U.S. Shuts Liberty Reserve Currency Exchange

By Jon Matonis
Forbes
Tuesday, May 28, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/28/u-s-authorities-close-another-digital-currency-exchange

In conjunction with Costa Rican authorities and Spanish police, U.S. law enforcement participated in a joint operation on Friday to arrest the founder of Liberty Reserve S. A., a private digital currency exchange service based in Costa Rica.

U.S. authorities accused the currency exchange of facilitating $6 billion worth of money laundering, calling it a “bank of choice for the criminal underworld.”

Today, the website domain is resolving again but a notice on the homepage states: “THIS DOMAIN NAME HAS BEEN SEIZED by the United States Global Illicit Financial Team.” Domain names were also seized for asianagold.com, exchangezone.com, moneycentralmarket.com and swiftexchanger.com most likely for their affiliation with Liberty Reserve.

According to the indictment unsealed today, U.S. prosecutors said that the case involved law enforcement agencies in 17 countries and “is believed to be the largest international money laundering prosecution in history.” This latest action follows the 2007 closure of Doug Jackson’s famous e-gold service and this month’s seizure of Mt. Gox’s assets and account facility at U.S.-based Dwolla.

Arthur Budovsky, 39, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, was arrested in Spain and U.S. officials are likely to seek his extradition. He has been under investigation in Costa Rica since 2011 for suspicion of money laundering and for using various shell companies to operate Liberty Reserve.

On Friday, San José prosecutors raided Budovsky’s home and offices in Escazú and Santa Ana, southwest of San José, and in the northern province of Heredia. Agents from the organized crime unit of the Costa Rican Prosecutor’s Office seized documents, computers, three Rolls Royce and Jaguar automobiles, and a motorcycle. A Russian national with the last name Chukharev was also arrested and the U.S. is seeking his extradition as well.

Costa Rica state prosecutor José Pablo Gonzalez said that Costa Rica’s financial regulator, Financial Institution Superintendency (SUGEF), had refused to issue a license to Liberty Reserve in 2011 due to concerns about its transparency and funding procedures.

Investigators allege that Budovsky’s businesses in Costa Rica were used to launder funds from drug trafficking, identity theft, and pornography websites. The seized digital and physical evidence from the companies will be turned over to U.S. law enforcement in accordance with “international penal assistance.” The involved companies are Silverhand Solutions & Technology S.A. (Santa Ana), Worldwide E-Commerce Business S.A., or WEBSA (Escazú), Grupo Lulu Limitada (Escazú), Triton Group A & A, S.A. (Escazú), and Cyberfuel.com (Santa Ana).

Some Liberty Reserve users are estimating that the company may have held customer funds in excess of $150 million at the time of the seizure. There has been no statement from authorities on the reclamation process.

Since 2002, Liberty Reserve had been operating one of the oldest and most popular payment processors in the world with millions of clients. Vitalik Buterin of Bitcoin Magazine credits the company with being “one of the chief enablers of the Bitcoin economy’s early growth.” Payment methods such as credit cards and ACH transfers are not a great match for the irreversible bitcoin, because those payment methods can be reversed, or charged back. In 2010 and 2011 with the bitcoin exchanges struggling for irreversible inbound payment methods, Liberty Reserve Dollars and Liberty Reserve Euros were proprietary digital units that satisfied the need for payment finality.

Although security researcher Brian Krebs emphasizes the more salacious cyber crime aspects of the case, Liberty Reserve was also utilized by many legal businesses.

According to Forex Magnates, Liberty Reserve was “the leading payment channel for traders in emerging and frontier markets” and it was used by several international forex brokers, such as Marketiva, FXOpen, Markets.com, and Instaforex. Citing Masroor Ghoori, a foreign exchange broker in Pakistan, Forex Magnates said, “Forex brokers have been benefiting from Liberty Reserve’s vast access as a payment provider, especially in countries where traders face difficulties in transferring funds. Liberty Reserve was a ‘gift’ for several traders, especially after the State Banks’ (State Bank of Pakistan) changes to international money transfers.”

In a separate report, Forex Magnates predicts that bitcoin may be a viable alternative for payments to introducing brokers and even direct forex account funding now that centralized systems are under attack.

Mitchell Rossetti, co-founder of virtual prepaid ePay Cards, told the BBC that his company now faces an “uphill battle” to make up potentially lost funds because his business had about $28,000 sitting in a Liberty Reserve account at the time the site went offline. The cards allow consumers outside the U.S. to purchase goods from stores in the country as if they owned a locally-issued Visa or Mastercard credit card. Based in Texas and London, the firm allowed its customers to load their virtual prepaid cards with Liberty Reserve because it was quick, efficient and secure.

Demonstrating that those most harmed in targeted digital currency shutdowns are law-abiding U.S. citizens, Panamanian payment system Perfect Money announced the following on Saturday:

"Due to changes in our policy we forbid new registrations from individuals or companies based in the United States of America. This includes US citizens residing overseas. If you fall under the above mentioned category or a US resident, please do not register an account with us. We apologize for inconvenience caused."

Top 10 Bitcoin Merchant Sites

By Jon Matonis
Forbes
Friday, May 24, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/24/top-10-bitcoin-merchant-sites/

If you’re involved in Bitcoin, you have no doubt been asked the question “So, who accepts bitcoin?” True, it is the quintessential chicken and egg paradox, but that is not unexpected for the world’s first decentralized cryptocurrency lacking a political authority.

Commodity money and quasi-commodity money must gain legitimacy and acceptance through the rigors of the free market unlike political currencies that simply gain prominence by virtue of State sanctioning. In the true absence of State sanctioning or legal tender status, the monetary unit with the superior features will prevail in a competitive marketplace.

Let’s take a look at the top ten merchant sites on the Internet that are currently accepting bitcoin as payment. Uncensored rankings are based on the amount of three-month traffic received by the website according to Alexa Top Sites (as of May 24th, 2013). The updated list is provided courtesy of The Bitcoin Trader, but a separate version of the Bitcoin Ladder is also tracked on the Bitcoin wiki.
 1. WordPress.com (Alexa Global Ranking 22) – Site offers free blogs managed by the developers of the WordPress software and includes custom design templates, integrated statistics, and automatic spam protection. WordPress announced their decision to start accepting bitcoin in November 2012.

2. The Pirate Bay (Alexa Global Ranking 108) – As a large BitTorrent directory for music, movies and software, The Pirate Bay started accepting bitcoin for donations in April 2013.

3. Reddit (Alexa Global Ranking 117) – The social news and entertainment site focuses on user-generated news links with votes promoting top stories to the front page. Reddit started accepting bitcoin for the purchase of reddit gold in February 2013.

4. The Internet Archive (Alexa Global Ranking 245) – The Internet Archive is a nonprofit organization established to provide a permanent digital library by preserving Web sites. The Wayback Machine provides links to older versions of various webpages. They started accepting bitcoin donations and paying some employees in bitcoin in February 2013.

5. OkCupid (Alexa Global Ranking 687) – The free friendship, dating and social networking site started accepting bitcoin to pay for bonus features in April 2013.

6. 4chan.org (Alexa Global Ranking 882) - 4chan is a simple image-based bulletin board where anyone can post comments and share images without a requirement to register. The boards are dedicated to a variety of topics, from Japanese animation and culture to video games, music, and photography. They started accepting bitcoin for premium subscriptions in December 2012.

7. Namecheap (Alexa Global Ranking 974) -Namecheap offers affordable domain name registration, parking, e-mail, URL forwarding, and SSL certificates. They began accepting bitcoin in March 2013.

8. EZTV (Alexa Global Ranking 1,052) – EZTV.it is your one-stop source for all your favorite TV shows and they started accepting bitcoin donations in April 2013.

9. Mega.co.nz (Alexa Global Ranking 1,783) – MEGA offers 50 GB of free storage space and uploaded files are encrypted with only the user holding the decryption keys. Processed by Bitvoucher, the Kim Dotcom site started accepting bitcoin for private package upgrades in February 2013.

10. Lumfile (Alexa Global Ranking 3,761) – Lumfile is a free cloud-based file server that has been accepting bitcoin for premium accounts since at least December 2012.

Other notable sites in the ranking include LewRockell.com (9,202), OKPay (11,704), and the Tor Project (14,028). Of course, top merchant sites by bitcoin volume would produce an entirely different list, but that data is not always publicly available. Additional bitcoin merchants from a wide variety of categories can be found on the Bitcoin Trade wiki.

Bitcoin Comes To SWIFT

By Jon Matonis
Forbes
Monday, May 20, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/20/bitcoin-comes-to-swift/

Hosted at the palatial and temple-like SWIFT headquarters, this year’s TransConstellation Alumni conference featured a mix of panel representatives from both “new” payment approaches and “established” payment players. I was invited to represent the new approach in an Oxford-style debate which I gladly accepted.

As the mecca for international payments, SWIFT is situated on a sprawling green campus in La Hulpe, Belgium where deer leap through the underbrush and occasionally cross the road in front of you. The member-owned cooperative provides the communications platform to connect more than 10,000 banking organizations, securities institutions and corporate customers in 210 countries. If you have ever made an international wire transfer, it has probably run through the SWIFT network. Also, with global initiatives like Innotribe, SWIFT readily embraces the study of emerging payment paradigms and the potential for disruptive operators to alter the landscape.

It was a pleasure to watch the live bitcoin transaction feed from Blockchain.info scroll proudly across the 8-foot screen monitors at both ends of the high-ceiling reception room. That is what decentralization looks like. In the absence of third-party intermediaries, amounts and fees and transaction numbers are on display for all the world to see. Somehow, I doubt that a similar live transaction feed from SWIFT’s network was scrolling on a public web browser anywhere in the building. And from the looks on some faces, I think that realization dawned on the attendees as well.

Interactive audience questions ranged all the way from “how will Bitcoin mining nodes transition to an environment of transaction fees only” to “how can something with no backing be a store of value” to “this is the first time I’ve ever heard of bitcoin,” so hopefully some lives were changed. In general though, the audience and the panel were more aware of Bitcoin than I would have expected, but maybe that’s a result of the recent price run-up too.

The educational evening yielded no clear winner since the majority of the audience concluded that a cryptocurrency like bitcoin may indeed represent the future, but the path will be evolutionary rather than revolutionary.

This European Union approach to money and payments sits in stark contrast to events currently unfolding in the United States where a still-evolving payments exchanger recently had account funds seized via court order on dubious legal grounds. The EU tends to view futuristic payments as a framework opportunity rather than a target-rich environment for arrogant enforcement.

The dichotomy between EU and U.S. approaches to e-money becomes even more apparent when one looks at the uniformity of the EU e-Money and Payment Services Directives versus the almost hostile FinCEN guidance on virtual currencies and the incomprehensible patchwork of state money transmitter laws. Because of this, I estimate that the EU currently enjoys at least a five-year head start over its U.S. brethren in accommodating evolving payments efforts.

Whereas the EU strives to provide reasonably low barriers to entry without sacrificing currency choices, the U.S seems content to extinguish innovations like e-Gold in an effort to maintain complete control over money businesses and to project dollar hegemony within its borders. In Russia, now a surprising bastion for freedom of choice in virtual currencies, e-payments brand WebMoney began integrating bitcoin into their value transfer system (although U.S. customers are blocked).

The undeniable march of Bitcoin definitely left an impression on SWIFT, however Bitcoin as a network is an existential threat. Bitcoin as a non-political, non-corporate unit of account is not. Rhetorically, I posed the question: “In fifty years, would you rather own 100 euros, 100 Amazon Coins, or 100 bitcoins?”

Bitcoin plays for the long game. The very long game. Bitcoin block rewards are set to expire eventually and all units of bitcoin will be created by the year 2140, shifting the mining economics completely to transaction fees. In the end, financial and monetary decentralization will win the day because that is more simply the state of nature. I only hope that I am around to enjoy it.

6 New Bitcoin Educational Resources

By Jon Matonis
Forbes
Monday, May 13, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/13/6-new-bitcoin-educational-resources/

In the fast-moving Bitcoin world, it’s crucial to stay up to date with the latest in educational resources and new media. The last two months have seen an explosion in media attention and a desire for new users to learn as much as possible about the global bitcoin economy. It is within this spirit that I present the latest Bitcoin educational resources to hit the web:

CoinDesk – This London-based resource and news operation aims to be the “Reuters of Bitcoin” according to its founder Shakil Khan. As an angel investor in Spotify and bitcoin startup BitPay, Khan noticed a gap in the news coverage for bitcoin and digital currencies in general when other entrepreneurs constantly questioned him about the bitcoin.

Also just last month, Khan assisted in orchestrating the sale of his mobile news gathering portfolio company, Summly, to Yahoo for approximately $30 million. Now, drawing on the experience of a few editors and freelance writers, CoinDesk largely covers the growing Bitcoin ecosystem for a general, non-technical audience. It still needs an RSS subscriber feed , but it is off to a brilliant start.

The Genesis Block – A welcome addition to the Bitcoin blogosphere, the writing is refreshing and sometimes technical. The Genesis Block claims to be your foundation for all things Bitcoin and they are a news and tutorial site covering mining, trading, economics, and businesses. The authors involved in the project include Phil Archer, Jonathan Stacke and Wayne Parker. Intentional or not, little else is known about the founders however they consistently crank out good content.

Bitcoin Education Project – The full name of this community-built resource is “Bitcoin or How I Learned to Stop Worrying and Love Crypto: The definitive guide to understand what the bitcoin is and why we should care about them.” Started by technology entrepreneur Charles Hoskinson and part of the Udemy network, this online Bitcoin course is one of many educational courses offered by the Udemy marketplace. The free course is organized into several mini-lectures covering Bitcoin basics and extending into specific topics such as wallets, mining, transaction fees, and cold storage. Interesting future content is crowd-funded on the site.

Khan Academy Bitcoin Series – Founded in 2008 by Salman Khan, the non-profit Khan Academy is on a mission to provide a free world-class education for anyone, anywhere. Within the larger Finance and Capital Markets section, and then within the Money, Banking and Central Banks subsection, they currently offer a new 8-part Bitcoin series taught by Zulfikar Ramzan, a world-leading expert in computer security and cryptography. Receiving his Ph.D. in computer science from MIT, Ramzan is currently the Chief Scientist at Sourcefire. Also, the interactive discussion below each lecture is particularly good.

Bitcoin Press Center – Launched by Andreas Antonopoulos as a sensible reaction to the bitter infighting regarding potential press contacts within the community, this resource supports multiple languages and time zones as well as targeted searches of individuals that have expressed a willingness to be available for media interviews. Billing itself as the global media center for Bitcoin and the best way to find a specific Bitcoin expert, the site accepts new nominations for Bitcoin experts with the only criteria being accuracy of their stated credentials and confirmation that they want to be listed.

Let’s Talk Bitcoin – This all-Bitcoin podcast is brand new on the scene and produced by Adam Levine, who has developed a loyal listener following in a short amount of time. Providing current news, topical interviews, and studied analysis, Adam is joined by Let’s Talk Bitcoin co-hosts Stephanie Murphy and Andreas Antonopoulos. The program started with an overly-ambitious daily schedule and is now available on Tuesdays and Thursdays, which hopefully will prevent burnout. Listeners can also send in questions and comments.

Expertly produced and always knowledgeable, this important program is well on its way to becoming the de facto podcast for all things Bitcoin. My only complaint is that the audio hosting has jumped around a lot and it’s not always easy to find the segment that I’m looking for. Despite that, Let’s Talk Bitcoin is required listening and vitamins for your Bitcoin brain.

The Elephant In The Payments Room

By Jon Matonis
American Banker
Monday, April 29, 2013

http://www.americanbanker.com/bankthink/the-elephant-in-the-payments-room-bitcoin-1058703-1.html

The payments industry has been ripe for disruption for as long as I can remember. Historically conservative and non-experimental, banking and financial services always appear to be the laggard for any new technology. But none of that has stopped recent innovators from pursuing things like Square, Stripe, Dwolla, FaceCash, ZooZ, Affirm, MangoPay, and Balanced. The Internet and mobile payments gold rush is in full swing and venture capitalists are lapping it up.

The amount of money raised by a startup in the space can be staggering too, ranging from $3.4 million to as much as $200 million in the case of Square. But are venture capitalists truly funding disruptive "home runs" if licensed banks and legacy credit card networks are required for their so-called innovations? Also, most would agree that the states' money transmitter licensing infrastructure acts more like a barrier of entry protecting incumbents than providing any protection for consumers.

Doesn't anyone notice the elephant in the room? Growth rates of over 10,000% since inception, measured in transaction volume and amounts. Pervasive international market penetration with full digital and mobile platforms. A passionate and dedicated customer base.

Of course, I'm talking about the distributed payments network and cryptocurrency Bitcoin, which plays a dual role as a transaction confirmation network and independent floating unit of account.

It's easy to understand why certain venture capitalists might be timid about pulling the trigger on a Bitcoin-related investment. Regulatory risk (illustrated by the fallout from Fincen's recent guidelines in the U.S.), on top of typical execution risk demands a greater return from initial investment. While that return may ultimately be there, a skittish board or a wary risk-averse management team might be unable to navigate the onslaught of negative public relations and price volatility.

Any lesser technology with so many forces aligned against it would be unlikely to survive. Bitcoin's persistence demonstrates that we are witnessing something unique in money and payments. For those that do invest and successfully navigate the potential traps, the reward is a first-mover advantage for a new international monetary unit.

Here's the important part. Disruption in the unit of account is the way to disrupt the payments space.

National currency units come with many strings attached and they reek of favoritism and crony capitalism primarily benefiting the well-connected. With a nonpolitical monetary unit, many new possibilities become apparent structurally that would not have been contemplated before, such as: peer-to-peer mobile applications that don't require permission from legacy transaction carriers; global remittances that don't require high-fee currency conversion; merchant categories that are no longer disallowed due to fraud and chargeback risk; and merchant reach into countries that are not even on the map for Visa, MasterCard or PayPal.

It's very telling that, when WordPress announced its plan to begin accepting bitcoin, the blogging platform provider noted, "PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons."

Compared to conventional payments startups, the largest private equity raise by a Bitcoin-related company has been Atlanta-based BitPay Inc. which raised $510,000 in January to expand its lead in the bitcoin merchant processing space. Startup CoinLab also raised $500,000 in April 2012 and foreign exchange platform Coinsetter closed a $500,000 investment round this month. Coinbase, a provider of personal wallet storage and merchant processing services, raised $600,000, although almost half of that was through crowdfunding.

Those are just some of the Bitcoin initiatives with external funding. Many Bitcoin-related companies grow organically with a one- or two-person team, because the technology offers the most open platform for payments innovation in the world today.

The powerful Bitcoin open-source development funnel will begin to suck in greater and greater talent driving applications that will have the broadest overall impact in the payments sphere. Creative talent naturally gravitates toward the point where maximum societal impact intersects with maximum reward. This alignment of incentives for early adopters and a global "workforce army" cannot be matched with traditional employee stock option plans. Legacy and closed systems cannot compete.

Just ask Kevin McInturff, who recently left Global Payments – a processor of Visa and MasterCard transactions with thousands of employees – to join BitPay, where he is one of three full-timers. Bitcoin "offers the opportunity to change the way business is done," McInturff told PaymentsSource.

Email wasn't spawned by the post office as a way to drive efficiency for the U.S. Postal Service. File sharing technology didn't come out of a media headquarters' lab to test improvements for distribution. Disruptive innovation simply doesn't work that way.

Disruptive technology disrupts. That is its mission. It annihilates any substandard process or product in its path and it originates outside of the established paradigm. You don't see it coming. I get a chuckle out of all these investors trying desperately to attach themselves to something, anything, in the Internet and mobile payments space.

However, a payments startup that ignores Bitcoin in its strategic plan is like a publisher ignoring the Web in 1999. Certainly, innovators can design routes around Bitcoin and established players can dismiss it as insignificant, but that won't make the elephant go away. The savvy and true disruptors already know this.

Bitcoin Exposes Financial Regulation As Political Favoritism

By Aaron Lasher
Real Virtual Currency
Saturday, April 27, 2013

https://chralash.wordpress.com/2013/04/27/bitcoin-provides-an-opportunity-to-expose-financial-regulation-as-political-favoritism-and-not-consumer-protection/

Bitcoin is, at present, almost entirely unregulated, save for a few vague guidelines from FinCEN.  The only real regulations imposed upon the exchange markets are those of supply and demand, at least for now.

This is not the case regarding the large conventional markets that we are more accustomed to dealing with. Muddled among the actual consumer sentiments are layers upon layers of structures, rules, and hidden costs that obscure the information that the market is trying to convey.

In many ways, financial regulation for the sake of stability is like damming a river. You may succeed in stopping the yearly flood that ruins a couple of houses, but you also ensure that when it does eventually flood, that the river will probably wipe out the whole village.

For lack of a better term, investors have been coddled into complacency with regards to their financial decisions. When was the last time that you checked the solvency of the bank where you leave your deposits? Do you even care about its financial health? Of course not, because your deposits are insured. Surely, you would never have to take a haircut like our friends in Cyprus did. That is, of course, until the flood.

When you deal in Bitcoin, you have to wear your big-boy pants. Nobody is there to help you if you make a poor decision. You have to do your own research and sink or swim on those terms. For instance, I keep a small but non-trivial amount of Bitcoins on the securities trading platform Havelock Investments. Recently I reached out to the owner, James, to inquire about his security precautions. He was gracious enough to describe his protocols (by the way, they are top-notch) and put my mind at ease. Conversely, I have no idea at all how imprudent that Bank of America may or may not be with my US dollars.

When the markets go bonkers, and Mt. Gox begins to lag, remember that people can only manipulate you if you let them. The panic selling that ensues after a DDoS attack has become less and less pronounced because Bitcoin owners are wising up. We don’t need an uptick rule, we just need experience. We’re learning all sorts of things that we never could with the Dow, the FTSE, or the Nikkei.

Take, for instance, the Bitcoin-only gambling game Satoshi Dice. It pays a monthly dividend in the form of 13% of net profits. In the world we are accustomed to living in, SD would be subject to all sorts of reporting and insider trading regulations. But in the Bitcoin world, the story is refreshingly simple. There are no rules to follow or break, no guarantee that insiders won’t trade the stock for certain periods of time. Personally, I love it. It means that I can trust the current price a lot more assuming that people in-the-know have affected it already. I get more information from the price and can therefor make better decisions about whether I think it is a good time to buy or sell. As a bonus, the absence of regulatory cost burdens means higher profits and more money in my pocket.

If you follow the regulatory paper trail, you will often end up at the doorstep of large banks such as JP Morgan Chase or Goldman Sachs. This is because they have very effective lobby groups that know how to get legislation passed. Regulations are sold to the public as necessary for the protection of consumers and the ferreting out of fraud and money laundering. But you shouldn’t be surprised to notice that the side effects of many bills serve to make large financial institutions larger and to raise the barriers to enter and thus compete.

So how can we show the world that Bitcoin doesn’t need regulating? At the very least, don’t ask for it. Don’t blame anybody but yourself if you lose money trading, or your coins are stolen because you were careless. Become your own financial advocate. Do your research, learn about the companies you choose to trust with your money, and when the trading bots start flittering around the Mt. Gox order book, or somebody sells a big chunk of coins, go for a walk. You’ve got your big-boy pants on, and big boys don’t panic.

If bitcoin works without regulation, then it will have the potential to invalidate many claims that “regulation is for your own protection,” leaving the alternative explanation that regulation in general is little more than a blunt anti-competitive tool.

Reprinted with permission.

Patrick Murck Discusses Bitcoin With Financial Crime Specialists

General Counsel at the Bitcoin Foundation and VP of Business Development and General Counsel at CoinLab, Patrick Murck, recorded a podcast on April 26th, 2013 with the Association of Certified Financial Crime Specialists, a group connecting the global financial crime community. The talk was entitled: "Bitcoin’s promise and perils: What financial institutions should know about the new virtual currency."

From the ACFCS website:

Until recently, the virtual currency of Bitcoin may have had almost as many critics, skeptics and naysayers as it had actual users. Much has changed in the past few months. With the value of Bitcoins exploding, its exchanges doing a lively business, and more and more merchants accepting it as payment, Bitcoin now seems close to fulfilling its potential as a widely used, decentralized online currency.

One thing that has not changed, however, are the concerns over money laundering and financial crime risks that have swirled around Bitcoin since its inception. To delve into the mechanics of the online currency and explain how it interfaces with financial institutions worldwide, ACFCS is joined by Patrick Murck, General Counsel of the Bitcoin Foundation, on this Financial CrimeCast. He explains the inner workings of Bitcoin, and describes what steps the currency and its exchanges are taking to mitigate financial crime risks.

He also analyzes the impact of recent guidance by the US Financial Crimes Enforcement Network that lays out suggested regulations for virtual currencies for the first time, and explains what financial institutions should know about doing business with Bitcoin users.

Fincen's New Regulations Are Choking Bitcoin Entrepreneurs

By Jon Matonis
American Banker
Thursday, April 25, 2013

http://www.americanbanker.com/bankthink/fincen-regulations-choking-bitcoin-entrepreneurs-1058606-1.html

More than a decade ago, regulators nearly suffocated PayPal. Now it looks like they’re trying to squelch another disruptive, innovative payments system.

At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network. That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network – moreso than the widely reported price volatility and hacker attacks.

"They've been the single biggest factor for stomping out currency competition," says Bradley Jansen, a former assistant to Rep. Ron Paul and director of the Center for Financial Privacy and Human Rights. Speaking recently on The Daily Bitcoin podcast with Adam Levine, Jansen expressed surprise at how little focus bitcoin business leaders are putting on Fincen, especially considering how regulators thwarted earlier emerging payment systems like PayPal and e-gold. PayPal obviously survived and prospered – but only after selling itself to eBay and agreeing to put restrictions on its service. E-gold was not so fortunate.

"Fincen was able to stop currency competition with technical innovations in the 90s even before their expanded powers under the U.S. Patriot Act. And, what we've got now is a Fincen on steroids without clear restrictions from Congress," Jansen says.

The guidance requires certain intermediaries that handle virtual currency to register with Fincen as money services businesses, which entails recordkeeping and reporting responsibilities. And it says some of those businesses may additionally be money transmitters, which would mean fingerprinting of directors and officers and compliance with a patchwork of state licensing requirements.

Jansen postulates that the recent Fincen virtual currency guidance was issued ex post facto as a way to set the stage for potential prosecutions in the future.

"It's a failure of Congress to do its job. We knew that these guidelines and these prosecutions were in the works even last Congress. Ron Paul was the chairman of the House subcommittee that had jurisdiction over Fincen and he never had a single hearing on this."

In a recent speech, Fincen Director Jennifer Shasky Calvery said the new guidance aims "to protect [digital currency] systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors." She reiterated that the guidance does not apply to everyday users who pay or accept bitcoin for goods and services.

But by saddling startups with compliance requirements, and making them unattractive clients for regulated banks that despair of serving MSBs, Fincen is choking these businesses that facilitate conversion of bitcoins into dollars. Fewer exchanges and more red tape will make it harder for merchants or consumers (who, after all, must still pay the bills with dollars) to take advantage of the Bitcoin payment system’s speed, privacy and competitive costs.

On March 20 – just two days after the guidance from Fincen came out – the bitcoin exchanger bitme.com suspended operations indefinitely. Bitme was a relatively small operation, but it was widely suspected among bitcoin users in online forums that this closure resulted from difficulties related to potential regulatory compliance.

BTC Buy, another bitcoin exchange site, suspended services and closed permanently in early April, specifically citing the legal uncertainty brought up by the Fincen guidance.

Most recently, the largest bitcoin exchange to halt trading was Bitfloor, run by Roman Shtylman, who blamed "circumstances outside of our control." His New York operation had average daily trading volume of about $300,000 (depending on the exchange rate), with U.S. dollar deposits and withdrawals running through a Capital One bank account – which the bank unilaterally closed.  "I had very little time to act between receiving the account closure letter and the account being closed," Shtylman told PaymentsSource.

In this case, the regulatory guidance may have had an indirect effect. Bitfloor was registered with Fincen as an MSB but was not licensed as a state money transmitter. Shtylman surmised that Capital One had judged his business to be "not worth the risk."

Across the Atlantic and presumably unrelated to Fincen, Poland-based Bitcoin-24 suspended trading after the government there froze its bank account. It reportedly did so because a bank in Germany complained of compromised accounts transferring stolen money without identification to Bitcoin-24. Also, U.K.-based TransferWise, a foreign currency intermediary, ceased transfers to any bitcoin exchanges at the request of its banking partners. TransferWise had mostly been servicing customers in the U.K., Poland, and Spain.

It will be interesting to watch how Fincen intends to treat one-way, fixed-rate brokers that either buy or sell bitcoin at a fixed price. Since a two-way exchange market is not involved it could be seen as merely a typical commodity purchase or sale.

Tangible Cryptography LLC, which registered as an MSB this month, operates FastCash4Bitcoins for selling bitcoins and Bitcoins Direct for private off-exchange purchases. The two businesses function independently of each other and neither is technically an exchange. Bitcoins Direct is frequently closed to new clients and its cash deposit feature was recently cancelled.

The fact that bitcoin survives at all with so many powerful forces lined up against it is a testament to its resiliency and tenacity. Now, in addition to the vicious press coverage and persistent denial of service attacks on exchanges, the emerging cryptographic money has to contend with onerous and targeted regulation.

With respect to bitcoin and financial regulation, Jansen warns: "I think the lesson from the 90s was that you either become what Fincen wants you to be or you're not going to be."

Not in the U.S., that is. But jurisdictional competition will kick in and overseas exchanges will gain market share and liquidity. They just may not have U.S. customers.

Bitcoin Foundation Expands Global Media Opportunities

By Jon Matonis
Forbes
Monday, April 22, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/22/bitcoin-foundation-expands-global-media-opportunities/

The Bitcoin Foundation is an excellent template for a decentralized nonprofit project and I am proud to serve alongside the other dedicated board members on such a historic effort.

Established seven short months ago, the foundation has recruited bitcoin’s lead developer (transparency of compensation is important), launched a grant program for funding bitcoin-related initiatives, and coordinated a showcase conference in San Jose. About 60% of our membership comes from outside the U.S. and we are currently seeking partners for local chapters in foreign countries which will increase global effectiveness.

Additionally, the foundation maintains an active relationship with various press entities seeking information about Bitcoin and the role of the nonprofit foundation. Since these inquiries come from around the world, we strive to be inclusive and we enlist the voluntary support of foundation members and regional affiliates for certain questions because they would best know their local bitcoin markets. We also refer many technical questions on cryptography and bitcoin mining to contributing developers. Frequently and on short notice, the press wants examples of bitcoin users in a particular country that are willing to speak openly with the media and sometimes on camera so we do our best to accommodate that.

Media opportunities often lead to conference opportunities. Ultimately, this work expands the market for bitcoin education. Conference organizers and media outlets also reach out directly to executives at existing bitcoin businesses and other professional analysts that are known from previous appearances. If a publication or television station seeks a certain individual for political commentary, that can be found quite easily on Twitter or the Bitcoin Forum. Social media has vastly increased the opportunities for people willing to speak.

It’s not always about taking a position on political or human rights issues. Mostly, it’s about freedom of choice in currencies and economic education on bitcoin price movements, bitcoin exchange markets, bitcoin merchants, potential regulation, and the differences between Bitcoin as a payments network and bitcoin as a monetary unit. Or, it’s about specific use cases such as asset protection in Cyprus or maintaining donation payments in support of freedom of the press.

The foundation itself is nonpolitical, so when an inquiry comes from an industry regulator, our role is to explain what is and what is not possible in terms of potential regulation. I believe this approach to be the most effective stance to take when confronted with regulatory queries. Fortunately, Bitcoin transcends the conventional philosophy of regulation by reducing certain aspects to irrelevancy.

For instance, bitcoin exchange endpoints where bitcoin interfaces with national fiat money and the banking system is a possible point of regulation due to current AML and KYC guidelines in most countries. However, due to the nature of distributed computing, ongoing transactions between individuals and companies would be technically outside the scope of potential regulatory action as long as there is electricity and internet connectivity.

Debates around gambling and personal drug use are moral issues. An apolitical currency like bitcoin is simply a network protocol, like email or telephone, so it is unable to express a morality.

To date, this educational approach has been effective because only four jurisdictions and one central bank have published any formal statements on the Bitcoin cryptocurrency — Norway, Australia, France, United States, and the ECB. With the exception of the recent U.S. FinCEN regulatory guidelines, all of the reports have been explanatory in nature.

Open source development projects while extraordinary in many respects are actually not very good at “staying on message,” whatever that means. And with Bitcoin, there’s no reason that they should be because there isn’t a single message. The diversity of what attracts different people to Bitcoin is one of its greatest strengths. Free market economists admire the separation of money and government while audit-minded accountants relish its public traceability. Even Paul Krugman secretly covets bitcoin’s abstract nature for a future Federal Reserve digital currency.

However, being against dissenting viewpoints on regulation, being unwilling to confront any form of taxation, or being anti-financial privacy does not make one a neutral bitcoin advocate as some have suggested. Those positions are the worst sort of bias because from the outset they wrap ideology in what is politically correct and easily digestible by the masses. Furthermore, it can be disingenuous and manipulative.

Either way, Bitcoin is the honey badger of currencies and the protocol rolls on. Hat tip to Gavin Andresen for locating this media theme song.

Bitcoin Pros to Talk Merchant Acquisition, Banking Opportunities

By Jon Matonis
PaymentsSource
Monday, April 22, 2013

http://www.paymentssource.com/news/bitcoin-pros-to-talk-merchant-acquisition-banking-opportunities-3013882-1.html

With bitcoin in the media spotlight, everyone seems to have an opinion on the price. Few recognize the profound implications of decentralized money for the monetary system, society and government – not to mention the emerging business opportunities.

The timing could not be better for the inaugural conference of the newly-formed Bitcoin Foundation. Next month, several hundred people from around the world will converge on the San Jose Convention Center (in Silicon Valley, naturally). Billed as "The Future of Payments," the conference is attracting technologists, venture capitalists, bankers, traders, payments specialists, and financial regulators.

Launched in January 2009, bitcoin achieved all-time highs in transaction volume and new entrants into the currency last week – milestones overshadowed by the price volatility. The nonprofit foundation was established in September 2012 to standardize and promote the core bitcoin protocol. (I have a seat on the foundation’s board.) Two of its early accomplishments were to recruit lead bitcoin developer Gavin Andresen (whose informal role in the Bitcoin community mirrors Linus Torvalds’ position in the Linux world) as chief scientist and to launch a quarterly grant program for funding various initiatives that advance the bitcoin protocol. Next, the foundation intends to encourage best practices for bitcoin businesses and exchanges, to facilitate the formation of local foundation chapters in foreign countries, and to educate global regulators about what can and cannot be regulated feasibly with a distributed peer-to-peer system such as bitcoin.

Although the conference features excellent technical tracks, the agenda will be particularly interesting to those in the banking and payments fields.

For example, many people understandably ask why merchants would want to accept payments in Bitcoin given the volatility of the exchange rate with the dollar. After all, even if you believe the digital currency will appreciate over time, you probably can’t use it to pay the electric bill or the rent.

Part of the answer is the service provided by firms like BitPay, whose cofounder and CEO, Anthony Gallippi, will explain how he’s been driving business adoption of Bitcoin. BitPay functions as a merchant payment processor, somewhat akin to the acquiring banks in the Visa/MasterCard space. The startup provides foreign exchange conversion services for merchants desiring immediate settlement in local national currencies. Thus Tony’s customers reap the benefits of Bitcoin – no chargebacks, since bitcoin transactions are irreversible, and lower fees than they’d pay for credit card transactions – while BitPay takes the currency risk. Tony recently landed one of the best-known merchants to accept Bitcoin: WordPress, the blogging platform.

Another startup is Paymium, whose Bitcoin-central exchange has shown it is possible to seamlessly integrate bitcoin and the traditional regulated banking infrastructure. The French company’s co-founder and chief operating officer, Pierre Noizat, will talk about bridging that gap. If his name rings a bell for some financial services professionals, it may be because Pierre comes from the traditional payments world, having served as managing director of the French Mobile Contactless Association.

Would-be disruptors eyeing this space but worried about legal uncertainties will have a chance to hear from Patrick Murck, the general counsel of the Bitcoin Foundation. His expertise extends across the legal and regulatory issues governing the use of Bitcoin, virtual economies, gamification, alternative payment systems, and social loyalty and reward programs. Immediately after the Financial Crimes Enforcement Network issued the March 18 regulatory guidance on centralized and decentralized virtual currencies, Patrick published an analysis.

Bitcoin’s user-defined anonymity protects personal privacy, and this combined with the decentralized structure arguably thwarts censorship – for example by allowing people who want to donate to WikiLeaks to circumvent the political blockade that forced the major payment processors to cut off that organization. Rainey Reitman, the activism director of the Electronic Frontier Foundation, a nonprofit civil liberties law firm and advocacy center, will hold forth on these liberating aspects of Bitcoin. She is particularly interested in the intersection between personal privacy and technology, and has spent significant time investigating the role of financial intermediaries as censors. Reitman is also the chief operating officer and co-founder of the Freedom of the Press Foundation, a nonprofit organization that crowd-sources funding to supporting independent, nonprofit journalistic institutions – and recently started accepting bitcoin.

Most of the attention paid to Bitcoin in the mainstream media has focused on its merits and drawbacks as a store of value. The smarter commentators have paid greater attention to its potential as a means of exchange. But what about the third key role of money, as a unit of account? Bitcoins, after all, are divisible to the eighth decimal place, and this is another disruptive component. Erik Voorhees, a bitcoin early adopter involved in several leading bitcoin-related companies, such as BitInstant, SatoshiDice and Coinapult, will encourage thinking on this as he discusses the economics of Bitcoin and its role as money.

Ever since the bitcoin cryptocurrency launched and achieved initial success, institutional investors and hedge fund managers have secretly sought a regulated investment vehicle for bitcoin placements. Malta-based Exante Ltd. has a solution with its new Bitcoin Fund. There remains a case for Bitcoin as a store of value, even after the recent whipsawing. Tuur Demeester, author of the financial newsletter MacroTrends, added bitcoin as part of his recommended currency basket in January 2012, and he’ll talk about bitcoin's emerging role as a separate asset class alongside precious metals, equities, and bonds.

Last month, my column featured a conversation with software developer and online payments industry veteran Peter Šurda about how nonpolitical cryptocurrencies like bitcoin could alter the future of fractional reserve banking. If you were as fascinated as I was by the discussion, he’ll be on the “Economics of Bitcoin” panel with Voorhees and Demester.

Bradley Jansen Discusses FinCEN Regulations and Bitcoin

Yesterday, Adam B. Levine, editor-in-chief of The Daily Bitcoin, interviewed Bradley Jansen for "Let's Talk Bitcoin" about the US Treasury's Financial Crimes Enforcement Network (FinCEN) and their recent guidance on alternative currencies such as Bitcoin. According to Jansen:

"What we've got now is a FinCEN on steroids without clear restrictions from Congress!"

You can listen to the entire interview here:
http://letstalkbitcoin.tumblr.com/post/48738464442/lets-talk-bitcoin-is-a-show-for-users-new-and

Bradley is editor of FreeBanking.org and Director of the Center for Financial Privacy and Human Rights. He comes on at about the nine-minute mark, but the conversation before that leads into the discussion on FinCEN.

The Fiat Emperor Has No Clothes

By Jon Matonis
Forbes
Thursday, April 18, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/18/the-fiat-emperor-has-no-clothes/

A piece from Paul Krugman in The New York Times this week criticizes bitcoin for being antisocial and for not having a State-controlled supply while secretly admiring its powerful abstractness.

As a complicit minion in the State’s appropriation of the monetary unit, Krugman perpetuates ‘The State Theory of Money’ myth that the sovereign’s power to collect taxes and declare legal tender imbues a currency with ultimate value.

While that may be a reason to acquire a certain amount of government fiat currency, it is a transitory value because in the end it is still based on a State-sanctioned illusion. Anyone who has visited a weekend flea market has noticed the old coin and currency collector displays filled with past experiments in national fiat money. Those paper notes were at one time valued for something too.

We don’t want a pristine monetary standard untouched by human frailty as Krugman claims. We want freedom in the monetary standard untouched by the politicizing process.

In a Krugman world, centralized management of the money supply is preferable to a market-based outcome because the academically-informed economists will serve the best interests of the economy at large. However, our monetary overlords possess no special knowledge or secret sauce that justifies dictatorial control over money any more than it would justify dictatorial control over the market for something like soda beverages or dog food. Trust in mathematics trumps trust in central bankers.

The question of political control over a monetary system is the greatest litmus test for discovering those that seek control over others. Usually, it will be cloaked in terms like full employment, price stability, temporary stimulus, quantitative easing, and economic growth, but manipulation of the money supply serves only to favor the issuers of that particular monetary unit.

Money has a lot in common with religion. At some level, it requires a huge leap of faith. Yes, a belief in gold requires this too as the non-monetary value assigned to gold is probably no more than 5% of its market price. However, this is also what makes bitcoin the ultimate social money because for its value it merely requires others, not the law. Money is already the most viral thing on the planet and the network effect exponentially reinforces that.

Krugman actually struggles to assert that bitcoin is antisocial because he cites economist Paul Samuelson who once declared that money is a “social contrivance,” not something that stands outside society. Samuelson is absolutely correct on that point and bitcoin stands firmly within society. It is no one’s right to question why some place value on bitcoin and some do not since all value is subjective. The rationale for assigning value to bitcoin is as varied as the human fabric itself.

In this context, society can be defined as those mutual users willing to agree to a medium of exchange and a store of value. Since bitcoin, just as the Internet, recognizes no political boundaries, Krugman resists seeing the global monetary unit as something social. Krugman sees society only as a multitude of aggregated fiefdoms where he is the emperor’s cherished tailor.

Though, just like the untainted child in the Hans Christian Andersen fairy tale, some of us are beginning to notice. It’s not the illusion itself that so offends our sensibilities, but more the notion that a competitive illusion is not to be permitted. If a free market illusion voluntarily agreed to from the bottom up is so desperately feared, then the protectors of the State-sanctioned illusion must not have the most benevolent of motives in store for us plebeians.

I don’t know about you, but I for one can stand up and exclaim: “the fiat emperor has no clothes!” What if more of us did?

FinCEN's Director on Virtual Currencies

By Bradley Jansen
FreeBanking.org
Saturday, April 20, 2013

http://www.freebanking.org/2013/04/20/fincens-director-on-virtual-currencies/

Earlier this week, FinCEN Director Jennifer Shasky Calvery addressed the National Cyber-Forensics Training Alliance CyFin 2013 Conference.

She explains again how the Financial Crimes Enforcement Network (FinCEN) gets its data from the reports it mandates that banks use to spy on their customers against them. Lots and lots of reports.

But she promises:

"However, right now this is long and arduous work as analysts sift through hundreds and sometimes thousands of reports. Very soon, new capacities made possible by our internal technology modernization will allow our analysts to deal with such data sets to find leads in a fraction of the time previously necessary. Very soon, we will be able to point law enforcement and other stakeholders precisely to where they should be looking. Our analysts, working hand- in-hand with our superb technology team, are now putting these new capacities into place."

But her talk really focused on "Emerging Payment Systems." Her comments have echoed mine (from an entirely different perspective) that technology (and specifically mobile apps) offer great opportunities (for free banking) and that those not well served by our current system (the "unbanked" in the US--immigrants, poor, racial and ethnic minorities--and people in countries with less mature financial systems or sound currencies) are a great target market.

"As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce."

Don't worry, FinCEN is working to strangle these initiatives in their crib with their regulations. She pays special attention to "crypto-currencies" in her talk.

"We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. While probably most of today’s audience understands what these emerging payments systems are and how they work, many line analysts, investigators, and prosecutors in law enforcement may not, and part of FinCEN’s role is to help be the bridge to explain these new systems. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems.

In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas."

And, as our Bitcoin fans know--at least those who follow my posts here or my rants on our Facebook page, FinCEN has "virtual currencies" in their sights. And, remember too, it was FinCEN that shut down e-gold back in the day and crippled the crypto-currency movement last century.

I'll quote her in the entirety of her virtual currency remarks:

"In fact, just last month, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies, such as Bitcoin, which has in recent weeks gained significant attention. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them.

FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.

The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance.

Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers have already registered with FinCEN as MSBs, though they have not necessarily identified themselves as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities and that all who need to, register appropriately."

The second half of her speech talked about account takeovers via malware, risks with third party payment processors, improvements they are making to their analytical work (after some false starts!), their public-private partnerships with industry, and her personal initiative "The Delta Team" ("The purpose of the Delta Team is for industry, regulators, and law enforcement to come together and examine the space between compliance risks and illicit financing risks. The goal is to reduce the variance between the two.").

And let's not forget FinCEN's dreams of global domination. They are in a partnership of 130 other "Financial Intelligence Units" as part of the Egmont Group.

The text of her remarks is available at the following link:
http://www.fincen.gov/news_room/speech/pdf/20130416.pdf

Reprinted with permission.

Flerovium: Tangible Nanomoney

By Jon Matonis
Forbes
Sunday, April 14, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/14/flerovium-tangible-nanomoney/

I need a break from Bitcoin. Let’s discuss the real future of money.

Beyond stable isotopes and naturally-occurring materials are the superheavy elements or SHEs. Scientists have recently added two new man-made elements to the periodic table — flerovium (element 114) and livermorium (element 116), with chemical symbols Fl and Lv.

After being created by smashing atoms together, these materials decay within seconds but long-lived SHEs are a theoretical possibility. This undiscovered region in the periodic table where heavy elements become stable again is known as the “island of stability,” first proposed by Glenn Seaborg in the late 1960s. If individuals prefer something more tangible over an amorphous cryptocurrency like bitcoin, then the edges of molecular matter in a nanotechnology future may hold the answer.

If some form of physical specie is even useful in an era of ubiquitous artificial molecular machine systems, money would still require certain attributes such as being a store of value, divisible, portable, safe, unable to counterfeit, and self-validating.

Nanotechnology scientist Robert Freitas suggests that the future of money lies with elements like flerovium, or what he refers to as tangible nanomoney. Flerovium is a radioactive chemical element first created in 1999 at the Flerov Laboratory of Nuclear Reactions in Dubna, Russia by colliding Plutonium-244 and Calcium-48 nuclei. Prior to May 30th, 2012, the unstable isotope was known as ununquadium.

After restricting his analysis to ordinary matter, as opposed to antimatter, Freitas compares the rarest elements along the natural isotope spectrum of potential monetary candidates such as technetium, helium, xenon, osmium, tantalum, and gold (however in a nano-age, easily extractable inert rare elements will have alternatives).  Ultimately concluding that a man-made superheavy element like flerovium best fits the overall criteria for physical specie, he describes how the element could likely be introduced into society circulating as coinage.

A flerovium coin would be fused with cheaper bioinert materials of the nano-age such as gold, platinum or diamond. Such a coin would be sufficiently costly to manufacture and have a relatively long half life, possessing negligible radiation and biotoxicity risk due to the very low concentration of SHE trace amounts.

These hypothetical SHE coins would be stable and long-lived. Freitas estimates that a coin with $1 million face value would only need to contain 10^⁹ SHE atoms worth $0.001/atom. Therefore, assuming a 10⁶-year half life, there would be only ~2 disintegration events per day putting it well below the disintegration levels of today’s base metal coinage. Rather than suffering from the insidious effects of government-induced inflation and coin clipping, market-based nanomoney would lose value due to radioactive decay. A million-dollar coin would lose approximately ~$0.50 per year or ~$500 per millennium from disintegration.

In addition to flerovium, Freitas admits that some other relatively stable superheavy elements may also be “coined” for the ultimate tangible nanomoney. So that’s the choice for our nonpolitical money of the singularity — low radiation coinage or digital bitcoin, you decide.

Government Fees, Parking Tickets May Soon Be Paid in Bitcoin

By Jon Matonis
PaymentsSource
Monday, April 8, 2013

http://www.paymentssource.com/news/government-fees-parking-tickets-may-soon-be-paid-in-bitcoin-3013753-1.html

While some call Bitcoin an “existential threat to the state,” local governments could soon embrace the digital currency and payment system as a practical alternative to credit and debit cards.

E-Gov Link, an Ohio company that helps municipalities accept payments online for parking tickets, permits, and the like, now allows its customers to take bitcoin. Noting that "credit card purchases tend to carry high transaction costs due to the middleman and due to the high costs of fraudulent online purchases," E-Gov President Bill Nadler emphasized in a press release, "having a payment option that doesn’t carry that heavy transactional cost is definitely a plus." Bitcoin transactions can be processed at a fraction of the cost of other payment methods because they avoid the interchange structure of the legacy card processors.

Aside from the benefits to merchants, bitcoin payment choices have significant benefits to consumers who may have already received bitcoin from others in the sale of products or services and do not necessarily want to convert out of the digital currency. Broadening merchant acceptance expands the "network effect" of a young currency and starts to make Bitcoin viable as an end-to-end payments system.

"We know the bitcoin community is passionate about using bitcoin for payments, and will be demanding it of their local governments," said Nadler. "We’re happy to be here to answer the call, as municipalities scramble to find partners to help them with bitcoin."

Naturally, the use of bitcoin in local government settings will not be leveraging its optional anonymity properties, thus demonstrating bitcoin's overall flexibility when compared to physical cash.

"We look at bitcoin as a competitive advantage," says Jerry Felix, Vice President of Software Development at E-Gov Link. The company sees it as a natural evolution for governments to accept bitcoin as the currency gains popularity and like in other merchant categories, supporting bitcoin first creates a first-mover advantage. E-Gov Link focuses on integrating bitcoin payments into the shopping cart experience while relying on payment processor BitPay to manage the bitcoin wallets and currency conversion.

"We have customers across the U.S., in over 30 states. We're dealing with small and medium sized municipalities – cities, towns, townships, villages, and counties, and we provide web solutions for them," adds Felix. Marquee client examples for the web solutions provider include municipalities like Niagara Falls, N.Y., and Skokie, Ill.

For now, a municipality has to step forward and ask E-Gov Link to enable bitcoin payments – which is peculiar because other payment methods are not selectively disabled.

It would be far more interesting for these local governments to make it known to citizens that the bitcoin payment choice is an option. Still, the offering from E-Gov Link is a major step in that direction because bitcoin first has to be a viable option for the local government. Whether bitcoin demand is merchant-driven or consumer-driven, one thing is clear. Greater merchant choices and new payment categories contribute to the increasing value of the Bitcoin network.

Payments to government entities stand as one of the primary economic lynchpins for the preferred monetary unit. The obligation of the political authority to accept tax payments in government fiat currency is what underlies its value. While this E-Gov Link move does not cover tax payments demanded in a particular monetary unit, it can be seen as a precursor to a political authority expressing a preference for payments in a digital currency.

Bitcoin Obliterates "The State Theory Of Money"

By Jon Matonis
Forbes
Wednesday, April 3, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/03/bitcoin-obliterates-the-state-theory-of-money/

Once you get past the childish title, the recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists. Denninger is an intelligent student of the capital markets and his essay deserves a serious reply.

The economic contribution of his essay is that it represents the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an expose advocating the Chartalist approach to monetary theory claiming that money must have no intrinsic value and strictly be used as tokens issued by the government, or fiat money. Today, modern-day chartalists are from the school of thought known as Modern Monetary Theory (MMT).

Without getting into the intrinsic value debate, this is where I strongly depart from Denninger, because if we accept the thesis that all money is a universal mass illusion, then a market-based illusion can be just as valid or more valid than a State-controlled illusion. What Denninger and Greenbackers and MMT supporters reject is the notion that monetary illusions themselves are a competitive marketplace, falsely believing that only the State is in a ‘special’ position to confer legitimacy in monetary matters.

Regarding this issue of State-sanctioned legitimacy, bitcoin as a cryptographic unit seeks and gains legitimacy through the free and open marketplace. It is not a governmental instrument of legal tender that requires regulatory legitimacy and coercion by law in order to gain acceptance.

Therefore, the path to widespread adoption of bitcoin hinges on three primary market-based developments: (a) robust and liquid global exchanges similar to national currencies that can offer risk management via futures and options, (b) more user-friendly applications that mask the complexities of cryptography from users and merchants, and (c) a paradigm shift towards “closing the loop” such as receiving source payments and wages in bitcoin to eliminate the need for conversion from or to national fiat.

Even after graciously accepting Denninger’s definition of what the ideal currency would be (which I don’t) and searching for any economic nuggets of value, his arguments can be distilled into four main criticisms of bitcoin as a monetary instrument. First, bitcoin does not provide cash-like anonymity. Second, bitcoin transactions take too long for confirmations to be useful in everyday transactions. Third, bitcoin exhibits irreversible entropy.  Fourth, the decoupling of the stateless bitcoin from the obligation of monetary sovereigns is considered a fatal weakness.

Now that we identified the objections, let’s take these in order.

On the first point surrounding bitcoin anonymity, Denninger only embarrasses himself with this criticism. By default, bitcoin may not offer anonymity and untraceability like our paper cash today, but it is better described as user-defined anonymity because the decision to reveal identity and usage patterns resides solely with the bitcoin user. This is far superior to a situation where users of a currency are relegated to seeking permission for their financial privacy which is typically denied by the monetary and financial overlords. Also, his capital gains tax issue is a non-starter because it’s a byproduct of a monopoly over money.

His second criticism of a lack of utility in the ‘goods and service preference’ due to timing of sufficient block chain confirmations has some merit. However, advances have been made in the use of green addressing techniques that solve the confirmation delay problem by utilizing special-purpose bitcoin addresses from parties trusted not to double spend.

Denniger’s third criticism that bitcoin exhibits irreversible entropy is confusing. Typically, entropy refers to a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system’s disorder. In the case of bitcoin, I suspect Denninger is taking it to mean the degradation of the matter in the universe because of his explicit comparison to gold. While it is true that bitcoins lost or forgotten are ultimately irretrievable, I view that as a feature not a bug because it is the prevailing trait of a digital bearer instrument. Two bitcoin digital attributes that make it superior to physical gold are its ability to create backups and its difficulty of confiscation. Furthermore, the number of spaces to the right of the decimal point (currently eight) is immaterial to bitcoin’s suitability as a monetary unit.

Now for the big and final one. Denninger asserts that monetary sovereign issuers possess not only the privilege, but the obligation, of seigniorage, which Denninger refers to as bi-directional since sovereigns have the responsibility of maintaining a stable price level during times of both economic expansion and economic contraction. As a product of Hayekian free choice in currency, market-based bitcoin is decentralized by nature and poses a false comparison to the century-old practice of central bank monetary manipulation. Fear not deflation.

Governments have appropriated the monetary unit for their own benefit by declaring it the only preferred monetary unit for payment of taxes to the State. Believing that governments have sincere and good intentions in administering the monetary system is akin to believing in fairy tales. Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign’s spending activity to the detriment of the unfortunate users of that monetary unit. Decentralized Bitcoin obliterates this sad state of affairs.

Denninger’s biased and establishment preference for a monetary sovereign serves only to harm his analysis because it undeniably closes him off from alternative, and usually superior, free-market monetary arrangements. More damaging, however, is the fact that it places him outside of the mainstream in free banking circles and squanders his remaining quasi-libertarian credibility as a champion of markets.