it as though it were a real crime, like murder. It's ridiculous, and further proof of the totally degraded state of the average person worldwide, absolutely including US citizens – what we used to call Americans. The government proclaims something as a law, and "sheeple" robotically assume it's part of the cosmic firmament. If an official tells them to do or not to do something, they roll over on their backs like whipped dogs and wet themselves out of fear. The War on Drugs may be where "money laundering" originated as a crime, but today it has a lot more to do with something infinitely more important to the state: the War on Tax Evasion.

Incidentally, not that a US citizen can open an account with a Swiss bank anyway any longer – except with at least seven figures and loads of paperwork – but now the policy in Switzerland is to insist that clients prove that their funds are all tax paid. The situation is out of control. And the world's governments are increasingly working together to make sure no one slips through the net.

Read the rest of the article.

For further reading:
"The Assault on Financial Privacy Goes On", Kevin Brekke, December 22, 2011