Voucher-Safe is an open source project from the founders of Pecunix. This overview of the decentralised P2P digital currency was published originally in the December 2010 issue of DGC Magazine.
Siddley Voucher-Safe Project
Voucher-Safe Open Source Voucher Payment Project
For further reading:
"Voucher-Safe Goes Live!- Global Anonymous Digital Cash", Voucher-Safe Forum, November 18, 2010
"P2P Voucher System Implementation", Voucher-Safe, January 8, 2010
Wednesday, February 29, 2012
Friday, February 17, 2012
Foreign-Located Money Services Businesses
By Financial Crimes Enforcement Network
Wednesday, February 15, 2012
http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A001.html
On July 21, 2011, the Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a final rule on definitions and other regulations relating to money services businesses (Final Rule).1 The Final Rule amended the definition of "money services business" at 31 CFR 1010.100(ff). An entity may now qualify as a money services business (MSB) under the Bank Secrecy Act (BSA) regulations based on its activities within the United States, even if none of its agents, agencies, branches or offices are physically located in the United States. The Final Rule arose in part from the recognition that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations.2 FinCEN seeks to ensure that the BSA rules apply to all persons engaging in covered activities within the United States, regardless of the person's physical location.
FinCEN is issuing this Advisory to advise financial institutions of their obligations under the BSA when providing financial services to foreign-located MSBs. Financial institutions should note the following:
Financial institutions may find it necessary to update their AML programs if they provide financial services to foreign-located MSBs or engage in financial transactions with these entities.5 Financial institutions may find previously issued Guidance and Advisories helpful when incorporating foreign-located MSBs into their AML policies and procedures. In 2005, FinCEN and the federal banking agencies issued guidance (Joint Guidance) on providing financial services to MSBs operating in the United States.6 Additionally, financial institutions may find FinCEN's 2010 Advisory on informal value transfer systems (IVTS) to be useful in determining if their customers are operating as unregistered money transmitters.7
Consistent with the standard for reporting suspicious activity under the BSA, if a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or appears to be indicative of money laundering, terrorist financing, or other violation of law or regulation, the financial institution should file a suspicious activity report (SAR).8 As noted in the Joint Guidance, financial institutions that provide banking services to MSBs should file a SAR if they become aware that their customers are operating as unregistered or unlicensed MSBs.9
Questions or comments regarding the contents of this Advisory should be addressed to the FinCEN Regulatory Helpline at 800-949-2732. Financial institutions wanting to report suspicious transactions that may relate to terrorist activity should call the Financial Institutions Toll-Free Hotline at (866) 556-3974 (7 days a week, 24 hours a day). The purpose of the hotline is to expedite the delivery of this information to law enforcement. Financial institutions should immediately report any imminent threat to local-area law enforcement officials.
1 Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011). http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18309.pdf.
2 Id. at 43588.
3 See 31 CFR 1010.100(ff)(1)-(7) for a full description of these activities.
4 See 31 CFR 1022.380 et seq.
5 See, Federal Financial Institutions Examination Council (FFIEC) Exam Manual, pp. 307-313 (April 29, 2010). Although the FFIEC Exam Manual is issued by the federal banking regulators regarding AML requirements applicable to banks, it contains guidance that may be of interest to other financial institution types that provide financial services to foreign-located MSBs.
6 Advisory - Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States (April 26, 2005). http://www.fincen.gov/statutes_regs/guidance/html/guidance04262005.html
7 FIN-2010-A011, Advisory - Informal Value Transfer Systems (September 1, 2010). http://www.fincen.gov/statutes_regs/guidance/html/FIN-2010-A011.html.
8 See e.g. 31 CFR 1020.320.
9 Supra at note 6.
For further reading:
"Bitcoin Exchange's Crisis Bodes Ill for Payment Innovation", Jeremy Quittner, Bank Technology News, February 17, 2012
"New FATF AML Recommendations And Bitcoin", Bitcoin Money, February 17, 2012
"Bitcoinica Legal Complaint", Amir Taaki, Bitcoin Media, February 17, 2012
"Major Bitcoin exchange shuts down, blaming regulation and loss of funds", Timothy B. Lee, ars technica, February 16, 2012
Wednesday, February 15, 2012
http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A001.html
On July 21, 2011, the Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a final rule on definitions and other regulations relating to money services businesses (Final Rule).1 The Final Rule amended the definition of "money services business" at 31 CFR 1010.100(ff). An entity may now qualify as a money services business (MSB) under the Bank Secrecy Act (BSA) regulations based on its activities within the United States, even if none of its agents, agencies, branches or offices are physically located in the United States. The Final Rule arose in part from the recognition that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations.2 FinCEN seeks to ensure that the BSA rules apply to all persons engaging in covered activities within the United States, regardless of the person's physical location.
FinCEN is issuing this Advisory to advise financial institutions of their obligations under the BSA when providing financial services to foreign-located MSBs. Financial institutions should note the following:
- To qualify as an MSB, a person, wherever located, must do business, wholly or in substantial part within the United States , in one or more of the capacities listed in 31 CFR 1010.100(ff).3 Relevant factors include whether the foreign-located person, whether or not on a regular basis or as an organized or licensed business concern, is providing services to customers located in the United States.
- Foreign-located MSBs are financial institutions under the BSA. With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.4
- Foreign-located MSBs are subject to the same civil and criminal penalties for violations of the BSA and its implementing regulations as MSBs with a physical presence in the United States.
- The Final Rule requires each foreign-located MSB to appoint a person residing in the United States as an agent for service of legal process with respect to compliance with the BSA and its implementing regulations.
- The Final Rule became effective on September 19, 2011. Reporting, recordkeeping and AML program requirements under the BSA now apply to foreign-located MSBs. However, registration and the appointment of an agent for service of legal process will not be required until the revised registration form is available, which is currently planned for release in early March 2012.
Guidance
Financial institutions may find it necessary to update their AML programs if they provide financial services to foreign-located MSBs or engage in financial transactions with these entities.5 Financial institutions may find previously issued Guidance and Advisories helpful when incorporating foreign-located MSBs into their AML policies and procedures. In 2005, FinCEN and the federal banking agencies issued guidance (Joint Guidance) on providing financial services to MSBs operating in the United States.6 Additionally, financial institutions may find FinCEN's 2010 Advisory on informal value transfer systems (IVTS) to be useful in determining if their customers are operating as unregistered money transmitters.7
Suspicious Activity Reporting
Consistent with the standard for reporting suspicious activity under the BSA, if a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or appears to be indicative of money laundering, terrorist financing, or other violation of law or regulation, the financial institution should file a suspicious activity report (SAR).8 As noted in the Joint Guidance, financial institutions that provide banking services to MSBs should file a SAR if they become aware that their customers are operating as unregistered or unlicensed MSBs.9
Questions or comments regarding the contents of this Advisory should be addressed to the FinCEN Regulatory Helpline at 800-949-2732. Financial institutions wanting to report suspicious transactions that may relate to terrorist activity should call the Financial Institutions Toll-Free Hotline at (866) 556-3974 (7 days a week, 24 hours a day). The purpose of the hotline is to expedite the delivery of this information to law enforcement. Financial institutions should immediately report any imminent threat to local-area law enforcement officials.
1 Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011). http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18309.pdf.
2 Id. at 43588.
3 See 31 CFR 1010.100(ff)(1)-(7) for a full description of these activities.
4 See 31 CFR 1022.380 et seq.
5 See, Federal Financial Institutions Examination Council (FFIEC) Exam Manual, pp. 307-313 (April 29, 2010). Although the FFIEC Exam Manual is issued by the federal banking regulators regarding AML requirements applicable to banks, it contains guidance that may be of interest to other financial institution types that provide financial services to foreign-located MSBs.
6 Advisory - Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States (April 26, 2005). http://www.fincen.gov/statutes_regs/guidance/html/guidance04262005.html
7 FIN-2010-A011, Advisory - Informal Value Transfer Systems (September 1, 2010). http://www.fincen.gov/statutes_regs/guidance/html/FIN-2010-A011.html.
8 See e.g. 31 CFR 1020.320.
9 Supra at note 6.
For further reading:
"Bitcoin Exchange's Crisis Bodes Ill for Payment Innovation", Jeremy Quittner, Bank Technology News, February 17, 2012
"New FATF AML Recommendations And Bitcoin", Bitcoin Money, February 17, 2012
"Bitcoinica Legal Complaint", Amir Taaki, Bitcoin Media, February 17, 2012
"Major Bitcoin exchange shuts down, blaming regulation and loss of funds", Timothy B. Lee, ars technica, February 16, 2012
Sunday, February 12, 2012
Paxum Exits From Bitcoin Business
By Jon Matonis
Citing "new bank regulations" and "the fact that we are constrained to act in this manner", Canada-based Paxum has exited from the bitcoin business which put them on the map in 2011. On February 10th, Paxum stated that they can no longer accept any accounts related to bitcoin or bitcoin exchanges and that all current bitcoin-related accounts have been closed. Paxum spokesperson, Ruth Blair, posted Paxum's rationale here and here.
Paxum is an e-wallet company that also offers the Paxum Prepaid Mastercard via Choice Bank in Belize. Effective immediately, this action has impacted all customers that rely on Paxum for two-way transfers into and out of the exchanges, but it was first noticed by exchange intermediary BitInstant and the floating-rate exchange TradeHill.
Paxum, Inc. is licensed and registered as an MSB (Money Servce Business) with main offices in Quebec, Canada. Apparently, the MSB regulatory body in Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), has decided to exert some soft pressure on e-wallet companies and their banks that facilitate bitcoin exchanges.
As no court jurisdiction has ruled on whether bitcoin is actually money, the regulators have decided to issue statements of guidance as to how bitcoin may or not be interpreted by the courts. The result of this has been to exert regulatory influence through warnings because the licensed money service businesses are being 'pre-warned' of potential legal issues ahead. As with PayPal and others, the adjustment that this causes has revolved mostly around modifying the company's terms of service to list 'currencies and currency exchange services' as a restricted class of transactions for the e-wallet or e-money company.
For further reading:
"Paxum Ends Association with Bitcoin Exchanges", Tom Hymes, AVN, February 13, 2012
"For Banks, Digital Currency Poses Threat — and Opportunity", Jeremy Quittner, Bank Technology News, January 13, 2012
Citing "new bank regulations" and "the fact that we are constrained to act in this manner", Canada-based Paxum has exited from the bitcoin business which put them on the map in 2011. On February 10th, Paxum stated that they can no longer accept any accounts related to bitcoin or bitcoin exchanges and that all current bitcoin-related accounts have been closed. Paxum spokesperson, Ruth Blair, posted Paxum's rationale here and here.
Paxum is an e-wallet company that also offers the Paxum Prepaid Mastercard via Choice Bank in Belize. Effective immediately, this action has impacted all customers that rely on Paxum for two-way transfers into and out of the exchanges, but it was first noticed by exchange intermediary BitInstant and the floating-rate exchange TradeHill. Paxum, Inc. is licensed and registered as an MSB (Money Servce Business) with main offices in Quebec, Canada. Apparently, the MSB regulatory body in Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), has decided to exert some soft pressure on e-wallet companies and their banks that facilitate bitcoin exchanges.
As no court jurisdiction has ruled on whether bitcoin is actually money, the regulators have decided to issue statements of guidance as to how bitcoin may or not be interpreted by the courts. The result of this has been to exert regulatory influence through warnings because the licensed money service businesses are being 'pre-warned' of potential legal issues ahead. As with PayPal and others, the adjustment that this causes has revolved mostly around modifying the company's terms of service to list 'currencies and currency exchange services' as a restricted class of transactions for the e-wallet or e-money company.
For further reading:
"Paxum Ends Association with Bitcoin Exchanges", Tom Hymes, AVN, February 13, 2012
"For Banks, Digital Currency Poses Threat — and Opportunity", Jeremy Quittner, Bank Technology News, January 13, 2012
Thursday, February 2, 2012
Dutch Supreme Court Rules Virtual Objects Are Legal Property
By Ren Reynolds
Virtual Policy Network
Wednesday, February 1, 2012
http://www.virtualpolicy.net/runescape-theft-dutch-supreme-court-decision.html
On the 31st of January 2012, the Supreme Court of the Netherlands found that items in the online game RuneScape had been stolen from a player. This is a ground-breaking case as it is the highest national court in the West to rule that taking virtual objects in this way is theft under national criminal law. This ruling may have broad implications for the online games industry.
The case dates back to 2007 when two youths used violence and threats of violence to force another player to log into the game of RuneScape. After the victim logged in to the game one of the defendants transferred virtual items and virtual currency from the victims account to their own. The Supreme Court upheld the conviction for theft but reduced the number of hours of community service to be served (taking into account Juvenile detention served).
The appeal did not turn on the material facts, i.e. whether there were threats were made or items were transferred. Rather, the appeal centred on the question of whether what had occurred was ‘theft’ as defined by the law of the Netherlands.
In coming to these conclusions the court noted that it is down to the discretion of the court to determine whether “due to the digitization of society, a virtual reality has been created, all aspects of which cannot be dismissed as mere illusion where the commission of criminal acts are not be possible” [Google Translation with amendments by R Reynolds].
This ruling means that there is a degree of control that someone can have over an object which is sufficient for that object to be stolen. The question that has puzzled both the industry and academics for many years is: if a digital object is capable of being stolen, does this mean that other rights accrue to a player? For example, irrespective of what the contract says, can a player:
For details of the Chinese, Korean and other cases see tVPN’s white paper on Virtual Objects and Public Policy which examines both cases and statute in detail.
Ren Reynolds is the founder of the Virtual Policy Network. Reprinted with permission.
For further reading:
"Dutch Supreme Court decides virtual theft case", Greg Lastowka, February 1, 2012
"Dutch Supreme Court: Stealing RuneScape gear is a crime", Matthew DeCarlo, February 1, 2012
"Dutch Court recognizes Runescape items as legal 'goods'", Terra Nova, February, 1, 2012
"Not all created equal", Ren Reynolds, Terra Nova, February 27, 2011
"The Virtual Property Problem: What Property Rights in Virtual Resources Might Look Like, How They Might Work, and Why They are a Bad Idea", John William Nelson, September 6, 2009
Virtual Policy Network
Wednesday, February 1, 2012
http://www.virtualpolicy.net/runescape-theft-dutch-supreme-court-decision.html
On the 31st of January 2012, the Supreme Court of the Netherlands found that items in the online game RuneScape had been stolen from a player. This is a ground-breaking case as it is the highest national court in the West to rule that taking virtual objects in this way is theft under national criminal law. This ruling may have broad implications for the online games industry.
The case dates back to 2007 when two youths used violence and threats of violence to force another player to log into the game of RuneScape. After the victim logged in to the game one of the defendants transferred virtual items and virtual currency from the victims account to their own. The Supreme Court upheld the conviction for theft but reduced the number of hours of community service to be served (taking into account Juvenile detention served).
The appeal did not turn on the material facts, i.e. whether there were threats were made or items were transferred. Rather, the appeal centred on the question of whether what had occurred was ‘theft’ as defined by the law of the Netherlands.
Key Arguments
The key arguments against the incident being defined as ‘theft’ considered by the court they were as follows:- Virtual items are not goods but an ‘illusion’ of goods made up of bits & bytes i.e. they are data
- Virtual items are Information
- The point of the game is to take objects from each other
- The virtual items are and remain the property of the publisher of the game not the victim or the defendant - hence they could not have been stolen
The ‘Illusion’ argument
The court ruled that:- Virtual items have value in virtual of the effort and time invested in obtaining them
- The value in Virtual items is recognised by those that play the game (including the defendents who went to the trouble to take them)
- The Virtual items were under the exclusive control of the player – who was relieved of this control
The ‘mere data’ argument
The court agreed that virtual items are data, but crucially added that they are not just data. That is, the fact that virtual items have data like properties does not mean that they don’t also have properties that make them capable of being stolen. In particular the court noted again that the virtual item had perceived value and were under the exclusive control of a player.The ‘I was playing a thief’ argument
The defence argued that one of the points of the game of RuneScape is to take virtual items from other players. The court noted that this was true but the way that the property was taken was outside the ‘context’ of the game.The ‘not your property’ argument
The court agreed that under the RuneScape terms and conditions, the virtual items in the game are owned by the publisher of RuneScape who grant the players have a ‘right to use’. However it concluded that the items in question were under the ‘exclusive dominion’ of the victim until they were removed from them, hence the position of RuneScape being owners of the items (from the perspective of intellectual property / contract law) is ‘not relevant’ in the context of the criminal case under consideration.Here the court made defence to money – which is the property of the sate but can still be stolen.In coming to these conclusions the court noted that it is down to the discretion of the court to determine whether “due to the digitization of society, a virtual reality has been created, all aspects of which cannot be dismissed as mere illusion where the commission of criminal acts are not be possible” [Google Translation with amendments by R Reynolds].
tVPN Commentary: Significance
This case is significant because it changes the relationship between individuals and service providers in respect of digital objects. That is, RuneScape’s contract clearly states that the players of the game do not own the game or any of the digital objects within it, whether they control them or not. This has long been a contentious matter as there is a large trade in the sale of objects between players for hard currency, so called Real Money Trading (RMT).This ruling means that there is a degree of control that someone can have over an object which is sufficient for that object to be stolen. The question that has puzzled both the industry and academics for many years is: if a digital object is capable of being stolen, does this mean that other rights accrue to a player? For example, irrespective of what the contract says, can a player:
- sell an object?
- claim rights if an object is deleted or changed by company?
- claim compensation if a game is closed?
For details of the Chinese, Korean and other cases see tVPN’s white paper on Virtual Objects and Public Policy which examines both cases and statute in detail.
tVPN Links
Li Hongchen v. Beijing Arctic Ice (2004 China)
External links
For further reading:
"Dutch Supreme Court decides virtual theft case", Greg Lastowka, February 1, 2012
"Dutch Supreme Court: Stealing RuneScape gear is a crime", Matthew DeCarlo, February 1, 2012
"Dutch Court recognizes Runescape items as legal 'goods'", Terra Nova, February, 1, 2012
"Not all created equal", Ren Reynolds, Terra Nova, February 27, 2011
"The Virtual Property Problem: What Property Rights in Virtual Resources Might Look Like, How They Might Work, and Why They are a Bad Idea", John William Nelson, September 6, 2009
Friday, January 27, 2012
paysafecard Could Be Huge
By Jon Matonis
Yes, that is my professional opinion for the potential of paysafecard. How do they become huge? All they have to do is adjust their 'Webshop' Terms and Conditions allowing online merchants to accept paysafecard for the sale of the bitcoin product. The global demand is certainly there. Sadly, paysafecard does not permit their product to be used for the purchase of bitcoin today because they do not view bitcoin as a valid consumer end-product -- but as a monetary intermediary. However, bitcoin is not defined in any jurisdiction as a monetary instrument, currency, or prepaid item and it is more of a fun 'cryptography product' than anything else.
The paysafecard group is an international company based in
Vienna, Austria. They have more than ten years of experience in the area
of prepaid online payment solutions and operate in 28 countries worldwide. paysafecard makes Internet payments as simple as
using cash and ensures absolute protection against data abuse. No credit card or bank account is
required and financial privacy remains fully guaranteed when making
payments. The prepaid solution works like a prepaid
calling card for mobile phones. The p2p transferable 16-digit code purchased at sales outlets is sufficient to carry
out a payment transaction and the paid amounts are booked from the credit
of the paysafecard, which may be accessed at any time online. Codes can be purchased in several denominations and then up to ten codes may be combined to make a single purchase not exceeding the equivalent of 1,000.00€ in most jurisdictions, well below the threshold for most anti-money laundering guidelines. With 350,000 sales outlets worldwide, including many in the United States, there are fourteen different currencies supported and a currency converter helps you pay in foreign currencies.
Now, a workaround does exist for purchasing bitcoin if you are willing to go through a virtual currency as a conduit. Currently, the virtual world exchange, VirWoX, accepts paysafecard for the purchase of Linden Dollars, the virtual currency of Second Life. In April 2011, VirWoX started accepting bitcoin and enabled two-way trading between bitcoin and Linden Dollars, which are in turn convertible to CHF, EUR, GBP, USD, and the other virtual currencies traded on VirWoX, the Open Metaverse Currency (OMC) and Avination's C$.
Astonished by these foreign exchange gymnastics, we decided to ask paysafecard about this apparent virtual currency exception which allows users to acquire bitcoin with paysafecard indirectly. Following is the official response received from paysafecard UK:
The paysafecard group is an international company based in
Vienna, Austria. They have more than ten years of experience in the area
of prepaid online payment solutions and operate in 28 countries worldwide. paysafecard makes Internet payments as simple as
using cash and ensures absolute protection against data abuse. No credit card or bank account is
required and financial privacy remains fully guaranteed when making
payments. The prepaid solution works like a prepaid
calling card for mobile phones. The p2p transferable 16-digit code purchased at sales outlets is sufficient to carry
out a payment transaction and the paid amounts are booked from the credit
of the paysafecard, which may be accessed at any time online. Codes can be purchased in several denominations and then up to ten codes may be combined to make a single purchase not exceeding the equivalent of 1,000.00€ in most jurisdictions, well below the threshold for most anti-money laundering guidelines. With 350,000 sales outlets worldwide, including many in the United States, there are fourteen different currencies supported and a currency converter helps you pay in foreign currencies.Now, a workaround does exist for purchasing bitcoin if you are willing to go through a virtual currency as a conduit. Currently, the virtual world exchange, VirWoX, accepts paysafecard for the purchase of Linden Dollars, the virtual currency of Second Life. In April 2011, VirWoX started accepting bitcoin and enabled two-way trading between bitcoin and Linden Dollars, which are in turn convertible to CHF, EUR, GBP, USD, and the other virtual currencies traded on VirWoX, the Open Metaverse Currency (OMC) and Avination's C$.
Astonished by these foreign exchange gymnastics, we decided to ask paysafecard about this apparent virtual currency exception which allows users to acquire bitcoin with paysafecard indirectly. Following is the official response received from paysafecard UK:
"Paysafecard is an anonymous payment option – there is no customer identification. By establishing a connection with another anonymous payment service as Bitcoins we would not only lose complete control over the flow of funds but also collide with local AML regulations. At this point we will not work with bitcoin exchanges."
"We allow paysafecard to be used on Virwox as Linden Dollars is a closed loop payment method, it can only be used for 2nd Life. The concern we have with working with a bitcoin exchange is we would enter into a payment cycle where we lose an element of control. If someone uses paysafecard to buy bitcoins we have not control how those bitcoins are used. They could be cashed out through another payment method or used on sites such as Silk Road, which goes completely against our merchant acquisition policy."If the Mt. Gox floating-rate bitcoin exchange is any indication of market demand, the volume for paysafecard transactions could be substantial. In the last 30 days, the cumulative trading volume of $19.2 million at Mt. Gox alone would estimate a conservative $4.8 million per month for casual retail purchases of bitcoin, assuming a 25% small-denomination retail demand component. This amount does not even include the existing trading volume at other exchanges, such as TradeHill and Crypto X Change, and the volume that is sure to come from the newer category of fixed-rate exchanges, such as GetBitcoin and blizzcoin. At an extrapolated annual turnover of $57.6 million, paysafecard would do well to garner a piece of that up-for-grabs payment processing.
Sunday, January 22, 2012
Bitcoin: A Universal Complementary Currency?
By Pierre Noizat
ParisTech Review
Friday, January 20, 2012
http://www.paristechreview.com/2012/01/20/bitcoin-universal-complementary-currency/
Bitcoin is a new payment application available on the internet since January 2009. In a way, by virtue of its open source publication, it is similar to the World Wide Web, the hugely successful internet application of the internet that now enables so many others. Much like the WWW has redefined the way mankind produces and shares knowledge, bitcoin transforms the social code underlying money supply to bring about a new degree of economic freedom. Can it be seen as a new monetary reform vehicle?
The relevance of complementary currencies is acutely
underlined by the emergence of a global economy dominated by the rules
of finance where state sponsored currencies are competing for growth and
trade surplus. Until 2009, ideas for a monetary reform could revolve
only around money supply mechanisms orchestrated by governments and the
banking system. With the inception of a universal currency harnessing
the transforming power of the web, new avenues may be explored for
economic and social changes: here is why a universal currency like
Bitcoin can help redefine money.
The Bitcoin Database of Transactions
The bitcoin protocol specifies how to build and maintain a distributed database of transactions on the internet. Transactions are published and signed electronically (using asymmetric cryptography and key pairs). The protocol enforces confirmation of every transaction by the network nodes.
Because all transactions in the database are linked together cryptographically, a property that explains why the bitcoin database is usually referred to as the bitcoin “chain”, any change in a past transaction would require computing an entirely new database from that point on.
Signatures by private keys ensure the title of property to any given amount of bitcoins: knowledge of the private key associated to the receiving address is required to send a part or the whole of any transaction output. The bitcoin transaction database holds all the necessary information for an address owner to receive and spend any amount of bitcoin: the database and the communication protocol together bring to life a new electronic currency.
Bitcoin Money Supply
Moreover, the bitcoin protocol specifies a money supply mechanism. Bitcoins are generated gradually by the network until a maximum quantity of 21 million bitcoins is reached. Bitcoins are created ex nihilo, pretty much in the same way as dollars are created when a commercial bank lends money to someone who is buying a house. The house existed before the loan. In fact, the seller is walking away with the dollars, de facto transferring the ownership of the house to the bank. The bank essentially created the money in its ledger out of thin air: it recorded the amount of the loan as a bank’s liability upon crediting with it the account of the borrower and that same amount was recorded as a bank’s asset, i.e. as a loan that must be paid back to the bank. Even top bankers and economists, including Nobel Prize winner Maurice Allais, call it magic.
Bitcoin builds on the recognition of the fact that the monopolistic aspect of the money supply mechanism in today’s banking system deserves at least to be revisited, if only because it has lasted for several hundred years. If only because of the continued effects of the financial crises, Bitcoin allows us to experiment with a new concept for money.
Bitcoin, as a new universal currency, is a true innovation, building on numerous prior attempts to create a sustainable currency and doing so independently of any state or centralized organization.
Towards the growth of a Bitcoin Economy?
Some bankers I spoke with shrug off Bitcoin on the somewhat circular logic that it cannot be backed by any assets in the real world. Well, thanks to merchants accepting bitcoins and to online exchanges trading bitcoins just like any other currency, a Bitcoin economy is emerging. If the economy of the euro or the dollar collapses, the expectation of a backing by the central banks is based on the assumption that a government has unlimited taxation power over said economy. The current financial crisis in Greece or, to a lesser extend in the US, demonstrates that actual use of this theoretical power is a stretch of economic reality. The truth of the matter is that 90% of the money today is created in the books of the banks and that price stability is the determining factor towards continuing public support of the central banks view.
There are over 140 state sponsored currencies in use across the world today. It is hard to prove that a new complementary currency will jeopardize the world’s economic outlook only because this new currency, unlike all the others, stems from a distributed monetary system without a central authority. The innovative feature of bitcoin that truly sets it apart from anything that existed before is simple: it is cash online without the necessity for a central organization or third party. As such, it is making other forms of cash transaction comparatively less convenient. Removing the necessity does not affect the usefulness of a third party in some cases. Transaction processing between merchants and their customers will always entail some kind of dispute resolution system, regardless of the currency that is being used for payments.
E-gold, as a tentatively universal currency backed by gold, was created in 1996 and failed mainly because it relied on a central organization to manage an inventory of gold. The quantity of gold needed was supposed to grow with the e-gold economy, which was impractical, dangerous and fundamentally useless in a digital age. (Another shortcoming of e-gold was the lack of a specific protocol: relying solely on a web browser to conduct irreversible transactions makes it difficult to secure them.)
Bitcoin money supply mechanism simulates the extraction of a rare metal with a mathematical model, using a clever recipe proven in electronic signature schemes and hashing algorithms that can be found today as ingredients in most banking systems.
One can think of bitcoin as a currency backed not by gold but by a metaphoric substitute of gold, since the quantity of bitcoins is limited by design: 21 million bitcoins.
Like gold, bitcoins can be seen as bonds that never mature but unlike gold, bitcoins bear virtually infinite divisibility and liquidity with no vaulting costs. According to 2010 year-end estimates by GMFS, total above ground stocks of gold are 166,600 tons worth US$6,500 Billion by 2010 average gold price, of which around US$2,400 Billion are held privately or by official reserves, in the form of coins and bars. The total stocks minus approximately 30,000 tons held in official reserves worldwide as of august 2011, gives us an estimated “market” size of US$1,230 Billion for gold as a private store of value. If we were to compute a fictitious exchange rate with the dollar based on these numbers, we would project an exchange rate of around US$600 for one BTC, if bitcoins were to capture only a 1% fraction of the private market for gold as a hedging instrument.
By the same token, if the bitcoin economy were to grow up to 5% of the US GDP, i.e. approximately US$750 Billion USD, and assuming the velocity of bitcoins to be the same as that of the dollars (around 50), then one bitcoin would represent the equivalent of US$700.
The numbers translate to a $15 Billion future valuation estimate for the bitcoin network. They are consistent with the market capitalization of Visa, Inc. ($55 Billion as of august 2011) or MasterCard ($39 Billion). Buying bitcoins today is like buying stocks of a new global electronic transaction network. At $10 as of august 2011, Bitcoins can be considered undervalued even if it is likely that other universal currencies might try to step in at some stage.
One would think at first that such a valuation would provide an investor with the rationale for purchasing the most powerful computer on earth (“K” in Japan as of June 2011) to take over the bitcoin network. However, doing so would drive away today’s “mining” participants and, at least temporarily would reduce the value of the bitcoins to zero. The supercomputer would stay idle, acting as a deterrent to any seller of bitcoin, waiting for the intruder to back away. In other words, to mitigate this risk, the new operator himself or herself would have had to acquire a large amount of bitcoins beforehand to keep the bitcoin economy running after the takeover, in the hope that more sellers would return after the more or less chaotic transition.
Additionally, by the time the attack is ready, it is unclear whether said supercomputer would be able to match the majority of the hashing power of the current nodes while this cumulative power is going up day after day. The uncertainty surrounding the outcome of this kind of hostile takeover makes it more likely that a rational investor would simply buy bitcoins much in the same way he or she would buy stocks in a start-up venture.
Another, more naïve attack would consist in buying “pools” of miners that are thriving these days on the bitcoin network. By joining a mining pool, a miner aims at gaining a share of the steady flow of bitcoin expected with a large amount of aggregate hashing power. The share is prorated according to the hashing power contributed by the miner. Conversely a solo miner can go for a long period before he/she earns the 50-bitcoin reward associated with the computation of a new block of transactions. Statistically, the expected rewards are the same though, only the income flow is steadier in a pool. Hence a miner would have no incentive to stay with a pool under the control of a hostile investor. He or she would simply switch to another pool or start mining solo.
This analysis remains true even after all the bitcoins have been minted. In fact, the incentive to “mine” transaction blocks will sustain the decline in the rewards by virtue of the increasing transaction fees combined with the increase in value of the bitcoins.
Electronic Money and Trust Management
Bitcoin is backed not only by this kind of projection but also by the trust of the “network nodes” that is materialized in the aggregate computing power of this group of people. Anyone with a personal computer and a graphic card (GPU) can join in and start participating in this giant transaction processing pool that defines the bitcoin network. It requires only downloading a piece of free software known as “mining” software in reference to the bitcoin money supply rules. Today, there are several tens of thousands of such “miners” around the world.
In contrast, Ripple, launched in 2004, attempted to create a universal currency by knitting together a web of Local Exchange Transaction Systems (LETS): IOUs issued in any LETS could be forwarded to any participant in the network, across a Web of Trust mechanism. However, a Web of Trust requires a central authority to manage trust certificates and to prevent fraud, raising lots of practical issues: the thorny problem of registering people to link them to a secure digital identity can lead a technological innovation to its demise even before it reaches any sizable roll out stage.
Bitcoin proof of work protocol avoids the need for a secure web of trust, relying instead on the assumption that a majority of the computing power is in the hands of honest participants: “honest” here simply means that they will cooperate to make the network confirm legitimate transactions. Legitimate transactions on the bitcoin network are those that can be linked cryptographically to the “genesis” transaction via the “longest” chain: the chain “length” refers to the depth of its proof-of-work, not to the number of transaction blocks. The “genesis” transaction is one that took place in January 2009 and got things started. This concept of cloud computing applied to the confirmation of transactions is very consequential: only two years after the launch of bitcoin, it takes already as much computing power as the “K” computer to take over the network. Taking over the network today with such a powerful machine would not prevent the network from operating but would disturb transaction confirmations until participants find a way to overcome the attack and regain control of the operations. Recovery strategies could be applied to resume operations normally thereafter. In other words, even assuming that a government or a large organization would be able to harness so much computing power to engage in such heavy-weight counter measure against the bitcoin network, its expected outcome is uncertain at best. This property makes bitcoin as resilient as a transaction network can be.
A universal currency like Bitcoin, which is using digital signatures and asymmetric cryptography, has the interesting additional property that it can go back and forth from digital to fiduciary status. The old boundaries between electronic transactions and cash transactions are blurred: the file containing the key pairs (public receiving address and secret key to sign the outgoing transfer of the amount received) can be printed. Let us say the public key is left apparent and the secret key is hidden underneath a cover: the cover can only be removed in a non-reversible manner. In doing so we have created a new e-note containing the bitcoins received on the public address that cannot be spent until the secret key is revealed. The e-note can be traded as long as it is not tampered with. The amount received on the public address can be printed also in a tamper-proof process: the amount received on the public address becomes the denomination of the e-note (7). When the cover of the secret key is removed, the e-note amount in bitcoins can be redeemed electronically for any payment using bitcoins. In further contrast with old notions of fiat money, e-notes without denomination are also possible: the amount received on any address can be checked by the recipient in the public bitcoin transaction database.
Decentralization and Deflation
By definition, a truly decentralized universal currency must start without a central authority regulating its money supply mechanism: this precludes establishing any form of correlation between the money supply and any set of economic parameters or measurements. Such systemic correlation would yield endless discussions between the users, hence requiring a governing body capable of moderating the discussion and enforcing the rules by some yet unknown universal democratic standards.
For the same reason, the new transaction software must be free software to escape the limitations and opacity of proprietary software. As Richard Stallman summed it up in his now famous statement: “The point of free software is either the users control the software or the software controls the users”.
To a large extend, state sponsored currencies like the euro or the dollar are created in a black box, with a lot of media attention focused on interest rates rather than money supply. A central organization promoting a currency system based on proprietary software would not be a game changer.
Therefore the money supply mechanism must be hard coded and published in the specifications from the outset, with little or no room for the currency to wiggle out of it to its possible demise. In the same logic, it is neither possible nor necessary to predict the rate of adoption and growth of the user base for the new currency: these numbers cannot be factored in with precision. The money supply model is therefore deflationary, defining a maximum quantity, unless the rules of generation are bound to the number of users by a user authentication protocol. This requirement is not compatible with an objective to design a decentralized currency since user authentication requires issuing identity certificates either in a web of trust or with a certification authority.
The Bitcoin specifications not only fulfill the requirement for a limited money supply but also make provisions for transaction fees to provide a sustainable incentive for miners to keep mining even after the rewards for the generation of new bitcoins have dwindled to zero.
Because Bitcoins are traded electronically, unlike gold, they are infinitely divisible and enjoy a high velocity, so a deflationary spiral can only reduce the scope of bitcoin to the function of a store of value, a more practical process than is used for gold. In fact, the deflationary spiral would have adverse economic consequences only if bitcoins were the exclusive currency in a given territory. That’s not the case: as a complementary currency, bitcoins are supposed to coexist with the local state sponsored currency not to replace it. Prices will most likely be expressed in local currencies. In an electronic online transaction, the price expressed in a universal currency can be easily adjusted in real time for exchange rate variations. Only for off line transactions, price stability is a strong requirement for a new universal currency.
In short, deflation will augment the attractiveness of bitcoins as a store of value and will only marginally affect its application as a trade currency.
Conclusions
Where do we go from here? In a global economy, the inception of one or more universal currencies is bound to happen as soon as technology permits it.
Bitcoin, as the first, is paving the way for new applications. In particular, bitcoin can greatly enhance the efficiency of money transfer where it is lacking, specifically development aid that was once famously characterized (by economist Peter Bauer) as “an excellent method for transferring money from poor people in rich countries to rich people in poor countries”. Bitcoin can leverage the generalization of mobile phones in developing countries to enable a money transfer directly to the recipient, bypassing all state bureaucracies and banking intermediaries. The institution or non-governmental organization responsible for the transfer could simply assign bitcoin addresses to recipients and their local merchants then fulfill the money transfers and payments in bitcoins.
The technology is enabling both a new kind of transaction network and a new universal currency.
By analogy, it is worth noticing that the World Wide Web does have a governing body, namely W3C, a non-profit organization made of more than 300 members among the largest companies in the high tech sector. Clearly, any leverage applied by a government to one of its constituents in W3C can be balanced out by the others if it does not fit the bill of the general interest. Because this principle holds successfully for the technology enabling new ways of producing and sharing as valuable an asset as knowledge, one is permitted to hope that a similar organization can also deal one day with the Bitcoin protocol specifications at a technical level to maintain its immunity from the hazards of macro-economic measurements.
Reprinted under Creative Commons.
For further reading:
ParisTech Review
Friday, January 20, 2012
http://www.paristechreview.com/2012/01/20/bitcoin-universal-complementary-currency/
Bitcoin is a new payment application available on the internet since January 2009. In a way, by virtue of its open source publication, it is similar to the World Wide Web, the hugely successful internet application of the internet that now enables so many others. Much like the WWW has redefined the way mankind produces and shares knowledge, bitcoin transforms the social code underlying money supply to bring about a new degree of economic freedom. Can it be seen as a new monetary reform vehicle?
The Bitcoin Database of Transactions
The bitcoin protocol specifies how to build and maintain a distributed database of transactions on the internet. Transactions are published and signed electronically (using asymmetric cryptography and key pairs). The protocol enforces confirmation of every transaction by the network nodes.
Because all transactions in the database are linked together cryptographically, a property that explains why the bitcoin database is usually referred to as the bitcoin “chain”, any change in a past transaction would require computing an entirely new database from that point on.
Signatures by private keys ensure the title of property to any given amount of bitcoins: knowledge of the private key associated to the receiving address is required to send a part or the whole of any transaction output. The bitcoin transaction database holds all the necessary information for an address owner to receive and spend any amount of bitcoin: the database and the communication protocol together bring to life a new electronic currency.
Bitcoin Money Supply
Moreover, the bitcoin protocol specifies a money supply mechanism. Bitcoins are generated gradually by the network until a maximum quantity of 21 million bitcoins is reached. Bitcoins are created ex nihilo, pretty much in the same way as dollars are created when a commercial bank lends money to someone who is buying a house. The house existed before the loan. In fact, the seller is walking away with the dollars, de facto transferring the ownership of the house to the bank. The bank essentially created the money in its ledger out of thin air: it recorded the amount of the loan as a bank’s liability upon crediting with it the account of the borrower and that same amount was recorded as a bank’s asset, i.e. as a loan that must be paid back to the bank. Even top bankers and economists, including Nobel Prize winner Maurice Allais, call it magic.
Bitcoin builds on the recognition of the fact that the monopolistic aspect of the money supply mechanism in today’s banking system deserves at least to be revisited, if only because it has lasted for several hundred years. If only because of the continued effects of the financial crises, Bitcoin allows us to experiment with a new concept for money.
Bitcoin, as a new universal currency, is a true innovation, building on numerous prior attempts to create a sustainable currency and doing so independently of any state or centralized organization.
Towards the growth of a Bitcoin Economy?
Some bankers I spoke with shrug off Bitcoin on the somewhat circular logic that it cannot be backed by any assets in the real world. Well, thanks to merchants accepting bitcoins and to online exchanges trading bitcoins just like any other currency, a Bitcoin economy is emerging. If the economy of the euro or the dollar collapses, the expectation of a backing by the central banks is based on the assumption that a government has unlimited taxation power over said economy. The current financial crisis in Greece or, to a lesser extend in the US, demonstrates that actual use of this theoretical power is a stretch of economic reality. The truth of the matter is that 90% of the money today is created in the books of the banks and that price stability is the determining factor towards continuing public support of the central banks view.
There are over 140 state sponsored currencies in use across the world today. It is hard to prove that a new complementary currency will jeopardize the world’s economic outlook only because this new currency, unlike all the others, stems from a distributed monetary system without a central authority. The innovative feature of bitcoin that truly sets it apart from anything that existed before is simple: it is cash online without the necessity for a central organization or third party. As such, it is making other forms of cash transaction comparatively less convenient. Removing the necessity does not affect the usefulness of a third party in some cases. Transaction processing between merchants and their customers will always entail some kind of dispute resolution system, regardless of the currency that is being used for payments.
E-gold, as a tentatively universal currency backed by gold, was created in 1996 and failed mainly because it relied on a central organization to manage an inventory of gold. The quantity of gold needed was supposed to grow with the e-gold economy, which was impractical, dangerous and fundamentally useless in a digital age. (Another shortcoming of e-gold was the lack of a specific protocol: relying solely on a web browser to conduct irreversible transactions makes it difficult to secure them.)
Bitcoin money supply mechanism simulates the extraction of a rare metal with a mathematical model, using a clever recipe proven in electronic signature schemes and hashing algorithms that can be found today as ingredients in most banking systems.
One can think of bitcoin as a currency backed not by gold but by a metaphoric substitute of gold, since the quantity of bitcoins is limited by design: 21 million bitcoins.
Like gold, bitcoins can be seen as bonds that never mature but unlike gold, bitcoins bear virtually infinite divisibility and liquidity with no vaulting costs. According to 2010 year-end estimates by GMFS, total above ground stocks of gold are 166,600 tons worth US$6,500 Billion by 2010 average gold price, of which around US$2,400 Billion are held privately or by official reserves, in the form of coins and bars. The total stocks minus approximately 30,000 tons held in official reserves worldwide as of august 2011, gives us an estimated “market” size of US$1,230 Billion for gold as a private store of value. If we were to compute a fictitious exchange rate with the dollar based on these numbers, we would project an exchange rate of around US$600 for one BTC, if bitcoins were to capture only a 1% fraction of the private market for gold as a hedging instrument.
By the same token, if the bitcoin economy were to grow up to 5% of the US GDP, i.e. approximately US$750 Billion USD, and assuming the velocity of bitcoins to be the same as that of the dollars (around 50), then one bitcoin would represent the equivalent of US$700.
The numbers translate to a $15 Billion future valuation estimate for the bitcoin network. They are consistent with the market capitalization of Visa, Inc. ($55 Billion as of august 2011) or MasterCard ($39 Billion). Buying bitcoins today is like buying stocks of a new global electronic transaction network. At $10 as of august 2011, Bitcoins can be considered undervalued even if it is likely that other universal currencies might try to step in at some stage.
One would think at first that such a valuation would provide an investor with the rationale for purchasing the most powerful computer on earth (“K” in Japan as of June 2011) to take over the bitcoin network. However, doing so would drive away today’s “mining” participants and, at least temporarily would reduce the value of the bitcoins to zero. The supercomputer would stay idle, acting as a deterrent to any seller of bitcoin, waiting for the intruder to back away. In other words, to mitigate this risk, the new operator himself or herself would have had to acquire a large amount of bitcoins beforehand to keep the bitcoin economy running after the takeover, in the hope that more sellers would return after the more or less chaotic transition.
Additionally, by the time the attack is ready, it is unclear whether said supercomputer would be able to match the majority of the hashing power of the current nodes while this cumulative power is going up day after day. The uncertainty surrounding the outcome of this kind of hostile takeover makes it more likely that a rational investor would simply buy bitcoins much in the same way he or she would buy stocks in a start-up venture.
Another, more naïve attack would consist in buying “pools” of miners that are thriving these days on the bitcoin network. By joining a mining pool, a miner aims at gaining a share of the steady flow of bitcoin expected with a large amount of aggregate hashing power. The share is prorated according to the hashing power contributed by the miner. Conversely a solo miner can go for a long period before he/she earns the 50-bitcoin reward associated with the computation of a new block of transactions. Statistically, the expected rewards are the same though, only the income flow is steadier in a pool. Hence a miner would have no incentive to stay with a pool under the control of a hostile investor. He or she would simply switch to another pool or start mining solo.
This analysis remains true even after all the bitcoins have been minted. In fact, the incentive to “mine” transaction blocks will sustain the decline in the rewards by virtue of the increasing transaction fees combined with the increase in value of the bitcoins.
Electronic Money and Trust Management
Bitcoin is backed not only by this kind of projection but also by the trust of the “network nodes” that is materialized in the aggregate computing power of this group of people. Anyone with a personal computer and a graphic card (GPU) can join in and start participating in this giant transaction processing pool that defines the bitcoin network. It requires only downloading a piece of free software known as “mining” software in reference to the bitcoin money supply rules. Today, there are several tens of thousands of such “miners” around the world.
In contrast, Ripple, launched in 2004, attempted to create a universal currency by knitting together a web of Local Exchange Transaction Systems (LETS): IOUs issued in any LETS could be forwarded to any participant in the network, across a Web of Trust mechanism. However, a Web of Trust requires a central authority to manage trust certificates and to prevent fraud, raising lots of practical issues: the thorny problem of registering people to link them to a secure digital identity can lead a technological innovation to its demise even before it reaches any sizable roll out stage.
Bitcoin proof of work protocol avoids the need for a secure web of trust, relying instead on the assumption that a majority of the computing power is in the hands of honest participants: “honest” here simply means that they will cooperate to make the network confirm legitimate transactions. Legitimate transactions on the bitcoin network are those that can be linked cryptographically to the “genesis” transaction via the “longest” chain: the chain “length” refers to the depth of its proof-of-work, not to the number of transaction blocks. The “genesis” transaction is one that took place in January 2009 and got things started. This concept of cloud computing applied to the confirmation of transactions is very consequential: only two years after the launch of bitcoin, it takes already as much computing power as the “K” computer to take over the network. Taking over the network today with such a powerful machine would not prevent the network from operating but would disturb transaction confirmations until participants find a way to overcome the attack and regain control of the operations. Recovery strategies could be applied to resume operations normally thereafter. In other words, even assuming that a government or a large organization would be able to harness so much computing power to engage in such heavy-weight counter measure against the bitcoin network, its expected outcome is uncertain at best. This property makes bitcoin as resilient as a transaction network can be.
A universal currency like Bitcoin, which is using digital signatures and asymmetric cryptography, has the interesting additional property that it can go back and forth from digital to fiduciary status. The old boundaries between electronic transactions and cash transactions are blurred: the file containing the key pairs (public receiving address and secret key to sign the outgoing transfer of the amount received) can be printed. Let us say the public key is left apparent and the secret key is hidden underneath a cover: the cover can only be removed in a non-reversible manner. In doing so we have created a new e-note containing the bitcoins received on the public address that cannot be spent until the secret key is revealed. The e-note can be traded as long as it is not tampered with. The amount received on the public address can be printed also in a tamper-proof process: the amount received on the public address becomes the denomination of the e-note (7). When the cover of the secret key is removed, the e-note amount in bitcoins can be redeemed electronically for any payment using bitcoins. In further contrast with old notions of fiat money, e-notes without denomination are also possible: the amount received on any address can be checked by the recipient in the public bitcoin transaction database.
Decentralization and Deflation
By definition, a truly decentralized universal currency must start without a central authority regulating its money supply mechanism: this precludes establishing any form of correlation between the money supply and any set of economic parameters or measurements. Such systemic correlation would yield endless discussions between the users, hence requiring a governing body capable of moderating the discussion and enforcing the rules by some yet unknown universal democratic standards.
For the same reason, the new transaction software must be free software to escape the limitations and opacity of proprietary software. As Richard Stallman summed it up in his now famous statement: “The point of free software is either the users control the software or the software controls the users”.
To a large extend, state sponsored currencies like the euro or the dollar are created in a black box, with a lot of media attention focused on interest rates rather than money supply. A central organization promoting a currency system based on proprietary software would not be a game changer.
Therefore the money supply mechanism must be hard coded and published in the specifications from the outset, with little or no room for the currency to wiggle out of it to its possible demise. In the same logic, it is neither possible nor necessary to predict the rate of adoption and growth of the user base for the new currency: these numbers cannot be factored in with precision. The money supply model is therefore deflationary, defining a maximum quantity, unless the rules of generation are bound to the number of users by a user authentication protocol. This requirement is not compatible with an objective to design a decentralized currency since user authentication requires issuing identity certificates either in a web of trust or with a certification authority.
The Bitcoin specifications not only fulfill the requirement for a limited money supply but also make provisions for transaction fees to provide a sustainable incentive for miners to keep mining even after the rewards for the generation of new bitcoins have dwindled to zero.
Because Bitcoins are traded electronically, unlike gold, they are infinitely divisible and enjoy a high velocity, so a deflationary spiral can only reduce the scope of bitcoin to the function of a store of value, a more practical process than is used for gold. In fact, the deflationary spiral would have adverse economic consequences only if bitcoins were the exclusive currency in a given territory. That’s not the case: as a complementary currency, bitcoins are supposed to coexist with the local state sponsored currency not to replace it. Prices will most likely be expressed in local currencies. In an electronic online transaction, the price expressed in a universal currency can be easily adjusted in real time for exchange rate variations. Only for off line transactions, price stability is a strong requirement for a new universal currency.
In short, deflation will augment the attractiveness of bitcoins as a store of value and will only marginally affect its application as a trade currency.
Conclusions
Where do we go from here? In a global economy, the inception of one or more universal currencies is bound to happen as soon as technology permits it.
Bitcoin, as the first, is paving the way for new applications. In particular, bitcoin can greatly enhance the efficiency of money transfer where it is lacking, specifically development aid that was once famously characterized (by economist Peter Bauer) as “an excellent method for transferring money from poor people in rich countries to rich people in poor countries”. Bitcoin can leverage the generalization of mobile phones in developing countries to enable a money transfer directly to the recipient, bypassing all state bureaucracies and banking intermediaries. The institution or non-governmental organization responsible for the transfer could simply assign bitcoin addresses to recipients and their local merchants then fulfill the money transfers and payments in bitcoins.
The technology is enabling both a new kind of transaction network and a new universal currency.
By analogy, it is worth noticing that the World Wide Web does have a governing body, namely W3C, a non-profit organization made of more than 300 members among the largest companies in the high tech sector. Clearly, any leverage applied by a government to one of its constituents in W3C can be balanced out by the others if it does not fit the bill of the general interest. Because this principle holds successfully for the technology enabling new ways of producing and sharing as valuable an asset as knowledge, one is permitted to hope that a similar organization can also deal one day with the Bitcoin protocol specifications at a technical level to maintain its immunity from the hazards of macro-economic measurements.
Reprinted under Creative Commons.
For further reading:
"The future of money. What is it?", Warren Coats, Cayman Financial Review,
January 18, 2012
Friday, January 20, 2012
A Virtual Fortune: Property Rights in Virtual Economies
Press Release
The Public Interest Advocacy Centre
Wednesday, January 11, 2012
http://www.piac.ca/consumers/consumers_should_be_wary_of_risks_in_virtual_worlds/
The Public Interest Advocacy Centre (PIAC) today released a report entitled “A Virtual Fortune: Consumer Protection for Banking and Consumer Fraud in Virtual Worlds”. The report studies virtual worlds, which are sometimes described as “massively multiplayer online role-playing games” (MMORPGs) that provide an immersive virtual experience for many players that many players consider to be “real”. Many virtual worlds have developed virtual economies based on a virtual currency that may be exchanged for real-world currency. Players will play the role of consumer and entrepreneur within virtual worlds.
As virtual economies grow, there have been instances of fraud in these virtual worlds. PIAC’s report studies examples of economic fraud conducted in virtual worlds such as Second Life, Entropia Universe, EVE Online, and World of Warcraft. For example, there have been cases of bank runs, securities fraud, and theft of virtual property. These situations have resulted in a financial loss to consumers in virtual worlds. Notably, virtual world operators in most cases stated that these fraudulent schemes are “part of the game” while denying responsibility and liability and refusing to compensate players who have lost money to fraud in virtual worlds. Efforts to set up in-world justice systems have not been successful.
“Where a consumer falls victim to fraudulent activity within a virtual world, they are not likely to be successful in seeking redress or compensation for their losses,” said Janet Lo, Legal Counsel at the Public Interest Advocacy Centre and author of the report. “Virtual world consumers must be aware of potential risks to their in-world assets and property, such as in-world fraudulent schemes or unilateral actions by virtual world operators dealing with user accounts.”
Given that individuals view their virtual world avatar as an extension of themselves, the report explored whether real-world rights should extend to the avatar and whether traditional notions of property rights and consumer protection should apply to virtual avatars participating in virtual economies. The report noted the use of End-User License Agreements (EULA) or Terms of Service by virtual world operators to limit their liability and stipulate certain mandatory forms of dispute resolution. The enforceability of these terms in real world courts have been questioned but real world case law has not yet clarified the legal status and rights of virtual world users.
The report notes that real-world regulators around the world continue to examine virtual world economies and contemplate whether real-world regulation should be applied to financial transactions conducted in-world. For example, securities and payment regulations could be applied with a view to providing greater consumer protection to virtual world users.
“As virtual world experiences blend into social networking websites and other areas of commerce, regulators will need to consider how consumer protection will operate and whether the application of real-world regulations will be sufficient to protect consumers,” said Lo.
The Public Interest Advocacy Centre
Wednesday, January 11, 2012
http://www.piac.ca/consumers/consumers_should_be_wary_of_risks_in_virtual_worlds/
The Public Interest Advocacy Centre (PIAC) today released a report entitled “A Virtual Fortune: Consumer Protection for Banking and Consumer Fraud in Virtual Worlds”. The report studies virtual worlds, which are sometimes described as “massively multiplayer online role-playing games” (MMORPGs) that provide an immersive virtual experience for many players that many players consider to be “real”. Many virtual worlds have developed virtual economies based on a virtual currency that may be exchanged for real-world currency. Players will play the role of consumer and entrepreneur within virtual worlds.
As virtual economies grow, there have been instances of fraud in these virtual worlds. PIAC’s report studies examples of economic fraud conducted in virtual worlds such as Second Life, Entropia Universe, EVE Online, and World of Warcraft. For example, there have been cases of bank runs, securities fraud, and theft of virtual property. These situations have resulted in a financial loss to consumers in virtual worlds. Notably, virtual world operators in most cases stated that these fraudulent schemes are “part of the game” while denying responsibility and liability and refusing to compensate players who have lost money to fraud in virtual worlds. Efforts to set up in-world justice systems have not been successful.
“Where a consumer falls victim to fraudulent activity within a virtual world, they are not likely to be successful in seeking redress or compensation for their losses,” said Janet Lo, Legal Counsel at the Public Interest Advocacy Centre and author of the report. “Virtual world consumers must be aware of potential risks to their in-world assets and property, such as in-world fraudulent schemes or unilateral actions by virtual world operators dealing with user accounts.”
Given that individuals view their virtual world avatar as an extension of themselves, the report explored whether real-world rights should extend to the avatar and whether traditional notions of property rights and consumer protection should apply to virtual avatars participating in virtual economies. The report noted the use of End-User License Agreements (EULA) or Terms of Service by virtual world operators to limit their liability and stipulate certain mandatory forms of dispute resolution. The enforceability of these terms in real world courts have been questioned but real world case law has not yet clarified the legal status and rights of virtual world users.
The report notes that real-world regulators around the world continue to examine virtual world economies and contemplate whether real-world regulation should be applied to financial transactions conducted in-world. For example, securities and payment regulations could be applied with a view to providing greater consumer protection to virtual world users.
“As virtual world experiences blend into social networking websites and other areas of commerce, regulators will need to consider how consumer protection will operate and whether the application of real-world regulations will be sufficient to protect consumers,” said Lo.
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