Major Bitcoin Exchange Ceases Operation

First time accepted submitter Sabbetus writes "On Monday the CEO of prominent Bitcoin exchange Tradehill announced that they are shutting down. Ars Technica ran a story on this stating that 'After Monday's news, the currency's value fell from $5.50 to $4.40, a decline of 20 percent.' Tradehill is returning all funds and meanwhile their competitors are fighting over who gets Tradehill's customers."

Comments

Re:Bizarre and Confusing Summary

[Ogi_UnixNut]

Sounds just like some of the financial trickery you hear about happening in the finance industry, doesn't it?

Re:Bizarre and Confusing Summary

[Ogi_UnixNut]

The Act only applies to the US though. Many places you can host an exchange. Never heard of tradehill though, so can't tell where they were based.

One of the nice things about bitcoin is that there are no real borders for it. You can trade on any exchange in the world, and use the currencty anywhere without restrictions (so a bit like cash, but without limits on how much you can take out the country, or currency conversion fees, etc...).

Re:Bizarre and Confusing Summary

[iluvcapra]

Quite simply put, no BitCoin exchange -- neither Tradehill nor Mt. Gox -- is going to be able to comply with the Bank Secrecy Act.

I disagree. As long as an exchange keeps identity records for all of its business and for all of the address endpoints it creates, it'd probably be able to comply with US Treasury Department regulations. Bitcoin isn't anonymous. Things only start to get murky once you are moving bitcoins around off an exchange, but that's not the exchange's problem.

Re:Bizarre and Confusing Summary

[Wonko the Sane]

The Act only applies to the US though.

Technically true but in practice any institution that touches dollars ends up being bound to obey US law if it wants access to the international financial system.

But the protocols are still intact

[adjustable_pliers]

The loss of Tradehill and the security breaches of other exchanges disrupted the confidence in using Bitcoin, but the protocols remained intact. I see this as a testament to the design of the system, even though a fundamental quality for any currency is the confidence of its users.

As a Bitcoin lurker (I've never owned anything more than 2 BTC), I've been intensely fascinated in the potential of this "currency." Without belaboring the great qualities of a decentralized currency, it has attracted a speculative class of users that have rushed into centralized exchanges using nervous money transmission providers. The irony is not lost on me.

Tradehill's departure and what I believe will be an eventual international agreement hobbling Bitcoin's biggest exchange Mt. Gox in Japan (a la UBS in Switzerland), due to tax evasion, ought to serve as a cautionary note to Bitcoin users. Money transmission is a confiscatorially regulated practice. Bitcoin's best hope ought to be transactions as decentralized as the protocol it uses.

Lurkers such as I can only hope of an ecosystem or application so widespread, so diversified, secure enough, and easy to use before Bitcoin can be considered useful to most internet users. I dream of a decentralized Facebook knock-off (e.g. diaspora*, etc.) with a Bitcoin client built in, making currency transmission as simple as tossing a dollar to a friend to buy a cup of coffee. Perhaps even at a coffee shop with patrons casually swapping US$ and BTC as they play chess or read.

But there are exchanges

[Sycraft-fu]

Many of them. The US dollar is traded on all international currency markets and for a small scale, any bank will convert them. If it weren't, it wouldn't be very useful. If I pay someone in Europe in US dollars they are ok with that because they can convert them to Euros, which is what they need to do their business. If they couldn't, if US dollars were non-convertible, they'd be non-useful.

Also you have the problem that next to nobody accepts and deals in bitcoins directly. It isn't a functional currency. The US Dollar, the Euro, the Yen, these are all functional currencies because a lot of people will accept them as such. You can buy goods with them, pay taxes with them, etc. I cannot name a single thing I'd want to buy, a single place I shop at, that takes bitcoins. As such if they aren't convertible, they are worthless.

Why Bitcoin is doomed

[betterunixthanunix]

We go through this discussion every single time a Bitcoin article appears on Slashdot. Bitcoin is guaranteed to fail in the long run:

1. It is a digital cash system in which the tokens cannot be refreshed; this is known in crypto research community to imply that the tokens must grow linearly in the number of transactions. Bitcoin attempts to hide this fact in its architecture, but if Bitcoin is secure then the computation resources needed to continue using Bitcoin will grow over time. Worse, as more people use Bitcoin, the growth rate will accelerate because of the increased number of transactions. If Bitcoin was used at anything close to the number of dollar transactions that happen every day, the technical limitations of Bitcoin would kill it off within a week's time.
   
   Useful digital cash systems involve a central issuing authority like a bank or government, that can accept old tokens and produce "fresh" tokens of equal value. Having such a central authority is not a bad thing:
2. The demand for Bitcoin will never exceed the demand for national currencies. Using the USA as an example, people who live in America must pay taxes -- taxes on income, taxes on property, sometimes taxes on purchases they make, and so forth. The government only accepts tax payments that are made in dollars, and yes, you have to pay taxes on transactions that do not involve dollars, such as barter or having a Bitcoin salary. Every year, hundreds of millions of Americans must pay their taxes, and if they were all using Bitcoin for everything, they would all simultaneously try to trade their Bitcoins for dollars to cover their tax debt. While this frequently happens with other currencies -- people paid in pounds sterling will try to make a similar trade -- all national currencies are demanded by some nation's citizens for a similar purpose, unlike Bitcoin, which nobody is legally obligated to use.
   
   It is a good thing that nobody is obligated to use BItcoin to pay their debts, because:
3. Bitcoin is a deflationary currency -- there is a fixed maximum number of Bitcoins that can exist. If you had a long-term debt to repay in Bitcoins, it would be harder to make payments as time went on, because Bitcoins would become harder to find (assuming that the Bitcoin economy continues to grow, which I already noted is an unlikely event). You would be a fool to ever incur a Bitcoin debt for this very reason. Unfortunately for Bitcoin, credit is a necessary component of any economy; this has been a fact of life for so long that it not only predates paper currency, but paper itself.

So there you have it.

Re:Why Bitcoin is doomed

[betterunixthanunix]

they have already begun by taking the mining out of the default client

This makes the scalability problem even worse, since it forces you to reuse older tokens, which have already grown because of their use in previous transactions. This is not a problem that you can just hack your way around, it is a fundamental limitation of digital cash systems. Note that on the very page you linked to, they attempt to sidestep this problem by claiming that hard drive sizes will grow to accommodate their needs, which I seriously doubt unless Bitcoin remains an obscure payment system.

The black market already holds its own to the deman for national currency and the black market is growing with time - it is very likely that within the next decade or two it may outpace the regulated one. With half the world's population already employed in the black market it is not much of a stretch to think that you don't need a government to back a currency, if the incentives are right for the market to protect it itself.

It is very much a stretch to think that money can exist without government backing. If the black market stopped using national currencies, they would be forced to switch to a currency backed by some other large, powerful organization to enforce payments, and that organization would be a de facto government. Money is only valuable within some enforcement structure, which is the role that a government plays; even when banks issue currency, they rely on governments to enforce debt payments.

And you could say by the same metric that trade in physical goods, whether coins or paper bills have been a 'necessary' component ...until the digital banking started to take over in the 80's or so. Just because something has always been part of the economy does not mean that it is necessary. That is a correlation vs. causation error in thinking.

Except that we still trade in physical goods (and even if all currency were digital cash, you would still trade in physical goods -- you need food, clothing, etc.), and we have had paper transactions managed by banks for centuries (which have simply moved computers, which are more efficient record keeping systems).

At a basic level, credit is necessary in any economy because people with the skills needed to complete a task do not always have the resources needed for that task. A farmer might not have enough money to buy the fertilizer he needs for a particular growing season, a cook might not have the resources needed to start a restaurant, etc. At an even more fundamental level, you might need to work before you are able to pay the soldiers that protect you from a hostile enemy, but those soldiers need to be paid while they are busy protecting you; taxes themselves are a form of debt, and governments cannot function without tax revenue.

The unfortunate thing about Bitcoin is that people have come to associate Bitcoin with digital cash. There are plenty of other digital cash systems that have all of Bitcoin's advantages without the serious disadvantages; those systems use a bank or other token issuing authority to renew tokens that have long transaction chains (thus avoiding the scalability problem) and are easy to back with a national currency, or perhaps to use as a national currency. Anarchists may not like the idea of a bank having power over currency, but that is just how currencies work: some central authority must back the currency. I am personally a big fan of digital cash, since it would solve a lot of the security problems that we see with debit and credit cards, but because of the various crypto battles and patents in the 90s digital cash never did take off.