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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Bitcoins join global bank network

Posted by WARREN MOSLER on December 10th, 2012

Been looking at Bitcoins for a while and seems it’s not a currency but a payments system.

For example, a acquaintance of mine who wanted to buy an item arranged with the seller to do it via Bitcoins to ‘save’ on vat taxes.

Say the Bitcoin happened to be valued at $12, the buyer wanted to pay $120 dollars.(Note that the value per se was of no consequence for this transaction.)

What the buyer of the item did was buy 10 Bitcoins for the $120, while simultaneously the seller sold 10 bit coins for $120.

The buyer then then bought the item by transferring his 10 Bitcoins to the seller via the exchange, who ‘delivered’ them to the exchange for his prearranged $120.

Bitcoins facilitate untaxed and anonymous transactions. The value of a Bitcoin is of no particular consequence to the buyer and seller in the case of transactions like this, and will fluctuate as a function of the policies of the exchange management.

And seems the right to ‘operate as a bank’ now officially sanctions this type of activity.

Virtual cash exchange becomes bank

** Bitcoins join global bank network **

A currency exchange that specialises in the virtual currency known as bitcoins has won the right to operate as a bank.

102 Responses to “Bitcoins join global bank network”

  1. MamMoTh Says:

    but bitcoins are a currency in the sense they are created out of thin air and add net financial assets denominated in bitcoins

    Reply

    WARREN MOSLER Reply:

    created out of think air is a property of many things.

    and depends on how you define ‘financial’

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    bitcoins are created out of thin air like euros or dollars.
    bitcoin balances are financial assets like euro or dollar balances.

    so which property must a currency have that bitcoin lacks of?
    the only thing we can say is that bitcoins are not tax driven.

    Reply

    WARREN MOSLER Reply:

    the term ‘currency’ is general enough to use for Bitcoins if you want.
    It applies to the various ‘local currencies’ that are used in exchange.

    It’s just that Bitcoins don’t seem to be used directly/independently for exchange,
    as even those local currencies are. They seem instead to be primarily used as a numeraire
    where the particular value is of no particular consequence, to facilitate privacy and
    tax avoidance.

    That is, why not just pay the $120 dollars for the purchase?
    Why use this ‘middle man’ between the two parties who are doing a dollar transaction?
    The Bitcoin is more like a boat that carries the dollars from one party to another.

  2. Adam (ak) Says:

    Dealing in bitcoins will be tolerated as long as they are primarily used to buy pot. Until Iran starts using them for receiving payments for oil and buying parts needed to make a nuclear weapon or a missile. Then we will see whether the network is really so immune to attacks as it was claimed by the inventors.

    Reply

  3. geerussell Says:

    The mindset of bitcoin adherents is mostly indistinguishable from the garden variety hard money goldbug. While bitcoins are virtual and created from thin air, the most appealing property is a hard limit in the creation process on the number of bitcoins which can ever be generated. They want it to be a “thing” like gold that can be hoarded as a store of value. The process of generating bitcoins is even affectionately called mining.

    Like physical goldbugs they dream of bitcoin as an escape from the clutches of government, taxes and inflation. Once reached, the limit on bitcoin creation is a hard money nirvana where no evil central bank or alchemist or miner with a pick-axe can ever come along to generate more coins to “de-value” their hoard.

    Reply

    WARREN MOSLER Reply:

    yes, that’s the mindset of some.

    but actual usage is to transact in another currency for ‘privacy’ purposes

    Reply

    Ed Rombach Reply:

    @WARREN MOSLER,

    “but actual usage is to transact in another currency for ‘privacy’ purposes”

    So… this implies that transactions could not be taxed?

    Reply

    WARREN MOSLER Reply:

    so far they are not taxed

    Neil Wilson Reply:

    @Ed Rombach,

    They are still taxable income though, much as if you were paid in gold or pork bellies, and you will have to declare it – depending upon the tax rules in place in the jurisdiction that you live.

    Eventually somebody will get taxed in dollars, etc for transactions in conducted in bitcoins. And then perhaps reality will dawn

  4. Ramon Says:

    Yes, Bitcoin is partially a payment network. When used exclusively for that purpose, there is little more to be said.

    It is possible to remain entirely within the Bitcoin system, though. At the moment this is not feasible, but as adoption grows, using Bitcoin and only Bitcoin will become easier.

    Currently, bitcoins work well as savings, albeit of a volatile sort. Both the Bitcoin system and associated services are highly dynamic and adaptable.

    What may occur is primary usage of Bitcoin by a smaller, independent region. Doing so bypasses the need to establish a complicated, expansive financial infrastructure. At the same time, using Bitcoin reduces or eliminates the danger of individuals “selling their souls to the company store.”

    Reply

    WARREN MOSLER Reply:

    it remains to be seen if anything happens beyond being a payment network.

    Reply

    Adam (ak) Reply:

    @WARREN MOSLER,

    Bitcoins are primarily objects suitable for speculation, building pyramids and blowing bubbles just like tulips. The same rules of greed and mass hysteria apply. In fact in the era of retarded celebrities and marketing mass-brainwashing anything will do. I agree that it yet remains to be seen whether anything more serious comes out of it.

    My bet is that if that happens, people breaking the law regulating currency issue will go straight to jail and nobody will bother asking them whether they read Ayn Rand or just forgot taking morning pills.

    http://www.nytimes.com/2012/10/25/us/liberty-dollar-creator-awaits-his-fate-behind-bars.html?pagewanted=all&_r=0

    Reply

  5. layne anderson Says:

    Bitcoins are NOT created out of thin air. They are “mined”, which means that a certain amount of electricity is used, and a person must do computer functions that support the bitcoin system in order to make coins.

    There are only going to be a certain amount of coins ever in creation.

    Reply

    WARREN MOSLER Reply:

    and there are only a certain amount of my business cards from my last job.

    Reply

    Neil Wilson Reply:

    @WARREN MOSLER,

    Time to take those business cards to the art-houses then and see what they are worth now you’re famous.

    ;-)

    Reply

    ESM Reply:

    @layne anderson,

    Yeah, I’ve been doing a bit of reading up on this, and I think Warren has it wrong. Bit coins are the digital equivalent of gold bars. They have no use except for doing transactions conveniently, efficiently, and anonymously, and they are only created after dedicating vast computational resources to the support of the transaction network.

    The only negative versus gold is that bitcoins aren’t as durable, and they seem vulnerable to hacking or the development of a substitute. I guess gold is vulnerable to a substitute too, but it seems much easier to start a rival network that facilitates transactions in a similar digital currency.

    Reply

    ESM Reply:

    @ESM,

    Actually, a very close analogy between bitcoins and a tax-driven fiat currency can be made:

    Bit coins run on a peer-to-peer network. Therefore in order to participate you have to dedicate computer resources to the network. This can be thought of as a tax, which is administered by the network community itself. The network community can be thought of as the citizens of the government (the “people”), and the agreed protocols, as embedded in the software which runs the network, can be thought of as the “government” and its laws.

    The government, as representatives of the people, spends to enhance and run the network infrastructure. It does this by issuing bitcoins to “miners” who dedicate significant computational resources in exchange. The government is on autopilot, which could be a drawback. The bitcoin currency could easily become devalued if the tax paid by network participants is too small compared to the number of bitcoins outstanding. It could also skyrocket in value if the tax paid becomes too large relative to the stock of bitcoins. I would imagine that the implicit tax paid by all participants increases as the rate of transactions per participant increases, so the value should rise as it catches on. Also, there will be some savings desire among participants, so the more participants there are, the more the currency will rise in value.

    As with any government, the people can vote to change it. With bitcoins, the participants can vote to change the protocols. Something that the progressives here might not like is that the government appears to be a plutocracy.

    I for one am going to go store a significant fraction of my net worth in bitcoins.

    Reply

  6. Otto Says:

    @WARREN MOSLER, Replace “bitcoin” with “Euro”, or any other form of cash. How would this exchange be any different?

    Well, for one, it wouldn’t be digital, but if you ignore that, then it’s basically the same, right?

    Okay, so what if your friend had received the bitcoins from another transaction instead? And the receiver kept the coins to use in a later transaction? Is that not a currency?

    Reply

    WARREN MOSLER Reply:

    the point is no seller of real goods and services is pricing his goods and services in bitcoin,
    as he doesn’t ultimately want to hold bitcoin.

    there’s no point in holding it.

    sellers want another currency and use bitcoin to facilitate that desire.

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    if there was no point in holding bitcoins then no one would be interested in getting new ones.

    Reply

    Neil Wilson Reply:

    @MamMoTh,

    There’s no point holding gold and there are plenty of people interested in getting new gold.

    There was a time when people got really excited about tulip bulbs.

    WARREN MOSLER Reply:

    right, that would be true, apart from ‘greater fool speculation’

    from what I’ve seen the serious interest is in keeping transactions private and away from legal authorities, not in holding Bitcoins per se.

    Otto Reply:

    @WARREN MOSLER, According to that logic, there’s no point in holding USD either, since ultimately I wish to trade it for goods and services.

    I don’t want dollars, I want food. I want power, water, a place to live. I use dollars as a medium of exchange to acquire these things. Ultimately, dollars have no value to me except in what they can buy.

    If I could buy such things with Bitcoin directly, then Bitcoin would be as equally useful to me as the dollar is. The fact that I cannot yet buy those things with BTC doesn’t mean that I will not be able to do so in the future. If and when I can do that, would BTC then be a currency?

    I’m just trying to understand what you think the difference actually is between a “currency” vs. a “payments system”.

    Recently, WordPress.com announced that they would accept payment in Bitcoins. Now, they are indeed using it as a payment mechanism, since they convert those bitcoins to USD (being a US company and all), but I don’t see how that’s any different than them accepting payment in Euros and auto-converting those to USD as well.

    As far as I can tell, “cash” is a payments system too.

    Reply

    Neil Wilson Reply:

    @Otto,

    If you’re in the US, the you need dollars to pay taxes or you do jail time.

    You can’t pay your taxes with bitcoins.

    And the reason you can buy everything you need from others in dollars is because they are under the same restriction too.

    “don’t see how that’s any different than them accepting payment in Euros and auto-converting those to USD as well.”

    You don’t convert. You exchange.

    Big difference.

    Otto Reply:

    @Otto, So, according to your logic, tax payment is the basis of all “money”?

    So, if two people perform an exchange with, I dunno, gold, then that isn’t a economic transaction in your viewpoint?

    Forgive me if I fail to understand the magic sauce that makes one piece of paper “money” and the other piece of paper “not money”. If you’re saying that it is taxes, then you’re saying only governments can create “money”. However, this is demonstrably not true, since money predates governmental regulation. As little as a couple hundred years ago, money was a local thing, made mostly by individual banks.

    The government can require me to pay taxes in the form that they choose, but that doesn’t create “money”. Taxes destroy money, by definition. All taxes I pay to the government are simply dollar bills that are instantly destroyed.

    WARREN MOSLER Reply:

    please read ‘the 7 dif’ thanks.

    the dollar has value because the US govt demands it for payment of US taxes.

    gold have value because:
    people like the color
    it can be helpful in getting a date
    central bankers buy it
    it’s a good conductor
    it makes a useful film for windows
    etc. etc.

    that’s all i’m saying…

    Nihat Reply:

    @Otto, at issue is non-convertible fiat money, not the ancient commodity money (like bitcoins?). And clearly, there is nothing but taxes that’d drive fiat currency.

    ESM Reply:

    @Otto,

    A fiat currency can be driven without imposing an ongoing tax (or even a tax to start with). If an entity has something of value to provide others, whether it be gold, land, oil, manufactured goods, licenses, services, or even other kinds of currency, then by issuing transferable IOUs, which are redeemable for those assets, goods, and/or services, on demand, then the entity has turned those IOUs into a fiat currency.

    For example, a group of settlers in a new land could agree to create a common trust which would be the owner of all of the land. The settlers could then vote to create a government which administers that trust and issues fiat currency which is redeemable for rights to occupy or build on areas of the land owned by the trust. Or perhaps just to own a piece of the land outright.

    The entire mechanism can be voluntary, and it would still work. To some extent, the US government actually does provide goods, services, leases, and licenses in exchange for dollars. So it is not only the imposition of a tax which drives the value of the dollar.

    I think the bitcoin is similar to the dollar. A lot of computer infrastructure (especially, software and associated algorithms) was donated into a trust, which is controlled by the participants in the network. Bitcoins were issued in exchange to those who donated their time, computer power, and/or other kinds of money to create the value contained in the network. New bitcoins are issued for those willing to carry the computational load necessary to ensure the security and integrity of the entire transaction scheme. And those who want to participate in this anonymous and secure transactional network must acquire bitcoins in some way, either by paying for them, providing goods and services for them, or by doing the requisite computational work (which does actually add real value, although how much value is hard for me to discern).

    So, as far as I understand it (which admittedly is not very far), the bitcoin is a legitimate fiat currency. And I see no reason to believe it is more at risk to crashing in value than any other fiat currency issued by the government of a very small economy.

    WARREN MOSLER Reply:

    that’s a convertible currency/fixed fx regime.

    it’s more like the various local currencies like ‘lets’ where you sell your goods and services for the currency with the hope that someone else will sell you their goods and services for that currency later. those currencies ‘work’ to the extent someone is willing to sell his services in the hope he gets same later, sort of a greater fool theory thing. That’s why they are a ‘weak force’ vs a tax driven currency which is a forces as strong as the taxing authority.

    And in any case the primary use of bit coins is as a ‘vehicle’ to effect a transaction in another currency where the buyers and sellers use the bitcoin vehicle for privacy. And when they do that there’s no need for the buyer or seller to be at risk of the value of the bitcoin fluctuating as they can do simultaneous transactions.

    It would be like pricing oil in paper clips if there was some tax advantage to doing that. As long as the buyer and seller agreed on any price for the paper clips they could get the oil bot/sold for dollars, yen, euro, whatever.

    JCD Reply:

    @Otto,

    I hate to be cynical, but I don’t see things like bitcoin being particularly successful.

    Government is essentially a protection scheme. Citizens cede to the state the legitimate use of violence, and the state is obliged to protect the lawful citizens form each other and foreigners.

    The protection takes real wealth and savvy governments have figured out the best way to procure that wealth is through money taxes. The best kind of money for the state to use is fiat money.

    So sure, a collective protected by a state umbrella or even cross boundaries (like bitcoin) could emerge, but it will exist as long as the state(s) will allow it to do so. If the state wants bitcoin gone, it’s gone. But bitcoin cannot threaten the state. Therefore Dollars will be preffered to bitcoins.

    Bitcoins and the like are merely curiosities.

    Nihat Reply:

    “For example, a group of settlers in a new land could agree to create a common trust which would be the owner of all of the land. The settlers could then vote to create a government which administers that trust and issues fiat currency which is redeemable for rights to occupy or build on areas of the land owned by the trust. Or perhaps just to own a piece of the land outright.”

    ESM, how is the settlers’ government going to distribute that currency? What do I have to do to get some of it to earn my “rights to occupy” a piece of it? If nothing, what’s the point of all this exercise? If something, how is that something any different from tax, which is at the end of the day a piece of my labor no matter how we cut it?

    ESM Reply:

    @Otto,

    @Nihat:

    I’m trying to distinguish between a voluntary exchange and a tax. I suppose that from a certain perspective (usually the progressive one, with which I disagree), nothing is truly voluntary, so requiring somebody to do work in order to have a home or food or health care is the equivalent of a tax. It’s the age-old argument about rights. Conservatives distinguish between negative rights (I have the right to not have you take my stuff, or force me do something against my will, or kill me) and positive rights (I have the right to health care, which in practice means I have the right to take your stuff so that I can give it to a doctor in exchange for medical services). There are those who believe that it is a distinction without a difference. I am not one of them.

    In the case of the settlers, you might argue that in order to exist, a settler needs to lease or buy some land and therefore needs to remit some fiat currency back to the commons/trust. But each settler could be granted a small plot of land on which to live from the very beginning, or even be provided a small stipend of food and water at a subsistence level. There are ways of avoiding the imposition of a tax, at least from my perspective.

    ESM Reply:

    @Otto,

    @JCD:

    I agree that dollars are more stable than bitcoins. However, I’m sure you would agree that bitcoins are more stable than the Syrian Pound.

    Yes, a sufficiently powerful government (or alliance of governments) can destroy the bitcoin network and hence the bitcoin. But the same thing could be said about any country’s currency.

    WARREN MOSLER Reply:

    national currencies function first to provision govt.
    bitcoin functions first to secure privacy.

    the investment vehicle aspect is secondary

    ESM Reply:

    @Otto,

    @Warren:

    “national currencies function first to provision govt.”

    And, as JCD points out, the primary role of government is to ensure security for its people. So it issues currency to acquire the resources necessary to create a stable society secure from external and internal threats.

    “bitcoin functions first to secure privacy.”

    Bitcoins are issued to acquire the computational work necessary to create a stable block of cryptographically time-stamped bitcoin transactions that are secure from external and internal threats. The more computational work that is done, the more secure the transaction chain is from attack, and the safer the entire stock of bitcoins is from threats of double spending or theft.

    So, in a sense, the peer-to-peer network issues bitcoins to provision itself against security threats. It is a bit (no pun intended) like a government performing its primary function, n’est-ce pas?

    WARREN MOSLER Reply:

    common, you’re better than that!

    why does anyone donate computational work? maybe he’s unemployed or otherwise has time on his hands and is thinking maybe he’ll get something back for his efforts later.

    why does anyone work for dollars? to not lose his house, car, etc. etc.

    more like possible carrot vs certain stick?

    JCD Reply:

    @Otto,

    I don’t really know enough about bitcoins, so I’ll ask the question.

    If the US government leans on its friends (and frenemies) and tells those sovereign states to find out who is issuing and protecting these bitcoins, do those sovereign states have a very good chance of collapsing the whole bitcoin network?

    That’s really the question.

    As for the Syrian (pound?), yes the US (or Israeli or Turkish or Iranian or …) government could make the Syrian pound lose value or disappear if it so chose. However to do so that government would have to (in all likelihood) invade and conquer Syria. Even then the currency would probably continue as there would likely be a successor regime that honors and issues and spends the legacy currency.

    But if the US government decides to treat bitcoins like Julian Assange (sp?) well then I believe the bitcoin loses 100% of its value.

    The difference is in degree. To change the currency of a sovereign state by force, you have to at least cross their territorial frontiers by force. For a curiosity like bitcoin that’s not necessary.

    ESM Reply:

    @Otto,

    @JCD:

    Bitcoins exist on a peer-to-peer network, where every participant computer has the entire transaction chain stored locally. Taking out some of the people, computers, and addresses which own bitcoins (as evidenced by the transaction chain) in, for example, the US, does not affect those outside the US who were not taken out. The major effect is to remove the bitcoins owned by US residents out of action permanently (it is computationally impossible to recover them), which in theory could redound to the benefit of the remaining owners of bitcoins.

    @Warren:

    “And in any case the primary use of bit coins is as a ‘vehicle’ to effect a transaction in another currency where the buyers and sellers use the bitcoin vehicle for privacy. And when they do that there’s no need for the buyer or seller to be at risk of the value of the bitcoin fluctuating as they can do simultaneous transactions.”

    You keep stating this as if it were a fact – that the primary use of bit coins is to effect a transaction anonymously where both sides take no bitcoin exchange rate risk. But each bitcoin transaction takes at least 10 minutes to verify to an acceptable level of confidence, so I don’t think it’s possible at all to remove the “exchange rate” risk from the process. Furthermore, I don’t see how privacy can be maintained if you are actually going to convert bitcoins at the end into a “real” currency like dollars (they have to appear in an account somewhere known to a bank, right?).

    So, my question is: what evidence do you that bitcoins are used for transactions primarily in the way that you claim? I suspect you don’t have any, especially since it is probably impossible for anybody to gather statistics on the way bitcoins are actually being used.

    WARREN MOSLER Reply:

    mainly anecdotal from speaking with foreigners who use them to make purchases without paying VAT.
    And some reading about them.
    And applying logic.

    Did you read the Forbes article?

    Adam (ak) Reply:

    ESM,

    The exchange rate risk is small because of the limited volatility over a 10 minutes period.

    This article gives an example what bitcoins are used for:
    http://www.forbes.com/sites/andygreenberg/2012/08/06/black-market-drug-site-silk-road-booming-22-million-in-annual-mostly-illegal-sales/

    Obviously there is no overall statistics (yet).

    I am not entirely convinced that the whole network cannot be effectively shut down by attacking it at the transport layer and by going after the exchanges.

    These articles and the follow-up discussion are interesting:
    http://nerdr.com/shutting-down-bitcoin-really-taking-down-the-bitcoin-network/
    http://nerdr.com/bitcoin-exchange-scam-bitcoins-are-worthless/

    Nihat Reply:

    ESM,

    I suppose counter ideological arguments could be brought to bear upon your conservative/progressive, negative/positive rights analyses. Not my cup of tea…

    You have the right to be safe in your person and property, so you want your government to provision for the necessary protection (and revenge) services. That’s not taking stuff from an uninterested third person and giving it to a protection officer because the lower the level of protection service, the higher the risk of injury for everybody.

    A similar argument could be made for health care services, but I suppose the injury from lack, inaccessibility, or low levels of these services is considered to be individualized, and not as direct and dramatic for the society at large.

    As for taxes’ being an imperative or not, I think that they, in one form or another, are an imperative in a diverse socioeconomic group larger than a trivial kinship society. They are the individual’s obligation to the group in the abstract, and different from charity and largesse.

    On another note, I really don’t understand how you can compare the security imperatives for a government and for the bitcoins system. The first has to do with securing people from real dangers to life, limb and property. The second sounds as though it is entirely about secure financial transactions, which is better compared to the function of armored Wells Fargo trucks.

    ESM Reply:

    @Otto,

    @Nihat:

    “On another note, I really don’t understand how you can compare the security imperatives for a government and for the bitcoins system.”

    This is in the context of arguing that the bitcoin is a real currency. Within the ecosystem of digital transactions, the primary imperative is security against fraud/theft/hacking, so I think the analogy to the security obligations of a government is apt.

    I suppose an easier analogy could have been made to a transit system which uses tokens, like the NY subway did until a few years ago. If you accept that a token is currency (which I do), then they have value without a tax being issued. You want a ride, you buy a token. Nobody is forcing you to do anything. Likewise for the bitcoin network, if you want to conduct secure and private transactions, then you have to buy bitcoins to play.

    I only brought in the government analogy because I think there is that additional aspect to bitcoins that subway tokens don’t have. In order to play, you also have to hook up a computer and dedicate some computational resources to the network. That’s kind of like a tax that all participants pay.

    WARREN MOSLER Reply:

    those tokens constitute what might be called a convertible currency.

    ESM Reply:

    @Otto,

    @Warren:

    “those tokens constitute what might be called a convertible currency.”

    Only by those who don’t know what a convertible currency is.

    You aren’t guaranteed to be able to redeem a NY subway token for a ride on the NY subway when it’s too crowded (or not running), or when you’re in Chicago, any more than the US government guarantees you can redeem a dollar to extinguish a tax liability even though you have no present tax liability.

    WARREN MOSLER Reply:

    it’s the sign that makes the difference. One offers a +, the other a -.
    one says $35 will get you an oz of gold, a subway ride, etc. while the other says if you don’t pay $35 you get a drone attack

  7. pebird Says:

    My frequent flyer miles are a currency!!

    I’m now a revolutionary.

    Reply

  8. Senexx Says:

    That’s my personal issue with bitcoins. They’re not driven/backed by anything like taxes.

    The bitcoin creator can change the rules at any point – so bit coin could just become a long con.

    Under our somewhat democratic government system, the rules can still be changed at any point but we can raise our ire and have the change not go ahead, or modified better to suit public purpose.

    Reply

    MamMoTh Reply:

    @Senexx,

    but there is no point in having issues with bitcoins. no one is forced to hold them.

    Reply

    Neil Wilson Reply:

    Bitcoins are really like a commodity

    Similarly foreign currency is also like a commodity.

    They’re just a class of asset.

    Reply

    Senexx Reply:

    @Neil Wilson, Good point re: foreign currency & I guess if you look at bitcoins as a commodity, pretty easy to oppose as a currency – which was my whole point.

    I loved it was assumed I hadn’t read about bitcoins – reading about it for years. I don’t come to conclusions lightly.

    I’m more interested in any responses to my comment on the next thread >>

    user Reply:

    @Senexx, try to read something about it before claiming such a nonsense. If you want to change anything in bitcoin protocol, you need to enforce more than half (but practicaly everybody) of the users and miners to switch to new rules. It is hard, because the code is opensource and there is more than one implementation.

    Reply

    Ed Rombach Reply:

    @Senexx,

    “That’s my personal issue with bitcoins. They’re not driven/backed by anything like taxes.”

    Seems like an advantage to me. I know the MMT take on monopoly provider of currency, but what’s so bad about being able to choose among private competing currencies?

    Reply

    Senexx Reply:

    @Ed Rombach, My understanding is then we get too many private currencies to choose from and then we have to create clearing houses for them all again to clear them all on par and that leads to our central banks which is just one big clearing house really.

    We’ve been down this road to get where we are today.

    Reply

  9. Rudd-O Says:

    The sentence “The bitcoin creator can change the rules at any point” is a lie. Do not let this lie fool you, guys.

    Also, yeah, you can evade the VAT using Bitcoin. I think that’s swell.

    Reply

    AP Reply:

    @Rudd-O,

    “you can evade the VAT using Bitcoin.”

    Which, all else equal, means greater actual net financial assets than otherwise, doesn’t it?

    Reply

    WARREN MOSLER Reply:

    yes! hadn’t thought of that!
    tax evasion as a growth policy!

    Reply

    AP Reply:

    @WARREN MOSLER,

    “tax evasion as a growth policy!”

    Seems like it can be. Especially in a ‘strong dollar’ fetish type of atmosphere a la Bentsen-Rubin-Clinton. Or an era of ‘meaningful deficit reduction’. :(

    Neil Wilson Reply:

    @Rudd-O,

    Not if you’re based in the EU you can’t.

    Neither can you avoid payroll taxes. The old ‘pay em in gold bars’ trick was squashed decades ago.

    Reply

  10. Senexx Says:

    Perhaps it would be more accurate to say it is my functional issue with bitcoins – given the creation process outlined above and mindset suggested that most hold.

    Reply

  11. Jon Matonis Says:

    In Forbes, I wrote an opinion piece on the French bitcoin company becoming licensed:

    Bitcoin’s Greatness Not Realized By Succumbing To Regulation
    http://www.forbes.com/sites/jonmatonis/2012/12/09/bitcoins-greatness-not-realized-by-succumbing-to-regulation/

    Reply

    WARREN MOSLER Reply:

    Intensely good article! Who are you? Have a read of ‘the 7 deadly innocent frauds’ on this website, thanks!

    Article Conclusion:

    Get real people! This is about more than just “agreeing to disagree” when it comes to stricter regulation being a good thing. Bitcoin without user-defined anonymous transactions is a neutered bitcoin. Paper cash comes with more financial privacy. In circular logic fashion, the pro-regulation adherents must then answer to their success, “what have we really accomplished?”

    Reply

  12. Bullen Says:

    Dear Warren, when you have learned how to mine your first bitcoin you will understand. The problem you and all non-natural science people have is that you see no interest in understanding the physical world. The service economy is resting on an inflatable matress where NATURAL resources are the pump holding it inflated, your fiat currencies are just a reflection of that pump. Bitcoin and gold are not good alternatives, they are the ONLY alternatives for store of value and non barting transactions. Today $ is the reserve currency because the US won the 2nd world war, some day that HAS to change. Now you buy these for $, soon you will buy $ for these. The master currency is energy.

    Reply

    WARREN MOSLER Reply:

    Makes sure to read the 7 deadly innocent frauds on this website, thanks, after which I’m sure you’ll rephrase your comments.

    Reply

    Bullen Reply:

    @WARREN MOSLER, ok, I don’t see how your explanation of money creation changes the hard fact that we only have ONE earth? Do you think accounting is more powerful than real physical things like food, weapons or birth and death? My point is everything is energy, and exergy is decreasing across the board globally and there is NOTHING you or anyone can do about it!

    Reply

    WARREN MOSLER Reply:

    so that means the US govt can run out of dollars, be the next Greece, and should keep 30 million people who want jobs unemployed?

    Nihat Reply:

    @Bullen,

    MMT does not contradict with your observation that the real world, the environment, the people, the real resources, etc. are what matter. Heck, it might even be teaching that.

  13. Sujit Says:

    No matter what currency. Gold and Silver are real money. The value of precious metals is the Labour involved in making the coin or bullion.

    Reply

    WARREN MOSLER Reply:

    ok, you’ve established your definitions, now read the 7dif on this website thanks

    Reply

    AP Reply:

    @Sujit,

    “The value of precious metals is the Labour involved in making the coin or bullion.”

    To quote Herman Cain, “Nein, nein, nein.”

    Reply

  14. Trace Mayer, J.D. Says:

    Who are you to assert there is ‘no point in holding it’? Last I check that is what markets are about; individual human action where individuals each make the economic calculation of whether there is a point to holding an asset.

    Thus, I find it interesting that you fail to mention one of the prime reasons to hold bitcoins which is also one of the prime reasons to hold gold. Neither are subject to counter-party risk; the financial ability of a counter-party to satisfy a liability.

    Niether gold nor bitcoins are anyone’s liabilities. This means they stand independent from bank failures like Wachovia or IndyMac, derivatives which are financial weapons of mass destruction, credit risk like Bear Stearns of Lehman Brothers, default risk like subprime mortgages or student loans, sovereign debt risk like Greece and etc.

    So bitcoins have not counter-party risk and are (1) immune to confiscation, (2) instantly be transferred to anyone anywhere, (4) no risk of that value transfer being impeded once submitted to the network, (5) allow income, deductions and gifts to appear wherever and whenever, (6) be a censorship-resistant settlement currency for other applications like Open Transactions or Ripple and several other abilities which I will not mention because of the first rule of Fight Club.

    So when you assert there is no reason to hold bitcoins; well, given those previous six reasons and several others I can think of many reasons reasonable people would desire to store capital in bitcoins instead of domestic bank accounts, Swiss bank accounts, tax havens, fine art, diamonds, gold and many other assets.

    The final demand just may be that Bitcoins allow for complete disintermediation from the current banking, financial and government system and transition into Cipherspace. So the price of bitcoins is just one tiny glimpse for those outside it at just how large the Cipherspace economy is and its rate of growth. After all, due to asymmetrical knowledge you don’t know what you don’t know and you don’t know that you don’t know it.

    http://www.youtube.com/watch?v=NQLeLMlavuY

    Reply

    WARREN MOSLER Reply:

    you just need the central bankers to start buying them and the deed is done!
    :(

    Reply

    AP Reply:

    @Trace Mayer, J.D.,

    “one of the prime reasons to hold bitcoins which is also one of the prime reasons to hold gold. Neither are subject to counter-party risk; the financial ability of a counter-party to satisfy a liability.”

    Gold is subject to plenty of other risks, notably the risk of throwing your back out if you choose not to use a custodian or counter party. :) Not to mention theft, or memory lapse(which seems to be a major risk of Brainwallet too-?)

    If you’re looking at BC and gold primarily as stores of value (sounds like you and others are, in addition to privacy and censorship?), there are plenty of risks there too. Until you can stop the hands of time, nothing is risk free.

    That said, it’s pretty fascinating stuff.

    Reply

    Nihat Reply:

    Yeah, my gold (and bitcoins, as I now learn) is not anyone’s liability. That, of course, means no one owes it to me to exchange my gold for other stuff that they may have and I might like to have.

    Reply

    WARREN MOSLER Reply:

    and all that fall under the heading of ‘investment vehicle’

    Reply

  15. Trace Mayer, J.D. Says:

    Perhaps I am a little dense but perhaps you could please explain why central banks need to buy bitcoins to get anything done?

    With bitcoins if individuals that determine the services central banks and governments provide are not worth the cost then they can completely disinter-mediate from them but continue to carry on trade and division of labor.

    Given advancements in software like Github, which allows for cooperation without coordination, and Cipherspace tools like Open Transactions there could be (are?) corporations and capital markets that function independently from any central banks and governments.

    One fundamental axiom of cryptography is: anything that can be done with a central authority can be done without one.

    Reply

    AP Reply:

    @Trace Mayer, J.D.,

    “One fundamental axiom of cryptography is: anything that can be done with a central authority can be done without one.”

    As long as the central authority doesn’t give a sh*t.

    Reply

    Trace Mayer, J.D. Reply:

    @AP,

    I think you have missed the point of the statement and the context with reference to elliptic curve public/private key pairs (which Bitcoin uses). The point being that any secure cipher that can be constructed with a centralized authority can also be constructed without a centralized authority. Without the need for a centralized authority there can be complete disintermediation from any particular authority.

    But nevertheless, what difference does it make what any particular central authority cares?

    What is this hypothetical central authority going to do against cryptography, use violence? Go ahead, get that machine gun out and shoot the math problem expressed as a cryptographic protocol until it is solved. Last I checked violence solves math problems extremely well.

    Reply

    WARREN MOSLER Reply:

    drone attacks?
    ;)

    Neil Wilson Reply:

    @Trace Mayer, J.D.,

    “What is this hypothetical central authority going to do against cryptography, use violence?”

    Lock up the people using the cryptography. You still live under a jurisdiction, and you have to declare income and pay taxes whatever form you receive your income in.

    AP Reply:

    @Trace Mayer, J.D.,

    “I think you have missed the point of the statement and the context with reference to elliptic curve public/private key pairs…”

    I missed the point and then some. I have absolutely no idea what you’re talking about in this instance. But my earlier point was simply that, if some political body with the authority to decides to involve itself in these types of transactions, it seems to me it will — unless bitcoin-related technologies are going to turn complex-system behaviors upside down?

    I also share some of the concerns expressed by Adam. Privacy’s one thing. Personal legal asymmetries are another. Ethically, I can make space for certain (but not many) kinds of off-the-grid transactions. I’ve met enough ‘shady libertarian’ types in my time to look at the motivations involved here with a jaundiced eye…

    WARREN MOSLER Reply:

    they don’t, I was my attempt at humor/ridicule, sorry!

    Reply

    Trace Mayer, J.D. Reply:

    @WARREN MOSLER,

    Perhaps you have a twisted sense of humor joking about drone attacks. But they just highlight the nature of wealth destruction. There must first be production to acquire the resources and the labor to fashion the drone. Then it can be deployed to destroy capital and humans.

    But how does the violence unleashed from a drone attack create or generate wealth? Or even unlock any value that is protected by cryptography; for example, moving bitcoins which represent stored wealth from one wallet to another in order to acquire the resources and pay for the labor to fashion a drone.

    Reply

    WARREN MOSLER Reply:

    it doesn’t

    Adam (ak) Reply:

    @Trace Mayer, J.D., When the taxation office asks a bitcoin peddler for the journal and balance books the cryptography will help very little. I hope this will happen rather sooner than later. There should be one law for everyone, a grocery seller and a dealer in cryptographic tokens or Bernie Madoff.

    If one wants to opt out from the state institution, there are still large lawless areas in Africa such as parts of Somalia, Libya or Mali. But I cannot comprehend how people want the state to guard their property rights and yet the same people are hell bent of destroying the very institution which is the backbone of their society.

    Nobody has proven that the bitcoin network is immune to a DDoS attack aimed at lengthening the transaction verification time by planting fake nodes and then generating fake traffic. I could do the analysis because I am qualified but frankly speaking I don’t care.

    Reply

  16. Trace Mayer, J.D. Says:

    @Neil, “Lock up the people using the cryptography. You still live under a jurisdiction, and you have to declare income and pay taxes whatever form you receive your income in.”

    Using cryptography does not change the nature of transactions or have much material effect on tax liability which is one reason we wrote A Lawyer’s Take on Bitcoins and Taxes which has 108 legal citations and approaches the taxation landscape from a US perspective.

    But in this case the issue being discussed is with the enforceability of that tax liability.

    But another interesting development which Bitcoin makes possible is related to artificial intelligence. Who is to say that only humans will be employing cryptography to protect themselves? There is already the infrastructure and potential for artificial intelligence code to evolve and sustain itself using the Bitcoin ecosystem and some have even started experimenting with writing the code.

    Reply

    Adam (ak) Reply:

    @Trace Mayer, J.D.,

    Bitcoin proponents are not employing cryptography to protect themselves but to destroy the state institutions such the as monetary system based on state monopoly. Just exactly what the principal strategic competitors (China, Russia) and enemies of America (Iran, various terrorist organisations) want “useful idiots” in America to do.

    We may ask Bradley Manning about the only logical conclusion in the path to so-called absolute “liberty” in the “cyber-era”. People like me, born in Eastern/Central Europe call it a TREASON. It is a great failure of the American educational system that otherwise well-educated people have no idea about history of other nations and no basic understanding of historic processes which may repeat themselves in similar circumstances.

    In the late 18th century king of Prussia Frederick II waged an economic war against Poland.

    “According to Scott, Frederick was eager to exploit Poland economically as his wider aim of increasing Prussia’s wealth. Scott views this as a continuation of his previous violations of Polish territory in 1759 and 1761 and raids within Greater Poland until 1765. After acquiring dies from which the currency of Poland was struck he issued debased Polish coins which drove money out of Poland into Hohenzollern territory – it is estimated that it gained him 25 million thalers of profit, while causing considerable monetary problems for Poland.[20]
    Frederick for many years circulated fake currency after obtaining Polish coin dies during the conquest of Saxony. His mint master Veitel-Heine Ephraim coordinated the procedure and the worthless coins were eventually called efraimki (pol. ‘efraimettes’)[21] He also opposed attempts at political reform in Poland, and his troops bombarded custom ports in Vistula, thwarting Polish efforts to create a modern fiscal system.[22]”
    http://en.wikipedia.org/wiki/Frederick_the_Great

    Regarding artificial intelligence using bitcoins to sustain itself I suggest defining artificial intelligence first. I would start with defining something even more elementary – intelligence in general. Otherwise we are just using “weasel words” and drifting towards the world of science fiction.

    Reply

  17. Adam (ak) Says:

    To go one step further – the volatility of exchange rate makes bitcoins virtually useless as a means of storing value (“saving” – one of the principle functions of money). They are only good for gambling/speculation and spot transactions (usually of a dubious legal status).

    I won’t accept my salary in bitcoins not knowing how much bread I can buy at the end of the month.

    http://upload.wikimedia.org/wikipedia/commons/c/c6/Bitcoin_exchange.png

    Bitcoins are NOT money. The value is not buttressed by the taxation power of the state or anchored in historic value of commodities (precious metals).

    The volatility of the bitcoin value is a strong argument supporting the State Theory of Money.

    Reply

    Ed Reply:

    @Adam (ak), adam, i hear ya!
    until bitcoin can say “all bitcoins are legal tender for all debts public and private under authority of US Govt” it is a geek experiment….fun to chat about, but no substance.

    by the way, i remember reading about people getting ripped off from online poker. seems the guy who sold the company to an indian reservation, kept a back door to see the cards of opponents and suckered people for like $25m….good like using bit coin….:-)

    Reply

    WARREN MOSLER Reply:

    lots of ‘substance’ with bitcoin facilitating ‘private’ transactions, so, left alone, it can get huge.
    and said legal tender laws don’t actually do anything for any currency.

    Reply

  18. MamMoTh Says:

    I think the government should order all its departments, at every level, start using their computers at night to mine bitcoins and hence find an alternative way to fund itself other than from China.

    Reply

    Neil Wilson Reply:

    @MamMoTh,

    It’s quite difficult to mine bitcoins. It’s been tried with huge arrays of powerful computers and you really don’t get very many.

    Probably not enough to pay the increased electricity bill.

    Reply

    WARREN MOSLER Reply:

    and it’s a smoke screen. doesn’t matter if they were a lot easier to get and the ‘value’ was .01 instead of $13.
    For their main function they are just a numeraire

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    My comment was a joke but I disagree with your remark.
    Bitcoins are not only a numeraire, there are extra financial assets created out of thin air, so extra purchasing power is added to the economy, even though the extra wealth is negligible.

    WARREN MOSLER Reply:

    I didn’t say they were ‘only a numeraire’
    I said this:
    For their main function they are just a numeraire

    MamMoTh Reply:

    @WARREN MOSLER,

    I disagree with this: doesn’t matter if they were a lot easier to get and the ‘value’ was .01 instead of $13.

    MamMoTh Reply:

    @Neil Wilson,

    Interesting. Do you have any link?

    Still with the number of computers the government owns it must be able to mine some bitcoins with those computers that remain idle at night. It must be more lucrative than trying to detect extraterrestrial life. And its one way the government could threaten the bitcoin market.

    What about Amazon, Microsoft, or Google using their unsold cloud computing time?

    Reply

    ESM Reply:

    @MamMoTh,

    https://blockchain.info/stats

    I think the efficient miners are making money.

    Neil Wilson Reply:

    @MamMoTh,

    http://www.bitcoinx.com/profit/

    The algorithm is quite clever. As you deploy leading edge hardware (which generally these days has to be specialist ASICs or GPUs) to mine the algorithm releases bitcoins at a slower rate. So the more mining that goes on the harder it gets and the less profitable it becomes.

    So you constantly have to deploy new hardware – which funnily enough tends to be priced in dollars…

  19. Nihat Says:

    Ha ha ha! This is priceless…

    I heard on network news that in Spain they raised the sales tax (or VAT) to 21% on theater tickets, and a theater operator started selling carrots, the tax on which is reportedly only 4%. Of course, he prices carrots liberally, like 30 to 40 euros each, and need I say it, each carrot so bought can be eaten or bartered for admission to a show.

    The guy has a plan, too. If the taxman becomes a bother to him, he’ll start selling potatoes or eggs.

    Reply

    MamMoTh Reply:

    @Nihat,

    That’s an old spanish trick. Since selling tickets to concerts, or other events on the internet was illegal to avoid scalpers, they used to sell paper clips, or pens for 200 euros or whatever with the ticket as a gift.

    Reply

    Ken Reply:

    @Nihat, Well, If I was the tax man, I’d just count up the number of seats in this theater, multiply that by the number of showings per day and numbers of days since he started his little trick, impute the appropriate tax, and send him the bill.

    Reply

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