Price Discovery in the Absence of Bitcoin Exchanges

By Jon Matonis
CoinDesk
Tuesday, December 31, 2013

http://www.coindesk.com/price-discovery-absence-bitcoin-exchanges/

Recently, authorities in India, China, Korea, Denmark, France, and Norway have issued stern warnings regarding the use and trade of bitcoin and other digital currencies.

As a consequence, important exchange outlets for price discovery have been slowed or shuttered following the government advisories. Furthermore, India and China represent nearly half of the globe’s total population.

The world has mostly underestimated the latent demand for a free and nonpolitical currency unit. In the face of this percolating demand, the arrogance of our monetary overlords is startling.

Imagine if we were forced to use a particular brand of toothpaste in the same way that we are coerced into using the prevailing unit of legal tender. The response might not be so submissive. Contrary to the misinformation in this article, bitcoin is not illegal in any country in the world.

In two separate incidents following the Reserve Bank of India advisory warning, trading operators’ premises were raided by the Enforcement Directorate (ED) citing a clear violation of Foreign Exchange Management Act (FEMA) rules. A top ED official said:

“We have found that through the website 400 persons have recorded 1,000 transactions that amount to a few crores of rupees. We are gathering the data of the transactions, name of the people who have transacted in the virtual currency from Gupta’s server that is hired in the US. At present, we believe that this is a violation of foreign exchange regulations of the country. If we are able to establish money laundering aspect then he can be arrested.”

In the days ahead, the ED will be challenged either to define bitcoin as a currency or to clarify the nature of bitcoin as an asset under Indian law.

Also, the South China Morning Post reported that China’s central bank met with payment processors on 16th December, ordering them to “stop giving clearing services to bitcoin, litecoin, and other cryptocurrency exchanges”.  The payment processors were ordered to sever their relationships with bitcoin exchanges by the end of January.

This action had a significant impact on bitcoin exchanges in China, such as BTC China.

In Korea, financial authorities announced that “the virtual currency does not have ‘intrinsic value’ due to its lack of stability while there is concern at the absence of structure and indicators to measure it.” Participating government agencies discussing the impact of bitcoin included the Ministry of Strategy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service.

In Denmark, Michael Landberg, chief legal adviser at the Financial Supervisory Authority in Denmark, said the most likely outcome for bitcoin exchangers would be an “amendment to existing financial legislation so that we have regulation covering it.”
Landberg added:

“It is also important to have this included in money laundering acts. We’ll seek to follow the mainstream. Bitcoins are not forbidden in the US and the UK It is out there and will continue to be out there. It just needs to be regulated. The challenge for us is how to do that.”

Currently, Denmark’s FSA doesn’t have the legal authority to prevent trade in bitcoin rendering it unable to stop a company that exchanges real currencies for bitcoin.

A report from the Bank of France said: “Even if bitcoin does not today meet the conditions to become a credible means for investment that could therefore threaten financial stability, it represents a clear financial risk for those that hold it.”

Warning that the use of bitcoins as an investment tool is limited because there is no underlying asset and the virtual currency is subject to high volatility, the central bank said speculators are at risk, as they would have no legal recourse if there is a loss of confidence in the cryptocurrency or if they are victims of theft from hackers.
According to the Bank of France report:

“The system can collapse at any moment if investors want to unwind their positions but find themselves holding portfolios that have become illiquid.”

In Norway, the director general of taxation, Hans Christian Holte, said the currency “doesn’t fall under the usual definition of money.” Instead, the Norwegian government decreed bitcoin to be an asset upon which capital gains tax can be charged.

Even the European Banking Authority (EBA) weighed in with its own report on virtual currencies warning consumers that they are not protected through regulation when using virtual currencies as a means of payment and may be at risk of losing their money.

These various warnings from around the world have not yet affected the larger price discovery mechanism for bitcoin which still occurs in certain jurisdictions. But, what if exchange-based price discovery for bitcoin was impeded in the future. What would be the price setting mechanism for conversion in and out of national currencies?

Just as with other restricted or ‘banned’ goods around the world, bitcoin trade would react by going local and going to a person-to-person model, such as LocalBitcoins.com. Additionally, small exchanges in certain countries would still cater to a local population in jurisdictions where crackdowns were not prevalent.

It might not be easy to chart aggregated price quotes from hundreds of small operators, but price discovery finds a way like water finds a way to flow downhill.

These global authorities are genuinely afraid of something like bitcoin with its limited issuance model and distributed trust architecture not requiring intermediaries.

However, they don’t fear it because of the potential for money laundering, terrorist financing, or harm to unsuspecting consumers. Authorities fear bitcoin because it threatens the adherence to their fabricated monetary illusion.

The genie is out of the bottle and centralized banking institutions are no longer seen as necessary for the provision of an exchangeable monetary unit. This cuts to the core of government’s power and prerogative of issuance, making bitcoin primarily a central bank concern – not a money laundering concern.

Some may attempt to harness the genie in the name of innovation and consumer protection, however the power of bitcoin will prove too difficult to contain. The best solution from authorities will be to accept the changes and to modify political behavior around a forthcoming model of decentralized currencies.

The Universe Wants One Money

By Oleg Andreev
Friday, June 28, 2013

http://blog.oleganza.com/post/54121516413/the-universe-wants-one-money

In this post I address issues of competing government currencies, competing private currencies, gold, silver, bitcoin and alternative “crypto-currencies”.

We all know that variety and competion is a good thing. We all want slightly different things, value the same things differently or make different trade-offs. That’s why we have a wide variety of products, prices, quality, colors and materials on the market. Interestingly, money is different. We all want one single universal money. It may not be obvious to many people, so let me explain.

How money is different from everything else? On one hand, money is just an asset. You can produce, buy, sell or hold it. On the other hand, money is a medium of exchange. It allows you to trade your 8 hours in the office for a new iPhone. It also allows you to delay consumption decision. You can spend 8 hours of work today, but then be free to decide when and for what to spend your salary. If suddenly you need to buy a ticket to Hong Kong, you can do it without working extra couple of hours to earn it.

The function of money is to exchange the widest variety of products between each other. iTunes credits allow you to choose between many songs. This make them money to some degree. But dollars are even better money because they can buy all those songs, but also a myriad of other things as well. Therefore, people tend to keep savings in dollars, not in iTunes credits.

It seems obvious that the best money is the cheapest and the most widely recognized and accepted one. Cheapest in a sense of handling it. If your money is a huge stone you have to carry around, it is more expensive than a small gold coin (provided they both have the same price in terms of goods they can buy). Piece of paper named “gold certificate” could be even cheaper than gold itself, but carries a risk of fraud, so in some cases it could be even more expensive to hold than the gold itself.

For a huge part of the civilized human history we used two metals as money: gold and silver. They were not perfect, but universally accepted and recognized. All other things like seashells, diamonds, IOU papers were less universally recognized, so they were naturally used in some very niche markets while everyone was keeping cash in gold or silver.

Both gold and silver were durable, easy verify, easy to cut and melt together, compact enough to be stored and moved around cheaply. And they were very hard to obtain, so there was very low inflation cost (every new gram of gold created eats into everyone’s savings because it increases purchasing power of its owner comparing to everyone else around). Other things were either easy to produce, or not durable, or hard to split in arbitrary parts.

Why gold did not outcompete silver? Or vice versa? That’s because they both had weight. For small purchases gold would have to be split in tiny difficult to handle pieces, while to make big purchases one would need to move several kilograms of silver comparing to much smaller amount of gold. This naturally created two parallel global markets: one for small purchases where the silver was used (and small droplets of gold would be impossible to handle) and another market for big purchases where silver was too heavy, so the gold was used instead.

Make a thought experiment now: if there was a gold-like metal that allowed moving both big and small amounts equally cheaply, it would be useful on both “small” and “big” markets. Thus it would be more marketable (more exchangeable) which by definition would make it a better money. Better than gold and better than silver. People would then tend to keep their cash in that magic metal because it would allow them access to bigger variety of goods: from bread to houses. And they would not lose money on conversion rate like when they sell some silver for gold or the other way around.

There was a competition in private coinage. Kings and private merchants were making their own coins in gold and silver and selling them for premium. The well-recognized coin was easier store and to verify if you trust the issuer. Instead of measuring each coin, you could simply read the number on its face. Names like “dollar”, “pound sterling” and others were all names for private coins or bullion and meant particular weight of the metal. That is, dollar was not some sort of separate money, it was simply a name for a certain amount of silver, like “gram” or “ounce”. The money was still the same — gold or silver, but there was a big variety of shapes of that money.

Of course, gold and silver were still quite limited. You could not drop a bag of gold across the ocean. That’s why people invented banking. Bank was simply a warehouse for your metal. You give them gold, they give you a receipt. Then, if the bank had good reputation and connections with other banks in the world, you could transfer those receipts of any face value quite cheaply anywhere. The only real cost was trust in those banks. Because if the bank is robbed or steals your metal, your receipt becomes worthless. If the bank prints additional receipts for the same amount of metal, the value of your receipt goes down proportionally (or you face a risk of bank run, when more people try to redeem their receipts than is available in the vault).

In old days, private currencies were simply those receipts for gold or silver. Each currency could have different name and different reputation. Bigger bank’s notes had more value on the market because they had less risk associated with them and as a result, wider acceptance. But ultimately, they all were receipts for the same metals that you could redeem at any time and move to any bank or under a mattress. Because people valued receipts only for their ability to represent readily accessible metal. Without the metal, those pieces of paper would be worthless.

Today things are different. After several huge economic disasters created by the governments of Russia, Europe and U.S. in the beginning of 20th century, we now have state-issued money in almost every country with a nice twist that now the money is not redeemable for metals. People use that money, though, because various controls and regulations make it almost impossible to use gold, silver or respective certificates in daily transactions. Every bank needs expensive license and must not be very creative at what it can offer to its clients.

Dollars can buy things in U.S., euros can buy things in E.U., but if you try to use them in inappropriate places, you would have to pay very high conversion fees. (Setting up your own clearing house or exchange with the lowest fees is not possible due to regulation.) It should be clear now that if, for instance, U.S. Dollar can buy more than Russian Ruble, Russians would tend to use Dollars in daily life. The reason why it does not happen anymore (it used to during liberal times in the 1990s) is stricter controls on currency exchange that make it illegal to price goods in dollars and expensive to exchange currencies frequently. For the same reason, gold and silver are not used: they are too expensive or illegal in some contexts, or there is a huge risk and cost on those who are going to store them. Several years ago, Liberty Dollar, alternative silver-based currency was shut down and all silver was confiscated by U.S. government. Founder was pronounced guilty of “making, possessing, and selling his own currency”.

Here we do not discuss whether it is good or moral to make your own currency or store other people’s money. The point is about demand for a single, most universally accepted money. If gold, silver and foreign currencies need violent intervention to not be used, it’s only a proof of existing demand. Because if there was no natural demand, no government would care setting up restrictions in the first place.

Now we enter crypto-currencies. It is a fancy name for Bitcoin and its many clones based on the same source code. Bitcoin itself is very different to ubiquitous government money, application-specific “credits” (like in multiplayer games) or gold and silver. It is absolutely digital, does not have a single controlling entity and is very cheap to store and transfer both huge and tiny amounts of money. This property makes Bitcoin very useful on certain markets: be it illegal market, or “sending money to family in another country”, or a market where banking is unavailable or too expensive.

What about alternative Bitcoin-like currencies? They all provide the same security risks and benefits. Nominally, they all have different divisibility (so called “larger number of coins”), but at the scale of trillions of smallest units in total money supply extra divisibility does not really matter.

Economically, all Bitcoin clones (altcoins) have the same problem: they all have much smaller market exposure than Bitcoin while not technically superior. When people decide in which one to keep their money, they would keep it in the money with the biggest market. There is not point in “diversification” in the long term. If Bitcoin fails for some reason, all its clones fail for the same reason automatically. If Bitcoin works well, any amount in altcoins is simply inferior in its purchasing power. It does not mean there won’t be any market. You can always keep some empty plastic bottles for selling later, but the bottles can only buy cash, while cash can buy anything.

Second problem of alt coins is mining. In the long term, any miner will throw 100% of computing resources into the most profitable currency. Even if Bitcoin is only 1% more profitable than Litecoin, since there is no fundamental difference between them, all the resources will be thrown into Bitcoin. In the short term, there are plenty of enthusiasts who find themselves equipped with a lot of outdated GPU hardware that was once used for Bitcoin, but now cannot compete with specialized ASIC hardware. These people now mine Litecoin in short-term expectation for any amount of reward. It is sort of a private club of people trading in their own funny money. All new miners devote all their energy to Bitcoin, while people who will sell or retire their GPUs will make Litecoin network weaker and less technically stable.

In the end, it is clear that we want the single money to be able to sell anything and buy anything. We all want it to be cheap to store, move and verify. And secure. With as little trust in middlemen as possible. Today we find ourselves with a lot of artificial barricades in the sphere of money, which causes artificial demand for various local currencies. Gold is being seized or moved from the country. Foreign currency is prohibited for merchants to price their goods at. Legal tender laws force you to accept government-issued currency as a payment for debts.

Regulations and licensing limit variety of private currencies or money substitutes. But all that trouble only proves almost universal desire to use the single virtual entity for buying food and saving for the future. Bitcoin gives us a mechanism to overcome all these regulations and trade as freely as was ever possible. Maybe it will allow us to achieve that single, most marketable entity that we all so desire.

Reprinted with permission.

Bitcoin Analysts Contribute to a Post-Legal Tender Age

By Jon Matonis
CoinDesk

Monday, December 23, 2013 

http://www.coindesk.com/bitcoin-analysts-post-legal-tender/

The year 2013 saw at least three bitcoin analyst reports from financial investment firms, an astonishing achievement for a young five-year-old digital currency. In some economic circles, bitcoin has slowly entered the ‘reserve currency’ lexicon.

Are we entering a post-legal tender era, where the provision of money is determined by the market and not by central bankers? Why do we see mainstream analysts reporting on price and economic impact for bitcoin when we never really saw that with other digital currencies?

The reason is simple – previous digital currencies were not decentralized with an independent floating exchange rate and they did not operate beyond confiscation.

Examples such as Digicash and e-Gold were brilliant proofs of concept, but their centralized nature also offered a single point of failure. Governments are not going to accept a challenge to their monetary authority if they don’t have to.

In a paper entitled “Regulating Digital Currencies: Bringing Bitcoin Within the Reach of the IMF,” Nicholas A. Plassaras suggests that the International Monetary Fund is ill-equipped to handle the widespread use of bitcoins into the foreign exchange market, highlighting the inability of the Fund to intervene in the event of a speculative attack on a country’s currency by bitcoin users.

He also hints at some of the tools that the IMF may consider deploying in the face of the global bitcoin challenge.
That academic study was followed by three analyst reports from the institutional investment industry. Together, all four studies solidify bitcoin’s maturity into a new and unique asset class with broad implications for both fiscal and monetary policy.

On 31st July, BBVA Research released “Bitcoin: A Chapter in Digital Currency Evolution” which concludes that bitcoin is here to stay and that the regulators and financial institutions embracing bitcoin early will likely become the leaders of the future digital monetary system.

On 1st December, Wedbush Securities released “Bitcoin: Intrinsic Value as Conduit for Disruptive Payment Network Technology” by Gil Luria and Aaron Turner.
The report observes three key sources of demand for bitcoin:

(a) as a disruptive payment network technology,
(b) an alternative uncorrelated asset class, and
(c) a safe haven currency.

Additionally, the report states that bitcoin represents another potential low-cost funding method for PayPal, leading Wedbush to predict “that with more regulatory clarity PayPal would likely embrace bitcoin.”

On 5th December, BofA Merrill Lynch Global Research published “Bitcoin: A First Assessment” by David Woo, head of global FX and rates strategy. Since Woo is considered to be one of the leading currency minds on Wall Street, his 14-page report represents a massive endorsement for bitcoin.
Woo states:

“We believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, bitcoin has clear potential for growth, in our view.”

Placing a $1,300 price target on bitcoin, he also identifies the three things that need to happen in order to justify the current bitcoin valuation – it will need to account for at least 10% of all global e-commerce B2C transactions, become one of the top three players in the money transfer industry, and acquire a store of value reputation close to silver.

As a contra indicator, the Bank of America Woo report can probably claim responsibility for diffusing the most recent bitcoin rally that took the cryptocurrency to an intraday high of $1,156.00 on the CoinDesk BPI.

As we gradually enter a post-legal tender era, it behooves us to examine the possible implications for fiscal and monetary policy within a bitcoin economic environment. This article focuses on fiscal policy while a future piece will focus on monetary policy.

Aside from the beneficial wave of new job creation and economic opportunity, bitcoin as a competitive and successful monetary unit influences some pretty substantial adjustments forthcoming to fiscal policy.

High on the list, of course, is the effect on true income determination and the resulting taxation policy. A growing army of bitcoin independent contractors and informal merchants selling labor and goods will operate off-the-grid, adhering to the same honor system that exists for paper cash today.

To fill State coffers, it is likely that the bulk of tax revenue from individuals will shift from taxing income to taxing consumption (or spending).

Good riddance. A progressive income tax is one of the fundamental tenets of Marxism and it holds back incentives for innovation and achievement.

Far more likely in a bitcoin environment would be heavy taxes on consumption, which are regressive in nature but also more equitable than progressive taxes. The ease of bitcoin merchant identification and point-of-sale audits makes consumption taxes nearly inevitable for a worried nation-state with diminishing revenue.

Other fiscal policy impacts revolve around how the spending beast will be starved by a lack of sufficient revenue to pursue global military adventurism and other unpopular spending programs made possible only by the ability to print prosperity.

The arrogance of control maintained through the unlimited issuance model of the world’s reserve currency will be dealt a mighty blow.

For the first time in modern history, a government will actually be forced to justify why they want to increase direct taxation and to demonstrate why that particular activity should be funded. Consequently, everyday people will become more empowered in the government actions executed under their name.

However, many in society will be left behind by this monumental shift of real wealth leaking out of national fiat currencies, because people have largely underestimated the widespread, latent demand for a non-political currency.

Joerg Platzer, founder of Crypto Economics Consulting Group, encourages individuals to start preparing for this day in advance to ensure economic survival. He also emphasizes the need for governments to be honest and to anticipate the vast swath of society that will simply be impoverished after the great wealth transfer to a cryptocurrency society.

Further economic thoughts on the cryptocurrency and free banking space will undoubtedly be filled out by other bitcoin economic thinkers, such as Peter Šurda, Konrad Graf, JP Koning, and George Selgin.

Bitcoin Ideology and the Tale of Casascius Coins

By Jon Matonis
CoinDesk
Tuesday, December 17, 2013

http://www.coindesk.com/bitcoin-ideology-casascius-coins/

A weekend article in The New York Times examined the ideological underpinnings of the bitcoin cryptocurrency. While the article got most of it correct, it missed some additional principles that are core to the adopters of bitcoin.

First of all, a vote for bitcoin is essentially a vote against the established monetary order with its centralized authority, legacy infrastructure, and diminishing financial privacy. Moreover, it is also a vote for an individual’s choice in currency and freedom of transaction without payment blockades and surveillance. To both the technical and non-technical, bitcoin represents fungibility, irreversibility, and user-defined privacy.

As The New York Times pointed out, additional facets that bitcoin adopters find attractive include how bitcoin demonstrates the absurdity of a central bank’s unlimited issuance model and the irrelevancy of self-serving capital controls.

A decentralized cryptocurrency separates a functioning medium of exchange from state control.

Nothing illustrates this more starkly than a physical bitcoin on a coin-shaped metal disc, which could be considered a negotiable monetary instrument in some jurisdictions. Lately, bitcoin has appreciated so much that the older 10 BTC and 25 BTC Casascius coins must now be declared to US Customs when entering or exiting the US.

FinCEN’s involvement

On November 27th, Casascius founder Mike Caldwell received a letter from FinCEN, the US Treasury bureau responsible for safeguarding the financial system from illicit use and combating money laundering. The letter implied that his three-year-old business of selling coin-shaped pieces of metal could be defined as a money services business requiring registration with FinCEN and possibly registration with the money transmitter regulators in each individual state.

The FinCEN claim rested largely on the premise that Caldwell had no way of verifying that the coins were being shipped to the same person, or persons, that purchased the items with bitcoin. Caldwell believes that the coins should be viewed as collectibles.

Subsequently, Caldwell suspended operations of his coin-shaped metal business and ceased taking orders for purchases of new product. He also engaged legal counsel to ascertain if his business was indeed acting as a money transmitter under the law.

In telephone conversations with Caldwell, he reiterated to me that the ongoing operation of his business was secondary to establishing the important freedom-to-contract principles and choice in currency principles.

According to Caldwell, he took the drastic step to suspend as a precaution, however he does not believe that he is in violation of any existing laws as he is only sending empty private keys in the mail.

Business model

Under the current business model, Casascius receives an order and the payment received does not involve any US currency or any other countries’ currency. He accepts bitcoin for the sale of a round metal disc with a private key attached under a hologram. The strong reputation of Casascius and its process is paramount to the success of a physical bitcoin, because it involves trusting the integrity of a third party.

During shipment, the coin-shaped piece of metal is valueless and corresponds to a bitcoin address containing zero bitcoin. When the recipient receives the coin-shaped piece of metal, an appropriate amount of bitcoin is transferred to the corresponding public key, or bitcoin address.

In an alternate approach, Casascius could send the coin-shaped metal and allow the recipient to initiate the transfer of bitcoin to the corresponding bitcoin address, thereby removing Caldwell from handling the bitcoins at all. In that scenario, Caldwell would not be handling US dollars or bitcoin so it would be difficult to see how any possible money transmission was occurring.

Recalescence Coins, LLC in Port Orchard, WA has already moved to the model of selling blank coins as a result of the FinCEN letter received by Casascius.

Caldwell and his attorney plan on responding to the FinCEN letter, describing their process and outlining a satisfactory business model.

Casascius uses brass tokens in the shape of a coin. Another business based in the UK sells similar coins. Other companies could just as easily use rectangular plastic or special paper to store a hidden private key. They could even be divided, sent separately, and re-joined later to form a complete private key. However, the requirement to separate a private key would mean sending empty private keys in the mail somehow represents a form of money transmission which it does not.

Form factors

Also, form factors matter legally, or they should. Phil Zimmermann faced a somewhat similar situation when he could not export his email encryption program, Pretty Good Privacy (PGP), due to US restrictions on the exporting of encryption with “munitions-level” strength. A group of volunteers then transcribed the computer code line-by-line into a book format to export PGP as a book to be re-transcribed and compiled on the other side.

Money is the speech of commerce and “we need freedom of speech in our financial commerce,” says Mike Gogulski, a stateless ex-American living in Bratislava, Slovakia.

The Liberty Dollar case exemplified how far a government will go when alternatives to the compulsory unit of account begin to emerge. The Liberty silver coins containing real silver were embarrassing to the government that was issuing the fake silver coins, so the public had to be protected from thinking that the real silver coins were actually money. Huh? Government prosecutors in the case laughingly described Bernard von NotHaus as representing a “unique form of domestic terrorism“.

All money is an illusion at some level, because like language and religion, its proliferation and success depends on growing adoption from an increasingly larger pool of adherents.

The creator of the Bitcoin protocol gave the world a method to conjure up its own monetary illusion. The reason this is a gift is because, prior to bitcoin, other monetary illusions depended either on legal tender laws for their illusory value or physical objects like gold and diamonds which are easily confiscated.

Bitcoin put the power of “survivable” money directly in the hands of the masses. It is a testament to bitcoin’s survivability that it still exists today.

Bitcoin is not permitted to exist because various governments are bitcoin-friendly or pledge to support innovation. Bitcoin exists today precisely because it is distributed and decentralized, designed to outlast political institutions.

And, it is beyond confiscation because it is digital. If it could be eradicated, it would have been eradicated as soon as it broke out of its niche market with a few pizza deals back in early 2010.

I understand from sources that approximately twelve such letters were issued by FinCEN in the last 30 days. If so, the purpose hopefully is to better understand these bitcoin business models and not just to use impressive letterhead in persuading voluntary business suspensions. In the case of Casascius, I fear the latter.

Why Bitcoin Fungibility is Essential

By Jon Matonis
CoinDesk
Sunday, December 1, 2013

http://www.coindesk.com/bitcoin-fungibility-essential/

What is the essence of bitcoin fungibility and why is it so important?

Fungibility refers to the concept that every unit or subunit remains equivalent and identical to any other unit or subunit. It is the property of a good or commodity whose individual units are capable of mutual substitution.

For instance, one bitcoin is considered the same as any other bitcoin when it comes to price and acceptance. Gold bullion has fungibility with identical degrees of fineness or purity. Government paper cash has fungibility provided that the bills have not been marked or serial numbers have not been ‘blacklisted.’ In other words, you cannot be held responsible for the historical path of that banknote prior to its acceptance by you.

Herein lies the controversy. Should you care where your money came from and how does a monetary system cope with the resultant risk placed upon the bearer?

Blacklisting

Recently, it has become fashionable in some bitcoin circles to suggest that blacklisting, or the more palatable term of redlisting, can be implemented to discourage the large-scale stealing of bitcoin wallets or even the ransom demands of petty criminals like CryptoLocker. Either way, it boils down to some form of coin validation with the more insidious side effect being government collusion with the coin validators for purposes of linking individuals to all of their transactions.

A related Scottish monetary case from the 1700s suggests that coin validation is a misguided premise. Fortunately, the judges in that case upheld the principle of unrestricted fungibility. Altering the monetary framework through blacklisting, redlisting, whitelisting, or any variant of subjective taint measuring would have catastrophic implications for the integrity of the financial system, thus detrimentally impacting economic prosperity for the whole.

Although opt-in efforts at sanitizing bitcoin or ensuring proper clean coins will inevitably emerge in a free market, that does not mean they are necessarily beneficial for the larger bitcoin economy and the principles of a non-politicized monetary unit.

Technical solutions

Fortunately, the political and market-based efforts to disrupt the integrity of a digital currency will be met with high-powered technical solutions, effectively rendering coin validation techniques useless in a sea of powerful circumvention.

Anonymizing and mixing solutions such as Zerocoin, CoinJoin, and SendShared will proliferate and encompass a larger and larger portion of overall bitcoin transactions despite the politics.

Bitcoin core developer Gregory Maxwell commented on the recent coin validation efforts:

“To stop this nonsense we have to make it impractical to pull off by changing the default behavior in the bitcoin ecosystem. We consider the lack of a central authority to be an essential virtue, which means that we can’t be protected by one either. We must protect ourselves. This means things like avoiding address reuse, avoiding centralized infrastructure, adopting— and funding!— privacy enhancing technology.”

Distributing mining and Hashcash creator, Adam Back, was simply astonished, exclaiming: “Their technical representatives of Coin Validation should be ashamed. How can someone who doesn’t understand a concept as basic as fungibility and its relation to transaction costs, and the difference between identity and coins hope to exist in this ecosystem.”

Harming bitcoin growth

Private sector attempts at promoting coin validation to seek favor with regulators are doomed to failure, because Bitcoin operates as a worldwide network with a border-less monetary unit. At the jurisdictional level, economies that embrace coin validation knowingly erect barriers to the free flow of digital capital and restrict the beneficial properties of bitcoin-induced growth in that particular region. It would be similar to “blacklisting” that entire jurisdiction from the world economy.

With the Unites States at an embarrassing 2% of all worldwide exchange volume for bitcoin trading, I cannot imagine that government authorities would want to take any steps which make the jurisdiction even less appealing.

Quite the opposite would be the economically sound position for US regulators to take.

If Director J. Shasky Calvery at FinCEN were sincere about attracting bitcoin-related companies to the US and not inhibiting innovation, she would have FinCEN make a public pronouncement that banks in compliance with existing AML laws and KYC guidelines have nothing to fear from engaging in business with bitcoin companies.

Additionally, FinCEN should state explicitly that it rejects coin validation and any other attacks on unrestricted fungibility for bitcoin, because this would undoubtedly taint the jurisdiction.

This type of leadership action would accomplish two objectives. First, it would serve to establish the longer-term principle that bitcoin trading does not require regulation as a government-issued financial instrument (as other jurisdictions have done).

Secondly, it would lift the cloud of the chilling effect emanating from one of the country’s leading law enforcement agencies, which we all know is an obtuse method to control and gain preemptive compliance in an extrajudicial manner.

User reaction

At the economic level for bitcoin businesses, any exchange or merchant that attempted to launch or participate in a coin validation scheme would find themselves largely shunned by the user community. Given such massive disapproval from the bitcoin user community, organized boycotts against certain companies could become a reality.

Conversely, any exchange or merchant that rejected coin validation schemes or redlisting would experience a dramatic increase in business volume. This fact alone should produce a stabilizing effect due to the incentives aligned against the validation trolls.

Protecting the core Bitcoin protocol, including unrestricted fungibility as it relates to bitcoin transactions, mining, and acceptance, requires vigorous defense of bitcoin transactions that are free from third-party validation because such validation jeopardizes overall fungibility and creates transactional friction.

Proactively, I call upon the Bitcoin user community and Bitcoin infrastructure companies to oppose any initiatives that attempt to undermine bitcoin fungibility and to support solutions that promote the broad adoption of privacy enhancing technologies for bitcoin.

However, do not worry, for bitcoin fungibility is inherently protected by design. If all else fails, there is always the ultimate solution to “fork off” the debilitating, validation-seeking Govcoin chain and become free again.

Exante’s Bitcoin Fund Reports YTD Performance of 4,847%

By Jon Matonis
CoinDesk
Monday, November 25, 2013

http://www.coindesk.com/exantes-bitcoin-fund/

Although technically launched in late 2012, Malta-based brokerage Exante released their 2013 year-to-date (YTD) performance statistics for The Bitcoin Fund last week. Listed in Bloomberg’s Comparative Fund Analysis section, The Bitcoin Fund came in with a 4,847% return, leading its peer group by a wide margin.

The closest funds in the comparative analysis registered a year-to-date performance of 33.7% and 25.4% respectively. The Bitcoin Fund gives institutions and high-net worth individuals easy, secure and rapid access to the vibrant bitcoin market with a unique licensed product.

The company also offers a reliable secondary market for the trading of fund shares on both a long and short position basis. Recognising that speculative bitcoin trades exceeded transactions for goods and services by 20 to 25 times in the latest quarter, Exante co-founder Vladimir Maslyakov told Bloomberg that:

“The real economy is not growing as fast as the price, speculators are usually much faster.”

It is impossible to know with certainty the motives behind a trade (or if liquidity-enhancing speculation is even detrimental), but this new chart from Blockchain.info attempts to measure the ratio of trade volume to transaction volume, as explained by David Perry.

However, this imbalance is expected to adjust as Bitcoin has now surpassed PayPal and Discover to become the world’s fifth largest payment network by daily transaction volume, as measured by Coinometrics.

Lately, increasing demand for bitcoin has been driven by China which recently eclipsed the US in active bitcoin nodes on the network. This rapid price appreciation tends to put pressure on bitcoin-related startups because entrepreneurs must increasingly justify how a placement into their company will yield a higher rate of return than simply investing straight into the digital currency. Building out the ecosystem benefits everyone.

Arguably, bitcoin represents a binary investment: either ultimate success as a world reserve currency, or capitulation to a zero price point.

The key challenge for venture capitalists and startup investors will be to leverage any investment into a scalable infrastructure company for dual participation by maintaining asset balances denominated in bitcoin. It would be counter-productive to financially support a bitcoin ecosystem company without also supporting the underlying base currency.

Union Square Ventures’ Fred Wilson seems to miss this point when he declares that his primary interest in Bitcoin is its ability to become the “financial and transactional protocol” for the global Internet, and that he and his firm own very little bitcoin. Wilson makes this statement as if Bitcoin can achieve the lofty protocol role without any impact on the monetary value of the underlying base currency unit.

It is almost as if he believes that USV’s portfolio company Coinbase will be better off by converting bitcoin-operational proceeds into US dollars and keeping balance sheet assets in US dollars. Unfortunately, I suspect this is the case at Coinbase.

Meanwhile, the Exante Bitcoin Fund’s assets under management currently total over $35m and the fund does not charge a performance-based fee because there is no discretionary management or use of leverage. However, there is an annual management fee of 1.75% as well as a 0.5% transaction fee.

Exante is regulated by the Malta Financial Authority and, as of 18th November, the value per unit of the Bitcoin Fund was $658 where one unit equals one bitcoin. Exante is not alone in the bitcoin fund business, since SecondMarket launched the private, open-ended Bitcoin Investment Trust (BIT) in September 2013.

The private investment vehicle is based in the US and open to institutional and accredited individual investors. SecondMarket also intends to facilitate two-way trading of the trust shares on its proprietary platform to enable both long and short positions. Barry Silbert, CEO, said:

 ”US investors, including wealthy families, are allocating more of their investments into Bitcoins in order to diversify portfolios.”

Silbert also confirmed that he’s working with Pensco Trust Co, Entrust Group Inc and Equity Trust Co to offer investors the ability to purchase bitcoin for individual retirement accounts. In a little under two months, SecondMarket’s Bitcoin Investment Trust has already attracted $46.8m under management.

Financial Services Club in Vienna

On December 3rd, 2013, I participated in my first Financial Services Club meeting. The event was held at the stately Residence of the British Ambassador to Austria in Vienna.

The panel discussion was “Virtual Currencies” – a phenomena, a trend or future money? moderated by Thomas Labenbacher, Chairman of the Financial Services Club CEE.

This will be a Panel Discussion Thomas Labenbacher - Chairman of the Financial Services Club CEE will moderate the panel - See more at: http://www.fsclubcee.com/austria/events-focus.cfm?id=382#sthash.K85LAVu9.dpuf