Monday, May 13, 2013
In the fast-moving Bitcoin world, it’s crucial to stay up to date with the latest in educational resources and new media. The last two months have seen an explosion in media attention and a desire for new users to learn as much as possible about the global bitcoin economy. It is within this spirit that I present the latest Bitcoin educational resources to hit the web:
CoinDesk – This London-based resource and news operation aims to be the “Reuters of Bitcoin” according to its founder Shakil Khan. As an angel investor in Spotify and bitcoin startup BitPay, Khan noticed a gap in the news coverage for bitcoin and digital currencies in general when other entrepreneurs constantly questioned him about the bitcoin.
Also just last month, Khan assisted in orchestrating the sale of his mobile news gathering portfolio company, Summly, to Yahoo for approximately $30 million. Now, drawing on the experience of a few editors and freelance writers, CoinDesk largely covers the growing Bitcoin ecosystem for a general, non-technical audience. It still needs an RSS subscriber feed , but it is off to a brilliant start.
The Genesis Block – A welcome addition to the Bitcoin blogosphere, the writing is refreshing and sometimes technical. The Genesis Block claims to be your foundation for all things Bitcoin and they are a news and tutorial site covering mining, trading, economics, and businesses. The authors involved in the project include Phil Archer, Jonathan Stacke and Wayne Parker. Intentional or not, little else is known about the founders however they consistently crank out good content.
Bitcoin Education Project – The full name of this community-built resource is “Bitcoin or How I Learned to Stop Worrying and Love Crypto: The definitive guide to understand what the bitcoin is and why we should care about them.” Started by technology entrepreneur Charles Hoskinson and part of the Udemy network, this online Bitcoin course is one of many educational courses offered by the Udemy marketplace. The free course is organized into several mini-lectures covering Bitcoin basics and extending into specific topics such as wallets, mining, transaction fees, and cold storage. Interesting future content is crowd-funded on the site.
Khan Academy Bitcoin Series – Founded in 2008 by Salman Khan, the non-profit Khan Academy is on a mission to provide a free world-class education for anyone, anywhere. Within the larger Finance and Capital Markets section, and then within the Money, Banking and Central Banks subsection, they currently offer a new 8-part Bitcoin series taught by Zulfikar Ramzan, a world-leading expert in computer security and cryptography. Receiving his Ph.D. in computer science from MIT, Ramzan is currently the Chief Scientist at Sourcefire. Also, the interactive discussion below each lecture is particularly good.
Bitcoin Press Center – Launched by Andreas Antonopoulos as a sensible reaction to the bitter infighting regarding potential press contacts within the community, this resource supports multiple languages and time zones as well as targeted searches of individuals that have expressed a willingness to be available for media interviews. Billing itself as the global media center for Bitcoin and the best way to find a specific Bitcoin expert, the site accepts new nominations for Bitcoin experts with the only criteria being accuracy of their stated credentials and confirmation that they want to be listed.
Let’s Talk Bitcoin – This all-Bitcoin podcast is brand new on the scene and produced by Adam Levine, who has developed a loyal listener following in a short amount of time. Providing current news, topical interviews, and studied analysis, Adam is joined by Let’s Talk Bitcoin co-hosts Stephanie Murphy and Andreas Antonopoulos. The program started with an overly-ambitious daily schedule and is now available on Tuesdays and Thursdays, which hopefully will prevent burnout. Listeners can also send in questions and comments.
Expertly produced and always knowledgeable, this important program is well on its way to becoming the de facto podcast for all things Bitcoin. My only complaint is that the audio hosting has jumped around a lot and it’s not always easy to find the segment that I’m looking for. Despite that, Let’s Talk Bitcoin is required listening and vitamins for your Bitcoin brain.
Monday, May 13, 2013
Typically, I don't cover or analyze so-called payments innovations that merely embrace and extend the legacy infrastructure, but a new middleware startup, CardFlight, could actually operate as a payments "air traffic controller" because its code sits directly between the consumer and the processor.
CardFlight announced the availability of a private beta last week for the iOS and Android platforms. Its encrypted magnetic-stripe card reader and simple software development tools allow developers to handle swiped card payments within mobile apps without becoming payments experts. It focuses on card-present payments and charges 10 cents per transaction.
As the New York startup's technology makes its way into more mobile applications, the company could also begin to offer non-card payment choices as well, such as the new cryptocurrencies like Bitcoin circulating worldwide now. Just as mobile application developers don't want to worry about compliance with the Payment Card Industry (PCI) data security standard, they don't want to worry about alternate payment models either. A one-stop shop for payments integration can allow developers to support bitcoin processing for a global marketplace.
The existing merchant processor landscape offers either a 100%-card platform or a 100%-bitcoin platform, requiring developers to integrate each separately. Atlanta-based BitPay is the leader in bitcoin merchant processing and they offer exchange rate guarantees as part of their service.
If grabbing market share of placement within mobile applications is the name of the game, the payments functionality is an excellent place to start.
"We aim to be the leading enabler of mobile commerce for vertical industry software developers and our vision is not constrained to Visa, Mastercard, Amex, and Discover," says CardFlight founder and CEO Derek Webster. "As a lynchpin in the payments processing chain, if customers demand bitcoin or Ripple support, we could easily accommodate those processing solutions because CardFlight acts as a switchboard."
At just three months old and with only three employees, CardFlight has the potential to fill a void left by companies such as Apple.
While restricting payment options for digital goods, Apple has traditionally permitted payments for real-world goods to go through a variety of payment channels. However, the Apple App Store still restricts the send and receive functionality for Bitcoin wallet apps on iOS. Conversely, the Google Play store does not place the same restrictions on Android Bitcoin wallet apps.
As a development tool provider with an open platform, CardFlight suggests potential uses for its technology such as apps for event organizers that need to sell tickets at the door, CRM apps to enable field sales and medical-practice management apps to collect a copay while keeping the rest of the details available for insurance billing.
It's interesting that the company has recently partnered with Stripe, which offers similar application development tools for 'card not present' transactions, because together the two companies can present a combined offering that is essentially a customizable version of Square and PayPal. Online and offline, they have you covered.
"We're proud to be working with CardFlight, as they share our developer-friendly approach to payments," Stripe Business Development Manager Cristina Cordova said in a blog post. "CardFlight provides tools to any Stripe user looking to incorporate in-person payments into their mobile apps, while still taking advantage of Stripe's simple pricing and seamless setup."
Sure, Stripe could extend into CardFlight's space at some point or vice versa, but for now the partnership is valuable to both.
Tuesday, May 7, 2013
When people hear the term money laundering today, they envision the most evil of acts, in which gangsters process satchels of cash through a fabricated company to show it as business revenue. Words and semantics are very important in this post-9/11 world, and as far as creating a negative connotation, that parlance has been extremely effective.
At its essence, money laundering is the act of concealing money or assets from the state to prevent its loss through taxation, judgment enforcement, or blatant confiscation. However, as the late J. Orlin Grabbe wrote: "Anyone who has studied the evolution of money-laundering statutes in the U.S. and elsewhere will realize that the 'crime' of money laundering boils down to a single, basic prohibited act: Doing something and not telling the government about it."
Protecting one's wealth is interwoven with the history of trade and banking which has existed since the dawn of commerce. Sterling Seagrave's Lords of the Rim describes how some 2,000 years before Christ, merchants in China would hide their wealth from rulers who would simply take it from them and subsequently banish them. This concealment involved moving the wealth and investing it in remote provinces or outside China.
Part myth, part rumor, the plausible tale of Mafia gangsters running huge amounts of cash from extortion, prostitution, gambling and bootleg liquor through existing Laundromats accounts for the phrase money laundering.
Also during this period, Al Capone was convicted in October 1931 for tax evasion, which is what earned the prosecutor's conviction rather than the predicate crimes that generated his illicit income. Capone's episode inspired Meyer Lansky, the mob's accountant, who structured elaborate international and Swiss financial facilities for safely securing money and vowed never to suffer Capone's fate.
Lansky is credited with designing one of the first real laundering techniques, the use of the "loan-back" concept, which disguised allegedly illegal money within "loans" provided by compliant foreign banks. The money could then be justified as revenue and a tax deduction for interest expense obtained in the process.
Without any method of tracking cash or bank activity, Congress passed the Bank Secrecy Act in 1970, heralding the age of transaction reporting, including the Currency Transaction Report (Form 4789), the Report of International Transportation of Currency or Monetary Instruments (Form 4790), and the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). In the United States, the Money Laundering Control Act formally made money laundering a federal crime.
Internationally, the elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. Also, the Financial Action Task Force on Money Laundering, founded in 1989 on the initiative of the Group of Seven industrialized nations, is an intergovernmental organization whose purpose is to develop policies to combat money laundering and terrorism financing.
From President Roosevelt's 1933 seizure of personal gold to the Nazi confiscation of Jewish wealth to the recent deposit theft at Cyprus banks, asset plundering by governments has a long and colorful tradition. Protecting wealth from oppressive regimes continues to this day.
It's highly political and also a matter of perspective whether protection from confiscation is a justifiable activity. Government access to wealth is at the heart of the issue and it matters not if it's hiding money or cleaning money.
Therefore, the artificial crime of "money laundering" had to be invented, mainly because more direct and traditional methods of enforcing certain laws yielded little result. Think of it as driving without a light bulb above the license plate being a felony because thieves might drive away in the night. All must participate in illuminating the way to be tracked. More than anything, this is a clear sign of regulatory desperation.
Money laundering has been called the thoughtcrime of finance. Isn't it really just banking with someone's possibly nefarious intentions attached to the act? It's like buying a drive-thru donut in a stolen vehicle. The theft of the vehicle may have been illegal and immoral but the act of purchasing a donut is not. Money laundering is not pre-crime but post-crime. And, it's difficult to identify the victim, other than the bank shareholders that must expend millions of dollars for the proactive compliance required as the state's deputized enforcers.
Moreover, money laundering is guilt by association. If the monetary flows resulting from associated businesses are deemed illegal, then the banking activity is defined as money laundering. But, in the absence of victimless crime laws against drugs, gambling, and prostitution, the majority of banking labeled as money laundering would simply be banking.
According to the International Money Laundering Information Bureau, "Money Laundering is also the world's third-largest industry by value." Apparently, it happens in every country in the world. Well, breathing by humans also happens in every country in the world. If money laundering is actually the third-largest industry in the world then it's either being calculated wrong or it's too easily defined.
In his Rolling Stone article "Gangster Bankers: Too Big to Jail," Matt Taibbi mocks the anti-money-laundering regime as being hypocritical because large commercial banks like HSBC receive a light slap on the wrist and the blind-eye treatment as smaller fish are routinely scooped up in the net. Taibbi correctly distinguishes between an arrestable class and an unarrestable class. However, he misses the point of the law's arbitrariness in the first place. Thank you for the analysis, Mr. Taibbi, but dispensing enforcement of an immoral law more evenly is not a solution for justice.
Even as the money-laundering laws are said to exist for the fight against terrorism or drugs or gambling, the cashless utopia is simultaneously being thrust upon us as the monetary architecture of the future. Expect ever more increasing thoughtcrime enforcement as the international money flow tightens.
Saturday, May 4, 2013
PayPal has recently entertained the notion of accepting and clearing the bitcoin unit on its pervasive platform. It’s a bit like the prince joining the revolution. Is this a good thing?
Naturally, some bitcoin businesses will see this as PayPal moving in to usurp bitcoin’s popularity and momentum in the marketplace. But, depending on your outlook, it may not be all negative and it raises the identical issues that a bank would face if embracing bitcoin, especially since PayPal is now viewed as part of the legacy apparatus.
Speaking as if PayPal represented some sort of global payments umbrella, CEO John Donahoe told the Wall Street Journal, “It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin closely. There may be ways to enable it inside PayPal.” I find this statement funny, particularly in light of the fact that WordPress’ reason for accepting bitcoin was that PayPal disabled certain parts of the globe for them.
Let’s examine what it could mean when something like Bitcoin, that is both platform and unit, is absorbed into something like PayPal that is just platform. Phil Archer writing at The Genesis Block categorized the four areas of likely impact — online wallets, escrow services, merchant processing, and exchange services. PayPal account funding alone is not exactly bitcoin sitting on the PayPal payments network, so that use case is not included in the analysis. Archer concludes that PayPal’s immediate advantage would be in the first two areas with eventual game-changing impact probable in the latter two.
While I tend to agree with the category choices, the analysis overlooks what the PayPal-Bitcoin world would not be getting (or, what it would be losing).
Firstly for the consumers, the new PayPal paradigm would look like a Coinbase on steroids with massive connectivity into your bank accounts and even more intrusive data collection. As a fully-regulated money services business (MSB) and licensed money transmitter, PayPal would be the undisputed gorilla in the U.S. marketplace with online wallets and fast exchange services. Of course, escrow services would be welcomed because this model is almost always needed in a free market and banks could look to provide this functionality as well.
However, what would consumers not be getting in this bitcoin nirvana? Not a huge fan of transactional privacy, PayPal would have to link your identity to your account and eliminate the user-defined privacy aspects of bitcoin. This has the effect of reducing bitcoin’s important cash-like qualities. While it may be convenient for exchange services to be an integrated part of your personal online wallet, it is fundamentally unnecessary.
Furthermore, it’s unlikely that PayPal would reach into many new countries that it doesn’t serve today because it would need the banking infrastructure to do so. By the way, that is the same situation for Coinbase too. So consumers would not gain anything in terms of worldwide access. Also, consumers would not get unimpeded access to their funds because it’s doubtful that PayPal will modify any of their current policies on account suspension.
Secondly for the merchants, the new PayPal paradigm would offer merchant processing services similar to BitPay with exchange rate guarantees for conversion into national currencies. As BitPay is more nimble with first-mover advantage and low-cost pricing, they are considered a likely acquisition target. PayPal’s distinct advantage in this area comes from leveraging its installed merchant base, however it is unclear how fee savings with bitcoin could be passed on to merchants due to the potential cannibalization of PayPal’s other revenue streams.
Larger merchants maintaining their balances in bitcoin and managing currency risk internally seems like the most efficient practice, but it’s unlikely that PayPal would offer that option for free. As part of the PayPal network, merchants would not enjoy the attractive bitcoin benefit of “no account freezing,” because without segregated bitcoin balances, a merchant’s overall funds could be ensnared in an account suspension.
Also, when it comes to specific merchant categories being restricted like online casinos or prescription drug sites, a PayPal-Bitcoin world is unlikely to remove the blocks on those merchants. It is a symptom of having one foot in the old banking and credit card world and one foot in the new decentralized and nonpolitical currency world. Perhaps, the PayPal executives view bitcoin as creative destruction but somehow I don’t think so.
My advice to PayPal and other conglomerates “looking into” Bitcoin with a shoehorn approach is to understand how authorization, clearing, and settlement occur nearly simultaneously within the Bitcoin distributed transaction network. Enhancing, rather than diminishing, that feature is the key to success. Bitcoin doesn’t need PayPal to be mobile, but PayPal probably needs Bitcoin to become seamlessly mobile.
About the best that could be said of any potential arrangement between PayPal and bitcoin is that it would bestow public credibility on bitcoin as a “unit of account” or new currency code. However, squeezing only the monetary unit portion into a legacy payments platform inserts an intermediary into a decentralized system and dilutes the value of the whole. Not to mention that Bitcoin will simply outlast PayPal.
Monday, April 29, 2013
The payments industry has been ripe for disruption for as long as I can remember. Historically conservative and non-experimental, banking and financial services always appear to be the laggard for any new technology. But none of that has stopped recent innovators from pursuing things like Square, Stripe, Dwolla, FaceCash, ZooZ, Affirm, MangoPay, and Balanced. The Internet and mobile payments gold rush is in full swing and venture capitalists are lapping it up.
The amount of money raised by a startup in the space can be staggering too, ranging from $3.4 million to as much as $200 million in the case of Square. But are venture capitalists truly funding disruptive "home runs" if licensed banks and legacy credit card networks are required for their so-called innovations? Also, most would agree that the states' money transmitter licensing infrastructure acts more like a barrier of entry protecting incumbents than providing any protection for consumers.
Doesn't anyone notice the elephant in the room? Growth rates of over 10,000% since inception, measured in transaction volume and amounts. Pervasive international market penetration with full digital and mobile platforms. A passionate and dedicated customer base.
Of course, I'm talking about the distributed payments network and cryptocurrency Bitcoin, which plays a dual role as a transaction confirmation network and independent floating unit of account.
It's easy to understand why certain venture capitalists might be timid about pulling the trigger on a Bitcoin-related investment. Regulatory risk (illustrated by the fallout from Fincen's recent guidelines in the U.S.), on top of typical execution risk demands a greater return from initial investment. While that return may ultimately be there, a skittish board or a wary risk-averse management team might be unable to navigate the onslaught of negative public relations and price volatility.
Any lesser technology with so many forces aligned against it would be unlikely to survive. Bitcoin's persistence demonstrates that we are witnessing something unique in money and payments. For those that do invest and successfully navigate the potential traps, the reward is a first-mover advantage for a new international monetary unit.
Here's the important part. Disruption in the unit of account is the way to disrupt the payments space.
National currency units come with many strings attached and they reek of favoritism and crony capitalism primarily benefiting the well-connected. With a nonpolitical monetary unit, many new possibilities become apparent structurally that would not have been contemplated before, such as: peer-to-peer mobile applications that don't require permission from legacy transaction carriers; global remittances that don't require high-fee currency conversion; merchant categories that are no longer disallowed due to fraud and chargeback risk; and merchant reach into countries that are not even on the map for Visa, MasterCard or PayPal.
It's very telling that, when WordPress announced its plan to begin accepting bitcoin, the blogging platform provider noted, "PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons."
Compared to conventional payments startups, the largest private equity raise by a Bitcoin-related company has been Atlanta-based BitPay Inc. which raised $510,000 in January to expand its lead in the bitcoin merchant processing space. Startup CoinLab also raised $500,000 in April 2012 and foreign exchange platform Coinsetter closed a $500,000 investment round this month. Coinbase, a provider of personal wallet storage and merchant processing services, raised $600,000, although almost half of that was through crowdfunding.
Those are just some of the Bitcoin initiatives with external funding. Many Bitcoin-related companies grow organically with a one- or two-person team, because the technology offers the most open platform for payments innovation in the world today.
The powerful Bitcoin open-source development funnel will begin to suck in greater and greater talent driving applications that will have the broadest overall impact in the payments sphere. Creative talent naturally gravitates toward the point where maximum societal impact intersects with maximum reward. This alignment of incentives for early adopters and a global "workforce army" cannot be matched with traditional employee stock option plans. Legacy and closed systems cannot compete.
Just ask Kevin McInturff, who recently left Global Payments – a processor of Visa and MasterCard transactions with thousands of employees – to join BitPay, where he is one of three full-timers. Bitcoin "offers the opportunity to change the way business is done," McInturff told PaymentsSource.
Email wasn't spawned by the post office as a way to drive efficiency for the U.S. Postal Service. File sharing technology didn't come out of a media headquarters' lab to test improvements for distribution. Disruptive innovation simply doesn't work that way.
Disruptive technology disrupts. That is its mission. It annihilates any substandard process or product in its path and it originates outside of the established paradigm. You don't see it coming. I get a chuckle out of all these investors trying desperately to attach themselves to something, anything, in the Internet and mobile payments space.
However, a payments startup that ignores Bitcoin in its strategic plan is like a publisher ignoring the Web in 1999. Certainly, innovators can design routes around Bitcoin and established players can dismiss it as insignificant, but that won't make the elephant go away. The savvy and true disruptors already know this.
Real Virtual Currency
Saturday, April 27, 2013
Bitcoin is, at present, almost entirely unregulated, save for a few vague guidelines from FinCEN. The only real regulations imposed upon the exchange markets are those of supply and demand, at least for now.
This is not the case regarding the large conventional markets that we are more accustomed to dealing with. Muddled among the actual consumer sentiments are layers upon layers of structures, rules, and hidden costs that obscure the information that the market is trying to convey.
In many ways, financial regulation for the sake of stability is like damming a river. You may succeed in stopping the yearly flood that ruins a couple of houses, but you also ensure that when it does eventually flood, that the river will probably wipe out the whole village.
For lack of a better term, investors have been coddled into complacency with regards to their financial decisions. When was the last time that you checked the solvency of the bank where you leave your deposits? Do you even care about its financial health? Of course not, because your deposits are insured. Surely, you would never have to take a haircut like our friends in Cyprus did. That is, of course, until the flood.
When you deal in Bitcoin, you have to wear your big-boy pants. Nobody is there to help you if you make a poor decision. You have to do your own research and sink or swim on those terms. For instance, I keep a small but non-trivial amount of Bitcoins on the securities trading platform Havelock Investments. Recently I reached out to the owner, James, to inquire about his security precautions. He was gracious enough to describe his protocols (by the way, they are top-notch) and put my mind at ease. Conversely, I have no idea at all how imprudent that Bank of America may or may not be with my US dollars.
When the markets go bonkers, and Mt. Gox begins to lag, remember that people can only manipulate you if you let them. The panic selling that ensues after a DDoS attack has become less and less pronounced because Bitcoin owners are wising up. We don’t need an uptick rule, we just need experience. We’re learning all sorts of things that we never could with the Dow, the FTSE, or the Nikkei.
Take, for instance, the Bitcoin-only gambling game Satoshi Dice. It pays a monthly dividend in the form of 13% of net profits. In the world we are accustomed to living in, SD would be subject to all sorts of reporting and insider trading regulations. But in the Bitcoin world, the story is refreshingly simple. There are no rules to follow or break, no guarantee that insiders won’t trade the stock for certain periods of time. Personally, I love it. It means that I can trust the current price a lot more assuming that people in-the-know have affected it already. I get more information from the price and can therefor make better decisions about whether I think it is a good time to buy or sell. As a bonus, the absence of regulatory cost burdens means higher profits and more money in my pocket.
If you follow the regulatory paper trail, you will often end up at the doorstep of large banks such as JP Morgan Chase or Goldman Sachs. This is because they have very effective lobby groups that know how to get legislation passed. Regulations are sold to the public as necessary for the protection of consumers and the ferreting out of fraud and money laundering. But you shouldn’t be surprised to notice that the side effects of many bills serve to make large financial institutions larger and to raise the barriers to enter and thus compete.
So how can we show the world that Bitcoin doesn’t need regulating? At the very least, don’t ask for it. Don’t blame anybody but yourself if you lose money trading, or your coins are stolen because you were careless. Become your own financial advocate. Do your research, learn about the companies you choose to trust with your money, and when the trading bots start flittering around the Mt. Gox order book, or somebody sells a big chunk of coins, go for a walk. You’ve got your big-boy pants on, and big boys don’t panic.
If bitcoin works without regulation, then it will have the potential to invalidate many claims that “regulation is for your own protection,” leaving the alternative explanation that regulation in general is little more than a blunt anti-competitive tool.
Reprinted with permission.
From the ACFCS website:
Until recently, the virtual currency of Bitcoin may have had almost as many critics, skeptics and naysayers as it had actual users. Much has changed in the past few months. With the value of Bitcoins exploding, its exchanges doing a lively business, and more and more merchants accepting it as payment, Bitcoin now seems close to fulfilling its potential as a widely used, decentralized online currency.
One thing that has not changed, however, are the concerns over money laundering and financial crime risks that have swirled around Bitcoin since its inception. To delve into the mechanics of the online currency and explain how it interfaces with financial institutions worldwide, ACFCS is joined by Patrick Murck, General Counsel of the Bitcoin Foundation, on this Financial CrimeCast. He explains the inner workings of Bitcoin, and describes what steps the currency and its exchanges are taking to mitigate financial crime risks.
He also analyzes the impact of recent guidance by the US Financial Crimes Enforcement Network that lays out suggested regulations for virtual currencies for the first time, and explains what financial institutions should know about doing business with Bitcoin users.
Thursday, April 25, 2013
More than a decade ago, regulators nearly suffocated PayPal. Now it looks like they’re trying to squelch another disruptive, innovative payments system.
At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network. That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network – moreso than the widely reported price volatility and hacker attacks.
"They've been the single biggest factor for stomping out currency competition," says Bradley Jansen, a former assistant to Rep. Ron Paul and director of the Center for Financial Privacy and Human Rights. Speaking recently on The Daily Bitcoin podcast with Adam Levine, Jansen expressed surprise at how little focus bitcoin business leaders are putting on Fincen, especially considering how regulators thwarted earlier emerging payment systems like PayPal and e-gold. PayPal obviously survived and prospered – but only after selling itself to eBay and agreeing to put restrictions on its service. E-gold was not so fortunate.
"Fincen was able to stop currency competition with technical innovations in the 90s even before their expanded powers under the U.S. Patriot Act. And, what we've got now is a Fincen on steroids without clear restrictions from Congress," Jansen says.
The guidance requires certain intermediaries that handle virtual currency to register with Fincen as money services businesses, which entails recordkeeping and reporting responsibilities. And it says some of those businesses may additionally be money transmitters, which would mean fingerprinting of directors and officers and compliance with a patchwork of state licensing requirements.
Jansen postulates that the recent Fincen virtual currency guidance was issued ex post facto as a way to set the stage for potential prosecutions in the future.
"It's a failure of Congress to do its job. We knew that these guidelines and these prosecutions were in the works even last Congress. Ron Paul was the chairman of the House subcommittee that had jurisdiction over Fincen and he never had a single hearing on this."
In a recent speech, Fincen Director Jennifer Shasky Calvery said the new guidance aims "to protect [digital currency] systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors." She reiterated that the guidance does not apply to everyday users who pay or accept bitcoin for goods and services.
But by saddling startups with compliance requirements, and making them unattractive clients for regulated banks that despair of serving MSBs, Fincen is choking these businesses that facilitate conversion of bitcoins into dollars. Fewer exchanges and more red tape will make it harder for merchants or consumers (who, after all, must still pay the bills with dollars) to take advantage of the Bitcoin payment system’s speed, privacy and competitive costs.
On March 20 – just two days after the guidance from Fincen came out – the bitcoin exchanger bitme.com suspended operations indefinitely. Bitme was a relatively small operation, but it was widely suspected among bitcoin users in online forums that this closure resulted from difficulties related to potential regulatory compliance.
BTC Buy, another bitcoin exchange site, suspended services and closed permanently in early April, specifically citing the legal uncertainty brought up by the Fincen guidance.
Most recently, the largest bitcoin exchange to halt trading was Bitfloor, run by Roman Shtylman, who blamed "circumstances outside of our control." His New York operation had average daily trading volume of about $300,000 (depending on the exchange rate), with U.S. dollar deposits and withdrawals running through a Capital One bank account – which the bank unilaterally closed. "I had very little time to act between receiving the account closure letter and the account being closed," Shtylman told PaymentsSource.
In this case, the regulatory guidance may have had an indirect effect. Bitfloor was registered with Fincen as an MSB but was not licensed as a state money transmitter. Shtylman surmised that Capital One had judged his business to be "not worth the risk."
Across the Atlantic and presumably unrelated to Fincen, Poland-based Bitcoin-24 suspended trading after the government there froze its bank account. It reportedly did so because a bank in Germany complained of compromised accounts transferring stolen money without identification to Bitcoin-24. Also, U.K.-based TransferWise, a foreign currency intermediary, ceased transfers to any bitcoin exchanges at the request of its banking partners. TransferWise had mostly been servicing customers in the U.K., Poland, and Spain.
It will be interesting to watch how Fincen intends to treat one-way, fixed-rate brokers that either buy or sell bitcoin at a fixed price. Since a two-way exchange market is not involved it could be seen as merely a typical commodity purchase or sale.
Tangible Cryptography LLC, which registered as an MSB this month, operates FastCash4Bitcoins for selling bitcoins and Bitcoins Direct for private off-exchange purchases. The two businesses function independently of each other and neither is technically an exchange. Bitcoins Direct is frequently closed to new clients and its cash deposit feature was recently cancelled.
The fact that bitcoin survives at all with so many powerful forces lined up against it is a testament to its resiliency and tenacity. Now, in addition to the vicious press coverage and persistent denial of service attacks on exchanges, the emerging cryptographic money has to contend with onerous and targeted regulation.
With respect to bitcoin and financial regulation, Jansen warns: "I think the lesson from the 90s was that you either become what Fincen wants you to be or you're not going to be."
Not in the U.S., that is. But jurisdictional competition will kick in and overseas exchanges will gain market share and liquidity. They just may not have U.S. customers.
Monday, April 22, 2013
The Bitcoin Foundation is an excellent template for a decentralized nonprofit project and I am proud to serve alongside the other dedicated board members on such a historic effort.
Established seven short months ago, the foundation has recruited bitcoin’s lead developer (transparency of compensation is important), launched a grant program for funding bitcoin-related initiatives, and coordinated a showcase conference in San Jose. About 60% of our membership comes from outside the U.S. and we are currently seeking partners for local chapters in foreign countries which will increase global effectiveness.
Additionally, the foundation maintains an active relationship with various press entities seeking information about Bitcoin and the role of the nonprofit foundation. Since these inquiries come from around the world, we strive to be inclusive and we enlist the voluntary support of foundation members and regional affiliates for certain questions because they would best know their local bitcoin markets. We also refer many technical questions on cryptography and bitcoin mining to contributing developers. Frequently and on short notice, the press wants examples of bitcoin users in a particular country that are willing to speak openly with the media and sometimes on camera so we do our best to accommodate that.
Media opportunities often lead to conference opportunities. Ultimately, this work expands the market for bitcoin education. Conference organizers and media outlets also reach out directly to executives at existing bitcoin businesses and other professional analysts that are known from previous appearances. If a publication or television station seeks a certain individual for political commentary, that can be found quite easily on Twitter or the Bitcoin Forum. Social media has vastly increased the opportunities for people willing to speak.
It’s not always about taking a position on political or human rights issues. Mostly, it’s about freedom of choice in currencies and economic education on bitcoin price movements, bitcoin exchange markets, bitcoin merchants, potential regulation, and the differences between Bitcoin as a payments network and bitcoin as a monetary unit. Or, it’s about specific use cases such as asset protection in Cyprus or maintaining donation payments in support of freedom of the press.
The foundation itself is nonpolitical, so when an inquiry comes from an industry regulator, our role is to explain what is and what is not possible in terms of potential regulation. I believe this approach to be the most effective stance to take when confronted with regulatory queries. Fortunately, Bitcoin transcends the conventional philosophy of regulation by reducing certain aspects to irrelevancy.
For instance, bitcoin exchange endpoints where bitcoin interfaces with national fiat money and the banking system is a possible point of regulation due to current AML and KYC guidelines in most countries. However, due to the nature of distributed computing, ongoing transactions between individuals and companies would be technically outside the scope of potential regulatory action as long as there is electricity and internet connectivity.
Debates around gambling and personal drug use are moral issues. An apolitical currency like bitcoin is simply a network protocol, like email or telephone, so it is unable to express a morality.
To date, this educational approach has been effective because only four jurisdictions and one central bank have published any formal statements on the Bitcoin cryptocurrency — Norway, Australia, France, United States, and the ECB. With the exception of the recent U.S. FinCEN regulatory guidelines, all of the reports have been explanatory in nature.
Open source development projects while extraordinary in many respects are actually not very good at “staying on message,” whatever that means. And with Bitcoin, there’s no reason that they should be because there isn’t a single message. The diversity of what attracts different people to Bitcoin is one of its greatest strengths. Free market economists admire the separation of money and government while audit-minded accountants relish its public traceability. Even Paul Krugman secretly covets bitcoin’s abstract nature for a future Federal Reserve digital currency.
However, being against dissenting viewpoints on regulation, being unwilling to confront any form of taxation, or being anti-financial privacy does not make one a neutral bitcoin advocate as some have suggested. Those positions are the worst sort of bias because from the outset they wrap ideology in what is politically correct and easily digestible by the masses. Furthermore, it can be disingenuous and manipulative.
Either way, Bitcoin is the honey badger of currencies and the protocol rolls on. Hat tip to Gavin Andresen for locating this media theme song.
Monday, April 22, 2013
With bitcoin in the media spotlight, everyone seems to have an opinion on the price. Few recognize the profound implications of decentralized money for the monetary system, society and government – not to mention the emerging business opportunities.
The timing could not be better for the inaugural conference of the newly-formed Bitcoin Foundation. Next month, several hundred people from around the world will converge on the San Jose Convention Center (in Silicon Valley, naturally). Billed as "The Future of Payments," the conference is attracting technologists, venture capitalists, bankers, traders, payments specialists, and financial regulators.
Launched in January 2009, bitcoin achieved all-time highs in transaction volume and new entrants into the currency last week – milestones overshadowed by the price volatility. The nonprofit foundation was established in September 2012 to standardize and promote the core bitcoin protocol. (I have a seat on the foundation’s board.) Two of its early accomplishments were to recruit lead bitcoin developer Gavin Andresen (whose informal role in the Bitcoin community mirrors Linus Torvalds’ position in the Linux world) as chief scientist and to launch a quarterly grant program for funding various initiatives that advance the bitcoin protocol. Next, the foundation intends to encourage best practices for bitcoin businesses and exchanges, to facilitate the formation of local foundation chapters in foreign countries, and to educate global regulators about what can and cannot be regulated feasibly with a distributed peer-to-peer system such as bitcoin.
Although the conference features excellent technical tracks, the agenda will be particularly interesting to those in the banking and payments fields.
For example, many people understandably ask why merchants would want to accept payments in Bitcoin given the volatility of the exchange rate with the dollar. After all, even if you believe the digital currency will appreciate over time, you probably can’t use it to pay the electric bill or the rent.
Part of the answer is the service provided by firms like BitPay, whose cofounder and CEO, Anthony Gallippi, will explain how he’s been driving business adoption of Bitcoin. BitPay functions as a merchant payment processor, somewhat akin to the acquiring banks in the Visa/MasterCard space. The startup provides foreign exchange conversion services for merchants desiring immediate settlement in local national currencies. Thus Tony’s customers reap the benefits of Bitcoin – no chargebacks, since bitcoin transactions are irreversible, and lower fees than they’d pay for credit card transactions – while BitPay takes the currency risk. Tony recently landed one of the best-known merchants to accept Bitcoin: WordPress, the blogging platform.
Another startup is Paymium, whose Bitcoin-central exchange has shown it is possible to seamlessly integrate bitcoin and the traditional regulated banking infrastructure. The French company’s co-founder and chief operating officer, Pierre Noizat, will talk about bridging that gap. If his name rings a bell for some financial services professionals, it may be because Pierre comes from the traditional payments world, having served as managing director of the French Mobile Contactless Association.
Would-be disruptors eyeing this space but worried about legal uncertainties will have a chance to hear from Patrick Murck, the general counsel of the Bitcoin Foundation. His expertise extends across the legal and regulatory issues governing the use of Bitcoin, virtual economies, gamification, alternative payment systems, and social loyalty and reward programs. Immediately after the Financial Crimes Enforcement Network issued the March 18 regulatory guidance on centralized and decentralized virtual currencies, Patrick published an analysis.
Bitcoin’s user-defined anonymity protects personal privacy, and this combined with the decentralized structure arguably thwarts censorship – for example by allowing people who want to donate to WikiLeaks to circumvent the political blockade that forced the major payment processors to cut off that organization. Rainey Reitman, the activism director of the Electronic Frontier Foundation, a nonprofit civil liberties law firm and advocacy center, will hold forth on these liberating aspects of Bitcoin. She is particularly interested in the intersection between personal privacy and technology, and has spent significant time investigating the role of financial intermediaries as censors. Reitman is also the chief operating officer and co-founder of the Freedom of the Press Foundation, a nonprofit organization that crowd-sources funding to supporting independent, nonprofit journalistic institutions – and recently started accepting bitcoin.
Most of the attention paid to Bitcoin in the mainstream media has focused on its merits and drawbacks as a store of value. The smarter commentators have paid greater attention to its potential as a means of exchange. But what about the third key role of money, as a unit of account? Bitcoins, after all, are divisible to the eighth decimal place, and this is another disruptive component. Erik Voorhees, a bitcoin early adopter involved in several leading bitcoin-related companies, such as BitInstant, SatoshiDice and Coinapult, will encourage thinking on this as he discusses the economics of Bitcoin and its role as money.
Ever since the bitcoin cryptocurrency launched and achieved initial success, institutional investors and hedge fund managers have secretly sought a regulated investment vehicle for bitcoin placements. Malta-based Exante Ltd. has a solution with its new Bitcoin Fund. There remains a case for Bitcoin as a store of value, even after the recent whipsawing. Tuur Demeester, author of the financial newsletter MacroTrends, added bitcoin as part of his recommended currency basket in January 2012, and he’ll talk about bitcoin's emerging role as a separate asset class alongside precious metals, equities, and bonds.
Last month, my column featured a conversation with software developer and online payments industry veteran Peter Šurda about how nonpolitical cryptocurrencies like bitcoin could alter the future of fractional reserve banking. If you were as fascinated as I was by the discussion, he’ll be on the “Economics of Bitcoin” panel with Voorhees and Demester.
"What we've got now is a FinCEN on steroids without clear restrictions from Congress!" One can listen to the entire interview here:
Bradley is editor of FreeBanking.org and Director of the Center for Financial Privacy and Human Rights. He comes on at about the nine-minute mark, but the conversation before that leads into the discussion on FinCEN.
Thursday, April 18, 2013
A piece from Paul Krugman in The New York Times this week criticizes bitcoin for being antisocial and for not having a State-controlled supply while secretly admiring its powerful abstractness.
As a complicit minion in the State’s appropriation of the monetary unit, Krugman perpetuates ‘The State Theory of Money’ myth that the sovereign’s power to collect taxes and declare legal tender imbues a currency with ultimate value.
While that may be a reason to acquire a certain amount of government fiat currency, it is a transitory value because in the end it is still based on a State-sanctioned illusion. Anyone who has visited a weekend flea market has noticed the old coin and currency collector displays filled with past experiments in national fiat money. Those paper notes were at one time valued for something too.
We don’t want a pristine monetary standard untouched by human frailty as Krugman claims. We want freedom in the monetary standard untouched by the politicizing process.
In a Krugman world, centralized management of the money supply is preferable to a market-based outcome because the academically-informed economists will serve the best interests of the economy at large. However, our monetary overlords possess no special knowledge or secret sauce that justifies dictatorial control over money any more than it would justify dictatorial control over the market for something like soda beverages or dog food. Trust in mathematics trumps trust in central bankers.
The question of political control over a monetary system is the greatest litmus test for discovering those that seek control over others. Usually, it will be cloaked in terms like full employment, price stability, temporary stimulus, quantitative easing, and economic growth, but manipulation of the money supply serves only to favor the issuers of that particular monetary unit.
Money has a lot in common with religion. At some level, it requires a huge leap of faith. Yes, a belief in gold requires this too as the non-monetary value assigned to gold is probably no more than 5% of its market price. However, this is also what makes bitcoin the ultimate social money because for its value it merely requires others, not the law. Money is already the most viral thing on the planet and the network effect exponentially reinforces that.
Krugman actually struggles to assert that bitcoin is antisocial because he cites economist Paul Samuelson who once declared that money is a “social contrivance,” not something that stands outside society. Samuelson is absolutely correct on that point and bitcoin stands firmly within society. It is no one’s right to question why some place value on bitcoin and some do not since all value is subjective. The rationale for assigning value to bitcoin is as varied as the human fabric itself.
In this context, society can be defined as those mutual users willing to agree to a medium of exchange and a store of value. Since bitcoin, just as the Internet, recognizes no political boundaries, Krugman resists seeing the global monetary unit as something social. Krugman sees society only as a multitude of aggregated fiefdoms where he is the emperor’s cherished tailor.
Though, just like the untainted child in the Hans Christian Andersen fairy tale, some of us are beginning to notice. It’s not the illusion itself that so offends our sensibilities, but more the notion that a competitive illusion is not to be permitted. If a free market illusion voluntarily agreed to from the bottom up is so desperately feared, then the protectors of the State-sanctioned illusion must not have the most benevolent of motives in store for us plebeians.
I don’t know about you, but I for one can stand up and exclaim: “the fiat emperor has no clothes!” What if more of us did?
Saturday, April 20, 2013
Earlier this week, FinCEN Director Jennifer Shasky Calvery addressed the National Cyber-Forensics Training Alliance CyFin 2013 Conference.
She explains again how the Financial Crimes Enforcement Network (FinCEN) gets its data from the reports it mandates that banks use to spy on their customers against them. Lots and lots of reports.
But she promises:
"However, right now this is long and arduous work as analysts sift through hundreds and sometimes thousands of reports. Very soon, new capacities made possible by our internal technology modernization will allow our analysts to deal with such data sets to find leads in a fraction of the time previously necessary. Very soon, we will be able to point law enforcement and other stakeholders precisely to where they should be looking. Our analysts, working hand- in-hand with our superb technology team, are now putting these new capacities into place." But her talk really focused on "Emerging Payment Systems." Her comments have echoed mine (from an entirely different perspective) that technology (and specifically mobile apps) offer great opportunities (for free banking) and that those not well served by our current system (the "unbanked" in the US--immigrants, poor, racial and ethnic minorities--and people in countries with less mature financial systems or sound currencies) are a great target market.
"As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce." Don't worry, FinCEN is working to strangle these initiatives in their crib with their regulations. She pays special attention to "crypto-currencies" in her talk.
"We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. While probably most of today’s audience understands what these emerging payments systems are and how they work, many line analysts, investigators, and prosecutors in law enforcement may not, and part of FinCEN’s role is to help be the bridge to explain these new systems. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems. In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas." And, as our Bitcoin fans know--at least those who follow my posts here or my rants on our Facebook page, FinCEN has "virtual currencies" in their sights. And, remember too, it was FinCEN that shut down e-gold back in the day and crippled the crypto-currency movement last century.
I'll quote her in the entirety of her virtual currency remarks:
"In fact, just last month, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies, such as Bitcoin, which has in recent weeks gained significant attention. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them. FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs. The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance. Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers have already registered with FinCEN as MSBs, though they have not necessarily identified themselves as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities and that all who need to, register appropriately." The second half of her speech talked about account takeovers via malware, risks with third party payment processors, improvements they are making to their analytical work (after some false starts!), their public-private partnerships with industry, and her personal initiative "The Delta Team" ("The purpose of the Delta Team is for industry, regulators, and law enforcement to come together and examine the space between compliance risks and illicit financing risks. The goal is to reduce the variance between the two.").
And let's not forget FinCEN's dreams of global domination. They are in a partnership of 130 other "Financial Intelligence Units" as part of the Egmont Group.
The text of her remarks is available at the following link:
Reprinted with permission.
Sunday, April 14, 2013
I need a break from Bitcoin. Let’s discuss the real future of money.
Beyond stable isotopes and naturally-occurring materials are the superheavy elements or SHEs. Scientists have recently added two new man-made elements to the periodic table — flerovium (element 114) and livermorium (element 116), with chemical symbols Fl and Lv.
After being created by smashing atoms together, these materials decay within seconds but long-lived SHEs are a theoretical possibility. This undiscovered region in the periodic table where heavy elements become stable again is known as the “island of stability,” first proposed by Glenn Seaborg in the late 1960s. If individuals prefer something more tangible over an amorphous cryptocurrency like bitcoin, then the edges of molecular matter in a nanotechnology future may hold the answer.
If some form of physical specie is even useful in an era of ubiquitous artificial molecular machine systems, money would still require certain attributes such as being a store of value, divisible, portable, safe, unable to counterfeit, and self-validating.
Nanotechnology scientist Robert Freitas suggests that the future of money lies with elements like flerovium, or what he refers to as tangible nanomoney. Flerovium is a radioactive chemical element first created in 1999 at the Flerov Laboratory of Nuclear Reactions in Dubna, Russia by colliding Plutonium-244 and Calcium-48 nuclei. Prior to May 30th, 2012, the unstable isotope was known as ununquadium.
After restricting his analysis to ordinary matter, as opposed to antimatter, Freitas compares the rarest elements along the natural isotope spectrum of potential monetary candidates such as technetium, helium, xenon, osmium, tantalum, and gold (however in a nano-age, easily extractable inert rare elements will have alternatives). Ultimately concluding that a man-made superheavy element like flerovium best fits the overall criteria for physical specie, he describes how the element could likely be introduced into society circulating as coinage.
A flerovium coin would be fused with cheaper bioinert materials of the nano-age such as gold, platinum or diamond. Such a coin would be sufficiently costly to manufacture and have a relatively long half life, possessing negligible radiation and biotoxicity risk due to the very low concentration of SHE trace amounts.
These hypothetical SHE coins would be stable and long-lived. Freitas estimates that a coin with $1 million face value would only need to contain 10⁹ SHE atoms worth $0.001/atom. Therefore, assuming a 10⁶-year half life, there would be only ~2 disintegration events per day putting it well below the disintegration levels of today’s base metal coinage. Rather than suffering from the insidious effects of government-induced inflation and coin clipping, market-based nanomoney would lose value due to radioactive decay. A million-dollar coin would lose approximately ~$0.50 per year or ~$500 per millennium from disintegration.
In addition to flerovium, Freitas admits that some other relatively stable superheavy elements may also be “coined” for the ultimate tangible nanomoney. So that’s the choice for our nonpolitical money of the singularity — low radiation coinage or digital bitcoin, you decide.
Thursday, April 11, 2013
Like never before, financial privacy and safe havens are under attack the world over.
Banks and even entire jurisdictions are feverishly responding to increased government scrutiny from the world's monetary power centers in the name of exposing political corruption, combating terrorism, and preventing tax evasion.
Full financial transparency is the new mantra and it's being invoked in the name of social justice. The International Consortium of Investigative Journalists recently released "Secrecy for Sale: Inside the Global Offshore Money Maze," a report that focuses on "exposing hidden dealings of politicians, con men and the mega-rich."
But why are private individuals lumped together with politicians who choose to be public figures representing the interests of their constituencies? Should private individuals and political figures be treated in the same manner regarding financial privacy?
Attorney Jenice Malecki of Malecki Law told me: "No, they should not. When you become a political figure, you agree to give up some of your privacy rights. You also need to be more transparent, so people know who you really are, whether they should believe what you say."
Politicians who do not voluntarily submit to monitoring of their financial activities will not be trusted.
"Private individuals should have more privacy, as they have not placed themselves into the political arena. They have not agreed to give up their privacy," adds Malecki. However, she also concedes that when it comes to offshore numbered accounts, "it does seem that banking secrecy is eroding. Slowly, but surely, banks are releasing information for governmental investigations."
Violations of everything from know-your-customer rules to the Foreign Account Tax Compliance Act can all be loosely categorized as the politically incorrect crime of money laundering. But as the investor and author Doug Casey says, "it's a completely artificial crime. It wasn’t even heard of 20 years ago, because the 'crime' didn’t exist." Moving money around was simply called banking. Furthermore, Casey says, "The war on drugs may be where 'money laundering' originated as a crime, but today it has a lot more to do with something infinitely more important to the state: the War on Tax Evasion."
Almost simultaneously with the recent jihad against tax dodgers, decentralized cryptocurrencies such as bitcoin arrived on the scene in early 2009 and now provide an outlet for personal wealth that is beyond restriction and confiscation. The exchange rate for government fiat currencies may be volatile now, but as the market price eventually finds equilibrium and stabilizes, bitcoin will become an important store of value.
Think of bitcoin as your own personal financial safe haven or offshore bank. Previously, you had to board a jet or hire an attorney to set up legal entities and open bank accounts in private banking jurisdictions like Liechtenstein, Luxembourg, the Cayman Islands or the Cook Islands.
Simply by leveraging the distributed bitcoin block chain, which records all transactions in the system and prevents double-spending without identifying the parties by name or location, individuals can protect their wealth from privacy violations and indiscriminate confiscation without leaving the keyboard. This represents a powerful new development that the world has not seen before and it will have a profound impact on the global asset management industry specifically.
Today's best tax havens combine a no-tax jurisdiction with extreme banking secrecy enshrined in law where bank employees could face imprisonment for disclosing bank customer details to third parties or parties outside of the bank. Unsanctioned disclosure of bank account information in most tax havens is considered a criminal offense punishable by incarceration and monetary fines.
Sanctioned disclosure usually requires a recognized court order and typically hinges on the distinction between legal tax avoidance and tax evasion. Offshore jurisdictions have been feeling the pressure for several years to remove that distinction and open the banking records regardless.
The global trend persists toward cleaning up the high-risk and uncooperative countries on the intergovernmental Financial Action Task Force’s blacklist. Ultimately, no jurisdiction will be exempt. On the complementary Organisation for Economic Co-operation and Development gray list, the tiny alpine principality of Liechtenstein has been amending tax laws in a move to anti-secrecy compliance. Similarly, as the small haven of Cyprus had built up a burgeoning financial center for the free flow of capital within the eurozone, it too had to be restrained, even if that meant egregious depositor "haircuts" of up to 60%.
Future regulatory and confiscatory attacks on safe havens and banking secrecy will become irrelevant, because bitcoin provides for a personal "offshore center" under direct and sole control of the individual. However, Malecki cautions, "If [the] bitcoin currency's respect and security grows, the governments will also find a way to keep on top of bitcoin monitoring and enforcement.
"I think that determining 'legitimacy' is difficult," she says, "but as with political asylum, perhaps the financial world needs some financial asylum – which has very specific criteria, review and oversight. Without that, there is bound to be abuse" by governments.
Legitimacy is a politically charged term. One person's legitimacy may be another person's aggressive and unjustifiable overreach. Also, what a certain government sees as legitimate may be viewed in other parts of the world as a violation of fundamental human rights. This is clearest in authoritarian regimes that impoverish and imprison their political opponents for so-called crimes against the state.
It all depends of who is performing the oversight. I am not quite sure how any political oversight could function effectively while still protecting the financial privacy rights of individuals. Thankfully, it doesn't matter anymore.
Monday, April 8, 2013
While some call Bitcoin an “existential threat to the state,” local governments could soon embrace the digital currency and payment system as a practical alternative to credit and debit cards.
E-Gov Link, an Ohio company that helps municipalities accept payments online for parking tickets, permits, and the like, now allows its customers to take bitcoin. Noting that "credit card purchases tend to carry high transaction costs due to the middleman and due to the high costs of fraudulent online purchases," E-Gov President Bill Nadler emphasized in a press release, "having a payment option that doesn’t carry that heavy transactional cost is definitely a plus." Bitcoin transactions can be processed at a fraction of the cost of other payment methods because they avoid the interchange structure of the legacy card processors.
Aside from the benefits to merchants, bitcoin payment choices have significant benefits to consumers who may have already received bitcoin from others in the sale of products or services and do not necessarily want to convert out of the digital currency. Broadening merchant acceptance expands the "network effect" of a young currency and starts to make Bitcoin viable as an end-to-end payments system.
"We know the bitcoin community is passionate about using bitcoin for payments, and will be demanding it of their local governments," said Nadler. "We’re happy to be here to answer the call, as municipalities scramble to find partners to help them with bitcoin."
Naturally, the use of bitcoin in local government settings will not be leveraging its optional anonymity properties, thus demonstrating bitcoin's overall flexibility when compared to physical cash.
"We look at bitcoin as a competitive advantage," says Jerry Felix, Vice President of Software Development at E-Gov Link. The company sees it as a natural evolution for governments to accept bitcoin as the currency gains popularity and like in other merchant categories, supporting bitcoin first creates a first-mover advantage. E-Gov Link focuses on integrating bitcoin payments into the shopping cart experience while relying on payment processor BitPay to manage the bitcoin wallets and currency conversion.
"We have customers across the U.S., in over 30 states. We're dealing with small and medium sized municipalities – cities, towns, townships, villages, and counties, and we provide web solutions for them," adds Felix. Marquee client examples for the web solutions provider include municipalities like Niagara Falls, N.Y., and Skokie, Ill.
For now, a municipality has to step forward and ask E-Gov Link to enable bitcoin payments – which is peculiar because other payment methods are not selectively disabled.
It would be far more interesting for these local governments to make it known to citizens that the bitcoin payment choice is an option. Still, the offering from E-Gov Link is a major step in that direction because bitcoin first has to be a viable option for the local government. Whether bitcoin demand is merchant-driven or consumer-driven, one thing is clear. Greater merchant choices and new payment categories contribute to the increasing value of the Bitcoin network.
Payments to government entities stand as one of the primary economic lynchpins for the preferred monetary unit. The obligation of the political authority to accept tax payments in government fiat currency is what underlies its value. While this E-Gov Link move does not cover tax payments demanded in a particular monetary unit, it can be seen as a precursor to a political authority expressing a preference for payments in a digital currency.
Wednesday, April 3, 2013
Once you get past the childish title, the recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists. Denninger is an intelligent student of the capital markets and his essay deserves a serious reply.
The economic contribution of his essay is that it represents the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an expose advocating the Chartalist approach to monetary theory claiming that money must have no intrinsic value and strictly be used as tokens issued by the government, or fiat money. Today, modern-day chartalists are from the school of thought known as Modern Monetary Theory (MMT).
Without getting into the intrinsic value debate, this is where I strongly depart from Denninger, because if we accept the thesis that all money is a universal mass illusion, then a market-based illusion can be just as valid or more valid than a State-controlled illusion. What Denninger and Greenbackers and MMT supporters reject is the notion that monetary illusions themselves are a competitive marketplace, falsely believing that only the State is in a ‘special’ position to confer legitimacy in monetary matters.
Regarding this issue of State-sanctioned legitimacy, bitcoin as a cryptographic unit seeks and gains legitimacy through the free and open marketplace. It is not a governmental instrument of legal tender that requires regulatory legitimacy and coercion by law in order to gain acceptance.
Therefore, the path to widespread adoption of bitcoin hinges on three primary market-based developments: (a) robust and liquid global exchanges similar to national currencies that can offer risk management via futures and options, (b) more user-friendly applications that mask the complexities of cryptography from users and merchants, and (c) a paradigm shift towards “closing the loop” such as receiving source payments and wages in bitcoin to eliminate the need for conversion from or to national fiat.
Even after graciously accepting Denninger’s definition of what the ideal currency would be (which I don’t) and searching for any economic nuggets of value, his arguments can be distilled into four main criticisms of bitcoin as a monetary instrument. First, bitcoin does not provide cash-like anonymity. Second, bitcoin transactions take too long for confirmations to be useful in everyday transactions. Third, bitcoin exhibits irreversible entropy. Fourth, the decoupling of the stateless bitcoin from the obligation of monetary sovereigns is considered a fatal weakness.
Now that we identified the objections, let’s take these in order.
On the first point surrounding bitcoin anonymity, Denninger only embarrasses himself with this criticism. By default, bitcoin may not offer anonymity and untraceability like our paper cash today, but it is better described as user-defined anonymity because the decision to reveal identity and usage patterns resides solely with the bitcoin user. This is far superior to a situation where users of a currency are relegated to seeking permission for their financial privacy which is typically denied by the monetary and financial overlords. Also, his capital gains tax issue is a non-starter because it’s a byproduct of a monopoly over money.
His second criticism of a lack of utility in the ‘goods and service preference’ due to timing of sufficient block chain confirmations has some merit. However, advances have been made in the use of green addressing techniques that solve the confirmation delay problem by utilizing special-purpose bitcoin addresses from parties trusted not to double spend.
Denniger’s third criticism that bitcoin exhibits irreversible entropy is confusing. Typically, entropy refers to a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system’s disorder. In the case of bitcoin, I suspect Denninger is taking it to mean the degradation of the matter in the universe because of his explicit comparison to gold. While it is true that bitcoins lost or forgotten are ultimately irretrievable, I view that as a feature not a bug because it is the prevailing trait of a digital bearer instrument. Two bitcoin digital attributes that make it superior to physical gold are its ability to create backups and its difficulty of confiscation. Furthermore, the number of spaces to the right of the decimal point (currently eight) is immaterial to bitcoin’s suitability as a monetary unit.
Now for the big and final one. Denninger asserts that monetary sovereign issuers possess not only the privilege, but the obligation, of seigniorage, which Denninger refers to as bi-directional since sovereigns have the responsibility of maintaining a stable price level during times of both economic expansion and economic contraction. As a product of Hayekian free choice in currency, market-based bitcoin is decentralized by nature and poses a false comparison to the century-old practice of central bank monetary manipulation. Fear not deflation.
Governments have appropriated the monetary unit for their own benefit by declaring it the only preferred monetary unit for payment of taxes to the State. Believing that governments have sincere and good intentions in administering the monetary system is akin to believing in fairy tales. Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign’s spending activity to the detriment of the unfortunate users of that monetary unit. Decentralized Bitcoin obliterates this sad state of affairs.
Denninger’s biased and establishment preference for a monetary sovereign serves only to harm his analysis because it undeniably closes him off from alternative, and usually superior, free-market monetary arrangements. More damaging, however, is the fact that it places him outside of the mainstream in free banking circles and squanders his remaining quasi-libertarian credibility as a champion of markets.
Monday, April 1, 2013
Largely affecting those banks outside of the U.S., the Foreign Account Tax Compliance Act requires all foreign financial institutions to report the activities of their American clients to the Internal Revenue Service. But given the recent demands from other nations hinting at reciprocity, the overreaching legislation could impact banks and financial institutions in the U.S. as well.
Now, there is the additional element of certain key countries rejecting FATCA outright, and the Asia-Pacific region could end up holding the most sway.
Cited as a hindrance to foreign investment that would ultimately dampen U.S. economic growth and threaten American jobs, the FATCA penalties for noncompliance provide a strong incentive for overseas investors to avoid U.S. depository institutions altogether. Tax Management International Journal cites 11 reasons why FATCA must be repealed. Reason number one is "the height of arrogance."
It is either the reciprocity angle or the cascade effect of China's reluctance that has the greatest potential to derail FATCA.
"The United States should be moving toward full reciprocity," Georgetown Law School Professor Itai Grinberg, a former Treasury official, told Reuters. He added that it would be "deeply hypocritical" for the U.S. to ask for information on American taxpayers "without offering some kind of reciprocity."
Because direct reciprocity may mean foreign banks violating the privacy laws of their own jurisdictions, the Treasury Department has started negotiating bilateral agreements so that foreign governments can aggregate the bank data necessary for the IRS.
Attorney Brian Mahany of Mahany & Ertl, a law firm specializing in offshore reporting and compliance, believes that reciprocity is a bit misleading. "We are one of the few countries that tax based on worldwide income. Reciprocity isn't as important to most other nations," he added.
Also, the U.S. is one of the worst offenders globally when it comes to tax havens and "secrecy jurisdictions." For instance, Mahany said "many people, including Chinese nationals, hide money here." While President Obama has asked Congress for reciprocity, he is dealing from a position of weakness. "The support for FATCA is not very strong," Mahany added.
However, with global financial transparency on the increase and more countries considering taxation on citizen's worldwide income as a way to combat growing budget deficits, reciprocity with U.S. financial institutions starts to look appealing.
On the China issue, Mahany concedes that the U.S. government will never get every nation to join FATCA and the Asia-Pacific countries are heavily influenced by Beijing. He states, "China is certainly an important player. Currently, none of the Asian-Pacific countries are signed up, although Japan will probably be the first. Without Singapore, China, Hong Kong and Macau, FATCA faces real challenges."
James Jatras of the Repeal FATCA campaign claims that Hong Kong, like the People’s Republic of China, is not even on the list of 50 countries the Treasury claims to be negotiating with.
There will probably be so few U.S. citizens holding bank accounts in China that the cost of implementing FATCA outweighs the benefit to China's financial institutions. Also, the Chinese taxpayers with U.S. bank accounts appear to be of minimal interest to the Chinese government, according to Lisa Smith of iExpats.com.
"Before rushing to safe keep all your money in Communist China, remember that even if China elects to ignore FATCA, they may still cooperate with the IRS on a case-by-case basis," according to Mahany. China and the U.S. signed a Mutual Legal Assistance Agreement in June of 2000.
However, none of this potentially disruptive turmoil means that financial institutions should put FATCA-related IT infrastructure plans on hold until China makes its decision, because foreign banks and other financial institutions are currently ill-prepared for FATCA.
According to Mahany, "Implementation has been delayed once but folks should not depend on that happening again. The penalties for not complying outweigh the risks of noncompliance."
Meredith Moss of Finomial believes "that a technology solution is the only way to go, given the tremendous amount of data, PDFs and paper documents to sift through." She says that banks moving forms online and creating a comprehensive FATCA audit trail will demonstrate diligence to the regulators and that "due diligence should be underway by January 2014 and completed by July 2014."
Although experts in the FATCA preparation business tend to agree that moving forward with expensive FATCA compliance plans is the prudent and logical step to be taking now, a comprehensive and worldwide FATCA rollout is far from a foregone conclusion. For those financial institutions and their shareholders offended by the overreaching legislation and lack of respect for mutual sovereignty, the cost savings alone may start to make FATCA's non-compliance penalties look tolerable.
Thursday, March 28, 2012
This week the bitcoin exchange Tradehill launches dark liquidity, or dark pools, for client institutions and individuals that do not want to reveal their trading size and identity. In trading on dark pools, market participants have the ability to execute large block trades without adversely impacting the price in either direction.
Based in San Francisco, Tradehill Inc. has relaunched successfully as a business-to-business bitcoin exchange for institutional investors and individuals qualifying as accredited investors. The original Tradehill founded by CEO Jered Kenna in 2011 had operations in the U.S. and Chile and maintained a consistent second position in daily trading volume after Mt. Gox.
Offering both a transparent open order book and a dark order book, the Tradehill service Prime will be critical for both large investors on the buy side, such as funds and institutions, and commercial participants on the sell side, such as merchant processors and bitcoin mining operators.
As “liquidity” and “market impact” can be synonymous in many cases, the market impact, especially on price, is a key consideration for those larger institutions that are regularly shifting assets between financial markets. If a large trade is executed incorrectly, the market impact can be several percentage points in addition to the typical transaction costs of commission and/or spread.
“Whether you’re trying to sell a large amount of bitcoin above market, or trying to buy without losing your shirt to slippage, dark orders on the Prime platform provide an important tool for larger traders,” said Kenna.
In one week, over 100 new accredited investors signed up for Tradehill Prime. The company requires a $10,000 minimum initial deposit (in bitcoin equivalent or U.S. dollars) and dark orders will be priced in BTC, trading in micro-lots of $1,000. New clients also receive a $75 account credit to test the integrated trading platform on the open order book.
Tradehill is a U.S-based exchange that falls within the definition of FinCEN’s regulations for virtual currency exchange operators. “Bitcoin’s primary use is value transmission and financial technology in the U.S. is a very regulated space,” according to Tradehill COO Ryan Singer. The company has anticipated this regulation and the recent guidance from FinCEN “really helps the startups in the space build a compliance game plan,” he added.
In offering dark pools of bitcoin liquidity within an exchange infrastructure, institutional clients gain the benefits of anonymity and non-display of orders but without losing any of the efficiencies associated with trading on an exchanges’ public order books. With bitcoin, it is difficult to gauge how much large-block trading occurs off a publicly visible exchange. By comparison, research firm Tabb Group estimates that off-exchange and dark pool trading in the U.S. equity markets accounted for 32% of trades in 2012.
Emma Quinn, AllianceBernstein’s Head of Asia Pacific Trading for equities, says ” We use dark pools to access liquidity for orders we would not normally place in the central limit order book. I think dark pools aid price discovery. There has to be post-trade transparency but once that happens you’ve actually got more transparency on a market than you normally would.”
MIT Professor of Finance Haoxiang Zhu agrees with that assessment writing that “dark pools can improve price discovery in open exchanges.” He also said, “Adding a dark pool alongside an exchange tends to concentrate price-relevant information into the exchange and improve price discovery. Improved price discovery coincides with reduced exchange liquidity.”
This is precisely where the Bitcoin market needs to be heading and it is a necessary prerequisite for Bitcoin’s evolving role in global trade. Wholesale trading exchanges like Tradehill Prime represent an evolution from the floating-rate and fixed-rate retail exchanges. They can also be considered a precursor to bitcoin-based forex markets as well as more sophisticated derivatives markets for bitcoin futures and options.
Monday, March 25, 2013
CEO Tony Gallippi Bitcoin payment processor BitPay Inc. today announced its global processing volume for the month of March will exceed $2 million, a milestone for the company.
BitPay is also reducing its fees. The company will now process Bitcoin transactions and support settlement into 11 local currencies at a rate of 0.99% for all merchants. Previously, there were separate conversion fees on top of the 0.99% processing fee, so the company has essentially waived the currency conversion charges.
Bitcoin payments are designed to resemble cash transactions more than credit-card transactions. Bitcoin payments have no disallowed merchant category codes (MCCs), no selective payment embargoes, no chargebacks and near immediacy of final transaction confirmation.
Accepting the digital Bitcoin currency as a payment method allows merchants to reach customers in over 60 countries not supported by PayPal. It also allows merchants to reach various countries that are restricted by Visa and MasterCard for high fraud or lack of infrastructure. A consumer transacting in bitcoins needs only a mobile phone application or an Internet connection.
"We chose to celebrate this milestone by rewarding all merchants, large and small, with an across-the-board fee reduction, instead of offering tiered pricing which rewards only the largest merchants," says BitPay CEO Tony Gallippi, in a press release. "We want our merchants to use this fee reduction to offer discounts and incentives to their customers for paying with Bitcoin."
Settlements to local currencies are made with a guaranteed exchange rate locked in at the point of sale for no additional fee. This protects the merchant from potential volatility of the bitcoin exchange rate.
Supported currencies for settlement include the U.S. dollar, Canadian dollar, Australian dollar, New Zealand dollar, euro, Pound sterling, Danish krone, Mexican peso, Norwegian krone, Swedish krona and South African rand. Currently, BitPay provides one-day settlement for the U.S. and settlement in 2-3 days for other countries. Euro settlement is currently available in Belgium, Finland, France, Germany, Italy, Spain and the Netherlands.
BitPay has over 4,000 merchants on its payments platform and is acquiring new merchants at a rate of 1,000 per month, the company says. It also recently announced that it has integrated its payment platform with Amazon’s fulfillment services, enabling merchants to combine frictionless international payments with international shipping in a fully-automated system.
The Amazon deal alone is a massive win for BitPay as it fits perfectly with Amazon's expansion strategy and showcases the qualities of the bitcoin payment method. Gallippi said in an interview that "the Amazon partnership has the potential to catapult the company to an entirely new level."