The Gloom of Central Banking

By Tuur Demeester
MacroTrends.be
November 2012

Gloom of Central Banking  

Introduction

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

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

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

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

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

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

http://www.financialsensenewshour.com/broadcast/insider/fsn2012-1031-1-insider-i8mw5o3.mp3


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

Generic Viagra Industry Is Pro-Choice In Payments

By Jon Matonis
Forbes
Friday, October 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/26/generic-viagra-industry-is-pro-choice-in-payments/

"Right now most affiliate programs have a mass of declines, cancels and pendings, and it doesn’t depend much on the program IMHO, there is a general sad picture, fucking Visa is burning us with napalm," screams one pharmaceutical operator.

Payment intervention is defined as the use of the payment mechanism to detect or prevent certain transactions that are deemed to be politically incorrect or against a particular jurisdiction's law. The latest target is online pharmaceuticals and their affiliates providing medications such as generic or unlicensed Viagra, Nexium, or Lipitor, all of which are illegal for Americans to have mailed into the United States.

In the recent paper "Priceless: The Role of Payments in Abuse-advertised Goods" presented at the 19th annual ACM Computer and Communications Security Conference in Raleigh, North Carolina, five academic researchers outline the methodology behind the aggressive practice known as payment intervention and arrogantly conclude that it is in society's interest.

This is the ugly face of monetary repression. It is shameful! Using the payments system as a repressive tool for or against certain behavior is like using Catholic Church attendance as a way to target illegal immigrants. In a free society, private payments should be covered by merchant-customer privilege just as attorney-client privilege covers confidential legal communication. Like the telephone network used to execute a transaction, the payments network is a neutral actor. Pro-choice means placing the decision of payment type in the hands of the money owner. Grandma wants her affordable generic Lipitor.

Oddly coupling the pharmaceutical sector with the counterfeit software sector in a dual study, researchers acknowledge the fragility of payments and show how an eradication effort can lead to the pursuit of riskier alternative payment methods:

"Overall, we find that reliable merchant banking is a scarce and critical resource that, when targeted carefully, is highly fragile to disruption. As a testament to this finding, we document the decimation of online credit-card financed counterfeit software sales due to a focused eradication effort. We further document how less carefully executed interventions, in the pharmaceutical sector, can also have serious (although less dramatic) impacts, including program closures, pursuit of riskier payment mechanisms, and reduced order conversions. Finally, we document the set of countermeasures being employed now by surviving merchants and discuss the resulting operational requirements for using payment intervention as an effective tool."

Herein lies the problem with the current payments network. It is far too dominated by Visa and Mastercard whose contracts with acquiring banks stipulate that merchants are prohibited from selling goods that are illegal in the purchaser's destination country. Therefore, simply participating in those payment networks inextricably links the law to a voluntary transaction between two consenting parties providing an enforcement mechanism that wouldn't necessarily exist under other payment types.

Access to safe and affordable pharmaceuticals should be a natural right for all Americans and denying it would be unacceptable, unethical, and a threat to the public health. A strong case can be made that uninsured, low-income patients obtaining affordable medications is a morally legitimate activity. "Does legality establish morality?" asks economist Walter E. Williams, who answers, "Legality alone cannot be the talisman of moral people."

In June 2011, Visa (and Mastercard similarly) made a series of changes to their operating regulations and explicitly classified pharmaceutical-related merchant category codes as "high-risk" along with gambling and various kinds of direct marketing services. Kudos must be given to the State Bank of Mauritius for being the only bank that both correctly codes pharmaceutical transactions and supports a large number of affiliate programs.

Leaving aside for the moment the twisted economics of privileged drug manufacturers collaborating with generic manufacturers, the immorality of the patent system, and the case against intellectual property, supranational authority was bestowed upon the IACC (International AntiCounterfeiting Coalition) in 2010 through a series of agreements made between brand holders, payment providers, and the White House’s Intellectual Property Enforcement Coordinator. The agreements streamlined targeted actions against 'rogue' websites and merchant accounts used to monetize counterfeit goods and services.

Bragging about the simplicity and effectiveness of the initiative, the study's researchers reveled in determining who was 'rogue' and then preparing them for 'termination':

"Security interventions should ultimately be evaluated on both their impact in disrupting the adversary and their cost to the defender. On both counts, the payment tier of abuse-advertising appears to be a ripe target. For the few tens of dollars for a modest online purchase, our data shows that it is possible to identify a portion of the underlying payment infrastructure and, within weeks, cause it to be terminated."

Unfortunately, the practice of targeting the payments mechanism is on the rise by governments and sufficiently "chilled" payment network lackeys, but it will backfire in spectacular fashion. Consumers will be driven to more liberated alternatives such as the privacy-oriented and cash-like bitcoin. They certainly don't want VISA, Mastercard, PayPal and the rest of the gang telling them what is and is not an acceptable purchase. Interestingly, the study cited bitcoin among creative alternatives when Visa processing becomes abruptly disabled:

"A few US-based pharmaceutical programs, notably Health Solutions Network (which we did not study in our analysis), enabled Cash-On-Delivery (COD) payments for their customers when their Visa processing was disabled. Ultimately, the effectiveness of such mechanisms depends on their familiarity and overhead to consumers, the readiness of alternative sites offering more traditional payments, and the extent to which consumers are well motivated. Indeed, while we witnessed some programs (notably in the OEM software space) attempt to continue their businesses using alternative payment mechanisms including PayPal and, most recently, Bitcoin, by all accounts this has not been successful."

I expect that to change radically for Bitcoin as the features of decentralized cryptographic money become more widely appreciated. Used properly, bitcoin can have the privacy attributes of paper cash and bitcoin doesn't make morality judgements about what you choose to do with your money. It is a natural fit for the online pharmaceutical industry. Payment providers, especially mobile payment providers, claim to represent the best in consumer-centric solutions, but if they truly care about consumers, why do they block so many important transaction types that consumers want?

Somebody has to say it. Big Pharma is a racket and Americans are being duped by the government and the powerful drug manufacturers that push their overpriced medications while simultaneously hiding behind the veil of protecting patient safety, for your own good of course. But "the little blue pill" will be protected as Pfizer's expiration date for the Viagra patent has just been extended until April 2020 which means no legal "generic Viagra" in the U.S. for several more years.

Perhaps more broadly disturbing is that the five individuals authoring the study seem to tacitly recommend the 'payments network' as the delegated enforcement arm of the justice system and sanctioned brand holders. These complicit payment providers do not practice payment neutrality nor do they recognize the importance of remaining nonpolitical and challenging encroachments that lead to politicalization.

The reason that it has become possible to utilize the payments apparatus in this manner is because society has become too complacent on insisting that our money not be used for identity tracking. The general attitude towards the privacy of cash (both physical and digital) has been eerily nonchalant and too readily conceded. Until that changes, expect evermore diminishing privacy in your transactions.

For further reading:
"Forbes on Viagra, Bitcoin and Intellectual Property", Stephan Kinsella, October 29, 2012
"Rogue Pharma, Fake AV Vendors Feel Credit Card Crunch", Brian Krebs, October 18, 2012
"Pharma vs India: a case of life or death for the world’s poor", Nick Harvey, October 17, 2012
"Fake pharmaceuticals: Bad medicine", The Economist, October 13, 2012
"What Payment Intermediaries Are Doing About Online Liability And Why It Matters", Mark MacCarthy, July 5, 2010

The Old Radical: How Bitcoin Is Being Destroyed

Posted by Julia Dixon
DGC Magazine
Wednesday, October 24, 2012

http://www.dgcmagazine.com/the-old-radical-how-bitcoin-is-being-destroyed/

This piece was recently sent to me by “an old radical.” The message is perhaps a bit harsh, but I have to admit, all I can do is grimace and nod in agreement to this thesis… “Bitcoin and state banking systems are born enemies: only one can survive. If you are imagining that they can peacefully coexist, you are fooling yourself.”

I was a radical before most of you Bitcoin users were born. That doesn’t make me any better than you (hopefully I did a few things to make you better than myself), but it does give me a better perspective; time just works that way.

I’ve been watching the recent developments in the Bitcoin markets, and having seen this drama before (too many times), I thought I’d pass along a lesson. This will strike its target in some of you, but others of you are also likely to reject it, because it doesn’t match what you want to be true.

Here’s the lesson: Trying to go ‘legit’ will destroy the Bitcoin market.

For those of you who haven’t turned away, I’ll explain:

There’s nothing really wrong with Bitcoin itself. The developers are doing a nice job of addressing its problems and a heartening number of people have jumped up to create new tools and new services. No problem here.

The problem is that too many people in the Bitcoin market are thinking the old way.

Understand this: Bitcoin is a new thing – it is  not compatible with the old financial system.

Bitcoin and state banking systems are born enemies: only one can survive. If you are imagining that they can peacefully coexist, you are fooling yourself.

Bitcoin exposes the fraud that is state banking. If you think that politicians and bankers will calmly allow it to take over a significant percentage of world financial flows, you’re in denial. States will come after Bitcoin, and hard. They have no choice. Their money can only exist if there are no competitors.

Alan Greenspan may have done a lot of bad things, but he is not stupid. And before his adventures at the Fed, he wrote this:

"(Under a fiat system), there is no way to protect savings from confiscation through inflation… If there were, the government would have to make its holding illegal, as was done in the case of gold."

What gold was then, Bitcoin is now… times five.

So, let me try this again: Going legit gives the state a handle to grab you with. ‘Legit’ means registered and regulated, doesn’t it? You have to tell them your name, where you live, and where you put your money, right? It means that they can control you whenever they want to.

There are two big reasons why Bitcoin people are tempted to go ‘legit’:

1. They want to get mega-rich fast, like Mark Zuckerberg.
2. They have been trained to be obedient and can’t unlearn it. They are compelled to believe that the government is basically good. It must just be one bad politician or one bad law.

#2 is what destroyed e-gold, and it looks like #1 is what killed GLBSE.

Because of GLBSE, Bitcoin is now being regarded as a currency and states will start to regulate it as one. That means that they’ll attack the public exchangers and force everyone possible to comply with their rules.

So… it’s time to man-up, or to crumble.

(Interestingly, there is often a larger percentage of women that “man-up” than men.)

Will you have the guts to do the right thing when the pressure is on? If yes, I applaud and honor you. If not, here are a few cheap excuses to use (after all, who wants to admit conditioning or cowardice):

• Without the rule of law, everything would fall apart.
• Without regulation, criminals would destroy everything.
• Yes, regulation is coercive, but along with it comes a certain amount of public benefit!
• I got ripped off, and someone has to fix it!
• If I can’t sue someone, they can get away with ripping me off!
• We can’t get people to use Bitcoin unless it’s authorized.
• We need approval or we will forever remain a tiny market.

A significant number of Bitcoin people will say these things (and others), but the real truth will be that they are scared, or are still hoping to get mega-rich, or just can’t rip the “government is our friend” meme out of their heads. But mostly it will be fear.

We all feel fear of course, but some of us are determined enough to do the right thing, even when we’re afraid.

So, here’s a final tip: If you run into someone who can feel the fear and still do the right thing, don’t let go of them.

Reprinted with permission. 

Bitcoin, Dollars and Pot-Banging Protests in Argentina

By The Blue Market

Thursday, October 18, 2012

http://thebluemarket.wordpress.com/2012/10/18/bitcoin-dollars-and-pot-banging-protests-in-argentina/

200.000 people in the Plaza de Mayo

This post is a peep into the underground exchange markets for dollars and bitcoins in Argentina. For the last couple of weeks, I have experienced the informal exchange of bitcoin and dollars on first hand in Buenos Aires. Furthermore, I have realized how both locals and expats may reap significant gains by using bitcoins as a medium of exchange.

Inflation and Monetary Restrictions

Before we dive into the details of the underground markets in Argentina, let me try to paint the picture of the current economic situation in Argentina.

For several years the Argentine inflation rate has been bumping around 25-30% per annum, according to figures published by independent institutions. The Argentine government doesn’t recognize the independent estimates and has allied with INDEC, the National Statistics Institute, to calculate inflation figures 2-3 times lower than the independent figures. The interesting fact is that the peso’s fixed exchange rate with the dollar is only taking into account INDEC’s inflation rate of 8-12%, causing overvaluation of the peso by not incorporating the true higher inflation rate. INDEC is indeed a neat implementation of an Orwellian “Ministry of Truth”, and the magic calculations have raised concerns with IMF who is threatening to expel Argentina from the organization.

Naturally the high inflation rate has caused capital flight out of Argentina, and every Argentine with a bit of savings is looking to exchange their pesos into something more secure. In order to stop the capital flight and fortify the central bank’s reserves, the government has implemented strict measures to prevent Argentines from obtaining foreign currencies. For example, only if you are travelling abroad are you allowed to exchange pesos for dollars legally, but there is a limit of 100$ per day abroad. Recently the government also imposed a 15% tax on all foreign credit card purchases, and a 50% custom duty on any goods which Argentines purchased abroad. Aside from the outrageous taxes, this legislation completely flashes your personal banking details to government officials, who can then snoop on your shopping list.

The complex regulatory environment has caused Paypal to suspend all domestic transactions in Argentina. Ebay and Amazon has followed suit with similar restrictions.

The Blue Dollar

In Argentina the dollar you care about is blue. The reason is that the difficulty for locals to acquire dollars through traditional means has fueled a secondary dollar exchange market. The unofficial exchange rate, known as the “blue dollar rate”, is approximately 25% higher than the official rate.

For expats, it’s a no-brainer that you are being ripped-off by withdrawing cash at ATMs from established banks, where the withdrawal is conducted at the official exchange rate currently around $ARS 4.70 pesos per dollar. In comparison, if you exchange USD on the “blue market” you get around $ARS 6.20  pesos per dollar.

Luckily before travelling to Argentina, my girlfriend and I were tipped off to this news and carried along dollars in cash when entering the country. One can exchange dollars at the blue market rate simply by heading to Bs. Aires main shopping street, Calle Florida. Here lots of street vendors are drifting around advertising their business to anyone who looks like a potential customer. The street vendors here are known as arbolitos by locals. Arbolitos means “little trees”, a reference to the street vendors are full of “green leaves”. If you are looking to exchange dollars the street vendors will quickly approach you and provide a quote. If you accept the quote, you just head to a nearby jewelry or electronics shop and complete the transaction.

Above approach is generally safe but I wasn’t too keen on exchanging dollars with street vendors. Instead I posted a small note on an online forum and got in contact with a couple living in Buenos Aires, who were eager to exchange dollars for pesos at the blue market rate. The snapshot below is the result of this exchange – and what an underground dollar market looks like.

The Bitcoin Hero

The dollars we brought into Argentina are soon running out, and we have been looking for alternatives to increase our dollar reserves. One approach is to cross the border to Uruguay – but you have the hassle of ATM withdrawal limits and the risk of travelling with lots of cash. There is also a service called Xoom, which allows you to transfer money from abroad to various pick-up locations in Bs. Aires. The magic of Xoom is that they somehow manage to provide the blue dollar exchange rate. Unfortunately they also require a US bank account to use its services.

Another possibility is Bitcoin, a new electronic currency, which has been flourishing online for the last couple of years. In our situation Bitcoin has turned out to be a great vehicle to transfer money into Argentina and achieve the blue dollar exchange rate. I completed my first bitcoin to pesos transaction last week and gained 25% in comparison to the official exchange rate.

The way it works is that you simply buy some bitcoins online through one of the many bitcoin exchanges. Mt.Gox is by far the largest but there are local alternatives as well, such as Bitcoin Nordic. Once you have your bitcoins you identify an Argentine who is on the market for bitcoins at the blue dollar rate. Given the economic situation there are lots of Argentines who are looking to get rid of pesos in exchange for other more secure assets.

In my case I circulated a note to Eudemocracia’s bitcoin mailing list announcing that I was interested in selling bitcoins. The price I offered was the Mt.Gox USD price converted to pesos at the blue USD exchange rate. Based on the number of replies this was an attractive offer, and after some email correspondence, I agreed  to meet up with one contact and conduct the transaction. After getting the agreed pesos in cash I made a one-click transfer of bitcoins to his online bitcoin wallet. A bitcoin transfer is instant and non reversible, and the picture below shows how we could confirm completion of the transaction on the spot.

Because of the dollar restrictions and the escalating inflation the demand for bitcoins in Argentina is greater than our personal need for pesos. Therefore, if you are an expat or just travelling through I encourage you to explore bitcoin as an alternative to finance your stay. Not only will you get a 25% higher exchange rate but you will also help locals protect their savings from being hollowed by inflation.

I believe the bitcoin adventure is just kicking off in Argentina. Also I’m keen to see how the 200.000 Argentines demonstrating for libertad in the Plaza de Mayo might use bitcoin to fight the monetary restrictions themselves. Maybe it’s an even better approach than banging a pot?

Large Cash Transactions Banned In Mexico

By Jon Matonis
Forbes
Wednesday, October 17, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/17/large-cash-transactions-banned-in-mexico/

Outgoing Mexican President Felipe Calderon has signed into law a ban on large cash transactions. The ban will take effect in about 90 days and it is part of a broader effort to control monetary flows within the country.

Under the law, a Specialized Unit in Financial Analysis operating within the Attorney General's Office will be created to investigate financial operations "that are related to resources of unknown origin."

For real estate transactions, cash payments of more than a half million pesos ($38,750) will be forbidden and, for automobiles or items like jewelry, art, and lottery tickets, cash payments of more than 200,000 pesos ($15,500) will be forbidden. The law carries a minimum penalty of five years in prison.

In 2010, Mexico instituted strict limits on foreign exchange cash transactions to $1,500 per person per month, which caused several cash dollar exchanges to withdraw from the business and had the effect of penalizing tourists.

Of course, US dollars are a huge portion of the actual paper cash that this effort is aimed at, but the Mexican peso is the 12th most traded currency in the world and by far the most traded currency in Latin America.

Reuters reported that, "Sales of drugs from marijuana to cocaine and methamphetamine in the United States are worth about $60 billion annually, according to the United Nations. About half of that amount is estimated to find its way back to cartels in Mexico."

The Woodrow Wilson International Center For Scholars' Mexico Institute published a comprehensive study in May 2012 entitled "It's All about the Money." The report recommended tight integration and coordination with the United States in the areas of legal framework, financial institution regulation, intelligence on cross-border currency flows, and non-conviction based asset forfeiture.

Two years in the making, the new law also requires notaries, real estate brokers, and other dealers to report the forms of payment for transactions above the respective limits. Financial institutions will also be required to report monthly credit card balances in excess of 50,000 pesos ($3,875).

Although it's part of a global trend among governments, Mexico will still have a long way to go to catch up. Spain recently banned cash transactions above 2,500 euros and Italy banned cash transactions above 1,000 euros.

Payoneer Quietly Enters Gibraltar Prepaid Market

By Jon Matonis
Forbes
Monday, October 15, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/15/payoneer-quietly-enters-gibraltar-prepaid-market/

Payoneer, a New York-based global payments and money transfer company, has quietly launched an EU subsidiary situated in Gibraltar having been approved by the financial regulator there in mid-2012.

Payoneer (EU) Limited is steadily building out its infrastructure and it is not clear when, or if, they intend to migrate their prepaid card portfolio to the Gibraltar location. Howard Gibbs is Managing Director with Lisa Ah-Moye as Finance Director and Mark Taylor as Money Laundering Reporting Officer.

In addition to facilitating global low-cost money transfers to over 200 countries, the EU subsidiary is focusing on payout solutions for international corporates, multi-level marketing companies, and affiliate networks.

Payoneer maintains its R&D center in Tel Aviv, Israel and is a privately-held venture with funding from Greylock Partners, Carmel Ventures and Crossbar Capital. They are most known for their Prepaid Mastercard product that corporate customers use to pay staff, affiliates, freelancers, and other service providers. However, since Payoneer is not a licensed banking institution they have had to outsource their card issuing business.

The self-governing jurisdiction of Gibraltar changes all of that. There are only three non-bank E-money institutions authorized under the Financial Services (Banking) Act for issuing means of payment in the form of electronic money. In addition to Payoneer (EU), the Gibraltar Financial Services Commission lists Wave Crest Holdings and Transact Network.

Why is this significant? For starters, it's a relatively small number of firms and it is not a new regulatory designation for Gibraltar as it falls under the EU E-Money Directive of 2009 which amended the 2006 and 2005 Directives that repealed the 2000 Directive. The E-Money Directive is transposed into law and applied nationally by the various member countries within the EU Single Market.

It is surprising that the Directive is not being leveraged more by the established U.S. players because it grants a license and the authority to issue prepaid Mastercard and VISA products directly after attaining card association membership thereby dramatically lowering the barriers to entry. Furthermore, it gives international brands an issuance platform throughout the whole European continent.

Previously, non-banks in the U.S. would have to negotiate a contract with a chartered, regulated banking entity like Choice Bank Limited in Belize or First Covenant Bank in Georgia or MetaBank in Iowa for their prepaid card issuing. Now they can become an issuer themselves.

In related prepaid debit card news, Delaware-based The Bancorp, Inc. has agreed to acquire the assets of Transact Network Limited, the largest e-money licensee and prepaid issuer in Gibraltar.

Frank Mastrangelo, President and COO of The Bancorp stated, "The acquisition of this platform from Transact Network, a well regarded Pan-European electronic money institution, will establish a European Payment Solutions presence for Bancorp and facilitate European expansion for many of Bancorp’s existing 'Payment Solutions' clients. It will also enable Bancorp to leverage its current BIN Sponsorship and Program Management Platforms for a wider set of European Payment solutions and offer enhanced products, flexibility, capability, and scalability. We will utilize our success and experience with our US payment solutions platform to grow our European presence."