I have lacked the energy to write a follow-up to my last post but will do so by the weekend. In the meantime, here are a couple of stories about a Bitcoin ATM.
Economics is the study of economic incentives on people's behavior. When I read about plans for a digital currency to coexist with the physical one, my two questions as an economist were: (1) "What are the incentives for a customer to exchange dollars for bitcoins before making payment when the seller could have also accepted his dollars directly?" and (2) "What are the incentives for a seller to accept his customer's bitcoins rather than dollars when he knows for sure that the latter will be accepted everywhere as medium of payment, while the former is not?"
(1) the buyer incurs in unnecessary transactional costs by using bitcoins: like a tourist having to exchange his foreign currency for the local one to carry out a transaction, why would anyone want to go through the tourist's hassle in his own country?
(2) the seller incurs in extra transactional cost by accepting bitcoins: like an exporter having to exchange the importer's currency for his own to pay his suppliers, why would anyone want to go through the exporter's hassle when selling domestically?
The two articles imply the incentives for both to use the digital money instead of dollars: To understand it, is better not to compare bitcoins with coins and bills, but with plastic money (debit and credit cards), as it is bitcoin's closest substitute: If Visa, MasterCard or AMEX charge higher monthly fees to sellers for using their charging services than bitcoin would, then the sellers would be the ones who would generate the incentives of special discounts to their customers for paying with bitcoin rather than any of these three.
Both parties can reduce their transaction costs, because Bitcoin is a technological improvement. It's fast, global, can't be reversed, blocked or frozen and the transaction fees are negligible. Also, the total amount of existing units is predefined and degressive (follows a geometric convergent series). Something like this has never existed before.
Even if you normally use fiat money, and an exchange using Bitcoin thus might contain more steps, it does not follow that the overall transaction costs are higher. Transaction costs are heterogeneous and include all kinds of auxiliary aspects, such as regulation, inflation, capital controls, principal-agent costs and so on. Most electronic transactions (in particular payment card processing) already occur in multiple steps, even if both sides are using the same currency (if they are using a different one, e.g. if I have a Euro-denominated debit card and pay a US shop, then there are forex fees in addition to that already).
Bitcoin makes payment processing into a utility and as its advanced features become more usable, it can entirely replace the whole banking sector.
I think I speak for many in saying that Bitcoin would be acceptable if owned, operated and protected directly by the Treasury Department, with the Federal Reserve limiting its function to that of fiscal agent (much as the Fed's role now when providing physical current U.S. coin to banks and depositors).
As far as the Constitutionality of a take-over of Bitcoin by the Treasury, the Treasury has never been authorized to grant legal tender privileges to a permanently unredeemable paper or electronic currency, so at some reasonable point in time, and at some reasonable location, the digits would need to redeemable for actual physical coin (as unlikely as depositors would be to take physical possession).
If I'm not mistaken, some precedent already exists for the Treasury to issue coined money that has not yet been struck by the mint. I'm thinking of something called "Treasury Coin Notes" which were issued in the early 1890's, which were notes that did not represent money that was already coined, but gave the holder rights to the bullion that was scheduled to be coined.
I am sorry but I don't understand your argument. "Acceptable" by whom? "Take-over" of what? Why is it relevant in any way whatsoever?
"Acceptable" to those looking for an alternative to debt-as-money. "Take over" of Bitcoin, which should not sound unusual because Congress has power to tax/regulate the "incoming transfer" of all kinds of money substitutes, though yes, the Treasury Department could simply let Bitcoin do its thing and develop its own version of Bitcoin.
What specifically can the involement of Treasury improve? Nothing. They can't provide liquid markets and they can't provide payment processing services. I would say it's exactly the opposite, the fact that it is more difficult for the state to interfere with Bitcoin that drives its acceptance. Your argument makes no sense whatsoever.
Also, since Bitcoin is decentralised, there's nothing to take over. You can only take over parts of the network, but that has no effect on other users. In other words, your argument is that in order for Bitcoin to be accepted, the state needs to confiscate it first, which is just absurd.
Where do people come up with this stuff? Do you just take arbitrary words and merge them together?
First, involvement by the Treasury cannot be avoided without a Constitutional amendment because Article 1, Section 8, Clause 5 is an exclusive grant of the coining power to Congress, i.e., a monopoly. So, in other words, the creation of metallic "coined base money" cannot be decentralized. However, once coin deposits reside at a local bank, either by demands by the bank or its depositors, that bank is "free" to create substitute currencies in the form of notes, checks, loans, etc. ... depending on the withdrawal patterns of the bank's depositors.
Second, it's a myth that Bitcoin is decentralized because the software is controlled by a select few. Only current U.S. coined money in someone's possession is truly decentralized.
Third, the federal government needs to tax, control and regulate Bitcoin-like currencies because its number one job is to protect property under Lockean theory, and this includes a duty to protect the monetary system that is used to measure economic value and various forms of property.
Finally, I "come up with this stuff" mainly by studying the eight Legal Tender Cases (1869-1884) ... and U.S. income tax evolution, which started in 1862, and was later influenced by the political economy of Henry George (1839-1897), and his son Henry George, Jr. (1862-1916), who incidentally, helped get the 16th Amendment ratified (but, as I said before, the current income tax we're laboring under is not authorized by the 16th).
So let us deal with the issue point by point.
First you said that Treasury needs to be involved for Bitcoin to be accepted, and now you write that involvement with Treasury can't be avoided. Those are two entirely different arguments. I claim they are both false, but the point is that they are different issues.
The Treasury already makes exceptions for foreign money. It does not exert its legal power over foreign central banks, for example, even though the constitution says that the privilege extends to foreign money too. It also makes exception for many privately issued forms of media of exchange, in particular if the producers do not call them "dollars" and if they are not a form of financial instruments (financial instruments are regulated by the SEC).
Your argument that "the creation of metallic coined base money cannot be decentralised" also suffers from the formulation unclarity. You probably wanted to write that the Treasury might want to use force to uphold its monopoly. But this, again, is an entirely different issue. Unless the Treasury takes over the whole internet all over the world, it can't take over Bitcoin, and even then it might not be enough. Then there's the issue that the monetary base of Bitcoin is virtual and not metallic. You can have metallic Bitcoins, but they don't form a significant proportion of the monetary base of Bitcoin and probably never will.
US coined money is not decentralised, because as you said yourself it has a monopoly issuer. You're contradicting yourself. Also, you imply a US-centric vision. Bitcoin is decentralised, because the owner of the network node is free to choose what software to use. The coders of the software cannot force the node operators to use their software and accept modifications they disagree with. The protocol is open (and changes create incompatibilities), and most implementations, including the reference one, are open source.
Implying that "the federal government needs to tax, control and regulate Bitcoin-like currencies" has again nothing to do with acceptance of Bitcoin, and to claim that this has to do with the Lockean theory is a total non-sequitur. So it's a non-sequitur and irrelevant. A double logical fallacy. Then there's both the inherent contradiction in a state, which is by definition a violator of property rights, being in charge of protecting them, and its terrible historical track record. But these are merely auxiliary issues. The main problem is a lack of a coherence in the argument.
Furthermore, the situation is exactly the reverse as you allege. The acceptance of Bitcoin is driven, among other things, by it making it easier to avoid the power of the state. If it was easier for the state to interfere with it, its acceptance would decrease.
Are you suggesting Congress and the IRS are going to let Bitcoin users off the hook regarding the income tax? Either way Congress is going to control Bitcoin, either by taxing its users with a substitute-currency-regulating income tax, by taking it over, or by developing its own Treasury-Direct version of Bitcoin. And when I say "taking over Bitcoin" that does not mean Bitcoin would retain its current status as a privately-owned currency. Also, when I say that Congress has a monopoly power over metallic coinage, I don't mean it in the private monopoly sense of the word because Congress is a fully public "people owned" legal entity, which simply means that current U.S. coins in the possession of someone are owned by everyone in general and no one in particular. The holder merely has a possessory title in the coins, which are like walking around with a bank in one's pocket, so that's what I mean about current U.S. coins being decentralized.
I am not suggesting anybody does anything. I am pointing to the logical flaws in your arguments. Whether I think people should or should do this or that has no effect on the validity of my criticism.
The taxation of Bitcoin and control over the transaction mechanism are two different issues. Barter and foreign currency transactions are taxed even though US does not control them. Similarly, Bitcoin transactions are subject to various taxes irrespective of how Bitcoin is controlled or classified. While Bitcoin makes it easier to avoid detection, that does not make it legal.
I argue that this feature of Bitcoin is, from the point of view of potential Bitcoin users, a comparative advantage. That some other people do not like it is irrelevant. People do not make choices based on what they think others' preferences should be. They make choices based on their own preferences.
The concept of something being "owned by everyone in general and no one in particular" is inaccurate, because at any particular time, the system gives control to someone specific (for example, the employees of the Treasury). It also ignores that there is a world outside of the US.
To repeat, my point is not that Bitcoin should or shouldn't be taken over. My point is that your argument that this takeover would have a positive effect on the acceptance of Bitcoin is unfounded.
"My point is that your argument that this takeover would have a positive effect on the acceptance of Bitcoin is unfounded."
Peter, I don't think so. If the Treasury Department took over Bitcoin or implemented a similar system of its own, it would have the positive effect of being a fully public owned and monitored system, not as Bill Still recently explained on his Facebook page, a "high-tech plutocracy."
Here is what he said:
In the past couple of years, I've been asked about Bitcoins at least once a week. I have been unable to answer intelligently. Now, I am becoming convinced that this is nothing more than a high-tech pyramid scheme and would like to warn my friends against it unless in the face of the following, the supporters of Bitcoin convince me otherwise.
Last week, I did a show on "Adam vs The Man" on RT. I was on with Mountain Hours guy Wayne Walton and some Bitcoin advocate. To my surprise the Bitcoin guy admitted several astonishing things: 1. the quantity of Bitcoins is limited; 2. the founder of Bitcoins has disappeared (one would assume with a sizeable number of Bitcoins); 3. he specifically stated that I do not have enough computing power to create any Bitcoins.
My response to this off the top of my head was, "Oh, so this is nothing more than a high-tech plutocracy."
Since then, the evidence is building up that this is exactly what it is -- a high-tech pyramid scheme -- where those who got in early, will have a supply of "money" that they created out of nothing and so they get the seignorage (the difference between the cost of creation of a money and the value they derive after its creation). This money will only increase in value due to the limited supply. It's no wonder the founder/creator has disappeared.
On my YouTube channel (bstill3), this just came in from someone else apparently well versed in the scheme. Remember, these words are not mine, but his.
"In the past, Bitcoins could have been mined with a higher end home computer, but the algorithm gets harder with each coin mined, and now a $3,000-$5,000 ASIC (specialized computer) is needed. The worst part about it is just one hoarder can crash the BC market by cashing in all at one time. It already happened once in it's relatively short existence. And though more legit businesses are taking them now, BC's are mostly used to buy drugs on the black market. Not good for confidence."
There is so much wrong in your / Bill's arguments that I have to write a blog post about it. Stay tuned.
"Where do people come up with this stuff? Do you just take arbitrary words and merge them together?"
Actually Michael, you should not applaud those kind of lines, they are disrespectful and bring down this blog´s intended level of education and politeness among its users. I am surprised Rick even re-adress him directly after that, as I -for instance- wouldn´t have.
As a economics noob, I think the Bitcoin is exciting! It allows me to make transactions "off the grid" if I so choose, and it's less expensive than PayPal or VISA. I suggest the nay-sayers give it a try.
My only concern is that, like all things computers, it's susceptible to hacking (from both internal and external clients) and data corruption.
And then we have to ask, what happens to the cash that is deposited into their ATMs? Obviously, someone is going to use it for economic gain. Who is that? How is that cash utilized within the Bitcoin "currency and economy".
Decentralisation, the use of well known encryption / hashing standards and open source compensate the risks. But the fundamental risk has nothing to do with computers. Physical goods are also vulnerable, to physical intrusions. We just have a much longer experience with protecting ourselves against physical intrusions, so our perception is skewed.
Mentally, it's probably better to visualise Bitcoin as a proof of concept rather than the ultimate solution. Maybe it will evolve into the ultimate solution, maybe something else will overtake it. But it signifies a fundamental shift.
What happens with the cash that is deposited into the ATM? Well, I don't have all the details, but I can make an educated guess. The ATM allegedly charges a 1% markup. So, my guess is that 99% (or 99.00990099...%, depending on how it is calculated) of the cash is used to offset the online forex trade that the ATM initiates (it needs to buy the Bitcoins somewhere, clearly), and the 1% is used to cover the electricity/rental/depreciation, and if anything remains, that's the profit of the ATM operator. The info I have is insufficient to know whether the forex fee is included in the 99% or not, but that doesn't fundamentally change the concept.
Bitcoin should be big news right now. It just reached a record high dollar-price yesterday. New services are being created as with these new ATMs and new businesses are accepting bitcoins. It really is an exciting time. Even if you are a doubter (and there's ample reason for skepticism) it's worth keeping Bitcoin on your radar to see how it evolves. With guarded optimism, I think Bitcoin might one day be considered as great an innovation as the Internet.
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