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European Central Bank Casts Wary Eye Toward Bitcoin
An anonymous reader writes "Erik Voorhees blogs for bitinstant.com: 'On Oct 29, 2012, the European Central Bank (ECB) released an official (and very nicely prepared) report called "Virtual Currency Schemes (PDF)." The 55-page report looks at several facets of what virtual currencies are, how they're being used, and what they can do. As it happens, the term "Bitcoin" appears 183 times. In fact, roughly a quarter of the whole report is specifically dedicated to Bitcoin and it's probably a safe assumption that Bitcoin's growth over the past year was the catalyst for producing this study in the first place. The report from the ECB concludes, in part: Virtual currencies fall within central banks' responsibility due to their characteristics, and Virtual currencies could have a "negative impact on the reputation of central banks."' Could this be the first step toward regulation of the digital currency?"
Virtual currencies could have a "negative impact on the reputation of central banks."'
By showing that the legion of morons and regulation and other peripheral bullshit associated with central banks are entirely unecessary and even counterproductive. Thus rendering, among others: the person that wrote the study potentially useless and unemployed.
They're both in the business of creating money out of thin air, so of course they'd see a problem with it.
No, its the first step toward eradication of it. The freedom of being able to buy something anonymously is soon coming to an end. Not only does it threaten banks and their empire, but governments too.
---- Booth was a patriot ----
Correct me if I'm wrong, but isn't the whole premise of bitcoin to be a currency that has no central authority?
That is, it's a currency designed from the ground up to exist without and outside of central regulation and interference.
I suspect that, if regulators attempt to get their hands on it somehow it will consider those attempts to be damage and, like the Internet, route around them.
Bit coin is a joke currency based on misusing my computers processing time, and the ECB is now operating like the FED with it's OMT's (Outright Monetary Transactions) The only real currencies are:
family
friends
seeds / food / land
survival equipment
gold
silver
Bitcoin, though (arguably) well meaning, is a joke.
I'm not sure how a decentralized, electronic currency can be "regulated" at all.
You have no idea what money is, do you?
It's afraid.
Yep, they know what's best for YOU.
Because YOU are too stupid to figure it out for yourself.
Bitcoin does potetially weaken the power of central banks and governments, transfering it back to the people, the way it was for thousands of years. Is it an outright threat? Only if your goal is to control people through virtual currency, and maintain the power to transfer wealth from the people to the government without the people being able to oppose it by printing money.
Interestingly, while we compare it to western banking, it really undercuts more corrupt regimes that try to boalster their self-inflating currencies by putting up roadblocks to currency trade... e.g., Argentina's heavy restrictions on purchasing US Dollars with pesos in order to continue the wealth transfer to the government through currency inflation money printing. You'd think that western governments would be a bit more supportive of a decentralized virtual currency that helps people in countries like that.
Perhaps people should just tell the ECB it is like a game currency (Linden dollars)...
Not many people realize why central banks exist, but their primary role to to assure a consistent monetary policy, specifically one encouraging minor inflation (1-4%). Why is that important and necessary? Because economies run best at a steady, expected pace. When inflation grows out of control, habits change with spending and investing (people buy less long term investments and more short-term riskier ones, or consumers horde goods) and we know from history that when an economy goes from inflation to deflation there is massive chaos not only in the markets but with consumer spending (as people sell off short-term investments for long term or consumers decide to hold off buying things knowing the cost will go down).
So, economic systems need a slow upward progression for currency to assure the economy to be healthy and Bitcoin offers that with the algorithmic generation but if the coins are generated too quickly (by some advance in computer processing), horded by a few people or other circumstances that reduce the liquidity of the currency (like the massive exchange thefts we've seen), the currency itself will begin to shift from the programmed inflation to deflation.
What's more is the fact that Bitcoin has a limit to the number of coins, which means when it hits that limit and the price of an apple goes from 1 coin to 0.1 coin, you just created programmed deflation and the behaviors of the users of the currency will change causing chaos against other world currencies that are targeting gradual inflation.
The actual report is about all virtual currency schemes, including the likes of Bitcoin, PayPal, or Second Life money.
Moreover, the precise conclusions from the executive summary:
It can be concluded that, in the current situation, virtual currency schemes:
- do not pose a risk to price stability, provided that money creation continues to stay at a low level;
- tend to be inherently unstable, but cannot jeopardise financial stability, owing to their limited connection with the real economy, their low volume traded and a lack of wide user acceptance;
- are currently not regulated and not closely supervised or overseen by any public authority, even though participation in these schemes exposes users to credit, liquidity, operational and legal risks;
Translation: they're completely irrelevant to the monetary system as things stand, are unregulated, and present the same kind of risks as legal tender does (aka you can go in debt).
- could represent a challenge for public authorities, given the legal uncertainty surrounding these schemes, as they can be used by criminals, fraudsters and money launderers to perform their illegal activities;
Translation: criminals can do illegal stuff with Bitcoin and PayPal.
- could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly;
Translation: if a virtual currency scheme collapses, victims might point to us for not having regulated it earlier.
- do indeed fall within central banks’ responsibility as a result of characteristics shared with payment systems, which give rise to the need for at least an examination of developments and the provision of an initial assessment.
Translation: those victims would be right in the sense that they traded actual currency for virtual currency.
So... basically, the ECB is flexing its muscle in the hopes of getting more power and responsibilities.
The whole thing prompts a remark, though: the cases of PayPal et al in the EU are reasonably well settled insofar as who gets to regulates: most operate as UK financial institutions. To the best of my knowledge, things are a lot murkier outside of the EU, or in the case of Bitcoin or virtual currency bought through in-app purchases.
But beyond any market-level incidents caused by a new currency, itâ(TM)s important to understand that virtual currencies can actually damage the faith people put into central banksâ"and fiat currenciesâ"as institutions themselves. People are taught that central banks are necessary to manage money supplies (even though the US boomed through the entire 19th century, most of which didnâ(TM)t have a central bank). But, if it is demonstrated that money can work without central planning, and maybe even work better, then indeed the faith in central banks will be undermined, and with good reason.
Why do we have centralized banking (aka the Federal Reserve System) in the USA?
https://en.wikipedia.org/wiki/The_Panic_of_1907
And you know what the solution to that panic was?
A bunch of rich guys injected liquidity into the system because there was no central bank to do so.
100 years later, when confronted with the same market situation, our central bank injected liquidity into the system and kept things from getting worse.
Imagine that! Unelected ivory tower banking eggheads made the exact same move as laissez-faire capitalist J.P. Morgan and friends.
The issues surrounding non-centralized banking isn't whether money works better or worse,
it's about what happens during the edge cases, when shit hits the fan.
[Fuck Beta]
o0t!
How could anyone possibly have a more pronounced negative impact on the reputation of central banks than those banks themselves? What universe are these jokers living in?
oh noes
predictable inflation is good but predictable deflation is bad? Why exactly? I can plug +1% and -1% into equations just fine. Do you like automatic paycut in the name of the almighty economy that much? Consumption and shit wouldn't be propped up to boost meaningless gdp number and the planet earth would be happy with slower pace of resource extraction. Why do you hate planet earth?
I hear this tirade over deflation over and over again... but I see no actual evidence for it, and there is a spectacular counter-example: technology. The tech industry has been in constant deflation since its inception. You get more and more computer (memory, storage, processing, bandwidth, what-have-you) for less and less money every year (if not every month). Yet the tech industry has not come falling down because of rampant deflation. Where's the proof that deflation is bad?
Could this be the first step toward regulation of the digital currency?
This might be a further, albeit small, step toward further success of digital currencies in general and Bitcoin in particular. If and when a central bank reacts in such a way, such a reaction may betray it feels threatened. Which proves at least implicitly that virtual currencies in general and, particularly, Bitcoin fulfill their purpose. QFD.
Religous speak to God. Insane are spoken to by God. When all shut up, one can finally hear Shostakovich in peace
"Scheme: 5.b. A plan of action devised in order to attain some end; a purpose together with a system of measures contrived for its accomplishment; a project, enterprise. Often with unfavourable notion, a self-seeking or an underhand project, a plot, or a visionary or foolish project"
The ECB systematically referst to virtual currencies ( and to Bitcoin ) as "schemes". The contempt of these bankers in their Frankurt ivory tower is almost tangibly present in this report....
Religous speak to God. Insane are spoken to by God. When all shut up, one can finally hear Shostakovich in peace
It's only predictable if it can be adjusted to changes in the market. If there is a sudden jump of efficiency in the production chain the deflation will be out of control, nothing predictable about it.
It's been in inflation, not deflation. You did show, however, that people would still actively produce something that's value was virtually certain to drop rapidly, congratulations.
Analogies don't equal equalities, they are merely somewhat analogous.
It will be a long time until BitCoin reaches the maximum number of coins in circulation, specifically around 2140, and at the time, the number of bitcoins will be approximately 21 million. Since each bitcoin is currently divisible up to 8 decimal places, that means that when those last bitcoins are mined, there will be about 2.1 quadrillion individually accountable units of bitcoin currency available for use. That means that there is a controlled inflation value until 2140, and only after that point would deflation be inevitable. If we're still using bitcoins in 2135 or whenever that becomes a serious concern I'm sure some enterprising fellow will create a bitcoin clone, and encourage users to switch (which they will if they realize their money can only depreciate in value).
Considering the gross world product for 2011 was just about $79 trillion USD, (or if we include the currently smallest common division of US currency in our calculations, the penny, we have aproximately 7.9 quadrillion individual units of currency) I think the number of potential bitcoins is plenty to compete with any other world currency. Especially since although the GDP figures above are listed in USD, the actual distribution of GDP is in USD, CAD, Euros, Yen, and whatever other currencies you can think of.
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From my very cursory recall of my history classes, the Panics of ______ tend not to get touched on, which is funny if they were bad enough to be called "Panics of ____". There's a bunch of them, I'm too lazy to look up the exact dates, but one after the Civil War, one near the 1890's, and now the 1907 one. The main money event anyone really remembers is the Great Depression day.
My first Journal Entry ever, in 8 years! http://slashdot.org/journal/365947/aphelion-scifi-fantasy-horror-poetry-webzine
The Euro experiment has been tried - it mostly failed. Time for a p2p world currency to give it a try...
There was a lot of deflation, then the Great Depression happened. By the ironclad law of Correlation = Causation, this single data point proves that deflation = depression.
(Welcome to Keynesian economics.)
Now explain where the demand for Bitcoin comes from. People don't magically start accepting currency; there needs to be a compelling reason for them to do so. Compelling reasons for most currencies are: taxes, the court system, legal tender, and more generally the law. Now, what does Bitcoin have, other than the age-old scam phrase, "Other people will accept it!"
Palm trees and 8
wtf? efficiency means undercutting competition and winning the consumers. Cheaper goods for everybody, where is the problem exactly?
You say the current situation is better? Nowadays the only way to make a decent buck is to frontrun yet another stimulus program of the Fed and the ECB, that recycles the purchasing power confiscated from the unwashed masses by inflation. Do masses have that kind of insider knowledge required to 'bet' right, or maybe bankers do (betting assumes you can lose, bankers don't lose)?
What does that market say about the future of bit coin? If investors have correctly priced bit coins, then their value relative to USD should be "fair" (that is, it's expected future value should be the same as that of USD). However the total value of bit coin is $100 million USD, and 75% of all bit coins that will ever be produced have already been produced. Therefore the total value of all bit coin, in today's dollars, is $133 million USD. Compare this to MB (supply of hard currency and Federal reserve balances) which was about $900 billion before the financial crisis (MB is the equivalent of the total value of all bit coins, since if we were to create fractional reserve banking system based on bit coins, it would use bit coins as its money base). So the total present value of all bitcoins today is about 1/7000 of the total value of all US dollars today, and with time this can only go down, since more US dollars are produced every day.*
Note that this is under the assumption that bit coins are correctly priced. If you believed bit coins will eventually catch up and become 1/100 of the US economy, that means that bit coins are underpriced by a factor of 70, and you should probably be buying some!
*You might object that inflation cancels this out, but the combined effect of inflation and printing money is that the total value of the money supply grows with time, at about the same rate as the economy, which slightly outpaces interest rates, so that the present value of the total US money supply in year X, grows exponentially with X.
Some amount of tax is good for currency: it creates demand. It creates a believable reason why anyone would want the currency.
Value does not come from scarcity only. There is not much "authentic betterunixthenunix urine" in the world, but I doubt that you would give me anything more than your own urine in exchange for it. Supply and demand are where value comes from, and Bitcoin in particular lacks demand (game currencies don't: you need the game currency to have fun in the game [or to increase the fun or whatever]; note the existence of an authority giving the currency demand and by extension value). Gold was valuable as currency because governments accepted gold for taxes etc.; if the government had not been willing to accept gold, it would just be shiny metal that might fetch some price as metal, but not nearly as much as whatever the government does accept as currency.
Palm trees and 8
Well said, but I would like to clarify some things you said.
Even though the exact nature of the price level (value of money) is still a bit murky to economists, it is generally agreed that the total value of money should have some relation to the total value of the economy. That is, the total value of money should be approximately equal to some fixed proportion of the total value of the economy. We can think of this as the equivalent of setting aside a percentage of the economy to use for barter.
Now since the economy is always growing in real terms, this means that the total value of money must also grow.
But if the number of bit coins is fixed, and it's value is growing in real terms (i.e. faster than interest rates), then it becomes a valuable investment. Or put another way, with rational investors the value of bit coin cannot grow over time. Fiat money doesn't suffer from this problem (gold may or may not) because central banks print money.
In fact, this is the reason central banks print money, beginning with monetarism (growing the money supply at a constant rate) and moving on to modern methods which target inflation to a constant amount. I really wish more people would read about this instead of blindly following charismatic non-experts. It seems like anti-reserve banking is the new creationism.
I'd worry more about how the Euro is having a negative impact on the reputation of central banks. It's not like they've been doing a bang-up job with their own virtual currency lately.
Have gnu, will travel.
And put a lot of people out of a job, don't forget that.
Every time you make a system too efficient, you reduce the number of workers but with economies it's important to have as many people working as possible.
The obvious solution is persistent, self-sustainable jobs. For example, if we turn those ex-employees into glue, then they'll be employed for a long time, say, holding layers of plywood together, a task for which they're admirably suited. They'll also stop needing basic needs and social services, and be far less of a drain on the rest of society.
The only drawback is that tax revenue might decline for a time. But given that we can spend without actual revenue, I don't see this as a significant issue.
As a non-humorous aside, why pay people to do nothing when we could be paying them to do something? It's not important to have as many people working as possible, when working means sucking cash from chumps who actually produce value.
Of course Virtual Currencies will have a "negative impact on the reputation of central banks." Virtual Currencies like bitcoin have numerous huge advantages over the fiat competition. Notice that these are not tiny advantages, but a large number of giant leaps forward:
Decentralised and free from control
Always running 24/7
International
No/low fees
New privacy model
Transparent system
Divisible
Secure
Fast transfers
No chargebacks
Environmentally friendly / efficient
Digital
I can spend them on over 1500 websites, donate $1 to wikileaks with no fee, instantly deposit/withdraw from poker/sportsbooks, get 5% off on amazon purchases, and do sub $1000 currency conversions for less than any other method. The IRS doesn't know about it, no one can sue me to take it, my wife doesn't get half of it in a divorce, and I don't have to worry about it being inflated away by the government. It increased in value by 1,750% last year, more than any other asset class, and this year it is up over 135%. This is a radically superior money compared to pieces of paper and gold, even if you only count what it can do right now, and this is just the beginning. The future will show the real potential of this disruptive technology. Central banks and fiat will be a thing of the past.
More detail on these points at: http://bitcoinmedia.com/bulleted-advantages/
It could have a negative impact on their.... "reputation"? WTF. I think they (banks and credit companies) do a good job of that themselves with all of the MASSIVE security breaches they seem to have and their ridiculous % rates. It's about time we had something like bitcoin where it doesn't matter what time of the day it is, where you are or where you are sending money too, if it's a holiday or not....etc You want money sent or received then that is what you will get and you won't have to wait for 2-3+ business days for it to happen either, or pay ridiculous fees for conversions or wire transfers, especially if they are international, they get very pricey.
Not even sure how they seem to think that control of bitcoin should fall under their control. First unless they want to build one hell of a processing center to gain control over the network it will cost them a lot. It's also already spread out into the population so there isn't much that can be done to stop it, and it's world wide so unless every bank cracks down it will be fine. Hell if they somehow stopped exchanges from converting bitcoins to other currencies, it might just help people move to just using bitcoin on it's own and not even bothering with converting to another currency.
Last thought I had is that the banks like the federal reserve were supposed to be .. you know... by the people for the people....yadda yadda. with the public and the government able to oversee all or most aspects of what was going on. Not anymore. it's so mind boggling it's sad and funny at the same time. Bitcoin is awesome because it's peer to peer and run by normal people and not just shady private banks or financial companies that are no better than loan sharks or the mob it often seems.
It does have it's ups and downs, kind of a given for a new fledgling currency. Despite that I don't know any other currency (I don't count precious metals since they are not currency in and of themselves.. they need to be refined and stamped into coins..etc) that has been worth so much more than the US Dollar for such a long period of time. I mean right now 1 Bitcoin (BTC) is worth ~$10.50 USD. Seems to float between $10-11. I don't know of any other currency that comes near that.
Anyways I'm just rambling. I really think that something like this would be great for the world, but realistically I know it takes too much money away from banks and other powerful people/groups/corporations so *shrugs*.
Virtual currencies could have a "negative impact on the reputation of central banks."
Judging by the economic situation in Europe, I think it's more accurate to say:
"Central banks could have a "negative impact on the reputation of central banks."
Could this be the first step toward regulation of the digital currency?
I can assure you, this is already well underway even if not publicly discussed. A currency not under the control of the Government (no matter the country) is a threat even if for no other reason than a lack of control. The minute it is viewed as such, regulations will start flying from everywhere and this report is probably the first step in such a direction.
As if banks could look any worse as they do now. Especially the "central banks", which are basically just Goldman Sachs facades.
Nobody deals with "normal" banks anymore, if he has any other way. Credit unions is where it's at. You are the boss. You own the bank. So unless you're self-abusive, I'd say that is the *vastly* superior deal.
"Virtual currencies could have a "negative impact on the reputation of central banks."'"
Why do banks seem to be more concerned with 'protecting their reputation' than ensuring that the public interest is served?
Any system of unregulated digital currency is merely a challange. The minipulation in supply and value conversion into "real money" is just too tempting for exploiters. A look at historical rates demonstrates the volativity. Proceed at your own risk.
They have it backwards. Bitcoin doesn't make banks look bad, it came about because they already look bad. Their (and Wall Street's) practices are crap, they're unfair on a global scale, and they're generally just to expensive with people at the top making a buttload of money. That's what makes bitcoins look better by comparison.
Inflation takes a fraction of the value in the entire economy, and transfers it to the guy with the new money,
Bitcoin includes constant inflation because that is the community's payment to the people burning up their graphics cards to ensure the integrity of the system. It is the bounty offered for the use of all that computation.
In contrast, central banks take that inflation value as payment for... giving some of it to their enabling governments. They don't actually provide the *users* of the currency with anything of value. Keynesian economists are paid by the banks and governments to throw up a smokescreen for their scam.
Deflation is not to be feared. It means your wages increase in value, and you don't have to dump all your cash into risky investments or bonds to avoid the inflation tax. Governments, banks, and megacorps FUD deflation because it's bad for THEM.
predictable inflation is good but predictable deflation is bad? Why exactly?
Because lending $1000 today and getting $999 back tomorrow is a universally bad deal regardless of how much deflation the economy has.
Moderate inflation means you need to invest your money in something other than currency or you will be losing value. Moderate deflation means you should hoard your currency because it will automatically become more valuable (have more purchasing power) over time. And when people start hoarding, the money supply decreases which causes faster deflation. Problem is you haven't plugged +1% and -1% into all the correct equations to see that there is a difference depending on the sign. You might think that 0% inflation would be optimal, but that simply sits on the line between stability and instability which is an undesirable place to be.
It seems the cause of those panics is always that the banks don't actually hold your money and then there's a run on them for one reason or another. In other words, the banks are the enabler for those panics, something just needs to trigger it. If we had secure digital currency people wouldn't need to keep it in a "safe place" like a bank. I don't know what that solution is, but bitcoin doesn't seem to fit the bill.
That is the WHOLE POINT! Bitcoin is simply more trustworthy. It's cash, guaranteed by the central authority of all its users.
Let legacy financial players be crushed under the inexorably advancing wall of ice called History. No matter how much they thrash around, they're still getting crushed. Good riddance.
Making laws based on opinions that stem up from false informations leads to witch hunts.
we know from history that when an economy goes from inflation to deflation there is massive chaos not only in the markets but with consumer spending (as people sell off short-term investments for long term or consumers decide to hold off buying things knowing the cost will go down).
Nonsense!
Think about computers, or smart phones. Have you ever put off a purchase, because there was going to be a cheaper or better one in the future. OK. Perhaps you have, but only for a few days. Have you done it long term, say a half-year or longer??? Be honest.
The answer to this question shows that neither you, nor anybody else, puts off purchases because of deflation. We have had constant deflation in the realm of computers and smart phones all of my life.
Destruction or busywork may not create prosperity, but they can be used to spread it around; and while a more rational way might be to simply pay the unemployed glassmakers social security benefits and retrain them, that solution seems to strike those better off as unfair, so that leaves either letting them starve - which will lead to a revolution eventually - or making enough busywork through bureaucracy or breaking windows to ensure near-full employment and simply accept the resulting waste as a price to pay for people's irrationality.
False dilemma fallacy. People can pay for their own reeducation (or borrow money to do so).
Casting the choice as either "welfare/wasteful inefficiency or death for unemployed" is disingenuous and makes me question your political bias. I can just as easily spin the choice as "require people to take personal responsibility for the outcome of their lives, or institutionalize the ethos of mediocrity and penalize the successful via confiscatory taxation until there is no remaining spark of excellence in this country". See how it works?
Pitching this in extremes of either political pole tends to shut down debate.
I've always though that the programmed maximum was silly, but largely irrelevant. There already are competing distributed alternate currencies to Bitcoin that use other allocation systems, so it is largely meaningless as well.
The real threat to inflation will be the large number of Bitcoins in clients that are being hoarded but not used (often because somebody lost their wallet, their computer crashed, or had bitcoins and stopped using them), and if some alternate system can hack at those old hashes to "release" those bitcoins into the market suddenly. That wouldn't impact "current" transactions that would presumably be protected with updated hash algorithms, but if algorithms used in the past had a defect (like the MD5 hashes... to give an example... or they were protected with ROT-13), those could be "hacked" and used. It doesn't change the total number of coins in the system, but it could be the equivalent of finding a Spanish galleon and flooding a local market with a large amount of gold.
People are taught that central banks are necessary to manage money supplies (even though the US boomed through the entire 19th century, most of which didn't have a central bank.
The US went bust in 1819, 1837, 1857, 1873 and 1893.
The Great Depression of the 1930s was called "great" for a reason. It followed a long series of depressions which afflicted the American economy throughout the 19th century.
Crop failures, drops in cotton prices, reckless railroad speculation, and sudden plunges in the stock market all came together at various times to send the growing American economy into chaos. The effects were often brutal, with millions of Americans losing jobs, farmers being forced off their land, and railroads, banks, and other businesses going under for good.
In early May 1893 the New York stock market dropped sharply, and in late June panic selling caused the stock market to crash.
A severe credit crisis resulted, and more than 16,000 businesses had failed by the end of 1893. Included in the failed businesses were 156 railroads and nearly 500 banks.
Unemployment spread until one in six American men lost their jobs.
Financial Panics of the 19th Century: Severe Economic Depressions Occurred Periodically
I know I'm over simplifying things here, but if someone wanted to 'release' lost bitcoins, they'd need the wallet file, in which case they'd no longer be lost. The wallet could be encrypted, but that's not really a lost wallet so much as a wallet locked up inside a safe that you don't know where the key is for. When bit coins are 'sent' what's really done is they are signed with a public key that matches the private key in your wallet file. For them to travel onto somewhere else you have to process them with your private key and resign them with the public key of where they're going next. Given current cryptographic complexities, the processing power to crack 'unspent' bitcoins would be so high, that it would be financially more profitable to devote those resources to mining new coins than to 'steal' them.
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For many years people thought the MD5 hash algorithm was secure, but eventually a flaw was found that could crack that hash. See also http://en.wikipedia.org/wiki/MD5#Security
You don't necessarily need the "wallet file" but you do need to be able to reconstruct it. This is all theoretical, but assuming that the current algorithm being used for Bitcoin had a similar mathematical vulnerability where you could crack a wallet some time in the future with ordinary computers in under a minute of effort, some of the older wallet files might be compromised. Don't go thinking that such things are flawless.
If the issues with MD5 are any sort of precedent, there will be some warning in the community of software developers world-wide that the Bitcoin hash algorithms may be compromised, and some substitute will be found to hopefully improve the situation. It would be strongly recommended in that situation to move your bitcoins to a new wallet, but that doesn't stop older wallets to be harvested in some fashion. The processing power to crack these "unspent" coins may not be nearly so high as you may think. It would be a mad dash though to "harvest" as many of these older wallets as could be found as such a vulnerability is found.
If quantum computers become common and high-Qbit computers (aka 500+ Qbits entanged together as a unit) are enabled, I would imagine that Shor's algorithm would be applied to older wallets and some sort of quantum encryption would thus be applied to future bitcoin transactions. This is a known vulnerability in the current structure of Bitcoin. As a practical matter, this is something you really don't need to worry about as such computers would not likely be built any time in mine or your lifetimes, but it is still something that could happen. Other problems might come up too.
Bitcoin solves that, its not a fiat currency. Banks are flaky because they lend money they don't have, thus magicing money into existence. So a run on a bank can bankrupt it very easily because it really doesn't have the assets to lend out, it has only a tiny fraction of those assets. So it is not possible to have a run on a bitcoin bank. No bailout is possible or desired or needed.
Also the other big advantage is everyone is on the same footing. When Investment banks in Wallstreet was given bank statue, it meant they could magic money from thin air and buy real assets with that money, ordinary people cannot do that. So the supply of money comes from a few sources who are plugged into the money making system. Bitcoin expands that system to everyone and levels the playing field. So instead of a few large institutions that can have a run on them, we have many more smaller ones.
"The panic was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company—New York City's third-largest trust. The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks."
This is the first shot over the bow by the central banks to start pushing legislators to block virtual currencies with new laws. Virtual currencies are the only competition to the monopoly congolmeration that is known as a central bank. Wiriting is on the wall. Should see more and more news stories about how "bad for the economy" virtual currencies are soon. The PR blitz will ramp up exponentially from here. (sorry if someone already posted this, didnt read all the comments.)
which they will if they realize their money can only depreciate in value
Um, if you own a fixed proportion of a fixed commodity that people want, it's not going to depreciate in value. On the contrary, BitCoins will increase in value, as there are not enough to go around. Thus, the prices of things in BC will go down (one apple costs fewer BC). That's the programmed deflation he's talking about.
"We don't need the government or banks to help us with our currency!" *Loses entire savings to a JS XSS exploit with no recourse to the law or bank security*
Excuse the Unicode crap in my posts. That's an apostrophe, and slashdot is busted.
That's hardly their fault. The failed US banking system tore apart carefully layered lies across the world. Heck, Greece needed help from Goldman Sachs to hide their debts and qualify to join the Euro currency system... Something that became clear and evident only after the US banking and housing crisis. The US has the most mismanaged central bank system there is!
The EU has done a great job on creating their currency, it just isn't perfect. What glass house do you live in? It also can't be called "virtual" when 17 countries or more have bills and coins issued!
Bitcoin is obviously threatening to central banks, as it questions their government-granted monopoly on their respective territories.
Funny thing, people tend to have a blind eye towards that monopoly, whereas they realize that monopolies are bad for consumers in other domains (lower quality, higher price, worse overall value). Bitcoin helps people reconsider the notion of alternative currencies.
Personally, I am attracted to bitcoin's feature of having a constrained supply by design. There is no problem with prices falling over time because of increased productivity relative to the money supply. Gold and silver are that way to. Other people may disagree and they are free to choose another currency to use. Just like Android fans can't force Apple or Microsoft users to switch.
May currencies compete for market share and popularity. That is good for the vast majority of people as it leads to innovation towards better service. The only exceptions are the banking cartel and their buddies in finance and politics, which currently benefit from the monopoly. If bitcoin or other currencies show signs of becoming popular, let me assure you they will fight it tooth and nails.
These comments are mine; I do not speak for my employer.
And since bitcoin uses sha256, the moment bitcoin becomes compromised we will have a much larger problem at hand, that is of compromised HTTPS/ssh and other secure protocols, basically everything we now call Internet would fail.
And BTW, md5 is still secure for functions it has been designed for - quick non-cryptographically strong hashing - you just have to use salt, that's it.
Not many people realize why central banks exist, but their primary role to to assure a consistent monetary policy, specifically one encouraging minor inflation (1-4%). Why is that important and necessary? Because economies run best at a steady, expected pace. When inflation grows out of control, habits change with spending and investing (people buy less long term investments and more short-term riskier ones, or consumers horde goods) and we know from history that when an economy goes from inflation to deflation there is massive chaos not only in the markets but with consumer spending (as people sell off short-term investments for long term or consumers decide to hold off buying things knowing the cost will go down).
So, economic systems need a slow upward progression for currency to assure the economy to be healthy and Bitcoin offers that with the algorithmic generation but if the coins are generated too quickly (by some advance in computer processing), horded by a few people or other circumstances that reduce the liquidity of the currency (like the massive exchange thefts we've seen), the currency itself will begin to shift from the programmed inflation to deflation.
What's more is the fact that Bitcoin has a limit to the number of coins, which means when it hits that limit and the price of an apple goes from 1 coin to 0.1 coin, you just created programmed deflation and the behaviors of the users of the currency will change causing chaos against other world currencies that are targeting gradual inflation.
Your taught that inflation is good and deflation is bad because deflation punishes those who live beyond their means. Governments live beyond their means and it's no surprise either that Keynesian economics is being taught as the correct way to run an economy despite the overwhelming evidence it doesn't work (Great Depression, 1970s, 1990s Japan and the US today). There shouldn't be a policy of pro-inflation/deflation though. The chips should fall where they may.
The belief that a bunch of academics can manage an economy is a fallacy and there has never been a consistent monetary policy.
As I said, having the hashing algorithms become compromised would be long process... something that would be identified years before it becomes a serious problem. Yes, it would cause a major series of updates for people who try to use hashing for security and I will agree that it would impact far more than just Bitcoin. None the less, it is a potential vector of attack to the protocol beyond simply getting a majority of the computing power. That was my point in the first place that there was at least a potential even if unlikely vector that could compromise Bitcoin as protocol.... and more importantly cause massive inflation for a short period of time.
Deflation is only bad for speculators who take on debt to buy assets in the hope their price will rise (with no work or effort on their part). For actual consumers and everyone else working in the real productive economy deflation is good thing: your money keeps on buying more and more.