Wednesday, April 23, 2014

The Bitcoin Word Game

By Jon Matonis
Friday, April 18, 2014

Words are very important. Even more so with bitcoin, competing constituencies craft specific words and phrases to evoke a predetermined image or outcome.

With a little help from political wordsmith observer Bill Maher, let’s look at some popular examples of this practice in action.

Avoiding the negative

For a long time, assisted suicide as a positive right with legal protections had a difficult time gaining acceptance. Once it was phrased as aid in dying, several US states passed legislation protecting the practice.

Gay marriage is another. Political opponents deployed the phrase when they wanted to convey the idea that the sanctity of marriage was under assault or its meaning was being diluted. Once it became termed marriage equality, it was difficult to be against because it then sounded trendy, inclusive and friendly. Everyone is for equality.

Lastly, when we hear the phrase drilling for oil, we imagine huge nameless corporations raping the wilderness to satiate an out-of-control demand for fossil fuel. However, re-brand it as energy exploration and we visualize a futuristic and responsible effort to transform our planet’s energy needs.

Steering public perception

In the evolving lexicon that is bitcoin, governments and the media consistently deploy phrases to gain an advantage in steering public perception. No secrets there. But, few of us can peer through the facade.

Here are some of the easy ones:

Privacy has become anonymity. Of course, people desire privacy and they rightly should take it for granted, but the word anonymous implies that it is secrecy being used for something nefarious.

Personal purchases have now become untraceable transactions. Remember that first drug store item that you wanted to keep as a personal purchase, so you made sure that no one saw you and that you used cash.

Finality of payment has become irreversibility. In the eyes of regulators, irreversibility has come to be associated with criminal transactions because who else would see the need for a transaction irreversible by a third party. Of course, this is ridiculous because many transaction classes have a proper need for payment finality.
Interestingly, this choice of wording permits opponents to cast bitcoin as anonymous, untraceable, and irreversible – all fitting into the dark persona of the notorious Guy Fawkes mask.

By the way, paper cash in your wallet today already possesses those attributes (analog equivalent rights), which is why we are witnessing a global war on cash or, as its proponents claim, a modern cashless society.

Moving into the regulatory sphere – and no jurisdiction is exempt – the stakes are higher, so predictably the labels have become more elevated.

Financial privacy has become money laundering. More than 30 years ago, money laundering did not exist because it is a made-up crime, as Doug Casey says, and the so-called thoughtcrime of finance.

Unfortunately, individuals seeking financial privacy have been cast as promoters of money laundering ever since.

Financial surveillance has been re-branded as patriotic anti-money laundering and know-your-customer guidelines. Realistically, it is still surveillance on a mass scale whatever you choose to call it.

Financial censorship has been re-positioned as an economic blockade, as in the international cases against WikiLeaks, Iran, and most recently Russia.

A positive spin

Every day, more and more young people embrace bitcoin. This is an encouraging demographic for the future of the cryptocurrency and they get it too.

For them, no government backing really means banks not required. Ignoring capital controls really means truly global with 24/7 availability. No third party for safety really means protection from financial surveillance. And, not centrally controlled really means easy person-to-person payments. Those are the things that matter most to that important demographic.

In economics, deflation is just another way of saying increased purchasing power.

In money, legitimacy is defined by community acceptance not by government decree. Triumphantly, bitcoin is money without government. If we don’t defend ourselves in the word game, all that remains are the sheeple lest we be called domestic terrorists.

Please add your own important bitcoin words in the comments area below.

Saturday, April 5, 2014

IRS Bitcoin Ruling May Have a Bright Side

By Jon Matonis
Monday, March 31, 2014

Last week’s guidance from the IRS on tax treatment for bitcoin transactions may have temporarily impeded one avenue in a single jurisdiction, but it has opened up another more significant avenue.

An IRS “property” classification for bitcoin reaffirms it’s status as “digital gold” because it tacitly encourages one type of monetary activity (store of value) over another (medium of exchange).

If bitcoin is digital gold, then gold is analog bitcoin. Both commodities have a significant economic role to play going forward because one is a consensual store of value based on chemical properties and the other is a consensual store of value based on mathematical properties.

This ruling was a lose-lose scenario for the IRS because an alternative tax ruling for treating bitcoin as a currency would have placed it in direct transactional competition with the US dollar. The Department of the Treasury was loath to do that at least from a tax perspective.

The big picture

In the big picture of so-called monetary transactions, economies support three basic types of transactions: person-to-business (P2B), business-to-business (B2B), and person-to-person (P2P). One could also include business-to-person (B2P), but I tend to leave that in the category of P2B.

These classifications hold up whether transactions are physical or digital and also whether transactions are domestic or international.
Regarding tax treatment in various jurisdictions, the only transaction classes affected would be P2B and some B2B in the jurisdictions enforcing merchant compliance for customer identity reporting. Hence, merchant compliance becomes a point of enforcement for authorities.

This is important because any tax rulings that bestow preferential treatment on bitcoin as a commodity will tend to nudge bitcoin (XBT) in the direction of a store of value perhaps backing alternate types of currency issuance or handling predominately large cross-border transactions – exactly the role played by gold (XAU) today.

Since gold and bitcoin are both monetary commodities that don’t represent another party’s liabilities, they become a medium of last resort for transactions without counterparty risk.

The two most prominent monetary metals in the world are gold and silver and while they might have established themselves initially in physical hand-to-hand exchanges, their usage has evolved beyond that. Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.

Dual properties

Bitcoin has the advantage of being both a potential long-term store of value and a useful medium in ordinary day-to-day transaction settings. The fact that bitcoin accommodates both makes its ultimate outcome more a function of jurisdictional treatment than commodity properties.

Remember, two of bitcoin’s medium-of-exchange advantages over gold are its near-infinite sub-divisibility and its near-zero transportation cost over long distances.

Cypherpunk hacker juno moneta tweeted: "IRS ruling likely drives a stake into those looking to transform in a new and better PayPal. I couldn't be more pleased"

What does this statement mean? Who wants to transform bitcoin?

To understand the answer to that, one must understand how PayPal willingly transformed itself in the regulatory sphere to get mainstream adoption. If the bitcoin innovators end up with a PayPal-like system saddled with third-party choke points, what has really changed in the payments world? Our twitter commentator states that the current IRS ruling happily steers bitcoin in the opposite direction.

Whereas PayPal never had the capability to evolve in the opposite direction, the distributed bitcoin network and its corresponding unit of value bitcoin certainly does. This is where the really big boys play.

The IRS ruling is also likely to elevate digital gold bitcoin into some form of reserve currency status and the vehicle of choice for large cross-border transactions. It would not be unusual to see this emergence as different jurisdictions will undoubtedly have varying treatments for “official” bitcoin classification.

Additionally, this outcome would support the thesis that larger international exchanges operate like bitcoin clearing houses while the domestic or regional exchanges satisfy the local markets.

About reserve currency

Reserve currency status refers to the use of a favored monetary instrument or commodity that is commonly held by nation-states and institutions for foreign exchange reserves and large cross-border transactions.
Reserve currencies, like gold, can also be used for the ultimate backing of a government’s own monetary regimes as in the currency substitution cases of Panama, Barbados, Bermuda, and Uruguay.

Bitcoin as a reserve currency asset has appeal because it is non-governmental and global in nature. Its sustainability will not be affected by regional political instability and it has the potential to outlast certain countries and their form of government. Bitcoin is governed by the laws of mathematics.

In the case of large cross-border transactions, bitcoin has appeal because it knows no political boundaries nor is it hampered by capital controls, orchestrated payment blockades, and foreign exchange restrictions. As these transactions are typically performed by sovereigns or large institutions, the jurisdictional tax treatment will probably not be a concern. Possible use cases include closed-loop diamond brokers settling intra-network trades or even partner countries within a trading bloc seeking a pricing and settlement unit other than USD.

Institutional and sovereign transactions fall under the B2B payments category and they also could provide the valuable underpinning for bitcoin price discovery absent sufficient retail price discovery. Just as end-to-end encrypted email messaging, on-network P2P bitcoin transactions exist in a world of their own.