Inside the Bitcoin advocates’ closed-door meeting with federal regulators

http://www.washingtonpost.com/blogs/the-switch/wp/2013/08/27/inside-the-bitcoin-advocates-closed-door-meeting-with-federal-regulators/

by jnazario • 13 years ago

81 63 13 years ago

washingtonpost.com

lmg6432• 13 years ago

I love the phrase "excessive regulation could drive innovation in virtual currencies overseas". Depending on your view of the US dollar, the US is already the world leader in virtual currencies - trillions of dollars created out of thin air by the federal reserve.

bitcoin deserves a better classification - "digital gold" - anonymous and resistant to inflation as is gold, but portable and easily divisible for use as a medium of exchange. corrects some key faults of gold, although secure long-term storage is a different kind of challenge.

since all inflation is created by the US government as an unofficial policy (or official, depending on how you look at it) to fund an ongoing operating deficit, I can't see them taking lightly to any serious challenger to currency transactions.

the pricing of oil (among other things) in US dollars around the world is a major pillar of US economic strength and the government probably will tolerate bitcoin as long as it is a diversion, but will get serious if it grows, and try to ban it on money laundering grounds (because USD clearly can never be used for money laundering, right?).

i also think the "innovation in virtual currencies" is an interesting claim because there are plenty of other non-US virtual currencies to use for transactions - yuan, rubles, etc. they just don't have the gold-like aspects of bitcoin.

joelhaasnoot• 13 years ago

I recently finished reading "Crypto: Secrecy and privacy in the new code war" by Steven Levy - and it sounds like bitcoin is going the way of cryptography in the 90s. The US Government wants to control it but doesn't get it enough to be very effective, and it's out of the bag so it is used internationally.

I seriously wonder if this is a bug that can be squashed - who says there won't be more variations of digital currency that's based on cryptography.

ha-ha-ha3• 13 years ago

It can be squashed easily - declare it an illegal, terrorist financing activity; send a few guys to Guantanamo and the 80% of the population, that matter, won't touch it.

ajross2• 13 years ago

since all inflation is created by the US government

... no. You're confusing currency with money. Governments create the former. The latter (which is a much larger number) is the result of any lending (be it by the Fed or a private bank), and "inflation" is a virtually inescapable side effect. Any macroeconomics textbook would have told you this. Even a google search for "how banks create money" should do pretty well.

But you can continue feeding your macroeconomic intuition with stuff you read on WND or see on Fox if you like.

richcollins2• 13 years ago

It depends on whether you consider the fed a part of the government I suppose.

justinmk• 13 years ago

[money] (which is a much larger number) is the result of any lending (be it by the Fed or a private bank), and

"Lending" money at 0% interest is monetary inflation. The banks in the federal reserve system are not private except in the sense that their profits are private. No one else gets handed money at virtually 0% interest.

"inflation" is a virtually inescapable side effect

Are you talking about monetary inflation or price inflation? The lack of this distinction is why these discussions are always pointless.

lmg6432• 13 years ago

Fractional reserve banking is only one way the fed can create inflation, POMO is another. I'm sure you've heard of quantitative easing. And while excessive money demanding "stuff" is the mechanism by which prices go up, first there has to be a lot of cash, which is the purview of the fed. They can't mandate how banks lend, which is why consumer inflation isn't out of control, but the fed can directly influence asset markets, and the signs of which are everywhere. Fear of the "fed taper" tells us how important this support is to asset prices.

duked2• 13 years ago

If you want to some useful documentary about the creation of money I was really impressed by that one: http://www.youtube.com/watch?v=TwmM5Nb6hiE

Very clear explanation on how the money is created (through lending/debt), very informative even if the documentary advocate a monetary reform the beginning is not biased.

GauntletWizard• 13 years ago

Nit: Bitcoin is not anonymous - It is hard pseudonymous. Wallets are known, balances are public, you can be tracked; It's really the IRS's dream, in some ways.

olefoo• 13 years ago

So clearly the answer is: you can remain anonymous, so long as you pay tax on your income.

So if you're reasonably careful you can earn an income on bitcoin and spend it in bitcoin, you just have to issue payment to the IRS for (.25 * income_in_BTC) otherwise they go after you and aggressively deanonymize you and hit you with a bill for (.9 * income_in_BTC). And the IRS really doesn't care if you're using your share to buy weed on Silk Road; they only care that you're not contributing your fair share.

Bonus: We get to tax income of non-US-Citizens ( benefits of empire ).

nhaehnle10• 13 years ago

since all inflation is created by the US government as an unofficial policy [...] to fund an ongoing operating deficit

This is crackpot conspiracy theory stated as fact. There is a very obvious reasons why this theory doesn't make any sense: People know about inflation, and are free to adjust their behavior accordingly. The simple fact is that if inflation were lower, nominal interest rates would be lower to match as well, and vice versa. In the end, the real interest rate will end up in the same place.

So the real story is much more nuanced. One important aspect is that monetary policy works better with higher inflation, because it takes longer to hit the Zero Lower Bound. This is why many economists have recently advocated raising the inflation target, with the hindsight experience of the ongoing aftermath of the Great Recession.

Another important aspect is essentially the Red Queen Hypothesis of economics. Due to the way pricing works in the real world outside of financial markets and auctions, prices move up more easily than they move down. For markets to work well, relative prices must adjust quickly to reflect changing underlying conditions. This relative adjustment is easier to get when the overall price level tends to move upwards.

reedlaw2• 13 years ago

Crackpot conspiracy theory? The Fed doesn't think so [1]. As that FAQ explains, the FOMC judges that maintaining a 2% inflation rate is optimal for price stability and maximal employment. The federal government operates at a deficit [2]. The Federal Reserve Banks holds U.S. Treasury debt as collateral for the Federal Reserve notes put into circulation by the Fed [3]. Therefore, although the quoted statement is somewhat inaccurate, the essential idea that government policy is responsible for inflation and finances its operations is true.

1. http://www.federalreserve.gov/faqs/economy_14400.htm

2. https://www.cbo.gov/publication/21999

3. http://www.federalreserve.gov/faqs/currency_12770.htm

dredmorbius5• 13 years ago

This is crackpot conspiracy theory stated as fact.

It's not crackpot, though it's slightly inaccurate. The Federal Reserve is established by Congress and its chairman appointed by the President. It's otherwise somewhat independent, is part public and part private, but might be considered a de facto fourth branch of the government.

And among its remits are to manage the long-term inflation rate through open-market transactions (buying and selling treasury bills).

You pretty much allude to that -- how could you have a target inflation rate ... without some means of aiming for and hitting that target.

Now, the question of how effective monetary (and fiscal) policy are in actually affecting long-term economic growth is a whole 'nother barrel of tadpoles. I subscribe to the thermoeconomic / biophysical economic heterodoxies (very strongly influenced by ecology) which say that the cheapness (which is to say, ease of access) and abundance (flow rate) of energy are principle.

Canada2• 13 years ago

People know about inflation, and are free to adjust their behavior accordingly.

People are not free to adjust their behavior accordingly. The average person is forced to transact in the official currency. Any alternative that threatens to become liquid enough for the average person to use will be shut down. (Thus the interest in this Bitcoin backers meet government regulators article)

Sovereign countries with key energy resources must sell them for US dollars exclusively and they must recycle excess dollars into US government bonds, or receive freedom and democracy. This is the Petrodollar system, and it is the reason why the Feds can run endless deficits, and the Fed can put trillions of dollars of unmarketable assets onto its balance sheet without creating Weimar-style problems.

kaonashi2• 13 years ago

All dollars are created out of nothing. That's what fiat is. Worthless bits of paper you have to acquire to not go to jail. It's the way societies have organized themselves since the advent of agriculture.

jafaku• 13 years ago

Is that right? I thought fiat was a lot more recent.

ccarter84• 13 years ago

Bitcoin is only as anonymous as the blockchain allows. The sooner LE & bitcoin exchangers unify forces and convince Congress to act on a national level (thus removing the regulatory uncertainty), the sooner BTC will be allowed by existing players to be adapted into mainstream financial system.

The shifting of BTC abroad aspect is a problem from the LE perspective, because it's akin to everything 'going dark.' Yes there are downsides to more regulation if you're looking for truly being off the grid, or are mainly a user of silk road --- but it will also allow the system to live in the open, much like the recent rulings from FinCEN equating BTC exchangers to MSB's and pulling them in to the existing framework that way.

seanalltogether• 13 years ago

I found it interesting that last night over the course of an hour the value of bitcoin jumped up by $10. Clearly some people with a lot of money to invest assumed the meeting had a positive outcome.

ISL• 13 years ago

If you look at "market depth" plots, you'll see that a small desire to buy or sell BTC has a disproportionate impact on the market relative to market capitalization. Lots of people are sitting on bitcoin, so the few who make trades on any given day have an amplified effect on price.

Right now, ~1 million USD can shift the price of BTC by ~$5. That $5 shift changes the effective market capitalization by ~$57 million. You'll know things are stable when a million dollar purchase of BTC shifts the market cap by ~$1 million.

nhaehnle10• 13 years ago

You'll know things are stable when a million dollar purchase of BTC shifts the market cap by ~$1 million.

In all fairness, this is nothing special about BTC. For every financial asset ever, an X$ amount of transactions shifts the market capitalization by more than X$.

That's what makes those "X billion $ value destroyed by stock market movement" stories so ridiculous.

It would be interesting though to see a comparison of BTC to a range of different stocks and other assets.

fiatmoney• 13 years ago

The feds should love bitcoin - it stores a record of every transaction ever made. It's an auditor's dream.

devx• 13 years ago

A relevant recent article:

http://www.wired.com/wiredenterprise/2013/08/bitocoin_anonym...

mpyne• 13 years ago

Indeed, and thanks to non-repudiation they simply have to verify once that a given wallet belongs to a certain someone and they've solved that many more layers of that fully-documented transaction history.

shtylman• 13 years ago

"drives jobs away" please, there are way more things that drive jobs away

"3$ to get money out of an ATM" Maybe you should 1) get a bank that refunds the fee 2) consider that there are costs associated with the physical ATM

guard-of-terra• 13 years ago

It's usually free to get money out of an ATM where I live (using a debit card, in this bank's or affiliated ATM).

That is, you get every bit of what's charged to your account.

zanny• 13 years ago

Bitcoin removes the physical costs. Instant competitive advantage. So the proponent argument saying atms are outdated and obsolete, thus meaning they are a drain on the economy to maintain rather than productive, still holds.

ballard• 13 years ago

Bitcoin currently has a tiny market cap (1.3 B USD) compared to USD (~6 T). [1] Average BTC transaction volume is around $35 M USD/day or roughly $12 B USD/year. [2] This is comparable to stock market capitalization (57.5 T) to USD (6 T) currency ratio (10x).

If you were a mega kingpin, you'd be forced to use other means of cash washing (art, metals, jewels, etc.). There isn't enough volume in BTC to wash great amounts of money unless something more clever were used (such as using BTC to cover escrow/insurance, but not normally transacted). (Are there black/grey market insurance carriers? I'm guessing there are with %75 confidence.)

[1] http://bitcoincharts.com/bitcoin/

[2] http://blockchain.info/charts/estimated-transaction-volume-u...

gambler• 13 years ago

<img intent in-standard-src="med.png" in-mobile-src="small.png" />

Why not <img intent src="med.png" in-mobile-src="small.png" />?

svasan• 13 years ago

As mentioned elsewhere here, Modern Money Mechanics booklet published by the Federal Reserve Bank of Chicago is a very good read. It explains the concept of "money" at a very fundamental level. The booklet talks about how and where money is "created", who are the players involved, and a working example of how these things happen.

Search for "Modern Money Mechanics" by FRB Chicago.

edit - Sorry, just realized this comment might be off-topic.

Inside the Bitcoin advocates’ closed-door meeting with federal regulators

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