Thursday, November 22, 2012

Why Support The Bitcoin Foundation

By Jon Matonis
Bitcoin Foundation
Monday, November 19, 2012

Since the nonprofit Bitcoin Foundation launched in September 2012 I have been asked many times by potential sponsors, "Why would our organization want to support bitcoin and the foundation?" The answer lies in the primary benefits that bitcoin enables in society and those benefits are not always so easy to recognize at first.

As a decentralized and nonpolitical cryptographic money, bitcoin acts as both payment platform and unit of account. In other words, it is both the train track and the train which is what gives bitcoin the ability to function smoothly without third-party intermediaries.

Why is this significant? Without intermediaries, bitcoin is not subject to being appropriated or usurped by governments for their political agendas in the way that monarchs assumed the privileges of minting and stamping the gold coins of the realm, which were eventually 'clipped' and later morphed into lower grade metals. Historically, civilized society has not seen an opportunity like this before nor what kind of economic revolution can be sparked by a sustainable, independent monetary unit.

The Bitcoin Foundation is an educational and software research organization offering annual memberships and a standard donation program. The donation program can be anonymous and is open to any group or any individual and the funding is put to work in the same way as membership funding. Corporations from a broad range of industries, NGOs, and other nonprofit organizations are likely benefactors to the Bitcoin Foundation. Through a collaborative alliance, we can extend your organization's reach and enhance your stated mission. Below I outline some of the significant initiative areas where we are already having a measurable impact:

Human Rights and Social Justice

Citizens from many countries are blocked out of the typical payment channels like PayPal and credit cards simply because they lack access to a bank account. Sometimes, even those that have banking infrastructures within their countries are blocked out due to poor credit histories or insurmountable fees. Around the globe and including remote parts of Africa and Asia, bitcoin combined with mobile technology is providing a means for previously disenfranchised consumers to enter the worldwide marketplace. With the liberating power of bitcoin, responsible individuals can take control of their own financial lives and operate as both consumer and merchant. Now that is real financial empowerment.


Financial privacy is a fundamental human right but lately it has become as vulnerable as email privacy or data privacy. You cannot take your privacy for granted -- you have to claim it. As governments and law enforcement increasingly use money channels as a way to track identity, they give up on the original crime that they were investigating and everything becomes a potential monetary crime. No one is immune to getting ensnarled in that type of fishing expedition. The ends do not justify the means. Free speech advocates and political dissidents can be identified and persecuted simply because of a payment that they made to a certain group or company. Bitcoin restores some of that balance back to the individual in that it permits user-defined anonymity and user-defined traceability.

Sound Public Policy

Public policy efforts should aim for freedom of choice in currencies for several economic reasons. Quantitative easing is a sophisticated sounding term made up by the politicians and bureaucrats. It really means inflating the money supply but that phrase sounds too negative and irresponsible. If the sovereign treasuries around the world can endlessly purchase their own debt and inject liquidity into the economy via monetary and fiscal stimulus, then why do they need taxes? Unfortunately, we suffer both taxation and growing inflation. Average working people and the elderly are impacted the most through the inevitable devaluation of the currency. Since Bitcoin is not the liability of anyone else and cannot be devalued, an easy and safe store of value is provided so that someone's life savings cannot be inflated away by the whims of a political class.

Math and Science

Advanced mathematics and science propels innovation and enhances the standard of living for everyone. Technology and the Internet have already made things possible that we never thought we would observe in our lifetimes. I look forward to more breakthroughs and greater accomplishments. Through its freely-available, open source software bitcoin educates individuals about cryptographic money, public key cryptography, and distributed computing. In just under four years the bitcoin p2p project has become the world's single largest distributed computed project.

We welcome your support in advancing the common goals that we share. For further information, please reach out to me ( or our Assistant Director, Lindsay Holland (

Wednesday, November 21, 2012

What’s Your Bitcoin Strategy? WordPress Now Accepts Bitcoin Across The Planet

By Jon Matonis
Friday, November 16, 2012

Best CEO Toni Schneider in 2007
I awoke to incredible news this morning. Leading web publishing service announced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.

Then I remembered that powers our online publishing platform. It also powers the blog platform for The New York Times, CNN, Reuters, Mashable, NBC Sports, GigaOm, TechCrunch, ELLE Girl, RealClearPolitics, TED, National Football League, General Motors, UPS, eBay, Sony, and Volkswagen.

Not only does this strategic move bring new unserved customers into the WordPress fold, it paves the way for the online publishing platform run by parent company Automattic not to be restricted by the choices of its payment partners. Companies doing business and accepting payments globally are subject to increasing fees and sometimes arbitrary chargebacks which no doubt impact their bottom line. WordPress would probably not even mind if a large chunk of their mainstream payment processing migrated to bitcoin.

Over 57.8 million WordPress sites are written in 120 different languages creating nearly 32 million new user posts each month.

Criticizing the centralized bankcard associations and citing payment method deficiencies, WordPress spokesperson Andy Skelton said, "Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone." And thus the planet becomes immediately open to their products and services.

"PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions," continued Skelton. "Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control." [Note: updated their original blog post which mentioned Cuba and Iraq.]

Vitalik Buterin of Bitcoin Magazine brings up an equally significant reason for accepting payment in Bitcoin, "Another argument which WordPress did not mention is anonymity. Many bloggers that operate in restrictive regimes do so using pseudonyms for their own protection, and traditional payment methods like credit cards and PayPal are unusable for those bloggers because they expose the payer’s physical identity." With user-defined anonymity and identity privacy, bitcoin offers unparalleled safety to dissident bloggers and free speech advocates.

Initially, processing will be managed by payment service provider BitPay, Inc. of Orlando, Florida. BitPay shields WordPress from having to handle actual payments by immediately converting and transferring sales proceeds into a WordPress merchant bank account. This minimizes the currency risk for the accepting merchant. An important configurable option also allows the merchant to retain Bitcoin balances for their own account and subsequent usage.

Although WordPress states that they are not waiting for a sufficient number of confirmations from the bitcoin block chain, it is largely irrelevant for e-services since upgrades can simply be deactivated or reversed due to a failed payment.

WordPress may not stand as the lone giant for very long since Reddit CEO Yishan Wong hinted last week at the social news site's willingness to begin transacting in Bitcoin for Reddit Gold subscriptions. Reddit is a subsidiary of Condé Nast's parent company, Advance Publications.

As the bitcoin juggernaut continues to roll forward absorbing merchants and customers globally it leaves archaic and unsuspecting payment methods in its wake. As one bitcoin forum member articulated, merchants will increasingly be asked: "What's your Bitcoin strategy?"

Monday, November 19, 2012

Currencies of the Future

By Douglas French
Laissez Faire Today
Tuesday, November 13, 2012

Many people complain about government control of currency, but only a few do something about it. I’m not talking about movements to “audit the Fed” and such. I’m talking about real innovation that makes an end run around the government’s iron grip on the monetary system.

A few of us old folks might like to return to the days of slapping a silver dollar on the bar for a shot of whiskey, but the younger techno-savvy generation sees paying for their Negroni cocktail with virtual currency from their hand-held device. To serve this market, a new world of virtual currencies has popped up spontaneously.

In a debate, Mitt Romney said, “You couldn’t have people opening up banks in their garage and making loans.”

Really? Some people are thinking precisely along these lines and even going further to create new units of accounting.

You might think these people are crazy. After all, to be a proper money, a currency must have a nonmonetary value, a high value per unit weight, a fairly stable supply and be divisible, durable, recognizable, and homogeneous. Gold and silver fit the bill perfectly. But does that mean something else (or a variety of things) can’t?

Money develops from being the most marketable good that in turn is used for indirect trade. Historically, that has been gold and silver. However, governments have worked very hard to demonetize gold and silver with taxes on precious metals and legal tender laws. And while a few people swear by storing their wealth in gold and silver, in relation to all other financial assets, the percentage of portfolios invested in precious metals is only 1%.

The idea that government is going to re-shackle its currency to gold anytime soon, when the only way federal governments are staying in business is with an unfettered printing press, is naive. Governments always have driven and will keep driving the value of their currencies to the value of the paper. It may take decades, it may take centuries, but it will happen eventually.

The answer to the currency question may not be to reform government in a way that it can’t reasonably be reformed, but to turn loose entrepreneurial genius to solve the problem and create a quality product. There are plenty of government roadblocks, but every new innovation encounters government resistance. Entrepreneurs persevere. However, this is a particularly risky area. There are currency entrepreneurs sitting in jail for competing with the government.

In 2009, Japanese programmer “Satoshi Nakamoto” (not his real name) was designing and implementing Bitcoin. It’s not for the faint of heart. It’s proven to be highly volatile. But it’s also proven to be very useful in a digital age.

Some people in the free-market community don’t know what to think of Bitcoin and have dismissed it. They say no currency can exist that doesn’t have a prior root in physical commodity.

That is because, as Robert Murphy summarized Ludwig von Mises: “We can trace the purchasing power of money back through time until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained.”

The naysayers contend Bitcoins never had a nonmonetary commodity value. The case for it is then dismissed without thought or argument. However, Mises built his “regression theorem” on the work of Carl Menger, the father of Austrian economics and subjective value.

In Menger’s view, economizing individuals constantly look to make their lives better through trade. These individuals trade less tradable goods for more tradeable goods. What makes goods more tradeable, Menger emphasizes, is custom in a particular locale.

“But the actual performance of exchange operations of this kind presupposes a knowledge of their interest on the part of economizing individuals,” Menger writes. But Menger goes on to explain that not all individuals gain this knowledge all at once. A small number of people recognize the marketability of certain goods before most others.
These might be considered currency entrepreneurs. They anticipate consumer needs and demands, and as is the case with any other good or service, these entrepreneurs recognized more salable goods before the majority of people.
"Since there is no better way in which men can become enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends, it is evident that nothing favored the rise of money so much as the long-practiced and economically profitable acceptance of eminently saleable commodities in exchange for all others by the most discerning and most capable economizing individuals."
For example, cattle were, at one time, the most saleable commodity and were thus considered money. Although cattle money sounds unwieldy, the Greeks and the Arabs were both on the cattle standard. This currency had four legs that could move itself, and grass was everywhere, so feeding it was inexpensive.

But then the division of labor led to the formation of cities, and the practicality of cattle money was over. Cattle were no longer marketable enough to be money. Cattle still had value, but, “They ceased to be the most saleable of commodities, the economic form of money, and finally ceased to be money at all,” Menger explains.

Then began the use of metals as money: Copper, brass and iron, and then silver and gold.

But Menger was quick to point out that various goods served as money in different locales.
"Thus money presents itself to us, in its special locally and temporally different forms, not as the result of an agreement, legislative compulsion, or mere chance, but as the natural product of differences in the economic situation of different peoples at the same time, or of the same people in different periods of their history."
So while people contend that money must be this or must be that, or come from here, or evolve from there, Menger, the father of the Austrian school, seems to leave it up to the market. When a money becomes uneconomic to use, it loses its marketability and ceases to be money. Other marketable goods emerge as money. It’s happened throughout history and likely will continue, despite government wanting to freeze the world in place to its liking.

Which brings us back to Bitcoin, what the European Central Bank (ECB) calls in its latest report “the most successful — and probably most controversial — virtual currency scheme to date.”

Ironically, while some economists are pooh-poohing Bitcoin, the ECB devotes some of their lengthy report to the idea that the Austrian school of economics provides the theoretical roots for the virtual currency. The business cycle theory of Mises, Hayek and Bohm-Bawerk is explained in the report and Hayek’s Denationalisation of Money is mentioned.

The report writers indicate that Bitcoin supporters see the virtual currency as a starting point for ending central bank money monopolies. Like Austrians, they criticize the fractional-reserve banking system and see the scheme as inspired by the classic gold standard.

Bitcoins are already used on a global basis. They can be traded for all sorts of products, both material and virtual. Bitcoins are divisible to eight decimal places and thus can be used for any size or type of transaction.

Bitcoins are not pegged to any government currency and there is no central clearinghouse or monetary authority. Its exchange rate is determined by supply and demand through the several exchange platforms that operate in real time. Bitcoin is based on a decentralized peer-to-peer network. There are no financial institutions involved. Bitcoin’s users take care of these tasks themselves.

Additional Bitcoin supply can only be created by “miners” solving specific mathematical problems. There are somewhere around 10 million Bitcoins currently in existence, and more will be released until a total of 21 million have been created by the year 2140. According to Bitcoin’s creator (whomever he or she is), mining on Bitcoin provides incentives to be honest:
"If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or by using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth".
The ECB’s report explains that Bitcoin supply is designed to grow in a predictable fashion. “The algorithms to be solved (i.e., the new blocks to be discovered) in order to receive newly created Bitcoins become more and more complex (more computing resources are needed).”

This steady supply increase is to avoid inflation (decrease in the value of Bitcoins) and business cycles caused when monetary authorities rapidly expand money supplies.

Bitcoin has become the currency of the online black market. For instance, The Silk Road (the Amazon of the illegal drug trade that can only be accessed through private networks using the IP scrambling service called Tor) only accepts payments in Bitcoin. However, as the ECB report points out, there are only about 10,000 Bitcoin users, and the market is illiquid and immature.

So why does the ECB give a damn about Bitcoin and other virtual currencies? The central bankers are worried that they are not regulated or closely supervised, that they could represent a challenge for public authorities and that they could have a negative impact on the reputation of central banks.

At the same time, the report makes the point that “these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers.”

The report says big players in the financial services arena are purchasing companies in the virtual payments space. VISA acquired PlaySpan Inc., a company with a payment platform that handles transactions for digital goods.

American Express (Amex) purchased Sometrics, a company “that helps video game makers establish virtual currencies and… plans to build a virtual currency platform in other industries, taking advantage of its merchant relationships.”

This would dovetail with American Express’ entry into the prepaid credit card business. Banking industry insiders are upset with Amex and Wal-Mart, that also is offering prepaid cards, because these prepaid accounts would amount to uninsured deposits, according to Andrew Kahr, who wrote a scathing piece on the issue for American Banker.

Kahr rips into the idea with this analogy:
"To provide even lower ‘discount prices,’ should Wal-Mart rent decaying buildings that don’t satisfy local fire laws and building codes — and offer still better deals to consumers? And why should Walmart have to honor the national minimum wage law, any more than Amex honors state banking statutes? With Bluebird, Amex can already violate both the Bank Holding Company Act and many state banking statues."
Kahr is implying that regulated fractionalized banking is safe and sound, while prepaid cards provided by huge companies like Amex and Wal-Mart is a shady scheme set up to rip off consumers. The fact is, in the case of IndyMac, panicked customers forced regulators to close the S&L by withdrawing only 7% of the huge S&L’s deposits. It was about the same for WaMu and Wachovia when regulators engineered sales of those banks being run on. Bitcoin supporters, unlike the general public, are well aware of fractionalized banking’s fragility.

Maybe what the banking industry is really afraid of is the Amexes and Wal-Marts of the world creating their own currencies and banking systems. Wal-Mart has tried to get approval to open a bank for years, and bankers have successfully stopped the retail giant for competing with them.

However, prepaid credit cards might be just the first step toward Wal-Mart issuing their own currency — Marts — that might initially be used only for purchases in Wal-Mart stores. But over time, it’s not hard to imagine Marts being traded all over town and easily converted to dollars, pesos, Yuan, or other currencies traded where Wal-Mart has stores.

Governments are destroying their currencies, and businesses know it. Entrepreneurs won’t just stand by and theorize. They’re doing something. They recognize a market opportunity. The banking industry realizes it. As Mr. Kahr concluded his article that calls for an end to all uninsured deposits: “Otherwise, we might have an unregulated Facebook or Google of payments, even PayPal, quickly becoming both highly vulnerable and TBTF. (It could actually be run by someone wearing a hoodie, without tie or even white shirt!)”

Here at LFB, we don’t know what tomorrow’s money will be. Digits and computer algorithms? Silver and gold coins engraved with someone wearing a hoodie, perhaps? What we know for sure is that we’re rooting for enterprising entrepreneurs to give the government a run for their money in the money business. Watch this space.

Douglas E. French is senior editor of the Laissez Faire Club and former president of the Mises Institute. Reprinted with permission. 

For further reading/viewing:
"Jeffrey Tucker on the future of private money" (video), Goldmoney, November 12, 2012

Sunday, November 18, 2012

The General, The Biographer, And Unencrypted Email

By Jon Matonis
Tuesday, November 13, 2012

The newest poster couple for encrypted email is General David Petraeus and his ‘embedded’ biographer Paula Broadwell. One of the more curious aspects of this episode is why the nation’s spy chief couldn’t figure out the basics around email cryptography or why a West Point graduate and lieutenant colonel in the U.S. Army Reserves who also worked with the FBI Joint Terrorism Task Force wasn’t aware of Tor for IP masking.

It all started with the trace of an apparently anonymous email sent by Broadwell to Petraeus’ friend Jill Kelley that was traced back to Broadwell’s hotel room at the time via email location metadata. This email was the original message that led to the eventual discovery of the sexually explicit emails between Petraeus and Broadwell.

Obviously for readability reasons this original message could not have been encrypted (also Tor does not provide encryption), but it could have been anonymized as to location and that is precisely what Tor was designed for. Originally a U.S. Navy project for shielding location data and defending against traffic analysis, the Tor Project utilizes a layered router protocol which obfuscates the sender’s IP location. Even a rudimentary VPN (Virtual Private Network) that religiously deleted IP log files and accepted anonymous payments would have been sufficient. Oh well…live and learn.

Beyond that, everyone seems to be asking the obvious question about email encryption, especially in today’s surveillance state. If they can do this to each other, what are they doing to us? But let’s examine how email encryption might have been used under these circumstances and if it would have proven effective.

Assuming that the connection between Petraeus and Broadwell would still have been discovered, what other precautions could they have taken besides the old terrorist trick of sharing a draft version that each party separately logged into?

For starters, the couple could have used stress-tested PGP (Pretty Good Privacy) for point-to-point encrypted email which involves installing a separate piece of client software and the exchanging of public keys. Also, they could have used a simpler web-based OpenPGP-compliant service such as Hushmail, which would have at least protected their historical retained messages provided neither one of them logged on again and made their password vulnerable to a court-ordered java applet spoofing.

So then, are the involved parties safe from anyone discovering the contents of their encrypted messages? Would the investigation have stopped at the discovery of Paula Broadwell as the anonymous email sender? I’m afraid it isn’t as simple as that. Many factors are at play here dealing with individual or third-party data retention policies sometimes beyond your control as well as continued usage of the same private encryption key and password.

Federal agents have many tools in their arsenal, some legal and some not-so-legal. If IP location details were not protected, the linkage could have been established between Petraeus and Broadwell proving at a minimum the existence of some encrypted correspondence. The question is whether or not additional investigative actions beyond that would be warranted, or even approved. At that point, it’s all about the strength of the password and obtaining it either through password cracking or password observation if the password is sufficiently strong.

When law enforcement has the advantage of tracking someone without their knowledge, software and hardware keyloggers can be an effective method to obtain password credentials. Keyloggers come in many forms but they are typically installed between the keyboard and the computer to capture and record a computer user’s keystrokes, including passwords. Hardware keyloggers have an advantage over software keyloggers as they can begin logging from the moment a computer is turned on.

Alternatively, an ultra-small camera can be mounted above usual computer locations, such as an office desk or table. A wireless camera would be able to relay the images of the user typing a password thereby eliminating the necessity of physical re-entry.

Failing that, and failing waterboarding of the suspects, contempt of court charges could be invoked by the government since there is no specific law regarding key disclosure in the United States. One of the parties would first have to be charged with a criminal offense before the government can demand that they surrender their private encryption keys. Relevant case law has revolved around the Fifth Amendment privilege against self-incrimination.

Ironically, the global encrypted communication service Silent Circle just launched last month targeting government and corporate enterprise customers. It was founded by a world-renowned cryptographer and a former U.S. Navy SEAL sniper and communications security expert. I suspect this whole sordid story will made an excellent advertisement for them.

For further reading:
"E-Mail Security in the Wake of Petraeus", Bruce Schneier, November 19, 2012
"Petraeus case triggers concerns about Americans' online privacy", Jessica Guynn, Los Angeles Times, November 15, 2012
"Surveillance and Security Lessons From the Petraeus Scandal", Chris Soghoian, November 13, 2012

Monday, November 12, 2012

Department Of Homeland Security To Scan Payment Cards At Borders And Airports

By Jon Matonis
Wednesday, November 7, 2012

Typical wireless electronic card reader
Travelers leaving or entering the United States have long had to declare aggregated cash and other monetary instruments exceeding $10,000. Now, under a proposed amendment to the Bank Secrecy Act, FinCEN (Financial Crimes Enforcement Network) will also require travelers to declare the value of prepaid cards that they are carrying, known now as "tangible prepaid access devices."

Expected to be finalized by the end of this year, the cross-border reporting modifications stem from a broader October 2011 definition of payment methods and form factors that replaced the term "stored value" with the term "prepaid access" in an effort to more accurately describe the process of accessing funds held by a payment provider.

Enforceability falls to U.S. Immigration and Customs Enforcement and U.S. Customs and Border Protection both within the Department of Homeland Security, which is already developing advanced handheld card readers that can ascertain whether a traveler is carrying a credit card, debit card, or prepaid card. This differentiation is important because only prepaid card balances will need to be added to declaration report forms.

Acknowledging that many questions still remain and that enforcement may not be straightforward, Cynthia Merritt, assistant director of the Retail Payments Risk Forum at the Federal Reserve Bank of Atlanta, had this to say about the handheld readers:
"Furthermore, according to the comments, the enforcement challenge is not new, nor is the concept of a device or document that can be used to access value. The current challenges are similar to those presented in the past with other monetary instruments such as checks, money orders, and traveler checks."
Merritt also stated that, "When law enforcement takes possession of a cash or monetary instrument at the border, they are effectively holding the funds, but not so with a prepaid card or other device. Holding the card does not provide access to the underlying funds."

Other questions to be settled include how to determine mobile phone wallet and key fob balances that can function in a manner similar to card swiping, how to distinguish between reloadable and non-reloadable prepaid cards, how to distinguish between bank-issued and non-bank-issued prepaid cards, should closed loop gift cards be included in the cross-border reporting requirements, what to do about cards that clear customs with a minimal balance but are then subsequently reloaded with an amount in violation of the reportable limits, and what to do about a large number of nonpersonalized, unembossed cards.

Also, would a traveler have legal recourse for damages if agents seized a proper debit card in the mistaken belief that it was a reportable prepaid card?

These complications and others imply that FinCEN's NPRM [Notice of Proposed Rule Making] may yet undergo some revisions in order to bring the regulations in sync with the realities of the prepaid card industry.

In the meantime, travelers with a memorized Bitcoin private key can breathe a sigh of relief, because according to an important April 9th, 2012 letter to FinCEN Director James Freis from Homeland Security Investigations it appears that intangible brainwallets are safe for the moment:
"Should the border declaration apply to codes, passwords and other intangibles as well as to any tangible object that is dedicated to accessing prepaid funds?"
"HSI believes that border declaration should not apply to codes, passwords and other intangibles. Identification and verification of intangibles in the context of border enforcement poses logistical and potential legal issues that are not contemplated by currency and monetary instrument declaration regulations. The structure of the currency and monetary instruments declaration regime, hinges on the existence of a physical object. The language requires something that can be passed from one individual to another in order to be presented to a third party for execution/payment."

Thursday, November 8, 2012

ECB: “Roots Of Bitcoin Can Be Found In The Austrian School Of Economics”

By Jon Matonis
Saturday, November 3, 2012

The ECB (European Central Bank) has produced the first official central bank study of the decentralized cryptographic money known as bitcoin, Virtual Currency Schemes. Ignoring for a moment the ECB's condescending and derogatory use of the virtual currency phrase and scheme phrase, the study produced at least one landmark achievement.

In claiming that "The theoretical roots of Bitcoin can be found in the Austrian school of economics," the ECB forever linked Bitcoin to the proud economic heritage of Menger, Mises, and Hayek as well as to Austrian business cycle theory. This recognition is also a direct testament to the monetary theory work of Friedrich von Hayek who inspired many with his 1976 landmark publication of Denationalisation of Money.

Bitcoin fully embodies the spirit of denationalized money as it seeks no authority for its continued existence and it recognizes no political borders for its circulation. Indeed according to the report, proponents see Bitcoin as "a good starting point to end the monopoly central banks have in the issuance of money" and "inspired by the former gold standard."

Economists from the 19th and mid-20th centuries can be forgiven for not anticipating an interconnected digital realm like the Internet with its p2p distributed architecture, but modern economists cannot be. From their own conclusions (on page 48) which inaccurately lump Bitcoin together with Linden Dollars, here is what the modern-day economists at the ECB are still not getting:

1. ECB concludes that if money creation remains at a low level, bitcoin does not pose a risk to price stability. This is incorrect on two levels. One, the creation of new bitcoin is capped at 21 million with eight current decimal places so it grows through adoption and usage rather than monetary expansion. And two, as with gold, silver, and other commodities having a monetary component, price stability is a function of the market not central planners;

2. ECB concludes that bitcoin cannot jeopardize financial stability due to its low volume and limited connection with the real economy. Conversely, bitcoin will tend to increase financial stability and overall soundness. Bitcoin's connection with the real economy is only a concern for the regulated and taxed economy, whereas bitcoin independently may thrive in the $10 trillion shadow or "original" economy. Besides, with its repeated market interventions, no one has done more to jeopardize financial stability than the ECB itself;

3. ECB concludes that bitcoin is currently not regulated and supervised by any public authority. It would be more accurate to say that State-sponsored regulation is largely irrelevant because of the inherent design properties of a peer-to-peer distributed computing system. But happily, this is still a conclusion that I can agree with and recommend that it remains the case;

4.  ECB concludes that bitcoin could represent a challenge for public authorities, given the legal uncertainty and potential for performing illegal activities. While public authorities will certainly be challenged by the introduction of a monetary unit that cannot be manipulated for political purposes, bitcoin in some cases does have the ability to provide tracking capability that far exceeds that of national cash or money substitutes. What authorities will find most troubling though, with bitcoin, is that money flows between individuals and businesses will no longer be exploitable for purposes of unlimited identity tracking and unconstitutional 'fishing expeditions';

5. ECB concludes that bitcoin "could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly." Pretentious as it may seem, the ECB is stating here that central banks as protector of the general public with respect to payments have a role to play because it is their reputation that suffers in the event of a bitcoin-related security incident. Firstly, that is an assumed responsibility -- not a delegated responsibility; and reputational impact aside, I would prefer to rely on lex mercatoria;

6. ECB concludes that bitcoin does indeed fall within central banks' responsibility as a result of characteristics shared with payment systems. Of course it does not. Central banks are a form of centralized economic planning so their stated responsibilities are suspect from the outset. Bitcoin represents an intangible math puzzle whose existence is solely restricted to transfer rights on a cloud-based public ledger. It more closely resembles an air guitar than a payment system for purposes of oversight.

Now, in affirming the superior attributes of bitcoin in the role of financial innovation, the ECB correctly identifies why the profligate issuers of national fiat currencies will ultimately feel threatened by such a decentralized nonpolitical unit. The report acknowledges the following with respect to bitcoin: (a) "higher degree of anonymity compared to other electronic payment instruments," (b) "lower transaction costs compared with traditional payment systems, and (c) "more direct and faster clearing and settlement of transactions" from the absence of intermediaries.

Overall, the fear of the monetary overlords is palpable as the study concludes by basically promising continued scrutiny and oversight. Also forecast for the plebeians is a possible remedy to the global scope and unclear jurisdiction of the regulatory challenge:
"One possible way to overcome this situation and obtain some quantitative information on the magnitude of the funds moved through these virtual currency schemes could be to focus on the link between the virtual economy and the real economy, i.e. the transfer of money from the banking environment to the virtual environment. Virtual accounts need to be funded either via credit transfer, payment card or PayPal and therefore a possibility would be to request this information from credit institutions, card schemes and PayPal."
However, Michael Parsons, a former executive with Emirates Bank (Dubai), Moscow Narodny Bank, and KPMG Moscow, believes that those efforts will prove futile and he explains, "Bitcoin is 'regulated' by its peers and mathematics. And Bitcoin is not a currency like fiat money. It is a value  transfer system which is given value only by its users. So the ECB, FED, etc. have no mandate to control a 'virtual currency' just because they call it (bitcoin) that! It will just go underground. Bitcoin is like Light and Air. Free to use and transfer. Owned and issued by the people and NOT the State!"

It evokes an image of central bankers huddled comfortably on the safe shoreline as they look out into the horizon and see the dangerous, unstable virtual currencies approaching. The opposite is actually the truth because it is the central bankers who are floating precipitously out at sea. As James Turk famously said about bitcoin's analog cousin, "When standing in a boat and looking at the shore, it is the boat (currencies) – and not the land (gold) – that is bobbing up and down."

Tuesday, November 6, 2012

The Gloom of Central Banking

By Tuur Demeester
November 2012

Gloom of Central Banking  


On october 29th, the ECB published a 55-page report titled “Virtual Currency Schemes”. With this dysphemistic title, the central bank refers to private, unregulated initiatives of virtual currency. With 183 references in the text, it seems obvious that specifically the fast growing peer to peer currency Bitcoin is under scrutiny.

In what follows, I sketch an evolution of how central banks—the monopolists of the current fiat money paradigm—have dealt with the threat of free market competition coming from the internet, and how they are now reacting to the sudden appearance of an enigmatic rival.

Be warned that this is a subjective take on the issue. People from central bank and government circles will no doubt accuse me of being unbalanced and unfair in my interpretations and conclusions. So be it. my goal here is to scrape off the veneer of these reports and thus catch a glimpse of what may actually be happening behind the closed doors of Basel and Brussels.

Monday, November 5, 2012

Bitcoin Cryptocurrency: Is "Digital Gold" The Future Of Money?

Jim Puplava, President of PFS Group and host of Financial Sense Newshour, welcomes Jon Matonis, an e-Money researcher and Crypto Economist focused on expanding the circulation of nonpolitical digital currencies. Jon explains the definition of "crypto-currency" and discusses Bitcoin, the first true crypto-currency, which he describes as ''digital gold." Jon and Jim discuss the potential of Bitcoin, if it will eventually compete against government monopoly currencies, and if crypto-currencies could in fact become the future of money itself (10/31/2012).

Jon Matonis on Bitcoin CryptoCurrency: Is "Digital Gold" The Future Of Money? The audio file is hosted below or you can download here.

Articles referenced during the interview:
Bitcoin Foundation Launches To Drive Bitcoin's Advancement (9/27/2012)
Brainwallet: The Ultimate In Mobile Money (3/12/2012)
Key Disclosure Law Can Be Used To Confiscate Bitcoin Assets (9/12/2012)
The Bitcoin Richest: Accumulating Large Balances (6/22/2012)