Tag Archives: btc

Big Next Step for Bitcoin: Meeting the Regulators

With China’s example at hand, one may think the idea of pegging the Bitcoin to the US dollar may become the salvation to most of bitcoin’s problems.

China became the second biggest economy in the world by pegging their currency to the dollar at an artificially cheap rate. This boosted exports and built up reserves to the multi-trillion yuan level – of which more than a 1 trillion is US dollars.

The Chinese workers themselves cannot afford the goods they make for Apple and hundreds of other companies that manufacture their products on ‘the world’s factory floor’ but they are better off working in these sweatshops than working the land; so we are told.

With Bitcoin, there is an interesting corollary with China and its currency peg. And the question is, why not peg Bitcoin to the dollar, at let’s say $100 BTC to the dollar.

This might solve two problems. First, the volatility issue – with merchants and spenders of Bitcoin uncomfortable with the exchange rate of Bitcoin’s wild fluctuations – having a fixed exchange rate would introduce stability and predictability into the economy. Secondly, having a fixed exchange rate would open up a possible workaround of the the FinCEN problem.

“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 the United States, to the decentralized Bitcoin network – more so than the widely reported price volatility and hacker attacks.” John Matonis writing in Forbes.

FinCEN, a captured regulator (like the SEC, and CFTC) is muscling Bitcoin exchanges and shutting them down, hoping to take off the market any potential competitor to entrenched oligopolists Visa, Mastercard and PayPal. Having a fixed rate of exchange for Bitcoin would allow all Bitcoin exchanges to ‘go dark’and hide behind cryptology. The conversion price of $100 is known so there is no need to ‘see’ the market.

Without the need to publish trading activity, exchange rates, and current prices; there would be no need to operate within eyesight of troublesome thugs-for-hire working for the payment and currency cartel looking to shut down a competitor.

The fixed exchange rate could be managed by the Bitcoin Foundation who would publish the official ‘fix’ every day and continuously be adjusted upward to keep miners incentivized to continue mining.

At some point in the future, when the Bitcoin industry and economy are big enough to lobby politicians and regulators sufficiently to get them to back off, the exchanges can come out of the dark and business can be transacted more transparently. But until then, having a fixed rate and dark exchanges might be the most expedient way to grow this new economy.

For those who scream… But Max, this defeats the idea of non-fiat currency! Consider this an interim solution to what is a very nettlesome problem: bitcoin’s vulnerability on the exchanges – that are being shut down right now. An ‘invisible’ dollar peg would allow the entire exchange business to go dark behind cryptology – allowing for the capitalization of Bitcoin to rise to the critical $50 – $100 bn. level unmolested by governments.

What if all the bitcoin exchanges were shut down?

Here’s a thought exercise. What if all bitcoin exchanges were shut down by various governments? What would the current value of a bitcoin be?

This is an important question because of the implied outcome of the current trend by governments to shut down – or prevent the creation of – bitcoin exchanges.

The mining of bitcoin would continue but transferring them and spending them becomes a problem since there would be no quoted price. The bitcoin protocol is about mining bitcoin not pricing bitcoin. There is nothing in the protocol about establishing a market price for bitcoin; you need a market for that, but what if all the exchange markets are shut down?

As a medium of exchange and barter, those looking to transact using bitcoin who name their price in individual transactions would continue to do so. And these transactions, in aggregate can be reported to give market participants a general idea of where the price per bitcoin generally is; like beaver pelts in early American history. But will this approach satisfy bitcoin’s aspirations to take on the Dollar, Yen, Pound and Euro? I don’t think so.

For this reason, I have suggested that some entity, possibly the Bitcoin Foundation (and this can be done on a non-profit basis), make a market in bitcoin and broadcast a current price for bitcoin (a peg) that various exchanges and merchants can use as a benchmark.

This market making activity should be done completely out of reach of regulators. Honesty on the part of the ‘peg’ maintainers would come by way of interacting with various exchanges (that are open) since maintaining this peg would require lots of buying and selling on the various exchanges to maintain an inventory (of bitcoin) that is necessary to maintain a peg and any resultant price gaps or arbitrage would be quickly closed by savvy traders. (By the way, if the VC community is serious about funding bitcoin start-ups they should pool their capital to fund such a mechanism).

With this added layer of price discovery in the bitcoin’s existence as a currency, the possibility of scaling up to the multi-hundred billion valuations necessary to get it on the first rung of the global currency market becomes a possibility. Without it, we’re talking about beaver pelts.

Can BitCoin, the First Open Source Currency, Threaten the Dollar?

It’s been called “the most dangerous technological project since the internet itself.”  Can the BitCoin give power back to the people?

In the book “Mythmakers & Lawbreakers” edited by Magpie Kiljoy, Alan Moore is interviewed and makes a very profound point.  The writer was paraphrasing a professor at the London School of Economics, and stated the following:

“[The lecturer] was saying that the only reason that governments are governments is that they control the currency; they don’t actually do anything for us that we don’t pay for, other than expose us to the threat of foreign wars by their reckless actions. They don’t actually really even govern us; all they do is control the currency and rake off the proceeds.”

Now, I’d certainly been aware of our government’s currency power creating problems for people in a system which they had never had a hand in creating or to which they had willingly agreed in the first place, quite contrary to Thomas Jefferson’s vision of a government that would dissolve and reconstitute every few decades.  But, it wasn’t until reading the Moore interview that a crystallization occurred, and I began to wonder if currency was perhaps the best way to neutralize a government’s power.

The initial thought had been that this solution could be arrived at by encouraging people to engage in black markets, which many billions do worldwide already.  Not effective enough.  Then it occurred to me that someone must create an alternate currency through which individuals can disengage from their country’s currency, thereby bypassing violent insurrection.

This is essentially what the creators of BitCoin have done with the introduction of their open source digital currency, controlled by each user, kept on one’s computer and impervious to hacks and manipulation, including the inflation that occurs when governments flood countries with newly-minted currency.

Not only does the BitCoin already have practical value—for users are already exchanging them via the internet—but it has struck a symbolic blow against states everywhere, even in its very early stages.

What are the defining characteristics of a BitCoin?  They cannot be tracked or frozen, for one thing.  They cannot be taxed, which would remove yet another source of power the state has over individuals.  The power of the state essentially lies in its taxation powers, which allows it to wage war and allow for modern empire, as well as dispense that taxpayer money to other countries.  BitCoin exchanges can be done anywhere in the world and fees are extremely minimal compared to similar exchanges within and across banks.

BitCoins have already been used to purchase books, video games and other items.  Of course, since the BitCoins can’t be tracked, it opens up a wealth of exploitable opportunity for black markets such as drug dealing and prostitution.  This alone will alarm politicians, who one can imagine are already considering making the new currency illegal.  The same thing could be said of CraigsList, however, and yet it is still legal.

How does one generate BitCoins?  This is where things get interesting and slightly confusing to the not-so-tech savvy.  Each computer can act as a BitCoin miner.  The computer “mines” BitCoins at a predictable rate, which requires time and energy (processing power, electricity and anywhere from 5 to 10 years), and then the fully mined BitCoins are stored locally on the computer.  The risk being that computer theft or computer crashes will erase BitCoin files, leaving users BitCoin-less.  It seems likely, however, that there will be ways of backing up BitCoin accounts.

One of the most fantastic aspects of BitCoin is that it is open source software, which means that one wouldn’t have to buy the software, but simply download it.  Open source has long been a dream of many hackers going back to the creation of home computers and the internet, and has taken on renewed vigor as corporations and governments have gradually consolidated power over computer software and the internet.

The catch with BitCoin is that there will be a limit to the number of BitCoins ultimately generated.  According to a Launch Conference article, only 21 million can be generated by 2140, “but at this point the electricity and time it would take to produce a BitCoin is larger than the actual value of a BitCoin (your laptop might take five years to make one batch of 50, and they currently trade at $6.70 per BitCoin).”

This built-in limitation would seem to restrict the BitCoin to the fringes, unless more and more people download the software, and the value of the BitCoin skyrockets.  And since it has limitations, it’s clear that not all human transactions could be done by way of the BitCoin, which would certainly limit its mission to put power back in the hands of people.  Question: would the tech savvy have an advantage in generating BitCoins?  This seems to be what BitCoin Tech Lead Gavin Andreson is intimating when he told Jason Calacanis on “This Week in Start-Ups” that generating BitCoins has become a specialized business.

In the interview, Calacanis gives BitCoin 24 months before it is dismantled by the US government.  And my good friend noted yesterday that it probably won’t take long before it’s somehow infiltrated and subverted by the US government.  Gavin Andresen, in fact, has already been asked to speak about the software to the CIA’s investment arm In-Q-Tel.  Also interesting is the possibility that open source currencies could revolutionize work: power relationships, work days, etc., freeing up humans to enjoy life instead of being tethered to jobs they hate.

Whatever happens, the invention of the BitCoin is a rather seismic event, and might point to the way of the future, in which the people might finally wrest the power that the state and corporations have held over individuals for far too long.

Is Bitcoin The Most Dangerous Technological Project Since The Web Itself?

Launch examines Bitcoin in an article that discusses the controversial P2P electronic currency, outlining what they’ve learned after researching it, and making some predictions for the future.

Bitcoins are a virtual peer-to-peer currency that can be sent and received directly from their site, or via and escrow service or currency exchange. The benefits are that your coins can’t be frozen, tracked or taxed, and transaction costs are very low.

From the article:

A month ago I heard folks talking online about a virtual currency called bitcoin that is untraceable and un-hackable. Folks were using it to buy and sell drugs online, support content they liked and worst of all — gasp! — play poker.

Bitcoin is a P2P currency that could topple governments, destabilize economies and create uncontrollable global bazaars for contraband.

…Bitcoins are created by a complex algorithm. Only 21M can be made by the year 2140. Your desktop bitcoin software can make bitcoins, but at this point the electricity and time it would take to produce a bitcoin is larger than the actual value of a bitcoin (your laptop might take five years to make one, and they currently trade at $6.70 per bitcoin [ see https://mtgox.com/trade/buy for the latest exchange rate ].

Bitcoin miners use super cheap GPUs (not CPUs) to create the coins, but as more people come online to make them, the algorithm adjusts so that one block can only be made every 10 minutes.

Here is what Launch stated after a month of research:

1. Bitcoin is a technologically sound project.
2. Bitcoin is unstoppable without end-user prosecution.
3. Bitcoin is the most dangerous open-source project ever created.
4. Bitcoin may be the most dangerous technological project since the internet itself.
5. Bitcoin is a political statement by technotarians (technological libertarians).
6. Bitcoins will change the world unless governments ban them with harsh penalties.

As a result, they add that they are “100% certain” that governments will start banning bitcoins in the next 12 to 18 months.