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?"

Comments

Cast in a negative light, obviously

[durrr]

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.

Re:Cast in a negative light, obviously

[Twinbee]

I see banks, and their multiple saving schemes, and different types of credit/debit card, and cheque books, and different types of notes, and tedious forms to fill in, and different currencies with all the complicated mess that entails when converting, and I think how nice it would be to scrap it all and start again from scratch, done properly, with almost total automation, and no UWS (Unnecessary Work Syndrome).

That would save billions or trillions of dollars per year probably.

Re:Cast in a negative light, obviously

[MatthiasF]

"That would save billions or trillions of dollars per year probably."

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.

So you're stuck trying to balance efficiency with employment.

Re:Cast in a negative light, obviously

[Kergan]

So, in other words, expand something like the EU's common currency to the entire world for the sake of simplicity? A little birdy tells me this might be problematic in the current political and economic environments.

Re:Cast in a negative light, obviously

[matunos]

Until bitcoins are widely used enough to become the major currency of a country, a comparison is just specious.

Re:Cast in a negative light, obviously

[fridaynightsmoke]

"That would save billions or trillions of dollars per year probably." 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. So you're stuck trying to balance efficiency with employment.

That must be why we subsidise the manufacture of buggy-whips and break all the windows every year to keep the glaziers in business, right?

Re:Cast in a negative light, obviously

[Twinbee]

And put a lot of people out of a job, don't forget that.

Only in the same way that the number of professional glass makers would be reduced if vandals stopped breaking windows.

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.

I disagree. We need to keep or gain productivity, sure. But that's what counts, not the number of workers doing said work. And no, I'm not some hardcore capitalist, as I think a basic income for everyone would be a good idea (unconditional money on top of any regular work income). Even the rich are happier when the poor have a relatively decent standard of living.

Re:Cast in a negative light, obviously

[Twinbee]

I was referring to the Broken window fallacy, which could completely remove unemployment, if vandals decided to cooperate. The amount of time and effort wasted with banks and their red tape is pretty similar to that.

Re:Cast in a negative light, obviously

[OrangeTide]

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.

They can be sent to work in the dilithium mines.

Re:Cast in a negative light, obviously

[jcr]

And put a lot of people out of a job, don't forget that.

That's a good thing. Any job that can be eliminated through technological advancement makes people available for more important work.

-jcr

Re:Cast in a negative light, obviously

[Znork]

Indeed, as the ultimate goal of humans is to work as much as possible. Almost everyone on their death bed regrets not having worked more. Or maybe not.

We're rapidly leaving the age of scarcity. Within years whole swaths of current human fields of labour will be rendered obsolete, even now Chinese labour is getting replaced by robots, 3d printing will probably do a lot more in and we're on the cusp of losing vehicle piloting to automation which will wipe out large parts of the transportation industry. Increased demand is simply fulfilled by more automated processes, it doesn't create more need for labour to anywhere near the extent it used to.

Ultimately we will have a choice. Either keep the few employed in productive necessary labour, while directly and indirectly taxing them like hell to support the rest of the population in meaningless make-work or outright welfare. Or we can cut working hours/days until equilibrium is restored and more equitable distribution of labour is achieved.

Personally I prefer the latter. I can live with having more free time, but both working my ass off to keep everyone else fed or, to paraphrase Keynes, doing make-work by burying money and digging it up again just to keep 'money' flowing aren't among the more palatable ways of living life.

Re:Cast in a negative light, obviously

[Kergan]

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.

Ever heard of Milton Friedman?

At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: "You don’t understand. This is a jobs program." To which Milton replied: "Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels."

Re:Cast in a negative light, obviously

[Twinbee]

Yes, or for free time, and enjoying life generally.

Re:Cast in a negative light, obviously

[Sulphur]

Until bitcoins are widely used enough to become the major currency of a country, a comparison is just specious.

Comparison to specie is specious.

Re:Cast in a negative light, obviously

[Twinbee]

Did you ever watch Fraggle Rock? In it, there were these characters called the 'Doozers' which lived to just work. They created (edible) 'buildings' just so that the fraggles would tear them and eat their handiwork. Kinda comical really. Anyway, I agree, free time is definitely undervalued. Even some or all of the mostly highly respected jobs will be automated eventually.

Re:Cast in a negative light, obviously

[zotz]

"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."

But I have the perfect solution for that little problem and have been quietly promoting it in my country for years now:

The Department Of Beach Surveys.

The government hires people and sends them to the beach every day. They get a clipboard and a short form to fill out daily.

Date:
Location:
Survey Taker:

Did you see any sea life today? Y/N
Did you see any birds today? Y/N
Did you see any land animals on the beach today? Y/N
Was it Windy / Calm?
Was it Sunny / Rainy?
Did you encounter any tourists on the beach today? Y/N
      If Yes, did they seem to be having a good time? Y/N
Did you have an enjoyable day at the beach today? Y/N
Optionally note below anything of interest you might want to.

Perhaps if your country does not have enough beaches, you could send those workers to our country to do the surveys here.

all the best,

drew

Re:Cast in a negative light, obviously

[Twinbee]

No I agree with you. You misunderstood me.

Re:Cast in a negative light, obviously

[pla]

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.

Working to create goods or value does not equal working to shuffle goods or value around on paper (as distinct from physically relocating goods, ie shipping, which does create actual value).

Some jobs just should not exist in the first place. Putting people out of them merely means having people available to do "real" work.

Re:Cast in a negative light, obviously

[Twinbee]

Switching to a new currency maybe has its own issues (though I do think it would be ultimately a good thing). But that's kinda separate from the other things I mentioned which really do waste time compared to a digital economy with full automation.

Re:Cast in a negative light, obviously

[spire3661]

Who gives a fuck if a job is lost? I have no problem replacing men with machines. A competent man will find a new way to sustain himself without relying on holding back progress.

Re:Cast in a negative light, obviously

[Luckyo]

Different banks. Central banks have little to nothing in common with savings banks.

Re:Cast in a negative light, obviously

[Luckyo]

Vast majority of "bank red tape" isn't something you can solve through technical means. That is because it's in place to control the human factor, also known as "opportunity makes a thief". And with rewards size of a bank, there are plenty of those looking for opportunities.

Re:Cast in a negative light, obviously

[ultranova]

I was referring to the Broken window fallacy, which could completely remove unemployment, if vandals decided to cooperate. The amount of time and effort wasted with banks and their red tape is pretty similar to that.

The problem is, Broken Window Fallacy is only a fallacy in the sense that an economy which has to use lots of resources to deal with vandalism is less well of than an otherwise identical economy which instead uses these resource to expand. It says absolutely nothing about whether a statement like "our economy would collapse if vandalism stopped all of a sudden because a lot of glassmakers would be out of work" is true.

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.

Re:Cast in a negative light, obviously

[ultranova]

That's a good thing. Any job that can be eliminated through technological advancement makes people available for more important work.

All of which completely ignores the time and resource cost of the training required for that more important work, the fact that not everyone can do every job with any amount of training, and most importantly that people aren't spare parts that sit on a low-rent warehouse waiting for their next assignment between jobs, but fairly high-maintenance living creatures. Thus the end result is not more efficient division of labour for the betterment of all, the end result is fairytale riches for some and poverty and uncertainty for most. Which is not a good thing, no matter how many rich megalomaniacs complain they aren't getting enough worship from their slaves.

Then again, if there's any group that deserves to be on the losing side of this dog-eat-dog battle, it's bankers.

Re:Cast in a negative light, obviously

[Chris Mattern]

My god, you're right.

We must immediately set half the unemployed to digging ditches while the other half fill them up again. It'll save the economy! You're brilliant!

Re:Cast in a negative light, obviously

[ultranova]

Who gives a fuck if a job is lost? I have no problem replacing men with machines. A competent man will find a new way to sustain himself without relying on holding back progress.

I think considering a superhero fantasy a valid answer to economic problem explains quite a bit about the current state of the economy. Or should that be a supervillain - that bit about replacing men with machines certainly sounded ominous...

Re:Cast in a negative light, obviously

[icebraining]

There's plenty of work to be done that most people could do. Elderly care, for example, is an important and growing sector.

Then again, if there's any group that deserves to be on the losing side of this dog-eat-dog battle, it's bankers.

There's no losing side. A person in the middle class today lives better than kings did in many ways (food balance, health, access to entertainment, etc).

Sure, we need to push back against the imbalances, but that kind of zero-sum thinking is poisonous.

Re:Cast in a negative light, obviously

[Anonymous Coward]

I will take the regulations on plain old banks any day over BitCoin.

One good example:

A close friend of mine had his retirement savings drained. The bank ate the loss.

If he had the same amount in BitCoins, stored at a BC exchange and the exchange had a break-in, the people there would be laughing at him saying that they are not obligated in any way to protect his savings whatsoever.

BitCoins are toys, but they are not a viable, nor trustworthy financial instrument. One can't even use them as a reliable anonymous currency unlike the eGold of the past.

I just tell people to stay away. BitCoins are only good for the people who were in when it started and had a 10,000 to 100,000 times easier chance of mining a coin.

Re:Cast in a negative light, obviously

[khallow]

But a lot of that "red tape" is put into place by pretty clueless people especially at the regulator and legislature level or by people with ulterior motives.

Re:Cast in a negative light, obviously

[drinkypoo]

Natural disasters aren't a form of broken window fallacy.

When your home is wiped out, and someone gives you a check so that you can rebuild in the same place, I'm not sure what else you call it.

Re:Cast in a negative light, obviously

[DanielRavenNest]

Bitcoin in circulation are larger in value than the money supply of 7 countries. OK, they are small countries, but you have to start somewhere.

Bitcoin current value: $110 million
Samoa money supply: $110 million

Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2214rank.html

Re:Cast in a negative light, obviously

[Fjandr]

Of course they are. After all, God is on our side.

Re:Cast in a negative light, obviously

[Anonymous Coward]

Yes. Start all over. Genius idea. That won't take an unbelievable amount of time and effort just to end up right back here where we are now, I'm certain of it.

Note, I'm being sarcastic. Just because YOU don't have enough money or don't do things that would make the different "cheque" books a viable, attractive option to have to manage your personal finances doesn't mean others don't. You perhaps forget that individuals aren't the only ones who use banks, and their "complicated mess". The system does a decent job facilitating keeping track of who's got what, and just because it's not perfect doesn't mean it should be scrapped. There are reasons we still use such things, and that's generally that people who actually know what the fuck is going on, and what they're talking about and what they're doing are convinced it's for the best. The fact that the system can occasionally be gamed and someone runs off with a whole bunch of money shouldn't be taken to imply that any alternative would necessarily be less problematic. Other systems have been tried, this one works best, without robbing a lot of people, many of whom don't deserve it, of what they've worked years, even decades to achieve.

The money you think it would probably save is figured only ignoring how much money is MADE, or the generation of which is facilitated, by the current system AS IT IS. You sound like a person who thinks no one should have to have car insurance because it just costs money, and hey, I'VE never had to file a claim... yeah, well, once you have, or when you grow up, you'll "probably" change your tune. Also, once you've worked for a number of years, and are supporting yourself, and you finally can choose to eat meals routinely that are not variations on store-brand macaroni and cheese and off-brand, post-expiry date baloney, you might realize that some idealistic little shit who's only just learned to piss standing up should NOT be given free reign to redistribute wealth as HE sees fit, and "scrap it all and start again from scratch, done properly, with almost total automation, and no UWS (Unnecessary Work Syndrome)"

People who opine, in my experience, (and I've talked to a lot of idealistic, wrong-headed little shits who have never done anything in their lives,) that the banking system needs to be scrapped will, when cornered, usually admit that along with remaking the entire banking system, they would, given their druthers, if they were in charge of the show, while they're at it, also redistribute the wealth more fairly, to achieve "social justice". Except for taking away from people who have STOLEN what they now have, any other form of redistribution based on some idea of "fairness" is a slap in the face of every person who has ever WORKED for a living, implying that parasites who have not, or will not earn their keep, somehow "deserve" to have what other people have earned given to them, so they can continue to waste billions of man-hours fucking around on Facebook and Twitter, and playing X-Box instead of doing something productive.

(Note that I won't speak ill of those who legitimately CAN NOT provide for themselves, in those cases where the reason they can not is not their fault. I'm only referring to those who CAN, but choose not to, instead letting other people provide for them after they should have become independent. The 29 year old boy living in his parents' basement, who describes himself, when asked what he does, as, for example, a "blogger".)

If that's not you, I apologize, but I have reason to believe it will be eventually. It usually works out that way. I've talked to a LOT of people who've said the same thing you've expressed. Usually they're 17-19 year olds with baby faces and wispy little beards, wearing hip, ironic sayings on their shirts, frequently sporting icons in the shape of marijuana leaves. I'm not saying you're a worthless pinko shit if this describes you, only that kids who have determined to be useful and do their fair share of the work simply DO NOT HAVE THE TIME O

Re:Cast in a negative light, obviously

[sjames]

And, likely by removing the constant drain on commerce, send a lot of people back to work too.

I fully agree that unemployment needs to be addressed, but there's quite enough things that might actually benefit society that people could be emoloyed to do if we could quit hemorrhaging money to the financial industry.

Re:Cast in a negative light, obviously

[sjames]

If there is so much more important work out there, why is unemployment hovering around 10% (not counting the people who have given up on getting work)? Related question, why hasn't demand driven wages up at at least the inflation rate?

Re:Cast in a negative light, obviously

[matunos]

But their use is distributed primarily amongst countries with much larger money supplies.

Use of bitcoins by a major country would run into similar problems as use of a gold standard: the relatvely slow money supply growth would become a hindrance to economic growth, and would be especially bad during a deflationary cycle, and especially as the number of bitcoins approaches 21 million (the maximum number that will exist).

That's not to say the concept of bitcoins itself is bad- just that I'm skeptical they could be used as a national (or international currency) over an extended period of time. They may be useful long-term as a means of storing value (a hedge against inflation of other currencies). We'll see if they remain useful as a medium of exchange (illicit or otherwise) as the growth of their supply fades.

Their value then will be proportional to their popularity, but their liquidity will decrease as their value grows (see Berkshire Hathaway A shares), creating a negative feedback loop, and probably thus an upper bound on both value and popularity.

Re:Cast in a negative light, obviously

[Twinbee]

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

That's the attitude that has to change. It definitely IS more rational to have someone's time being freed and being paid, rather than doing pointless work (i.e. digging and refilling a ditch ad infinitum) and being paid. The real workers and the rich shouldn't have to worry because a scheme like a Basic unconditional income (or even social security) won't suddenly put the 'leechers' on a par with them.

On the other hand, the time saved by the 'leechers' will give them opportunity to improve and educate themselves. This can't be achieved if they're digging and refilling a ditch pointlessly.

Re:Cast in a negative light, obviously

[Luckyo]

It's both funny and sad how it's usually people who never really had to handle the human factor on that scale that make this claim.

Re:Cast in a negative light, obviously

[Luckyo]

Unfortunately both have their own problems. A can be easily picked or cut through, which is how most bikes are stolen nowadays. B requires enormous amount of effort.

The usual solution is to employ both. Lock the bike and place it somewhere where it's seen by many people to make it hard to break the lock without attracting attention.

Re:Cast in a negative light, obviously

[Skal Tura]

For joe average a lot of the "bank red tape" is because of stupid things like chargeback etc. not because of opportunity to steal from the bank.
Opportunity is with those who are working in the banking industry.

Chargeback btw is a major nuisance for many merchants, it gets mostly abused. For actual fraud i think the individual who lost their CC should be liable or a additional insurance for that case included in all CCs. It should not be the merchants responsibility to cover for that.
Probably 95%+ of Chargeback cases is just individuals looking to get free stuff in any case.

Re:Cast in a negative light, obviously

[khallow]

It's both funny and sad how it's usually people who never really had to handle the human factor on that scale that make this claim.

Well, don't be one of those people then.

In the US, a lot of that red tape is regulatory, governments keeping track of money flows, the ethnicity of loan recipients, proscriptions against various sorts of investments, and anything else that some congresscritter decided to throw in. It doesn't have anything to do with actual "human factor". Banks in addition often throw in fee generating red tape (making it a revenue center instead of a cost center) and security theater.

Re:Cast in a negative light, obviously

[Luckyo]

I must say, this would be really funny if it was a joke. And it's really sad that you actually appear to believe in what you're writing.

Re:Cast in a negative light, obviously

[khallow]

Ditto. It'd be nice if people would actually listen to their own advice rather than stoop to self-parody.

Re:Cast in a negative light, obviously

[ThurstonMoore]

The extreme left are extreme right they just have a different agenda. Both are right wing.

Re:Cast in a negative light, obviously

[CFTM]

Then why is the Dodd-Frank legislation, that was passed before it was even written, being written by people in their late 20's that just graduated from some masters program in public policy? The people writing this legislation have only a theoretical understanding of what will happen whey they start pulling levers.

That said, I am glad that more legislation was put into place on the banks but how the bill is being written has created a great deal more uncertainty, and uncertainty is the one thing that banks HATE. And in turn makes them less willing to issue short-term loans, the life-blood of small business.

Re:Cast in a negative light, obviously

[TheTurtlesMoves]

I am a big fan of basic income systems. I think they would save *far* more money than current welfare schemes by just removing all the book keeping and bureaucracy that is currently spent deciding if you are eligible. It is simple, and economically is the same as all these low income tax breaks etc.

Even the rich are happier when the poor have a relatively decent standard of living.

Alas I have meet people that would be less happy. They measure their success and hence happiness by what they have that others don't. They don't like the idea that a "lazy" person could/should have a decent standard of living.

Re:Cast in a negative light, obviously

[MysteriousPreacher]

This loan... Did you get your TV and wedding ring returned on completion of the final payment?

Re:Cast in a negative light, obviously

[Teancum]

Unless Bitcoins encounter a 10 billion times increase in value, the issue of liquidity is not even remotely a problem. Even then, there are options in the protocol to allow further subdivisions of the currency if needed. Your comparison to Bershire Hathaway A shares is completely unfounded, or it would be like those shares currently selling for a million shares for a penny.

Re:Cast in a negative light, obviously

[bhiestand]

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.

Working to create goods or value does not equal working to shuffle goods or value around on paper (as distinct from physically relocating goods, ie shipping, which does create actual value).

Some jobs just should not exist in the first place. Putting people out of them merely means having people available to do "real" work.

The key word there is "available". There are no guarantees that the available people will actually be able to find "real" work. Changing economic realities create real losers--those who cannot adapt to the new reality and will be unable to earn similar or greater salaries. Many armchair economists forget that these are real people who make up a significant portion of society and must be dealt with.

The Luddites were real and had a few good points, even if it's currently referred to as the Luddite fallacy in some circles (I love the Keynes quote at the top). Ultimately, the economy will likely work itself out, but we're all going to be in for a world of hurt if we don't either a) find gainful employment for displaced workers or b) provide some sort of welfare/guaranteed income.

Re:Cast in a negative light, obviously

[bhiestand]

Who gives a fuck if a job is lost? I have no problem replacing men with machines. A competent man will find a new way to sustain himself without relying on holding back progress.

I think considering a superhero fantasy a valid answer to economic problem explains quite a bit about the current state of the economy. Or should that be a supervillain - that bit about replacing men with machines certainly sounded ominous...

It is quite possible that the GP is a misandrist who is quite fond of adult gadgets powerful enough to be called "machines". If you read the comment in that light, you may find yourself in complete agreement!

Re:Cast in a negative light, obviously

[strikethree]

Any job that can be eliminated through technological advancement makes people available for more important work.

Except a majority of people are incapable of more important work. We either need a jobs program or we need to just straight out give them money. Even killing them off as dead weight is useless as the same percentages will show up in the next generation. We need to actually find work for them to do.

Wonderful

[skipkent]

They're both in the business of creating money out of thin air, so of course they'd see a problem with it.

Re:Wonderful

[Anonymous Coward]

Welcome to the era of FaceBucks, Google Dollars & Amazon Quids. They're all going to try to become the dominant virtual currency so they control & profit from micro-transactions. Currencies with no oversight or compensation when it gets hacked, exploited or hit with hyperinflation.

Re:Wonderful

[skipkent]

At least when a business does it, I know they're doing it for profit. But when the government gets together with bankers on a private island then passes the law on Christmas Eve, you just get a little uneasy that it may be for some other reason.

Re:Wonderful

[Impy the Impiuos Imp]

A virtual currency has its prpblems, but keeping transactions encrypted and away from pryi (read: taxing) eyes is a government's worst nighmare.

Re:Wonderful

[click2005]

They do it for the same reasons, they just try to hide it better.

Re:Wonderful

[arose]

All bitcoin transactions are publicly recorded, it's a cornerstone of the protocol. The only secrecy is that you are pseudonymous as a function of being identified by a public key.

first step to regulation of digital currency?

[nurb432]

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.

Re:first step to regulation of digital currency?

[Twinbee]

If people can't be trusted to pay tax, then we could still have something like Bitcoin, automated, online, but officially recorded as well. In a way, I prefer recording the transaction for security purposes (to prove I've paid), but it's quite an involved subject, and I'm sure there are pros and cons.

Re:first step to regulation of digital currency?

[nurb432]

A private sale of a used product should not be a tax event ( which is what is mostly happening today with anonymous currency ). It doesn't matter what i bought or sold, I dont want my transactions 'officially recorded' its no ones business other than mine and the seller/buyer.

If you want to talk about businesses not collecting tax on a new item, then that is not a problem of the currency, but of fraud and will be caught evenutally due to 'missing' inventory reports and such. ( and it should still be anonymous, no one needs to know i bought a candy bar.. )

Re:first step to regulation of digital currency?

[Twinbee]

I can't see any real problems of even second-hand items or candy bars being recorded. What would the worst case scenario be? I'm sure Facebook et al. are 100x worse, and even that's not incredibly inconveniencing the world.

Re:first step to regulation of digital currency?

[pla]

The freedom of being able to buy something anonymously is soon coming to an end.

I know, right? Like how they scanned my driver's license last time I bought something with cash; or how I had to register with the Bureau of Private Transactions this past week when I traded a friend a Snickers for a Milky Way.

Bitcoin makes it easier to make semi-anonymous purchases online. It makes it easier to get around stupid government regulations on how I can spend my money, like anti-gambling laws. It makes it easier to engage in almost any transaction with someone from another country (or rather, "another currency", for those of you in the Eurozone), though that largely goes back to getting around insanely archaic pre-internet regulations.

But anonymity? I'd like to see the governments of the world try to eliminate that from the markets, because it would effectively put an end to any support whatsoever for their useless-in-the-modern-world oversight.

Re:first step to regulation of digital currency?

[LodCrappo]

"The freedom of being able to buy something anonymously is soon coming to an end"

Cash? It's not exactly new.

Re:first step to regulation of digital currency?

[nurb432]

Not always, if you sell a used house or car you get hit with taxes and such. if you are acompany that sells used goods, you have to charge sales tax. ( at least around here ). So in effect the 'object' can be taxed many times during its life. Personaly i think its wrong, but that is a different discussoin.

But aside from that i was using that as a point to address the OP's comments about paying taxes. With the most common use being between 2 private citzens ( at least today ), taxes are not the reason to clamp down on bitcoin since for the most part they dont exist anyway.

Re:first step to regulation of digital currency?

[tftp]

Cash? It's not exactly new.

Try to buy a house with cash; or land; or a company; or a ship. Try even to place an order for industrial parts and pay with cash. Many businesses are not set up to deal with cash.

Cash is only accepted for small transactions, those that do not matter in the big picture. That's why money laundering is a big business; it wouldn't be so if anyone could drive a trailer full of money bags to a bank and say that you want to make a deposit.

Even using cash for everyday purchases is getting more and more difficult. Give someone a $100 bill and be looked at with suspicion, and the bill - tested. Give someone a $1000 bill and you will likely be arrested until the police finds out that those bills do, in fact, exist. Want to buy gas? There is no attendant on duty, and the pumps only accept plastic. Want to use a parking facility? Go find the only exit that has a human cashier; all other exits are automated.

There is a very good reason for all that. The society benefits from automation of money-counting. It takes a human clerk to count your money - and there will be occasional mistakes. But when the cash register sends a transaction for $14.99 then the money charged will be exactly that - not more, not less. People also benefit from having safe access to all or most of their finances without the need to carry the cash in their pockets. Electronic money is also safe from counterfeiting; it never falls through the hole in your pocket; you will not be shortchanged, and you will not leave the coins as a tip.

But, of course, plastic is only your fair weather friend. Come TEOTWAWKI, and all your money has to be in your personal posession. Chances are, though, that after a SHTF event the old paper bills will not be very valuable - there are just too many of them, and they can be counterfeited or stolen en masse from banks' vaults, and in SHTF conditions it will be nearly impossible to understand what the value of money is. Essentially, if you give someone food for a $100 bill you'd better be sure someone else will give you 10 rounds of ammo for the same piece of paper. With the government out of the picture, nobody can be forced to accept that money; they need to be given good reasons to do so. One condition is that the printing presses (wherever they remain in operation) must not print more paper. But after TEOTWAWKI everyone who has access to these presses will do exactly that.

Re:first step to regulation of digital currency?

[AmiMoJo]

Did you read the report? It seems fairly clear that they are worried about the possibility of an unregulated virtual currency becoming popular enough to cause a financial meltdown in the wider economy. Unscrupulous people could do all the dodgy financial wrangling that we already banned in the real world, and in fact already are with ponzi schemes and totally unregulated and insecure banks.

But hay, don't let TFA get in the way of your paranoia.

Re:first step to regulation of digital currency?

[OdinOdin_]

But there is no such thing as a new product. Someone has to buy 2nd hand raw materials to make it. All transfers of wealth can be taxed, the classification for it to be new or used is not important. If you make it important then everyone will be writing invoices for used goods to make use of your new proposed low tax rate to avoid paying tax.

Re:first step to regulation of digital currency?

[nurb432]

know, right? Like how they scanned my driver's license last time I bought something with cash

The camera scanned your face. If you have a state issued ID, it would be trivial to see who you were, match the time and sales record of that store to see what you purchased.

Removing someting like bitcoin from the mix removes one more chance to be anonymous in our purchases.

Re:first step to regulation of digital currency?

[nurb432]

I said "coming to an end" not that the end is here yet. There is a push to remove cash from our economic systems and move to an all digital system. Also, as others will comment, if you purchase anything of any value you are tracked. Cars, homes, pretty much anything over a ever lowering limit MUST be reported.

Re:first step to regulation of digital currency?

[pla]

The camera scanned your face.

A private store's security camera caught me on tape. If they don't get robbed in the next week, the tapes will get recycled.

Yes, we get caught on CCTV just about everywhere we go in public. Those don't go directly to Citizen Tracking central.

Re:first step to regulation of digital currency?

[drinkypoo]

If enough shit hits the fan at once, though, no currency will be valuable unless it has even more intrinsic value than gold. That ammunition you mentioned would be a good candidate. Let's see, the largest unit of currency you'll normally see is the .50 BMG HEAP, then... how many of those to a 20MM?

Re:first step to regulation of digital currency?

[pla]

If you are paid 1,000 bitcoins a month, and you gamble with them, the government knows what you did.

Half true (thus my stressing the word "semi" as a modifier of "anonymously"). If you gamble with 1000 BTC, the whole world knows that "someone" paid "someone else" 1000BTC.

"They" don't know who paid it, who received it, or what it paid for. "They" don't know if the transaction originated in the US, or from China, or from the latest Mars rover for that matter. "They" don't even know, when you cash out 1500BTC at the end of the month, that you and the casino count as the same trading partners that exchanged the 1000BTC earlier in the month.

So yes, the whole world can see that "something happened", in a way that doesn't apply with cash. But that ends how much more anyone can know vs using cash.

Re:first step to regulation of digital currency?

[Teancum]

That is sort of true. Anybody who has a public bitcoin address (aka they've published the hash key on a public location like a web site) can have the money traced not just to that number but also where that money has gone. For example, when the EFF was taking donations in Bitcions, it was possible to know exactly how much money they received in donations.

That said, you can through a "secure channel" transmit the Bitcoin address and it would be much, much harder to track.

Interplanetary transactions are a bit harder of a problem to deal with though, because of time delay problems related to the speed of light. Bitcoin mining on Mars seems to be unlikely to happen, although it could present some interesting issues.

Re:first step to regulation of digital currency?

[ultranova]

A private sale of a used product should not be a tax event ( which is what is mostly happening today with anonymous currency ). It doesn't matter what i bought or sold, I dont want my transactions 'officially recorded' its no ones business other than mine and the seller/buyer.

But your transactions must be publically recorded, otherwise the seller can't prove that he now owns the money the buyer sent him and the buyer can't prove he hasn't already spent the money he's using to make the purchase. You can both be pseudonymous, but the transaction itself must be made public.

The whole Bitcoin scheme is really just a distributed accounting database system. Until a transaction has been recorded in it, and preferably confirmed several times, it hasn't happened.

Re:first step to regulation of digital currency?

[SuricouRaven]

The database gets leaked. Ten years later, when you apply for work, the employer contacts their candidate screening agency. They search their profile you, and discovered that you once a sizeable number of politically-incorrect books to a friend. You are flagged as a potential source of workplace hostility, and don't get the job.

Re:first step to regulation of digital currency?

[SuricouRaven]

Combine with facial recognition and it'd be very useful data for advert targetting. You could extend the internet method to the real world: As people walk past a store, the e-paper signs in the window automatically change to show products most likely to appeal to the extract crowd of that moment. Recomputing every time the composition changes significently, on a moment-by-moment basis. In turn the cameras note who stops to read the signs, and further incorporate this into the targetting profiles.

Re:first step to regulation of digital currency?

[Twinbee]

But that could happen now. My Amazon buy list could be leaked, or my credit card history. We'd be no worse off than now.

Also wouldn't it be possible to encrypt the database, at least stuff older than say, a month?

Re:first step to regulation of digital currency?

[maxwell demon]

What if some state (say, Sealand) adopted Bitcoin as official currency?

Re:first step to regulation of digital currency?

[ultranova]

Interplanetary transactions are a bit harder of a problem to deal with though, because of time delay problems related to the speed of light. Bitcoin mining on Mars seems to be unlikely to happen, although it could present some interesting issues.

The target interval of new blocks needs to be much greater than the round-trip time of the network. If you can live with slow confirmations, this works fine.

Alternatively, the network could be partitioned: allow there be multiple blockchains, possibly with different rules, and a mechanism for trading between these different BitCurrencies within the network itself. For example, if I have 10 EarthCoins, I could send a sell offer accepting a minimum of 5 MarsCoins and an expiration date/block. Should this transaction meet acceptable MarsCoins-to-EarthCoins sell orders, a mining node could match them up into a single transaction when the first one expires, broadcast to both networks, and claim the transaction fees of the participant offering currency in the chain the block belongs to. This setup would allow Martians to mine MarsCoins on Mars, Earthlings to mine Earthcoins on Earth, and crazy inflationary guys to mine AsymptoticallyNearingWorthlessCoins on their villainous lairs, and all to trade with each other.

The details need to be worked on by people smarter than me (at the very least there must be rules on how transactions are paired off to prevent different chains form forming different ones), but the basic idea - having not one BitCoin, but several BitCurrencies and an ability to trade between them in the BitCoin network itself - would solve not only the latency problem, but also the endless debates about the deflationary vs. inflationary currencies and other potential BitCoin tweaks: let them all compete and see how it plays out.

Heck, a normal bank or a government could issue its own FiatCoin currency (mining reward goes to 0 after the original block, which generates a zillion coins in its coinbase) and see how it goes.

Re:first step to regulation of digital currency?

[ultranova]

If enough shit hits the fan at once, though, no currency will be valuable unless it has even more intrinsic value than gold. That ammunition you mentioned would be a good candidate. Let's see, the largest unit of currency you'll normally see is the .50 BMG HEAP, then... how many of those to a 20MM?

Ammo is only really only valuable in the special case where the government is strong enough to suppress warlords but not highway bandits, but that kind of government could also issue money. If it's weaker, you'd be crazy to start a gunfight against an army by yourself while if you're member of an army yourself you will have a quartermaster to distribute ammunition, whereas if it's stronger you only need ammo for hunting, which makes it a tool (and you still get purpose-made money).

Einen moment, bitte.

[istvaan]

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.

Re:Einen moment, bitte.

[Sir_Sri]

Well the central authority is built into how it was designed in the first place. You don't need a persistent authority because the core monetary rules of the currency exist from its inception and are unchangeable.

This is of course one of the two fatal flaws of bit coins - like gold - you severely limit the flexibility of the currency to cope with a crisis. And secondly, alternate currencies are essentially a mechanism to dodge tax (including barter), they have other advantages and disadvantages*, but you can use them to dodge tax, which means governments are going to clamp down on it, as it undermines the basis of a functioning society when people are legally dodging large amounts of tax.

And yes, much of this is like regulating the chips in a casino.

*Those advantages and disadvantages matter a lot of course. The primary benefit of Bitcoins is anonymity, which can be accomplished other ways with regular currency (cash..). But that could potentially be a serious drawback if it can be used to circumvent sanctions for example.

Re:Einen moment, bitte.

[durrr]

People legally dodging large amounts of tax?
You mean like the entire range of Fortune 500 companies and the associated persons?

Re:Einen moment, bitte.

[ultranova]

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.

Bitcoin has two problems: the size of the network and the fact that there is a network.

The size of the network is a problem because an attacker with more computing power than the rest of the network combined can subvert Bitcoin. At the current size, it's plausible that a government might be able to do this. This is also a problem with any future decentralized currencies: until they're big enough they are vulnerable, and getting big requires drawing attention - which will include that of malefactors. This will always be a problem with proof-of-work based systems.

The fact that there is a network is a problem because it means a government can find out who runs Bitcoin software, thus making it possible to ban it. This might be worked around by routing network connections through Tor, however it makes it difficult for merchants to accept Bitcoin.

Re:Einen moment, bitte.

[click2005]

If any regulation is added it'll be no different to Chip & Pin, Verified by Visa or any number of other security failures badly added to prevent fraud (shift liability to the customer) or as an inconvenience (DRM).

Trying to add some kind of regulation would probably be so badly implemented that it'll increase the risk of fraud or exploitation.

Re:Einen moment, bitte.

[IcyHando'Death]

... it will consider those attempts to be damage and, like the Internet, route around them.

The nineties called; they want their argument back (they're probably looking to get this put-down back too).

What we've seen in the last decade and more is that regulation of the digital realm is absolutely possible (think "Great Firewall of China") and can shut down or marginalize targeted activities quite effectively. Not perfectly, mind you, but law enforcement has never been perfect in the analog world either.

Time to update our thinking.

Re:Einen moment, bitte.

[arose]

Pseudonymity with an arbitrary number pseudonyms that are all completely independent (you can't swap money between your accounts privately), not anonymity.

Re:Einen moment, bitte.

[betterunixthanunix]

Correct me if I'm wrong, but isn't the whole premise of bitcoin to be a currency that has no central authority?

Aside from the serious technical and economic problems that creates, there is nothing about a lack of central issuing authorities that makes Bitcoin impossible to regulate. People do, in fact, rely on the government to do things for them, which is why the government is able to regulate anything at all. You know those daytime court shows, where some celebrity judge settles disputes between ordinary people? That is not just TV; ordinary people do, in fact, have disputes with each other and with the businesses and organizations they interact with, and more often than not those disputes involve money. We use courts to settle those disputes, by respecting the authority of the courts and by allowing the police to arrest people who violate court orders. If everyone started using Bitcoin and coming to courts with disputes over Bitcoin contracts or transactions, the government would be able to regulate Bitcoin; if you failed to bring the proper paperwork to court, showing that you abided by the regulations, you would lose your case and possibly be arrested.

The alternative is to settle disputes with strength, coming at people who owe you Bitcoin (or who you feel owe your Bitcoin) with guns, knives, clubs, rocks, and fists. That would basically lead to the collapse of civilization, and ironically, the collapse of Bitcoin.

Re:Einen moment, bitte.

[Sir_Sri]

You mean like the entire range of Fortune 500 companies and the associated persons?

and as I said, it undermines the basis of a functioning society. Look at how long and hard the US has had to fight for healthcare, look at wealth distribution, the constant lies told by the corporate media etc. And they are, including fortune 500 companies, on the scale of things, relatively honest. Compared to say, north korea.

Re:Einen moment, bitte.

[Sir_Sri]

sanctions on what? on countries? sanctions are on unwashed masses of those countries who may or may not support to offficial policy, but the govt? It will always manage to feed itself, just look at NKorea.

I wasn't suggesting sanctions work or don't work, or a good idea or bad. But they exist and legal rules, and if you're trying to use bitcoins to sell rabits for food to north korean peasants you could be signing yourself up for a world of legal trouble.

And what if it's your own country that announces it's going to fuck you over and inflate 50% of your life savings overnight and there will be capital flow controls?

The same thing that doesn't stop gold from crashing overnight or facebook stock dropping 50%. If you have all of your money in 'cash' or in a single 'thing' including bitcoins you can be screwed.

On top of that, inflating 50% of your life savings, as you put it, also makes your debt 50% easier to pay off with your foreign assets, and your debt all counted, includes government debt incurred on your behalf.

Re:Einen moment, bitte.

[Richy_T]

For me, the primary benefit is that it is not subject to arbitrary inflation. This is not the case with cash.

Re:Einen moment, bitte.

[sosume]

But the government has no power over Bitcoin. You could have millions of USD in Bitcoins but as long as you refuse to hand over your wallet, they will never know or be able to prove this. And they will be unable to take it away unless you are locked up for life.

Re:Einen moment, bitte.

[betterunixthanunix]

But the government has no power over Bitcoin. You could have millions of USD in Bitcoins but as long as you refuse to hand over your wallet, they will never know or be able to prove this. And they will be unable to take it away unless you are locked up for life.

Right, and when I steal that car that you bought with your unregulated currency, you'll have the following choices:

1. Go to the police, and they'll just say, "What car? You don't have any paperwork to show that you purchased a car."
2. Find a gun and a group of friends to chase after me, and pray that you actually survive a shootout.

Unless society collapses, the government will always be able to regulate currency, even if for some reason the currency is not being issued by the government.

Re:Einen moment, bitte.

[butlerm]

like gold - you severely limit the flexibility of the currency to cope with a crisis

There is nothing wrong with gold. The problem is that legalized embezzlement of deposits (aka fractional reserve banking) is incompatible with hard currency. With FRB, just like any other embezzlement scheme, anytime anything goes seriously wrong, either depositors are out their money or their holdings are devalued.

It is economically impossible for holders of a debt backed currency to be made whole in real terms. All FRB institutions are ticking time bombs that can only be kept alive by debasing the currency - meaning negative real interest rates on all "deposits".

Re:Einen moment, bitte.

[BeanThere]

By "dodging tax", you mean contributing nearly 40% of all federal income tax revenues? I'd hate to see what you call actually dodging tax.

Only humans can "pay" tax ... as a verb, it applies to humans only. Companies are not taxed, people only speak that way metaphorically ... what is actually happening when we speak of companies "paying tax", is that the humans that own those companies (and their customers indirectly) are being taxed through "corporate taxes". Also, those humans then also pay income tax whenever money is transferred out of a business and to them, in order to actually use the money for any personal self-enjoyment purposes

Re:Einen moment, bitte.

[tftp]

You could have millions of USD in Bitcoins but as long as you refuse to hand over your wallet, they will never know or be able to prove this.

Your [way of thinking is ] wrong. If I were the government I'd do this.

Phase 0. All financial accounts have to be registered with the government. This is already done for you by the banks. Now the government simply extends this requirement to Bitcoin.

Phase 1. Some Bitcoin holders register - and they are safe for now. You do not register. Read on.

Phase 2. The government starts monitoring Bitcoin transactions *and* the Internet. It becomes trivial to note that your IP generated some transaction and it got registered in the network. If you dare to walk to a store and buy something there with BC, all merchants will of course report your account and the sirens start blaring. You only can use your unregistered account from home or from public places that allow BC traffic (good luck finding those, with a prison term for the owner.) Perhaps a VPN to a foreign server is an option if you keep your wallet there; but those servers will be treated like foreign banks, and they will be requested to open the kimono for the IRS; otherwise they will be utterly destroyed. Even the Swiss government couldn't stand up to the USA; a group of teens in New Zealand have no chance.

Phase 3. The government accuses you of tax evasion. Your computer is seized and the wallet discovered. If you remain silent then the government's assertion that you transferred $big_bucks to another account stands unopposed, and you go to prison. If you do not remain silent and reveal the wallet's password then the government has you for whatever you did; you may be even released if there is no crime - but your fate will be a lesson to other Bitcoin revolutionaries.

Note that Phases 0 and 1 are *already* in effect. If you fill your tax forms yourself you probably saw a requirement there to report all foreign financial accounts that you control. This requirement is there for many years now, to fight the massive tax evasion by holders of accounts in Swiss banks. BC will be one such financial account, for sure (because it is - your money is held on the Internet, outside of the country.) Failure to disclose will result in an audit by a group of armed IRS agents. This is something that a prepared man can survive; but the vast majority of BC refuseniks will not be prepared men - and they will go down, fast and hard.

Re:Einen moment, bitte.

[Vaphell]

The same thing that doesn't stop gold from crashing overnight or facebook stock dropping 50%. If you have all of your money in 'cash' or in a single 'thing' including bitcoins you can be screwed. If you have all of your money in 'cash' or in a single 'thing' including bitcoins you can be screwed.

facebook stock? Everybody knew it was junk, nobody makes you park in it. Gold? Not possible, you'd have to corner the market full of central banks and i don't see that. With govt mandated legal tender it's not so simple.
The point is, with stocks, commodities and what not you have a choice, you can plan, you can come up with strategy. If you fail, basically it's your fault. When your own govt fucks you over, it's game over. They can put you in jail if you don't cooperate.

On top of that, inflating 50% of your life savings, as you put it, also makes your debt 50% easier to pay off with your foreign assets, and your debt all counted, includes government debt incurred on your behalf.

Fuck that. I am a saver and I am tired of getting my ass handed to me every time there is a downturn, because motherfuckers happily living on credit need to be saved. 0 down mortgages for anybody with a pulse inflated the prices of real estate out of my reach. I should be able to pick up some dirt cheap property right now, but fuck no, i pay taxes to fund relief programs for underwater bastards instead, effectively subsidizing my own competition on the market with my own money.
Me being a saver should tell you everything you need to know what i think about government debt incurred on my behalf. There should be none.

I don't mind debt per se, but when everybody and their dog borrow to fund consumption - that's fucked up. Debt makes sense if it's invested in something with good ROI so it can pay itself. Nowadays both private citizens and governments fund unproductive consumption with debt. Joe Sixpacks buy flatscreen tvs and iphones they can't afford, while govts fill the holes in budget caused mainly by warfare and welfare.

You want stable economy? Set up incentive structure right because illusion of safety provided by shitload of govt red tape works only until it doesn't. Currently world economy is structurally biased towards irresponsibility and you wonder why shit hits the fan? World as a whole traded resilience for propped up GDP numbers thanks to the whole 'saving is bad, leverage is good, credit must flow no matter what' mantra.

Re:Einen moment, bitte.

[Sir_Sri]

The US has had fine health care for a very long time. Better in quality and quantity than most of the rest of the world.

As I said, the US is relatively honest, compared to say, north korea. If you would prefer, the US is relatively honest compared to most of the world, I'll grant you, but being the richest country in the world, and 8th per capita* means you should be able to reach goal higher than 'top half'. If I were to guess, the US i, top quarter or so, behind northern europe and a couple of other places, but well ahead of southern europe, south america and all of asia and africa. But the healthcare, wealth distribution and media are significantly worse than most of the countries with reasonably comparable GDP, and in large part that is because those countries are more functioning more honest societies.

Quit confusing insurance with the care that insurance purchases.

Depends. If you pay $1 for the same thing I get for $0.95 then you might have an argument, when you pay close to double for on average worse care, you're getting hosed. Medicare, medicaid and the US government health plans are actually pretty good I'll grant you.

What I don't understand is this insistence from so many quarters that profitable (aka successful) business should be punished

What you don't understand is that this is not what's happening, and so that's why you're confused. You've been convinced in the reality of a straw man, and now you're arguing with him. You're Clint Eastwood talking to an empty chair. But thanks for trying.
The actual argument is that everyone should have opportunity, and very successful enterprises should be willing to kick it forward and help the next guy be as successful as they were. It's also a problem that if businesses are sitting on cash and not investing that you need to create product demand (so they will invest in growth to meet demand), the reason US interest rates are through the floor is that businesses have cash and aren't investing it. It would be better for everyone if they just spent the money, but on an individual basis they won't do that, so government could tax/borrow the money away to create jobs to create demand - at which point the government would need to borrow less money but there would be less available to borrow etc. There is quite a lot of very good analytical research on this topic.

mediocre schemes guaranteed to be unable to handle the load that was formerly satisfied by the businesses that it replaced.

Well the current US healthcare system spends more money than anyone else, and doesn't cover 50 million people, and covers millions more monstrously inefficiently. You've clearly bought into the misguided belief that just because it works in Switzerland and Japan and Massachusetts that there is no reason to believe it won't work for the entire US. Because... 'merica is different! Except, it isn't. Sorry to burst your bubble, which you, presumably, will choose to patch back up with false narratives and republican talking points and then continue to live in. Reality however, is moving on without you.

*And I will point out many of the wealthier per capita counties, excepting Norway and Luxembourg and switzerland, are significantly worse places to live on average than the US. So the US should easily be top 4th or 5th in rankings like education and healthcare etc. But it isn't.

Re:Einen moment, bitte.

[Teancum]

So you want the 40% of tax revenues to be paid by individuals on their personal income taxes instead?

If it means that I get paid 60%-80% more... sure, why not?

Simplifying the tax code helps everybody as it makes criminals obvious and screws over the honest much less.

Re:Einen moment, bitte.

[Teancum]

The example was to show that trusting any sort of fungible asset (including Facebook shares) is all relative and that anything as an investment or even being used for money will fluctuate in price. The Facebook example is how something thought rock sold or even priced low (as was thought the day before the IPO) turned out to be not so good.

The original poster knows that Facebook did drop 25% in one day. That was in fact his point.

Re:Einen moment, bitte.

[Teancum]

I would dare say trying to attack the network with more computer power is a losing proposition. First of all, any prolonged attempt at applying computing power to the network will be noticed by anybody involved (especially the major mining groups). Indeed it is often discussed when some new group goes on-line with a large batch of servers in a quest for mining work units.

It should also be noted that the Bitcoin network is currently so large that you would have to invest an insane amount of money to "capture" the network. That would need to be for reasons other than merely profit. Hint: Ordinary users like you or me are unlikely to get Bitcoin work units with an ordinary computer any more. You simply need to have a few thousand servers just to hope to occasionally get a work unit. Possibly a major government might be able to cause mischief, but that would be true only as long as one major government decided to get involved.

As for the network itself and having the government identify who is using the software.... yeah that could be a problem. Perhaps they might check certain port id numbers, but you could easily disguise ports in a number of ways to hide the network. Running through Tor is hardly the only solution. That doesn't even stop a "sneaker net" option for distributing information either... and yes you can use Bitcoin via sneaker net. From that you can do dead drops and all sorts of spycraft in terms of how you spread transaction information. Bitcoins can be as dark of a black market as has ever existed in human history.

Keep in mind that there are other checks on work units as well, and one of the other dirty little secrets is that not only do you need to get the majority of the CPU cycles to "capture" the network, but you also need to get the "vast majority" of the clients who are monitoring and processing completed work units to accept those work units. It isn't a 50% rule necessarily, but if most of the clients don't recognize the packets as valid for a variety or reasons, it doesn't matter if you have a valid hash... they simply won't be accepted into the chain. If there is a backlog of transactions not getting into work units, it is possible to build checks in the network to start rejecting work units which aren't incorporating at least a portion of that backlog.

Re:Einen moment, bitte.

[Teancum]

I would be very curious about how any sort of regulation could be effectively enforced. Sure, some bone-headed government might try to do something like say only banks can be using this software legally or something equally stupid. And you thought the war on drugs produced a bunch of nightmare problems.

Any sort of regulation would just push this kind of activity underground, and there would be most definitely a financial incentive to keep doing this 'underground" away from any sort of regulatory control. Either that or as you suggest the "official" clients would have a huge amount of risk and the "black" clients would be the safe and secure ones that anybody with brains would be using anyway.

Re:Einen moment, bitte.

[Teancum]

Give me a list of activities, disapproved of by authorities, which have become shut down or marginalised in the last decade.

About the only thing which comes to mind is blasphemy of Allah and his Prophet (aka the god of Islam and Mohammed), mentioning that Tibet is an occupied independent nation, that Taiwan really is an independent nation with its own foreign policy, and that Tiananmen Square has been anything but a peaceful tourist backdrop in the 20th and 21st Centuries.

And of course the dismissal that anything serious or newsworthy happened in Libya on September 11th of this year... but that is just censorship on the part of major media outlets and not really internet censorship.

Re:Einen moment, bitte.

[SuricouRaven]

What personal income?

To take an example, the first that comes to mind is Mr Creflow Dollar. He's a televangalist, and a successful one. He lives in a giant mansion, with all the trappings of the super-rich lifestyle. Flies on private jets, sports cars, that sort of things. Yet Mr Dollar himself is actually not rich at all. The mansion, jets and cars are all owned by his ministry - which, as a church, is tax exempt. If you went to a purely income-tax system, you'd see an expansion of that trick beyond just religion: Ever company CEO would have the company own their house, and make it one of the benefits that comes with their position.

Accountants, I hear, call it being 'tax efficient.'

Re:Einen moment, bitte.

[SuricouRaven]

An Evil Hacker or goverment could use a more old-fashioned technique. MITM attacks on the addresses themselves, which are usually sent via unencrypted HTTP. If Evil Hacker or government controls a proxy or the network - and it isn't hard to set up a public access point with something like this - a simple regex could replace bitcoin addresses with the hackers own. So the public goes to, say, savethefluffykittens.org to donate to a worthy cause - but the bitcoin address they actually see is modified by their malicious access point, or hacked company web-filter. Everything looks in order, they copy-paste the address to the client, and as far as they can tell they just gave money to a worthy cause. Except they didn't: The BC just went into the hacker's wallet.

Re:Einen moment, bitte.

[SuricouRaven]

They don't need to do something so fancy. It's easy: The government just has to accept taxes in US$ only. Thus everyone will need US$, all wages will be in US$... you think Bitcoin is the first attempt to establish an alternative currency? Bitcoin will thus exist, but only as a niche currency used only by criminals and paranoids.

Re:Einen moment, bitte.

[maxwell demon]

At least in Germany, also the non-financial benefits get taxed, if they are of a kind you'd normally pay money for ("geldwerte Leistungen"). So the CEO in your example would have to pay the tax for the rent he normally would have to pay if he were regularly renting the house (that is, the situation is treated as the company renting the house to him, and paying him the rent as benefit).

Re:Einen moment, bitte.

[witherstaff]

I'd argue that bitcoin is better than a fiat currency like the US Dollar. The FED - a private banking system managing our currency - has caused many of the bubbles with their monetary policies. Even Bloomberg recently had an article comparing current central bank policies across the world as possibly causing another Japan like lost decade. So flexibility in a crisis doesn't work very well with our current system.

You talk about wealth distribution. Look no further than the policies of the FED and the government. Who got the bailouts? Primarily the big banks and rich. Who got in trouble for breaking rules and causing the financial meltdown? Oh nobody. Also we have 5 banks bigger than before the too big to fail. The US has corporatism at its finest. I'll take my chances on a small shake up with an open money alternative like bitcoin. With a total network monetary value of what, 100 million or so BTC is a small player at the moment.

Re:Einen moment, bitte.

[Teancum]

You need to study up on your Bitcoin protocols some more. Such an attack as you are suggesting here simply wouldn't work on a mathematical basis. You need to have the following to get such a system to work:

• The public key(s) with the wallet holding the bitcoins. Yes, keys, as in there may be more than one "wallet" holding the coins.
• The private security key(s) for those same wallets of those holding the keys.
• The public key of the receiver of the money
• a time-date stamp for the transaction

While there are public keys here, unless the government or evil hacker has all of this down exactly, such a hack simply won't work. This "evil hacker" would need to take nearly the age of the known universe using existing hardware to be able to hack just one of these "redirected" packets... by which time the person who attempted to send the money will have received an e-mail saying the money never made the trip to the intended recipient so he sends off another payment into the system... and the original payment is cancelled. Yes, you can cancel transactions before they get incorporated into a work unit.

What is stopping this kind of attack is pure mathematics, and was thought up in the original design of the protocol. At best all a government can do is to perform a denial of service attack by flooding the network with bogus packets and transactions that will be rejected by miners. Any mining group that attempts to inject bogus transactions like this will have their workunits rejected.... thus they won't get credit for getting the work unit and will lose not only the mined bitcoins but also any transaction fees in that work unit.

To sum this up, your suggested "evil hack" simply won't work. Want to try another theory on how Bitcoins are vulnerable?

Re:Einen moment, bitte.

[Sir_Sri]

Fuck that. I am a saver and I am tired of getting my ass handed to me every time there is a downturn, because motherfuckers happily living on credit need to be saved. ....Me being a saver should tell you everything you need to know what i think about government debt incurred on my behalf. There should be none.

So move somewhere else. If you don't like the government borrowing money on your behalf move somewhere being forced to balance their budget. Like Greece.

Fortunately you aren't an economist, of if you are, you're a terrible one and should find a new job.

You want stable economy? Set up incentive structure right because illusion of safety provided by shitload of govt red tape works only until it doesn't. Currently world economy is structurally biased towards irresponsibility and you wonder why shit hits the fan?

You are, essentially contradicting yourself. Shit hit the fan a lot less in Europe than the US because they had a much stronger safety net. Shit is hitting the fan now in europe because their safety net is managed at the wrong level (it would be like the US federal government spending 1% of GDP rather than the current 25 or so). The US economy, because it has a weak safety net is biased towards irresponsibility, essentially if you don't hit it rich you're fucked - so everyone is trying to get rich or die trying - whereas a stronger safety net in europe means people can actually have half decent lives on smaller incomes.

facebook stock? Everybody knew it was junk, nobody makes you park in it. Gold? Not possible, you'd have to corner the market full of central banks and i don't see that. With govt mandated legal tender it's not so simple.
The point is, with stocks, commodities and what not you have a choice, you can plan, you can come up with strategy. If you fail, basically it's your fault. When your own govt fucks you over, it's game over. They can put you in jail if you don't cooperate.

Obviously not, or it would have immediately dropped 50% and not taken several months to go from 38 bucks a share down to 21. Everyone I knew at Facebook fled like rats from a sinking ship the moment they could, but obviously a lot of investors got screwed. Whether that was fraud or their own stupidity is harder to say. Also, gold prices have dropped about 10% from their high less than a year ago. And no one has cornered the market on gold. Also the reverse is true too, gold went up - way up- since 2008, which sounds good, but when it's done that in the past (including in the 1980's) it dropped like a rock when the economy started to pick up. http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

Nowadays both private citizens and governments fund unproductive consumption with debt. Joe Sixpacks buy flatscreen tvs and iphones they can't afford, while govts fill the holes in budget caused mainly by warfare and welfare.

Business != economics. Please try not to confuse the two. Most especially on government spending, where their spending becomes your income, your spending becomes their income. Warfare and welfare are essentially re distributive in nature, you take money from people paying tax, and give to to other people, they in turn use that money to buy things, which becomes tax revenue. If you cut spending - any spending, that means there's less demand for goods and it becomes a bit of an austerity death spiral. Even the double dip in the UK and the disaster that are greece and spain prove this point adequately to anyone with a minimum of brain power. The time to cut government spending is when unemployment is low, wealth relatively well distributed, and an inadequate supply of labour, right now is essentially the exact opposite of that, government needs to expand taxation and expand employment - the latter being much more important than the former, even if that incurs debt, the debt can be paid off when people have jobs (

Re:Einen moment, bitte.

[Teancum]

I'll point out that simplifying the tax code might just make it necessary for churches to pay taxes, so your example may not fly in a situation like that. Furthremore, if a CEO would get fired from his job (for whatever reason that might be), the company could always take those homes, automobiles, and other items away from him.... or he would be forced to pay taxes on all of that if he kept those items. That sounds like one heck of a nasty source of control that a board of directors would have over the life of a CEO that I think few CEOs would be willing to put up with.

As I said, by simplifying the tax code it would point out those who are cheating the system much more clearly. Warren Buffet might even be paying the same tax rate (if not more) than his secretary.

Re:Einen moment, bitte.

[ultranova]

You need to study up on your Bitcoin protocols some more.

No, because he's not talking about hacking Bitcoin, he's talking about hacking HTTP - specifically forcing all Web traffick to go through a proxy and replacing everything that looks like a Bitcoin address with your own. You know, the good old "forged bill" fraud.

Re:Einen moment, bitte.

[Tuoqui]

When I can pay my tax bill in barter then they can consider bartering a tax dodge.

Precisely

[Anonymous Coward]

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.

Re:Precisely

[biodata]

You forgot the most important one - water.

Re:Precisely

[Anonymous Coward]

I prefer not to exchange (parts of) my friends and family for my groceries, nor do I seek to acquire other peoples friends and family. How exactly do they qualify as 'currency'?
Gold and silver, apart from their their industrial applications, are worthless. They have no intrinsic value, only perceived value. Surely that disqualifies them as a 'real' currency?

Re:Precisely

[kdemetter]

I have a much more important one : compassion.
Always in high demand and in low supply.

Re:Precisely

[thoughtlover]

I prefer not to exchange (parts of) my friends and family for my groceries, nor do I seek to acquire other peoples friends and family. How exactly do they qualify as 'currency'? Gold and silver, apart from their their industrial applications, are worthless. They have no intrinsic value, only perceived value. Surely that disqualifies them as a 'real' currency?

Worth is found in something that satiates a recurring need. You need food and water, therefore they are worth something. However, I've often thought that the greatest resource (or currency) is the human being. Without more humans, you will struggle to find comfort (also something that has value or worth). You won't have human comforts like laughter and sex unless there's another human there. So that's why I think it's OK to include family and friends in a list of 'currency'.

Religious orders and governments know that humans are the greatest resource. When you have a bunch of people working together to not only keep society going, but to build new and interesting layers upon it, you have the greatest synergy that comes from humans mingling.. you get ideas. Ideas always have value, whether they're novel or forgotten, then remembered and reused.

Re:Precisely

[pla]

Can I use any of these to buy cannabis on the Silk Road?

Well, you can first sell your little sister for BTC, then use the BTC to buy weed, so, yes!. ;)

Re:Precisely

[pmontra]

Gold and silver currencies are not as important as the other ones you listed, not even close to being fundamental. Some countries used shells, they are the same. Gold you mine, shells you fish.

Re:Precisely

[Trilkin]

Obligatory XK...Penny Arcade

Re:Precisely

[icebraining]

So? Are you planning on living thousands of years?

Re:Precisely

[Velex]

Mod me troll, seeing as how family is the quickest to screw you over, even when times are good, how do they fit into it?

Survival equipment, friends, and seeds/food/land, that I can see.

Good luck with that

[stevegee58]

I'm not sure how a decentralized, electronic currency can be "regulated" at all.

Re:Good luck with that

[cmburns69]

You can "regulate" it by making laws against using it at all. Enforcing them may be difficult, but it could come to the point of it being a criminal offense to even have bitcoin software installed on your machine.

Re:Good luck with that

[betterunixthanunix]

1. Barter is regulated in the United States. You are expected to report large barter transactions on your taxes, and if you fail to do so you could be caught in an audit.
2. Good luck taking someone to court with a dispute involving an unregulated currency.

Yeah I know, anarchist fantasies about the world of people living without the government. Except that we do not live in a fantasy, we live in the real world where disputes need to be settled and where settling disputes without courts degenerates into violence (see: gang war).

Re:Good luck with that

[cyberjock1980]

I have a few friends that have considered going into Bitcoin. I always make the same comment the parent mentions. All your government has to do is pass a law making it illegal and suddenly its worthless, unless you don't mind breaking the law.

Re:Good luck with that

[stevegee58]

I recall a law like that in the past. It was called Prohibition. Turned whole populations into criminals until they repealed it.

Re:Good luck with that

[Richy_T]

Between losing a few bucks now and then to disputes which aren't settled satisfactorily and losing more than a third of my income to the government each year, the choice is an easy one.

Re:Good luck with that

[betterunixthanunix]

More like losing your life to a dispute. Here is what happens when we don't bother with courts to settle our problems:

https://en.wikipedia.org/wiki/Murder,_Inc.

Re:Good luck with that

[pmontra]

But without the interposition of police or equivalent organizations you might die in any of those disputes, which I bet will increase dramatically. Historically people valued their lives more than their possessions and created police corps even if they had to pay for them. That's why we are living in this kind of world.

Re:Good luck with that

[Richy_T]

I bet those dead guys are sure glad the government was there to protect them.

Re:Good luck with that

[PPH]

If it's illegal for businesses to take it as a form of payment,

The only way that is going to happen is if it is made illegal to possess BitCoin at all. Otherwise, its all a matter of a contract between private parties. Once any regulatory body steps in and starts dictating what may or may not be used as consideration for the terms of a contract, we damage the principle of freedom of contract upon which our economic system is based.

Re:Good luck with that

[Richy_T]

I bet they were paying rather less than a third of their income to those police corps though, right?

Re:Good luck with that

[betterunixthanunix]

Well, if you think the government is not going to protect you, I hope you live in a tactically advantageous location, have a stockpile of ammunition and guns, and a magic source of food. If not, then tell me this: what stops me and a group of my friends from coming to your home, killing you, and claiming your property as our own?

See, if we have a dispute like this -- one in which I claim that I am actually the rightful owner of your things -- we can either ask the court (i.e. government) to settle the dispute, or we can let strength settle the dispute. In some places, where the courts are not respected, that is how disputes are settled, and people kill each other all the time (which actually leads to more disputes, and more killing). That is why we have courts, laws, and governments: so that we do not kill each other over disputes.

Re:Good luck with that

[Richy_T]

Well, if you think the government is not going to protect you, I hope you live in a tactically advantageous location, have a stockpile of ammunition and guns, and a magic source of food. If not, then tell me this: what stops me and a group of my friends from coming to your home, killing you, and claiming your property as our own?

If you really wanted to? Not much, I suspect. If I got lucky I might take one or more of you down before your numbers overwhelmed. Though if you planned properly, I'm sure you could take me by surprise easily enough.

Re:Good luck with that

[pjt33]

Somehow I struggle to believe that there is any (geographical*) population which has Bitcoin anywhere near as deeply embedded in it as the social consumption of alcohol is embedded into just about every non-Muslim population.

* Pre-empting pedants who might consider "Bitcoin users" a population.

Re:Good luck with that

[pmontra]

I won't bet against you on that one.

Re:Good luck with that

[subreality]

The same way they regulate marijuana: make it illegal; everyone uses it anyway; bust anyone who does enough business with it to upset someone powerful.

Re:Good luck with that

[stevegee58]

How very naive to think that businesses all operate 100% out in the open and on the books.
If 2 people agree on a price and goods/services are exchanged for currency who's to know? Happens all the time.

Re:Good luck with that

[Teancum]

Arguably consumption of alcohol increased during the 1920's and 1930's when prohibition was constitutional. It also took a constitutional amendment in order to make it illegal as well... something that may also be a problem for Bitcoins in terms of regulations being technically unconstitutional except through a gross perversion of the interstate commerce clause. 1st amendment rights may apply as well.

Then again, since when has the U.S. Supreme Court ever cared about individual rights like the 1st amendment, much less the 9th amendment?

Re:Good luck with that

[Teancum]

If the government makes some money, they can refuse to give it to you and they can go after those who have a license to spread that money around if that license is abused according to the government. There is a vested self-interest on the part of banks to follow regulations as their privileges (like fractional reserve lending) would be revoked if they don't play those games.

The question here is because Bitcoin is a distributed currency that no single person or central server can be arrested or have their power disconnected, it would by necessity require a widespread criminal approach which involves mass arrests. That would also require implicit popular support for such regulations as well, so it can't be arbitrary either.

Some centralized alternative currencies like Liberty Dollars or e-Gold have been confiscated by the U.S. federal government in recent years. Their problem was the centralized repositories that could be raided and captured. About the only equivalent to that with Bitcoins are the major exchange businesses which trade Federal Reserve Notes and other currencies for Bitcoins.

Re:Good luck with that

[Richy_T]

Maybe. But perhaps that would be better than having to open my wallet whether I did or I didn't.

Re:Good luck with that

[maxwell demon]

I bet those dead guys are sure glad the government was there to protect them.

I bet those non-dead guys who would additionally have been killed if law enforcement had not finally destroyed the group are very glad the government was there to protect them. And those who were killed would have been glad if the government had been there in time to protect them as well.

Re:Good luck with that

[pjt33]

More to the point, since when has the US Supreme Court had jurisdiction over the EU?

Re:Good luck with that

[Teancum]

Julian Assange and Bobby Fischer might argue with you about the reach of the U.S. Supreme Court in the EU. While not direct jurisdiction, they can still make your life miserable. Why EU governments put up with that stuff is another story though.

A threat to the printing machine

[InPursuitOfTruth]

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)...

Re:A threat to the printing machine

[betterunixthanunix]

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.

Nonsense. At no point in human history has a disorganized group of people had any meaningful currency. Currency is valuable because of authority; societies stay together because there are authorities keeping the peace.

No, it is not fascist to say that. Courts have authority; the reason people don't go around killing each other when they feel like they are owed money or that they were cheated is that we have such authorities, and that we respect their decision. The point of democracy is to ensure that such authority is imposed with the permission of the people living under it.

People did not use gold as currency because it is shiny. It was used because there was no better technology around to prevent counterfeiting, nor was there a good technology for printing money on paper (for that matter, there was no paper). Gold is not the only currency that was used prior to paper money; there is some evidence that clay was used to issue money in ancient Mesopotamia. Beyond very small, ad-hoc schemes, however, the commonality in money since the beginning of civilization is government: money has value because of government.

Yes, see, "medium of exchange" is nice, but why gold over clay, or over tobacco, or some other medium? Why US dollars in the US, but Canadian dollars in Canada? It's not that the government has a gun pointed to your head telling you that you must only use US dollars. It's that things like taxes, court settlements, fees for government services, and so forth all require US dollars; that is where the demand for US dollars comes from. As long as that demand exists somewhere in the world, and as long as the supply of US dollars is not infinite, US dollars have value. Take the US government away, and pretty soon people will realize that US dollars are worthless.

Yes, I know, inflation and blah blah blah. That's a supply issue. Bitcoin has no supply issue, but it has a serious demand issue. The demand for Bitcoin is dwarfed by the demand for government issued currency. Game currencies have more demand than Bitcoin. That is the reason Bitcoin is going to fail in the long run: eventually people are going to realize that they are selling their Bitcoin more than they are buying Bitcoin, and then the scheme will collapse (if deflationary spirals don't kill it first).

Re:A threat to the printing machine

[Richy_T]

Bitcoin may yet fail. And yet more and more, people see their savings dwindle away as the government prints more money or find that it's not even worth having savings and so we have the terrible consumer debt-ridden powder keg we now live in. People will want to store their wealth somewhere other than the next bubble. Bitcoins offers a similar option as gold which is, after all, just a shiny metal with little industrial use.

The delflationary spiral is a lie, brought to you by the same kind of thought processes that brought Muthusian catastrophe theory and pushed by people who want an excuse to steal your wealth by inflating the money supply (purely for humanitarian reasons, of course).

Re:A threat to the printing machine

[Anonymous Coward]

Parent post is easily the most ignorant thing I have read all week.

Fiat money is used because of Gresham's Law. That's the one that says bad money drives out good. You see, the "authority" parent poster spoke of declared that in all of its courts, if there were disputes over payments of debt, the authority's worthless scrip could be substituted one for one against the real money promised as payment. If you and I entered into a contract where I promised to pay you an ounce of gold, and our cartel enforcer (who coincidentally manufactures toilet paper) declares that as far as he is concerned, a roll of toilet paper is equal in value to an ounce of gold, guess which money you're getting, buddy?

Bitcoin isn't worthless because it isn't backed by a government. It is worthless because people can't buy what they want with it, and governments could at any moment raid the shit out of any domestic business that chooses to accept it in payment.

Since black markets are already inherently resistant to government controls, that makes Bitcoin superior to government fiat currencies in that venue. Hence we have Silk Road, where you can pseudonymously buy weed and Adderall all week without even leaving your house. That's really all it needs to get started. Some people will decide that for some portion of their business, they wouldn't mind taking weed as payment, so they start accepting Bitcoin. The central banks that live or die by *their* worthless, yet well entrenched, scrip have to act quickly to nip the newcomer in the bud before it does actually become worth something.

Re:A threat to the printing machine

[Wildclaw]

Parent post is easily the most ignorant thing I have read all week.

Your post is about the most ignorant I have read all week. The parent post was pretty much spot on. And anyone with the slightest bit of historical knowledge knows that.

Fiat money is used because of Gresham's Law. That's the one that says bad money drives out good.

Gresham's Law is bullshit from start to end. It is based on the false premise that currencies should have intrinsic value, when in reality, the exact opposite is true. Any currency with intrinsic value is bad as it not only ties up resources, but also allows external attacks on economies.

As such, smart countries have always moved towards using currencies with as little intrinsic value as possible. Of course, the idiot Gresham didn't get that, and instead came up with his insanely stupid law.

Bitcoin is doomed because of programmed deflation

[MatthiasF]

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.

Overhyped summary

[Kergan]

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.

19th Century

[TubeSteak]

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.

Re:19th Century

[butlerm]

A bunch of rich guys injected liquidity into the system because there was no central bank to do so.

Quite true. What you do not mention, however, is that non-fractional-reserve currencies do not have liquidity crises. If fractional reserve banking (meaning legalized embezzlement of deposits) was prohibited, as it had been in common law for most of the past two millennia, the Panic of 1907 would have been over before it started.

An economy can handle massive swings in equity indices without serious problems. But as soon as people start demanding the return of a deposit all hell breaks loose. In the current system a demand deposit isn't a deposit at all, it is a loan to the bank that a depositor (lender actually) can call at any time.

No economy deals well with callable loans on a large scale, and yet our current banking system is structured on them. We just call them demand deposits instead, even though they have nothing legally in common with deposits except the name.

If too many customers start calling their loans to the bank, the whole house of cards starts falling apart. A house of cards that can grow so big that no combination of honest monied interests can bail them out. Hence the advent of fiat currency, where the central bank can make money out of thin air (roughly speaking) so that it can keep those highly leveraged hedge funds we call banks afloat.

Re:19th Century

[TubeSteak]

You're making a critical mistake here, or being obtuse:

"The panic might have deepened if not for the intervention of financier J. P. Morgan,[2] who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system."

Nope. My point is that capitalists under a laissez faire system used the exact same "bail everyone out" theory of economics as Bernake did 100 years later.

Note the section that said "large sums of his own money". This is not at all what is happening today. J.P. Morgan didn't create money out of thin air, like the Fed is doing right now, by printing it, thereby devaluing the currency.

You're right. In a sense.
During this last crisis, J.P. Morgan again rode to the rescue*, this time by buying Bear Stearns.
You know how J.P. Morgan afforded it? By issuing new stock or, as you said, "printing it, thereby devaluing the currency"

But JP Morgan couldn't have bought all the distressed companies.
Which is another way of saying that, overall, the nature of our marketplace has changed.
There is just so much money, leveraged at least 10:1, that it requires the resources of a central bank to pull everyone's chestnuts out of the fire.

*with prodding from the Federal Reserve

Tell me, do you think it's an accident that the prices of food and oil have gone up like crazy and stayed up?

It's not an accident. There's a lot going on in the world.
But if you think currency devaluation is the reason food/oil prices have gone up, I'd encourage you to prove it.

Instead, during the peak of the mortgage crisis, while the Fed was pouring heroic amounts of money into the banking system, the inflation of food/oil prices slowed and then reversed (which is code for 'prices dropped'). Food prices/inflation have since rebounded and continue to rise. Oil prices are back up. The short version is that demand dropped and so did prices, but I never dug very deep into the situation behind food prices.

Re:19th Century

[udachny]

'Injecting liquidity' to inflate further an exploding bubble is an exercise in futility and it damages the economy further. The bubble was inflated with various instruments that went beyond the limitations imposed by the real money (gold), the bubble was inflated with various derivative bets and the bubble needed to burst and many people needed to lose plenty of money, there is nothing wrong with people losing money, with companies going bust, it's a good thing if the market decides to clear that way from all the dead wood.

In step the bankers and politicians and 'save' the economy by harming it with various 'liquidity injections', however they are manufactured. This causes the current imbalances to grow, the wrong investments to continue (mal-investments) and this prevents cleansing of the market from all the wrong decisions that were made so far. The further economic structures are built upon the faulty foundation and eventually it will collapse. The bankers and politicians figured out how to postpone the real collapse by creating the Federal reserve and eventually allowing it to create infinite amounts of money to buy Treasuries and more than that (even mortgages today). The bigger the structure that is built on top of the faulty foundation the more spectacular will be the collapse.

Re:19th Century

[Teancum]

The final chapter of this current economic episode has not been written yet, so it is dubious to try and make any sort of suggestions as to how inflation is going to pan out. Now that the Federal Reserve is doing perpetual quantitative easing (they aren't even using terms like QE-2 any more) it is even harder to say what will end up happening with all of that extra money. The point is that there is no historical comparison to suggest what might happen... other than to look at the Weimar Republic in Germany. That isn't exactly comforting if you are claiming that a substantial increase in inflation won't be happening.

I certainly wouldn't use the word "heroic" about the lazy attitude that the Fed has taken to manipulating the economy. Ben Bernanke is making the presumption that high housing prices is a good thing. Is it wise to be diverting so much of the economy into buying real estate and building homes? The American people don't think it is a wise thing right now... sort of the reason why housing prices has gone down. The "mortgage crises" was mainly a crises in the banks themselves, not anything dealing with those who held mortgages. Possibly a small extent to those who wanted to borrow money to buy a home, but tight credit rewards those who save up the money to buy instead.

One interesting point about the price of oil: If you compare how many gallons of gasoline or even raw crude you can purchase for an ounce of silver or gold, you would find that oil prices have been pretty much flat or even deflationary. It is only if you compare the price of those products in dollars or euros do you see any inflation at all.

Re:19th Century

[Teancum]

The equivalent of fractional reserve currency in the equity market is the naked short. In other words selling shares of a company you don't even have in the first place, on the presumption that eventually you need to buy those shares back. The difference is that you are loaning money you don't really have.

I do agree with you that an economy which lacks fractional reserves (like an equity market that limits or prohibits naked shorts) will generally not face a liquidity crises except in the very rare situation where there simply is a lack of currency from which to engage in transactions. This can happen when the units of exchange are too valuable (like requiring the minimum transaction to be a kilogram of gold) or if you are in a situation where there simply isn't money at all to be used and people are simply looking for something to be used as a medium of exchange.

My experience in those situations with a lack of liquidity is that a medium of exchange will eventually be found if it is needed. POW prison camps in World War II famously used cigarettes as a medium of exchange, and there have been historical examples of people using playing cards for similar purposes.

Re:19th Century

[Teancum]

I don't understand the irrational fear of the current presidential administration to letting companies go bankrupt. If a company is so poorly managed that they can't earn even a nominal profit to stay in business and meet expenses, they shouldn't be in business. Sometimes the government can screw things up to make it hard or impossible for a business to stay solvent, but I would have to presume that was the intention of those government policies in the first place if any of those politicians were thinking with half a brain. Why it makes sense to tax an organization that is being subsidized is beyond me. Why not save the government bureaucrats who end up being counter productive to society (not to mention corruption potential at each point when money changes hands) and have the government get out of the way?

Re:19th Century

[udachny]

But this is about control and growth of power. It's about perception of power as well.

Imagine a government that says: well, we could throw a bunch of money at the problem, but we won't solve it, we'll just postpone it while making the problem bigger. Of-course you, right now, will feel better if we do that, because it will sweep the real problems under the rug for a while.

OTOH: we could do nothing..... let the companies that went bankrupt go bankrupt. Let the market clear the debts, let it restructure the economy, let the companies that are inefficient collapse, let the capital that is used in an inefficient manner be released, let the creditors suffer. Imagine a government that says all of this?

Question becomes, will the DUMB masses (the mob) NOT elect another set of politicians into the office that would immediately offer "the solution", the silver bullet?

I mean what is the main purpose of a politician? Is it to do something that is good for the economy, for the people in the long term or is it to be reelected and to stay in power?

And why do politicians want to stay in power? That's easy. Be it Pelosi or Gingrich or Clinton, whoever it is, they enter the offices without any money and they become millionaires in the process. Is it a surprise that a politician wants to stay in power and thus offers whatever he thinks the STUPID mob wants to stay in power and to make his millions on corruption?

And ALL government IS corruption, there is no part of government that is not corruption, anybody who thinks that just doesn't understand what power is. Government is power and power is corruption, because power allows politicians, executives, whoever is in power, to give themselves money without having to work for it in the private sector. Being in power means being respected, being on TV all the time, having all the money, having all the powerful people talk to you, listen to you, it's a roller-coaster of fun I suppose.

Most people do not want to throw away that ticket but they end up throwing away the future of all (even though the 'all' don't even understand it and think it's good that politicians promise them all the things that cannot be delivered without long term collapse of the economy).

Re:19th Century

[Teancum]

Actually, America did elect a politician to become President who did exactly like you said: do nothing and let companies fail.

His name was Calvin Coolidge.

Some have said that his policies are what caused the Great Depression, but you can judge that for yourself. He did face a pretty strong recession during his tenure as President and simply let companies fail. For myself, I wish Obama had done just that, as it would have improved his golf handicap (not that it needs much help) and he likely would have a lock on this election.

Re:19th Century

[bhiestand]

Now that the Federal Reserve is doing perpetual quantitative easing (they aren't even using terms like QE-2 any more) it is even harder to say what will end up happening with all of that extra money.

No, they're using QE3 now.

The point is that there is no historical comparison to suggest what might happen... other than to look at the Weimar Republic in Germany. That isn't exactly comforting if you are claiming that a substantial increase in inflation won't be happening.

It's getting late so I won't attempt details, but I'd argue the fundamentals are different. Although we have fairly loose policies on state money, we have drastically tightened policy on bank money in recapitalization efforts. The result: not much inflation. State money is only a small portion (IIRC, 15%).

I think the housing-based economy is ridiculous, and that we're setting ourselves up for a few really big crashes... but I don't think QE will be responsible for them. Or that it's likely to lead to hyperinflation. I believe they will be able to ease QE before things get out of hand, and that the US is more than capable of increasing revenues to match current spending. It would be politically unpopular, but they should be able to operate without hyper-inflating.

I can't believe I'm going to refer someone to a conversation between a guy from CATO and another at Hoover, but for a good discussion and explanation of the subject you should check out Steve Hanke's 10/29/12 EconTalk. Hanke is an expert in hyperinflation and definitely worth a listen/read.

Re:19th Century

[udachny]

The Great Depression was caused by the Federal reserve printing money to buy up bad UK debt from France starting in 1925, this inflated the bubble that burst (agriculture equities) and by the way, people like Keynes lost plenty of money in that crash while Hayek predicted it and published the prediction a few months before the bubble burst. Of-course nobody cared about what he published. The recession that followed the crash was fought by Hoover and FDR, who borrowed, printed huge gobs of money to buy up assets that were falling in price and even destroy them, to prevent deflation! That's while people were losing jobs and savings, instead of allowing them to buy cheap food, the gov't made sure there was no food. All the bail outs and stimulus, creation of FDIC, all this nonsense, including huge inflation is what turned that crash into the biggest Depression (until now, since there is so much more riding on that rotten foundation). Of-course in between there were other crashes, all tied to gov't spending, especially the 1970s, when the USA defaulted on the dollar.

Re:Bitcoin is doomed because of programmed deflati

[Anonymous Coward]

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?

No,on the contrary !

[vikingpower]

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.

ECB choice of words

[vikingpower]

From my dearest possession, the Oxford English Dictionary:

"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....

Re:ECB choice of words

[zotz]

In the Bahamas our own government chose to name something the "National Insurance Scheme" so there you go.

drew

Re:Bitcoin is doomed because of programmed deflati

[arose]

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.

Re:Bitcoin is doomed because of programmed deflati

[Linsaran]

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.

Re: "The Panic of ____"

[TaoPhoenix]

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.

Control vs Freedom

[u64]

The Euro experiment has been tried - it mostly failed. Time for a p2p world currency to give it a try...

Demand

[betterunixthanunix]

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!"

Re:Demand

[Richy_T]

Feel free to read the many, many pages of discussion on the subject. A glib naysay doesn't count for much.

Re:Demand

[betterunixthanunix]

The many pages amount to, "Other people will accept it!" which is, as I said, typical of scams. At the end of the day, Bitcoin's demand is weak; it is based on false promises of anonymity and is greatly undermined by the inability to use Bitcoin in offline transactions without sacrificing security. The demand for Bitcoin is dwarfed by the demand for government-backed currencies, even within the black market, because the overwhelming majority of people pay taxes and utilize the court system to settle disputes.

I have contributed to the pages of discussion on the subject. I have yet to see a convincing argument for Bitcoin's long-term prospects, nor for Bitcoin ever being more than an obscure Internet toy. The lack of a central issuing authority for Bitcoin is a technical liability: it precludes offline payments that are both secure and scalable (see Chaum's work from the early 90s on that subject), and that becomes an economic liability (see above). Lacking any legal framework, Bitcoin will always suffer from a "demand gap" with government issued currencies, no matter how many people "experiment" with accepting Bitcoin payments.

To put it another way, if you went to court and claimed that I owed you some amount of Bitcoin, the first thing the judge would do is restate the dispute in terms of government backed money. If I lost that dispute, I would be ordered to pay you with that government backed money, and unless I already had enough, I would be forced to sell my Bitcoin tokens for such money. That is the demand gap: nobody will ever be forced by law to sell their government backed money for Bitcoin, but the law does force people to procure currency that is backed by the government, and does so to the degree that almost nobody accepts any other form of money.

It is the same reason why Canadian dollars are not commonly used for trade in the United States, and visa versa. The difference is that there is a large group of people in the world who are legally compelled to use Canadian dollars, and a large group who are legally compelled to use US dollars, and so neither currency is left wanting for demand. It is not that Canadian currency is magically more useful in Canada than it is in the USA; it is a matter of where the Canadian government has authority.

Re:Demand

[Richy_T]

I can agree to disagree with you there. I see Bitcoin as having more than just anonymity going for it. I also don't think it will displace national currencies but I do think it has the potential to grow to be quite significant, particularly as an international currency. As to the courts, there are mechanisms available that mitigate the issue somewhat (escrow, arbitration and friends) and are arguably a better way to deal with things. But even then, I think you underestimate the courts. It's might be hard to see from the mostly homogenous environment of the US where the currency is not only used almost exclusively within a large area but is also the biggest player on the world stage but cross-border, cross-currency disputes have been being settled by the courts in many countries for a long, long time.

Re:Demand

[Teancum]

The compelling reason to use Bitcoins is when other currency systems have become ineffective... usually through massive hyperinflation (as may happen to U.S. dollars or euros) or a collapse of the economic system altogether.

There still is gold, silver, and other commodities that can be used as media of exchange. Still, other bonuses that happen with Bitcoins or other related currencies is that you can transmit them electronically without a central authority verifying that transaction. That is the huge advantage of Bitcoins, and why it is being used at all.

There is no real need for court systems, legal tender laws, or even "the law" to enforce the value of a Bitcoin. It is worth whatever you think it is worth, just like an ounce of gold is what you think it is worth. If you can convince somebody that a brand new car is worth an ounce of gold, that is its value. Ditto if they think it is only worth the value of a loaf of bread. BTW, the same thing applies to other money including a dollar or a euro.

A court system is useful in terms of preventing fraud or enforcement of a contract where one person has filled their part of the contract (aka paid the money, performed some sort of service or delivered a product) and another person has not lived up to their end of the agreement. That has nothing to do with the value of money or even what kind of instrument you are using for that money. A judge may not recognize Bitcoins as the medium of exchange in their court room, or in other words they may require you to use something like U.S. dollars or the local currency (whatever it may be) to settle the case, but that doesn't change the ability to enforce the contract. Then again it is entirely up to the judge himself to decide what is legitimate in that situation, which very well may include payment in Bitcoins to settle the debt.

The only real difference with taxes is that the government will threaten to take your life (ultimately... there are several steps before that) if you refuse to pay those taxes for whatever amount that government sees fit as a very arbitrary amount. Usually most people value their life as something more valuable than an ounce or two of gold, so they would gladly give that up to a government. That doesn't make armed robbery any more palatable or for that matter any more honorable that it is being done in the name of the law, but that is precisely what is going on with any sort of taxation. Of course in regards to taxes, "other people will accept it" too.

Re:Bitcoin is doomed because of programmed deflati

[Anonymous Coward]

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 the Market Say?

[PhamNguyen]

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.

Re:What Does the Market Say?

[Richy_T]

You are sadly mistaken. The inflation rate is currently much higher than the rate of growth of the economy and that's even with the effects of the last round of quantitative easing being held back by trickery. And let's not forget that awfully-huge national debt hanging out there.

It is hard to tell if Bitcoin is currently priced correctly. It has fluctuated quite heavily over the past 12 months or so. It is also still relatively unknown and under-used. It could possibly go under and be worth 0 of anything but if it grows (as it has been) and people find a use for it, its value will grow. The shakier the dollar becomes, the more attractive it will look. The longer it, if nothing else, just stays around, the more attractive it will look.

It's hard to say where Bitcoin will go. It likely won't ever fully take over the world or even a single country's economy but it has a huge potential for growth. If nothing else, it's a fascinating way to get a handle on what money and currency is really about. I've put a little money into it, it'll be interesting to see what happens.

Re:What Does the Market Say?

[Time_Ngler]

Just a side note, does the fact that the bitcoin volume has been drying up recently bother you? I wonder if it's just been mainly hype that keeps the bitcoin price afloat so far. I suppose if someone does come up with a really successful idea that incorporates bitcoin this will change, but so far, every company that uses them has been very obscure and I can't imagine a lot of volume... besides, of course, the silk road. But if bitcoin hangs it hat on that and only that, it will bound to end up being a massive and drama filled disaster. (I know all the arguments about how bitcoin is impenetrable to government intervention, but I don't really believe that..)

Re:What Does the Market Say?

[PhamNguyen]

Well the less volume is traded/used, the less you can trust the price I think. So my argument relies on the volume being sufficient that a person who really wanted to arbitrage on bitcoins could actually do it.

Re:What Does the Market Say?

[Teancum]

The only real issue with the "volume drying up" is that the individual unit of exchange might become so valuable that it can't be subdivided. The actual quanta of a single bitcoin is still rather worthless at the moment but in theory if massive deflation of the currency were to occur, that smallest fraction of a bitcoin might be impossible to further subdivide.

This was talked about on the Bitcoin forums, where in theory the protocol could be extended to recognize additional fractions of a bitcion, but it was dismissed as a problem.... just like those who set up IPv4 thought 4 billion network addresses would be impossible to exhaust.

Taxes create demand

[betterunixthanunix]

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.

Re:Taxes create demand

[DanielRavenNest]

Bitcoin has utility to transmit funds easily between countries. Existing methods like bank international wire, or Western Union are expensive and complicated. Even after converting from your local currency at your end, and the recipient converting back to their currency at the other end, it can end up being a lot cheaper. So the value of the coins is not in holding them for their intrinsic value, but the use you get out of them.

The software to make easy use of the bitcoin protocol is still in early development.

Re:Taxes create demand

[ultranova]

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.

Bad example.

Re:Bitcoin is doomed because of programmed deflati

[PhamNguyen]

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.

Re:Rare Metals?

[pmontra]

They have no intrinsic value. Iron could be more valuable than gold as anybody would discover going to a fight with a golden sword against an iron one. People have been trained to believe that gold is precious. It will be as long as this belief lasts.

Pot, kettle ....

[PPH]

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.

A modest fix for this modern problem

[khallow]

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.

Bitcoin damages central banks and fiat currency

[ragingbull1965]

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/

Re:Bitcoin damages central banks and fiat currency

[Teancum]

If you are a software engineer I would suggest that you help in trying to review the source code for the reference client and try to understand the protocol for yourself. Since that software package is in an open source license and the protocol is somewhat documented, that is something you can realistically do and even recompile the source code yourself, and even create your own root block or use the test chain (a separate chain of blocks that don't have nearly so many miners working on them and is being used for testing the protocol and mining clients).

The proof is in that protocol and a competent software engineer can evaluate a great many of these claims including a solid review of the hash protocols. I've done that myself and for my own satisfaction... and even helped to write up a significant part of the current "official" specification document that I derived from the original source code that Satoshi wrote. If you really want to get into the specification, which by definition is no bull because it is the working document that engineers need to work from in order to implement the protocol, you can look here:

https://en.bitcoin.it/wiki/Protocol_specification

The rest of that website has several other documents that are extremely useful for learning about Bitcoins, and I would highly recommend reviewing it, although it is written by and for software developers and not mere mortals. The FAQ is especially useful: ahref=https://en.bitcoin.it/wiki/FAQrel=url2html-18813https://en.bitcoin.it/wiki/FAQ>

I wish that the Wikipedia page on Bitcoin was a bit more useful and could go into the technical issues related to how Bitcoin works, and there is the Bitcoin wiki that sort of explains some of the issues and be able to answer your question a little more completely. The problem with your request is that trying to put together such a no-nonsense paper on Bitcion with full references and done in a manner that could pass muster with a major scholarly journal takes a considerable amount of time... usually much more than those who really understand the protocol are willing to put forward into writing. Wikipedia should be such a page, but it really isn't up to speed on that...and I've tried to stay away from writing on Wikipedia about this topic because of potential conflict of interest issues and what would be considered "original research".

The "environmentally friendly" claim is something that is a huge stretch of the imagination, particularly in light of how bitcoin mining is performed, and the "no transaction fee" is a complete farce that simply isn't true.

Fast transfers is relative... as it can take up to a couple of hours for some transactions to get processed (although usually it happens in less than a half hour). I suppose that is "fast" in the sense that international bank transfers can sometimes take several days to clear and be completed. On the other hand, you can transfer via PayPal and take just a few minutes or make a "point of sale" purchase at Wal-Mart in just a few seconds. Of course unmentioned in that situation is that a store really is issuing you temporary credit until those transactions actually get processed.

Security is also somewhat dubious, but it is protected by a hash algorithm that the National Security Agency is using and at the moment is considered to be cryptographically sound on a mathematical basis. Then again, do you trust the NSA? I mean that seriously and not in a tinfoil hat way, but it is a question to legitimately ask.

Divisibility does have a limit, but that limit will likely not be exhausted for a great many years or decades, as the smallest "unit" is of such low value as to be laughable right now. I think it is a billionth of a bitcoin (I'd have to review my notes, but it is something like that) so the claim is still roughly true. If you are buying something of substance like even an old-fa

I think they put the sentence wrong....

[jbssm]

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."

Of course it is

[Guru80]

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.

Re:Of course it is

[BeanThere]

It's instructive to follow the story of the liberty dollar, another attempt at a free currency. Shut down by the federal government, raided, assets seized, and the founder charged and convicted of "making, possessing and selling his own coins". He was even labelled a 'domestic terrorist'.

Trust me, the currency cartels of western economies do not like competition, and they are very powerful with friends in high places ... Bitcoin's days are numbered.

Re:Of course it is

[tftp]

Bitcoin's days are numbered.

It may be not as simple to stomp the BC out. But ultimately yes, BC exists only at the pleasure of authorities. It is also a useful testbed for the government's control over such things. A BC activist on the Internet is just like an anti-government activist on the Internet. So if you learn now to identify the former you will be well prepared to deal with the latter. As all the world's societies slowly collapse onto themselves, like a star, the need for such means of control become more and more necessary (at least from the point of view of governments.) In essence, the future looks pretty dark; you can choose between the infinitely free world of Mad Max, if you are lucky, and the fascist society like 1984. All the countries in the world exhibit this trend because they are not politically willing to accept the natural solution - which is invariably bloody.

Re:Of course it is

[Corwn of Amber]

Trollolol, an idiot doing disruptive shit under his own name in the U.S.A, like that was going to be let alone.

What we need is so many Bitcoin miners that they'll never be able to lock them all up. They're the ones minting the money, after all. A really good idea would be to include mining capabilities in all Bitcoin clients, to balloon the number of users way past what it's feasible to oppress.

Bitcom - Where there's a will

[r1_97]

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.

I disagree

[slashmydots]

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.

Re:Bitcoin is doomed because of programmed deflati

[Anonymous Coward]

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.

Re:Bitcoin is doomed because of programmed deflati

[Wildclaw]

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.

Re:Bitcoin is doomed because of programmed deflati

[gr8_phk]

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.

Re:Rare Metals?

[Fjandr]

Nothing has intrinsic value by that metric.

The intrinsic value of gold and silver (amongst many other similar materials) is that they are visually pleasing to humans. Aesthetics have important emotional and psychological functions which rank only marginally below those required for survival.

Talk to any anthropologist worth their salt, and you'll find all the evidence you need to show it is a universal trait amongst human cultures. Creation of jewelry is second only to specialized tool use in defining modern human behavior.

But do you know the cause?

[gr8_phk]

And you know what the solution to that panic was?

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.

Negative impact on the reputation of central banks

[Corwn of Amber]

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.

Re:Bitcoin is doomed because of programmed deflati

[Anonymous Coward]

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.

Re:Bitcoin is doomed because of programmed deflati

[Teancum]

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.

19th Century Financial Panics

[westlake]

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

Re:Bitcoin is doomed because of programmed deflati

[Linsaran]

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.

Re:Bitcoin is doomed because of programmed deflati

[Teancum]

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.

Who needs banks when you have gangsters!

[sg_oneill]

"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*

Competitive currencies

[dumky2]

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.

Re:Bitcoin is doomed because of programmed deflati

[Teancum]

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.

Re:Rare Metals?

[Teancum]

Every fiat currency in history has collapsed, gold has not.

I wonder how you explain Iraqi Dinars? That is an example of a currency that outlived the government which set it up in the first place, and was a fiat currency.

The advantage was that the printing presses which made the currency were destroyed by the invasion of the country, and stockpiles of money were also destroyed in the take-over of the government as well. Often as a way to subjugate the local population, invading armies brought along truck loads of the local currency as a way to debase that currency... so I'm not entirely sure why the U.S. Army didn't do that in Iraq. But this is a pretty clear counter example to the claim that all fiat currencies collapse.

Furthermore, if you have any Confederate dollars that can be authenticated, they are currently worth more than the U.S. Dollar. That says something, and it is another example of how some fiat currencies can maintain value over time or even increase in value.

Re:Rare Metals?

[bhiestand]

The intrinsic value of gold and silver (amongst many other similar materials) is that they are visually pleasing to humans. Aesthetics have important emotional and psychological functions which rank only marginally below those required for survival.

Talk to any anthropologist worth their salt, and you'll find all the evidence you need to show it is a universal trait amongst human cultures. Creation of jewelry is second only to specialized tool use in defining modern human behavior.

So the price of gold on international markets is determined by gold's visual appeal? When gold goes up by $100/ounce, is that because humans found gold to be intrinsically more aesthetically pleasing by $100/ounce than the day before?

Once could certainly argue that gold's real value is far below its current market value and that gold is in a 4000-year bubble. Gold does have use in jewelry, space tech, and some industrial applications... but it would be pretty difficult to argue that any of these drives the prices of gold.

People invest in gold for the same reasons they invest in anything else that doesn't pay dividends: a) they think there is a greater fool b) they think it will increase in value or c) they feel it is the best risk/reward tradeoff for their concerns on inflation, currency fluctuations, etc. I'm missing a few other options, but you get my drift.

Re:Rare Metals?

[Fjandr]

You took a response to a pedant and made a mountain out of a mole hill.

Yes, I'm aware of all that. Markets make most of the "value" of anything. Ultimately, it's backed by faith, just like paper. Unlike paper, gold doesn't require any significant organized body, anywhere, to decide it's worth something in an official capacity.

My main point was, and still is, either nothing has intrinsic value, or gold has intrinsic value. My secondary point was that the belief that gold has value required no societal training. Any other tangents are outside the scope of my comment.