Following up on the comments to George Selgin's post on Bitcoin, here's a suggestion. An enterprising reader should write a paper on the early history of Bitcoin, while people's memories are still fresh. Answer the questions George suggested, and give other details of just how Bitcoin got off the ground. Whether or not Bitcoin becomes bigger than it is, you will have contributed an important piece of knowledge.
Thomas at the Breakfast Impossible blog has a post with some provisional thoughts on Bitcoin. Thomas is one of the few people who is deeply knowledgeable in both economics and computer programming. His post is a complement to George Selgin’s recent post. Thomas suggests that one important practical aid to the further spread of Bitcoin would be an app allowing parties using Bitcoin to easily determine an exchange rate with national currencies. He also expresses skepticism that Bitcoin will become popular as a unit of account, for reasons similar to those that George discusses in his recent paper. I agree that Bitcoin’s low upper limit of supply is a hindrance to it becoming a true currency as opposed to an object of speculation, like Beanie Baby dolls (remember them?). The low upper limit means that if many more people start using Bitcoin, its value will increase even more sharply than it has. But unless people think everybody is going to use Bitcoin, so that the price has nowhere to go but up until leveling off after everybody is using it, the ever higher price will deter many potential users from switching except under a dire scenario where people are willing to abandon national currencies as they do in hyperinflations.
George's paper, “Synthetic Commodity Money,” uses simple but powerful logic to make a definite advance in monetary theory. The paper observes how there are certain monies that do not fit the standard classification of commodity or fiat, and proposes to replace the two-way classification with a two-by-two classification (where, however, one of the cells may be empty). It’s a fundamental idea, so fundamental that after further discussion it deserves to be in money and banking textbooks. Put it in your cap along with your work on free banking and your discussion of good and bad inflation and deflation, George.
I am reading Dick Timberlake’s book Constitutional Money, which George describes in the preceding post. Dick’s earlier book Monetary Policy in the United States: An Intellectual and Institutional History sought to distinguish itself from Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960 by covering a longer period, delving less into statistics, and focusing more on Congress and less on the executive branch than Friedman and Schwartz. It succeeded. Dick’s new book extends coverage of monetary policy to key decisions of the Supreme Court. So, now we have all three branches of the U.S. government covered.
An important point that came up at the Cato Institute presentation of Dick’s book a few days ago is that the U.S. Constitution, while intended to restrict the kind of money that states and the federal government can issue, contains no explicit restrictions on the private sector, and under the reading of the Tenth Amendment that Dick and other advocates of limited government favor, reserves to the people the power to issue and use whatever kind of privately issued money they wish. To summarize: for the government, gold coin; for the private sector, Bitcoin if people want. (Curious why Dick’s book stops with the 1930s, I asked him if there were any cases since then he would consider anywhere near as important. His answer was no, the decisions of the 1930s have cemented the legal framework the United States has had since in the aspects his book discusses.)
That's what Dick Timberlake originally planned to call the fantastic book that Cambridge University Press has recently published under the modified title, Constitutional Money: A Review of the Supreme Court's Monetary Decisions.
I'm rather partial to the old title, for it conveys better than the new one does the fact that the basic money of the United States today really is something that has been "made" by the Supreme Court rather than something "Constitutional" in the sense of being obviously permitted, much less expressly authorized, by what is still, nominally at least, the supreme law of the land.
That law contains only two references to money, both of which occur within its first Article. Section 8 of that Article gives Congress the power "To coin Money" and to "regulate the value thereof." Section 10 in turn declares that "No state shall...coin money; emit Bills of Credit; [or] make any Thing but gold and Silver Coin a Tender in payment of Debts."
It ought to be perfectly evident, from the writings of the founders themselves, from opinions expressed (according to James Madison's notes) during the Constitutional Convention, and from the understanding common to all authoritative commentaries on the Constitutional debates, that the overarching objective of these clauses was to guarantee that neither the states nor the Federal government should ever again be able to issue irredeemable paper currency as several colonies, as well as the Continental Congress, had done in order to avoid having to pay their bills with specie. The idea, as Roger Sherman put it at the time, was that of "crushing paper money" once and for all.
Nor, as any competent Constitutional scholar will tell you, does the fact that states alone are expressly prohibited from emitting "bills of credit" or from making legal tender out of anything save gold or silver mean that the founders thought it A-O-K for Congress to do either of those things. On the contrary: as the 10th amendment was supposed to make clear, in case anyone was dull enough to forget it, the whole point of the Constitution was to set forth those powers that states had elected to delegate to the central government, the others being "reserved to the States respectively" or (if prohibited to the States) "to the people."
All of which, of course, raises two obvious questions: (1) How did we end up having, as our nation's official money, Federal Reserve notes--notes which, being irredeemable in gold or silver or anything else, are precisely the sort of "bills of credit" the founders intended to proscribe?; and (2) How did the government manage to make these notes "legal tender for all debts public and private"? Those questions in turn raise a third obvious question, to wit: Where the heck was the Supreme Court while all this was goin' down?
The answer to the last question is, of course, that the Supreme Court was there all along, torturing the Constitution until it submitted to the decisions that led us where we are today. The details concerning the infernal devices the Court employed to twist and to stretch and eventually to eviscerate the Constitution's monetary clauses (and, with them, much of the rest of that document's sinews), the men who wielded them, and those who protested, are the subjects of Dick's story--a story he tells as only the leading historian of American monetary policy could tell it. And he tells it both with great aplomb and with a rectitude which, in light of the maddeningly perverse nature of some of the sophistries he must contend with, seems in places almost super-human.
According to Timberlake's retrospective account, it was largely owing to Chief Justice John Marshall's 1819 decision in McCulloch v. Maryland--a case concerning Congress's power to charter a bank--that the fiat money camel was able, first to poke its nose, and eventually to force its way entirely, into the Constitution's precious-metal wigwam. Marshall offered two reasons for holding that Congress did indeed have the power in question. First he observed that "There is nothing in the Constitution that excludes it." Then, as if he'd suddenly remembered the 10th amendment, he added that the Bank's constitutionality rested upon Congress's power to make "all laws which shall be necessary and proper" for carrying out its express powers, as set forth in Article 1, Section 8, and elsewhere. The latter argument, admittedly, also comes to grief if one takes "necessary" to mean "indispensable" or "absolutely required" or "essential," as dictionaries tend to do. But Marshall had an answer for that, too: "Necessary," he began by observing, means "convenient, useful, and essential." Having thus arbitrarily restricted the meaning of "necessary" to include only things both essential and convenient, he then quietly went on arguing as if he'd written "or" instead of "and." Thus Congress' implied powers, instead of being narrowly confined according to the Convention's own choice of words, were so extended as to make all the fastidious language setting-forth Congress's express powers appear otiose.
Another big step came in 1884, with Juilliard v. Greenman--the third and last of the so-called "Legal Tender Cases." Here Chief Justice Horace Gray wrote the majority opinion, to wit, that in issuing irredeemable Greenbacks and making them legal tender Congress was merely exercising "a power universally understood to belong to sovereingty...at the time of the framing and adopting of the Constitution of the United States. The governments of Europe, " Gray continued, "had and have as sovereign a power of issuing paper money as of stamping coin." In short, because various, mostly monarchical, European governments assumed, among their other sovereign prerogatives, that of engaging in paper-money finance, Congress surely ought to be able to do the same. That the founders had set up a republic, based on popular sovereignty, rather than an absolute monarchy, was a detail apparently beyond either Justice Gray's comprehension or that of the other (mostly Republican) justices who joined his majority opinion.
Although it managed to survive Juiliard v. Greenman the gold standard did not survive the Great Depression, when the Roosevelt administration, further testing the limits of the Federal government's "implied powers," turned Federal Reserve notes into the latest version of Congressionally-sanctioned bills of credit, confiscated all private holdings of monetary gold, reduced the dollars' official gold content, and declared specific gold-payment provisions in both private and public contracts null and void. In all this, it almost goes without saying, the Supreme Court happily acquiesced, in a final paroxysm of monetary iniquity known as the Gold Clause decisions.
Perhaps some, reading this summary, will think, "So, the High Court overruled the founders, and got us off gold. Bully for them: had they done otherwise, those metallic 'fetters' of which the founders were so fond might have us still shackled tight to the very depths of the Great Slump. The founders, after all, cannot have imagined all the means now at our disposal for promoting happiness, or its pursuit. They supposed that gold and silver were the best of all possible monies; but they were mistaken."
To such reasoning several replies seem in order. First, so far as the U.S. case is concerned, the assertion that the gold standard stood in the way of monetary expansion is wrong. As Timberlake himself points out (p. 185), at the trough of the great monetary contraction "the Fed-Treasury gold stockpile, even with all the reserve requirements in place, was still large enough to generate nearly twice as much common money--hand-to-hand currency and bank deposits subject to check--as then existed." What's more the Fed had the authority to relax it's own very hefty gold reserve requirements, which included a minimum 40 percent requirement against its outstanding notes, whenever circumstances seemed to warrant doing so. In short, the collapse of the U.S. money stock was the result, not of the Fed's commitment to maintain the gold standard, but of it's unwillingness to part with surplus gold when doing so might have averted panic.
Second, the authors of the Constitution never pretended that they could anticipate future developments that might make some changes in the law desirable. On the contrary: it was precisely to provide for such modifications that they included Article 5, spelling-out amendment procedures. The requirements are strict; but (as experience proves) they are hardly insurmountable. And that's just as it ought to be if the Constitution is to remain an expression of the will of the people, or at least of a majority of them.
Finally and most importantly, to apologize for the Supreme Court's running roughshod over the Constitution's money clauses, as so many fans of fiat money are inclined to do, is to thumb one's nose at the rule of law itself. It is to treat constitutions and such as mere scraps of parchment, to be caste aside the moment that numbers displayed on some lightning utility calculator indicate that a new arrangement, though patently against the law, might boost social welfare.
But it's such thinking itself that's really mistaken: it isn't a question of determining which arrangements might yield the greatest utility, even supposing such a calculation to have scientific merit notwithstanding the peril it poses to particular underrepresented persons, whether redheads or creditors or others, whose Hicks-Kaldor compensation checks are likely to remain forever in the mail. It is a matter of having rules that guard against arrangements which, whatever their potential advantages, have an at least equal potential to do harm. That irredeemable paper money might prove beneficial was in fact not an argument of which the founders were unaware; Ben Franklin, for one, made it in his usual, eloquent and spirited way. But the odds were then and have remained ever since against the likelihood that such paper money would be managed responsibly. Fans of the Constitution get that. It's sad that so many of today's calculating economists don't.
This morning, the Senate Judiciary Committee passed by voice vote a bill proposed by Chairman Leahy (D-VT) and Sen. Mike Lee (R-UT) that would update the Electronic Communications Privacy Act. In short, the bill would make sure our 4th Amendment protections apply online as well as in the physical world: now law enforcement would need to get a warrant before demanding email and other online content. ECPA was passed in 1986 to protect online communications--long before cloud computing, online video chatting, etc.
This is great news for the millions of Americans conducting financial transactions online, storing their personal information "in the cloud" and who think law enforcement should follow Constitutional protections.
Perhaps those who should be most encouraged are users of bitcoin and other virtual currencies (including electronic commodity monies) who find FinCEN's and other regulations strangling currency innovations. At least now they have some good news that brings both legal clarity to a long in the tooth law that had become murky in a way that protects privacy and encourages technological innovation.
I had written about this bill in a previous post last year, but now we're at the start of the session, not the end.
I've been posting a lot about FinCEN (the US Treasury's Financial Crimes Enforcement Network) following their Guidance on Emerging Payment Systems including virtual currencies (read Bitcoin). Today they put out their latest--this time teaming up with the Financial Action Task Force (FATF) to make sure poor people in select poor countries not following their dictates remain poor (I'm paraphrasing, but not by much).
The Financial Action Task Force (FATF) is the sister organization of the Organization for Economic Cooperation and Development (OECD). The OECD has a campaign to stamp out what it calls "harmful tax competition" and uses the FATF to financially strangle Non Complying Countries and Territories. It helps to understand what is going on in this context to think of of the OECD and FATF as a cartel of mostly rich, white, former colonial powers that take offense when their mostly poorer, darker-skinned former colonies get too uppity. I've written a lot about the FATF over the years here.
Which of the two groups' descriptions fits this list of countries? Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Bangladesh, Bolivia, Brunei Darussalam, Cambodia, Cuba, Kuwait, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Philippines, Sri Lanka, Sudan, Thailand, Tajikistan, Zimbabwe. Yup. How about this list? Iran and Democratic People's Republic of Korea (DPRK), Ecuador, Ethiopia, Indonesia, Kenya, Myanmar, Nigeria, Pakistan, São Tomé and Príncipe, Syria, Tanzania, Turkey, Vietnam, and Yemen. Same?
Suppose you're a Bitcoin "money transmitter" and/or "Money Service Business" and think you're complying with all of FinCEN's registration and reporting requirements. Maybe, maybe not. Perhaps you're really just an agent of financial terrorism (in the eyes of the powers that be).
Here is the latest from FinCEN:
FinCEN Issues FATF-Related Advisories on AML/CFT Risks
Today, the Financial Crimes Enforcement Network (FinCEN) issued an advisory (FIN-2013-A004) to inform banks and other financial institutions operating in the United States of the risks of money laundering and financing of terrorism associated with jurisdictions identified by the Financial Action Task Force (FATF) on February 22, 2013 as having deficiencies in their anti-money laundering/counter-terrorist financing (AML/CFT) regimes and that (i) have not made sufficient progress in addressing these deficiencies or (ii) are subject to FATF’s call for countermeasures. In addition, FinCEN issued a complementary advisory (FIN-2013-A003) that addresses a separate, but related, FATF document identifying jurisdictions with strategic AML/CFT deficiencies, for which each jurisdiction has provided a high-level political commitment to address.
· FIN-2013-A004 -- Guidance to Financial Institutions Based on the Financial Action Task Force Public Statement on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Risks (http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A004.pdf)
· FIN-2013-A003 -- Guidance to Financial Institutions Based on the Financial Action Task Force Publication on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Risks posed by Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Bangladesh, Bolivia, Brunei Darussalam, Cambodia, Cuba, Kuwait, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Philippines, Sri Lanka, Sudan, Thailand, Tajikistan, Zimbabwe, and the substantial AML/CFT improvements in Ghana and Venezuela (http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A003.pdf)
Addendum: Let's keep in mind that non-official transfers are far more important to help the global poor than foreign aid is. As BBC reports, people sending money to family back home are hugely important for the recipient countries, "In 2010 - the most recent year for which meaningful comparisons can be made, according to [Hong Kong-based Ghanaian academic Adams Bodomo] - the African diaspora remitted $51.8bn (£34bn) to the continent." It continues, "Worldwide remittances from people who hail from developing countries totalled $350bn," he said; "far exceeding ODA at $130bn...In the case of Africa, about 75% of remittances are sent informally - we can't track that."
Obviously they're all financing terrorism not helping their struggling families. Just ask FinCEN and the FATF.
And as allAfrica.com reports, the Africans are working hard to comply with FATF dictates, "The first Gulf of Aden Counter-Terrorism Forum...called for countries in the region to tighten controls on the movement of money that can be used to fund terrorism, appealed to the international community to help dry up terrorism financing by refraining from paying ransom to terrorist groups, and called for work to begin on a convention to combat terrorism to be signed by all member states, to strengthen regional co-ordination and build up marine forces and customs units...The Forum also wants to see a joint military mechanism formed to co-ordinate efforts to combat terrorism, piracy, illegal immigration smuggling and human trafficking." In fact, one might say they are quite militant about it.
The US House Financial Services Committee is holding a hearing today at 2 pm on whether the United States should pony up an additional $65 billion to double our quota contribution to the International Monetary Fund. We should just say "No!"
The Subcommittee on Monetary Policy and Trade will hold this “Evaluating U.S. Contributions to the International Monetary Fund" hearing to examine the Obama Administration’s request to Congress to authorize governance reforms at the International Monetary Fund (IMF) and increase the U.S. quota share by about $63 billion. The only witness at the hearing will be Lael Brainard who is the Under Secretary for International Affairs, United States Department of the Treasury. The committee website should webcast it live. As of 10 am, the testimony has not been made public on their site.
The memo helpfully summarizes:
The IMF has not been without controversy, and increased attention on its activities since the global financial crisis of 2008-2009 and subsequent Eurozone crises have revived long- standing debates about the institution’s role in the global economy. Some analysts argue that with the end of fixed exchange rates, the IMF is no longer needed and it should be abolished. [emphasis added] Others say the IMF is still vital, but needs to be restructured and refocused. Still others suggest that new functions should be added to the IMF and its role in the international monetary system should be expanded.
Of course we recognize systemically that the IMF isn't doing it's job so we give them not one but two lines of credit to US taxpayer money at the US Treasury:
In addition to quota, the United States has also committed resources to “supplementary” funds at the IMF. These are funds that can be tapped when demand for IMF resources is particularly strong, such as during major financial crises. The IMF has two supplementary funds: the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB). The United States has committed about $103 billion to the NAB (18.67% of total NAB resources), and about $6 billion to the GAB (25% of total GAB resources). U.S. financial contributions to the IMF, including to IMF quota and the supplementary funds, are not grants. Instead, they are lines of credit extended by the United States to the IMF. The United States earns a small amount of interest when the IMF taps U.S. commitments to fund IMF programs.
For appropriating all of this money, the US Congress does try to add some accountability:
Over the years, Congress has also passed several legislative mandates that have shaped U.S. policy at the IMF. Legislative mandates typically fall into three categories. First, “voice and vote” mandates direct the U.S. Executive Director to promote specific policies at the IMF and to vote for such policies. Second, directed voting mandates require the U.S. Executive Director to vote against or abstain in votes relating to certain types of programs or policies. The final type, reporting requirements, requires the Treasury Department to report to Congress on issues related to U.S. participation in the IMF.
Some live in a Pollyanna world where the IMF does no wrong and is a great vehicle for the US to lord over other countries' foreign policies through financial intimidation, much like loan sharks act to the ones they lend money too (but without the exemption from paying taxes on their salaries like IMF employees get, right Mr. Geithner?).
Others are more skeptical and see the IMF as an enabler of moral hazard. They are concerned that taxpayer dollars are being used to fund IMF programs to bail out governments that have implemented irresponsible fiscal and monetary policies. They argue that the availability of funding from the IMF reduces incentives for governments to adopt difficult, but prudent, economic policies. Opponents also point out that the IMF is often unpopular in countries receiving IMF assistance, typically because of the conditions attached to IMF loans which often require recipients to adopt unpopular austerity measures. In some cases, public anger is also directed towards the United States, which is seen by some citizens of borrowing countries as responsible for the policy prescriptions imposed by the IMF as a condition for receiving funds.
Short version: the Obama Administration wants us to DOUBLE our quota contribution to the IMF so it can help more countries act irresponsibly (Greece, etc.) and wreak financial havoc around the world in exchange for reforms that dilute our say in how the IMF would spend the money.
I have long and publicly criticized the IMF's commitment to oppose property rights with designs on helping usher in a global financial surveillance network and beforehand at the Cato Institute and as a vehicle for global corporate welfare. It's reassuring to me to know that I'm in the good company of now Pope Francis who witnessed and publicly opposed the effects of the IMF's misguided policies of bad reverse income redistribution from the poor to the elite and the inherent corruption.
In a forthcoming post, I'll revisit the debate over the IMF quota increase from 1998-1999, but the single most important statement would be the Dissenting View I wrote for then Congressman Ron Paul.
If the US is even going to entertain this notion (and we shouldn't), I have a few suggestions for them to consider:
One, I think we should demand as a condition that they restitute all IMF First Articles of Agreement gold (I'm sure the Europeans and others could use it at least as much as we can!) We are talking about (back of the envelope) 90 million ounces at SDR35/oz.
That restituted gold should then go to the Social Security Trust fund with gold-denominated bonds. The US Gold Commission Report explained the restitution question. Alan Greenspan and Judy Shelton, among others, have explained how these bonds might work.
Two, relatedly, in order for gold bonds in the Social Security Trust Fund to work, Congress would have to demand that the IMF remove the three words from its Second Articles of Agreement that prohibit member states from using gold as money.
After President Nixon took the US off the gold standard internationally ("temporarily"! just as FDR took us off it domestically only temporarily!), the IMF members reached a "Second" Articles of Agreement that did a 180 on the first one's requirement to use gold as money (at least for payments to the IMF, etc.). The Second Articles of Agreement includes a three word phrase that needs to be struck.
Article IV: Obligations Regarding Exchange Arrangements
Section 2. General exchange arrangements
(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold [emphasis added], selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.
Congress should reject a moral hazard on steroids and stand for sound money.
The committee has issued a background memo on the issue here
This morning, Adam B. Levine, editor-in-chief of The Daily Bitcoin, interviewed me for "Let's Talk Bitcoin" about the US Treasury's Financial Crimes Enforcement Network (FinCEN) and their recent guidance on alternative currencies such as Bitcoin.
One can listen to the interview here:
I come on at about the nine minute mark, but the conversation before mine leads into the discussion Adam and I had well.
The University of Georgia having, in its infinite wisdom, decided long ago to make its faculty do without sabbaticals, yours truly, sensing impending burnout, determined to do the next best thing, by taking leave for several months from all extra-curricular economics, including participation in economics discussions in this forum, in the blogosphere generally, and (so far as he could manage it) in the larger world.
Having thus refreshed myself, I now feel fit not only to return to the monetary-economics fray, but to plunge straight into the bitcoin melee, by means of a declaration calculated to make every true-blue bitcoiner take aim for my jugular.
The declaration? Simply, that no matter how often bitcoin enthusiasts state otherwise, bitcoins aren't currency. Nor are they money of any other sort. They aren't--to employ economists' standard technical definition--a "generally accepted medium of exchange." Perhaps some day they will be. But not yet--not even by a (very) long chalk.
But that bitcoins aren't money doesn't mean that monetary economists shouldn't be interested in them. On the contrary: they ought to find them very interesting indeed, both because of the puzzle their presence poses, and because of the possibilities that presence points to.
What's puzzling about bitcoin is that it has gained a foothold at all. Thousands of retailers (some are listed here) now accept bitcoin in payment for everything from restaurant tabs to dating site dues, not to mention marijuana and other black-market stuff. And the number keeps growing daily. That growth itself isn't puzzling, for once a payments-network bandwagon gets going it becomes more and more tempting for merchants to hop on. But how did it get going in the first place? It is said that the first person to eat an oyster had to have been exceedingly brave or exceedingly crazy or some of each. But that primordial mollusc eater had nothing on the first, equally anonymous person to receive bitcoins in exchange for valuable merchandise, in the hope of somehow fobbing them off in turn on others. The earlier pioneer might, after all, have simply taken his cue from a seagull or oyster-catcher.
Unlike the rise of bitcoin's network, that of various past money commodities like tobacco, cowries, and salt poses no puzzle: whoever first toyed with accepting such commodities for goods could count on the existence of persons who desired the commodities in question for their own sake, even if no one else was prepared to hazard their employment as exchange media. By adding their own willingness to try a commodity as an exchange medium to the preexisting non-monetary demand for it, such experimenters enhanced the likelihood of success on the part of others who made the same gambit, and so on. Such, in essence, is the basis for Menger's famous (if controversial) conjecture regarding the spontaneous evolution of early (commodity) monies. The first person to accept bitcoins in exchange, in contrast, couldn't hope to smoke them, make them into a nice bracelet, or sprinkle them on his food, in case he couldn't trade them away: he (or she) could only hope that someone else would attempt a similar leap of faith, or face the consequences of trading some useful goods or service for so many units of digital dross.
It's owing to the leap (or leaps) of faith required to turn otherwise useless stuff into exchange media that it has generally been supposed that fiat money could never become such except by means of government coercion, meaning not simply that the government must stamp "this is legal tender" on otherwise worthless pieces of paper, but that it can only get such pieces of paper to circulate in the first place by first making them convertible claims to either a commodity money or some established fiat money (which must itself have once been convertible into either a commodity or some other fiat money, and so on). Once it has managed to get its convertible paper into orbit, a government can then (suddenly) withdraw the convertibility launching pad without having its paper spiral back to earth, thanks to the now established demand for it as a pure exchange medium. Such, at any rate, has been the standard view of those (including the present writer) endeavoring to bridge the chasm separating Menger's theory of commodity money from the modern reality in which irredeemable fiat monies rule the roost.
Such bridge building has had as its counterpart several studies casting doubt on the possibility of a "private" (which is to say voluntarily adopted) fiat money of the sort that Benjamin Klein and (despite his Austrian heritage) Friedrich Hayek have thought possible. According to such critical studies, such a money, being potentially infinitely expandable, would tempt its suppliers to reap high short-run profits by hyperinflating, rather than settle for the more modest periodic gains they might have by preserving their currencies' purchasing power. Knowing this to be so, rationale persons will steer clear of such would-be exchange media, making them non-starters.
So much for received wisdom. Bitcoins challenge this wisdom, not quite by flatly contradicting it--to do that bitcoins would have to be money, which (as I've said) they aren't--but by having managed to get off the ground at all, despite lacking any sort of convertibility "launching pad" and despite being "intrinsically" useless. Just as a toddler's first steps don't qualify it for the Olympics, the first barely above-ground flight of bitcoin is far from guaranteeing that it will stay aloft, let alone keep gaining altitude. Still it does seem to show that otherwise useless stuff can become an exchange medium without resort to trickery, and indeed without any sort of government encouragement. And that's neither a mean nor an uninteresting accomplishment.
Just how did bitcoin manage to overcome what (for want of a better name) I'll call the "oyster" problem? My partial answer is that, at least for some time after they first became available in 2009, bitcoins possessed three qualities such as no other actual or potential exchange medium had yet managed to combine. First, the open-source software providing for them to be "mined" by persons commanding sufficient computer-power allows only for a strictly limited annual output, with steadily diminishing returns such as will make unit mining costs approach infinity as total output approaches 21 million coins (as it is scheduled to do in 2040). In short, with just over 11 million bitcoins outstanding so far, no amount of computer power or time will ever expand the quantity by more than another 10 million. No one, in other words, is able to make a bundle by striking bitcoins at libidum. The problem of securing trust that might confront a prospective issuer of private "fiat" money is thus averted. In this respect bitcoin is more like a commodity than a fiat money, which is why I prefer to label it a "synthetic" commodity.
The other features that made bitcoin unique are (1) the untraceable nature of transactions conducted using it and (2) the fact that, being a "digital" money, it can circulate electronically. Bitcoin, in short, was the first medium to allow for perfectly anonymous transactions, avoiding both a paper trail and face-to-face contact, and to do so with the same convenience as any other sort of "digital" payment. Bitcoin's inventors were thus able to take advantage of an unfilled niche. But filling it guaranteed nothing: the water was there for the horses to drink, but whether any would risk a first sip remained to be seen.
Risk it, of course, some did; and now, after some dramatic gyrations, with more undoubtedly to come, bitcoin, having already merited at least a footnote in the history of exchange media, might well manage to do considerably better than that. It is, after all, the nature of network goods to go from strength to strength, with every uptick in network size enhancing the prospects for further growth. That, so far as bitcoin enthusiasts are concerned, is the good news. The bad news is, first of all, that bitcoin remains a bit player relative to established moneys, which for all their shortcomings command vast networks that are correspondingly self-reinforcing. Second, bitcoin's relatively tiny network goes hand-in-hand with a high degree of market volatility, and a correspondingly reduced attractiveness to retailers, with large orders placed by one or two "big players" sufficing to generate huge price swings. Finally, the very success of bitcoin is bound to inspire imitations combining the original product's desirable features with others such as might cause it to suffer the same fate as Betamax and BlackBerries. Consider, for example, a private cybercurrency based on a "mining" protocol aimed at dampening short-run swings in its exchange value. Or consider MintChip, a cypercurrency now under development at the Royal Canadian Mint, which is supposed to be as anonymous as bitcoin, but with the very considerable advantage of being fully compatible and integrated with the already established Canadian dollar exchange network.
Paradoxically, the very innovations that may eventually doom bitcoin also explain why it deserves to be regarded as one of the most promising developments in the history of money since the invention of ordinary coins. For, as I explain in my paper on "Synthetic Commodity Money," its otherwise modest achievement proves that, with the help of the right software, one might design an "ideal" money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes--be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it's only a possibility. But what a possibility!
Addendum (April 23): Over at Bitcoin Forum a commentator observes, regarding my post: "I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010. It's like they don't want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty." While I can't pretend to be chaffing at the bit to converse with ideologically-driven libertarians, whether anarcho- or anacrho- or both, I will say that I don't see what the emergence of BTC/USD markets has to do with the "oyster" problem I pose. Sure, once bitcoins became desirable enough people wanted to be able to get hold of them without mining for them themselves, e.g., by purchasing them with dollars. Nothing puzzling about that. But the fact that entrepreneurs were quick to respond to that desire hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them. Should anyone at Bitcoin Forum wish to enlighten me and others on the matter, as I'm sure many can, I should be very grateful to him or her.
I posted recently about the US Treasury's Financial Crimes Enforcement Network's (FinCEN) guidance and virtual currencies and a followup post on the FinCEN director's speech about it after a similiar one. I wasn't the only one who took a look.
The International Law Office (.com)'s newsletter has a good examination of the FinCEN guidance and raises some important questions. It urges:
Companies engaged in activities involving convertible virtual currencies should assess the impact of the guidance on their obligations under the Bank Secrecy Act Regulations without delay. In addition, in light of the indirect influence that FinCEN positions can have on interpretations of state money transmitter licensing laws, administrators and exchangers of convertible virtual currency may want to re-evaluate their status under those laws.
Its background explains
Money services businesses are subject to certain requirements under the regulations, which are partially dictated by the type of activity that qualifies the entity as a money services business. Such requirements include an obligation to maintain an anti-money laundering programme, as well as registration, reporting and record-keeping requirements.
The guidance applies only to convertible virtual currency and generally provides that administrators and exchangers of convertible virtual currency are money transmitters and therefore are money services businesses under the regulations, subject to any applicable limitation or exemption. The guidance also provides that users of convertible virtual currency are not considered money services businesses under the regulations.
Most of the analysis looks at Convertible Virtual Currency (most significantly Bitcoin) and "Administrators and exchangers of convertible virtual currency as money transmitters." One of the most obvious problem is the "guidance" makes some things less clear, "There are some critical ambiguities in this construct. First, notwithstanding the appellation 'convertible' virtual currency, the definition itself incorporates no reference to the ability to convert virtual currency to real currency" and that " it remains somewhat difficult to parse the distinction drawn in the guidance between 'pre-paid access' and 'convertible virtual currency'."
Importantly, the analysis takes the same look as I did on how FinCEN stifles currency competition, "the guidance takes the position that if the broker or dealer transfers funds between the customer and a third party that is not part of the transaction, it is operating as a money transmitter. In examples that appear to be modelled after the ill-fated e-Gold service, FinCEN describes the typical activities of these types of entity as the electronic distribution of digital certificates of ownership of real currencies or precious metals."
They make a distinction between centralized virtual currencies and decentralized ones (here targeting Bitcoin), "a person is a money transmitter under the regulations if he or she creates units of convertible virtual currency and sells them to a third party for real currency or its equivalent. In addition, the guidance indicates that a person is an exchanger and a money transmitter under the regulations if he or she accepts convertible virtual currency from one person and transmits it to another person."
Security Management's "Security's Web Connection" site has an article "Treasury Department Using Advanced Analytics to Help Detect, Prevent Money-Laundering" that looked at the same FinCEN director speech as I analyzed here. The article basically mimics her remarks that they are getting their technical act together, that their new analytics tool FinCEN Query "allows investigators to more easily search the 11 years of BSA data and apply filters. That has already facilitated investigations, but the next step is predictive analytics." FinCEN seems to dream of a Vanilla Sky future where they can predict and prevent financial crimes.
DataGuidance's Privacy This Week devoted an article "USA: FinCEN says AML rules applicable to 'convertible' virtual currencies" on the same guidance. The article quotes David E. Teitelbaum, Partner at Sidley Austin, as saying that the guidance will be "challenging" and Angela Angelovska-Wilson, Counsel at Latham & Watkins in Washington D.C. and a Member of the Finance Department and the Financial Regulatory Group, as explaining as others have how the guidance creates more confusion than it clarifies: the new definitions introduce ambiguities and where it seems to target Bitcoin it isn't clear if it affects programs offering "miles" or "points," etc.
The article quotes the FBI's Bitcoin report
'The FBI assesses with low confidence, based on current user and vendor acceptance, that malicious actors will exploit Bitcoin to launder money. This assessment is based on observed criminal activities, investigations, and prosecutions of individuals exploiting other virtual currencies, such as e-Gold and WebMoney. A lack of current reporting specific to Bitcoin restricts the confidence level.'
And it notes the European Central Bank's (ECB) report "Virtual Currency Schemes" (October 2012) worrying that "virtual currency schemes […] 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." The ECB is also targeting Amazon Coins!
The article elaborates that the rise of social networking and distrust of the current financial system increase the acceptance of virtual currencies.
We can only hope that the UK Guardian gets it right
The future of money may or may not include a Federal Reserve Bank of Amazon, but it probably does involve the gradual decentralisation and democratisation of currency. Virtual currencies aren't just a new-fangled sort of Monopoly money. Rather, they may just be the thing that ends the monopoly on money.
Earlier this week, FinCEN Director Jennifer Shasky Calvery addressed the National Cyber-Forensics Training Alliance CyFin 2013 Conference.
She explains again how the Financial Crimes Enforcement Network (FinCEN) gets its data from the reports it mandates that banks use to spy on their customers against them. Lots and lots of reports.
But she promises:
However, right now this is long and arduous work as analysts sift through hundreds and sometimes thousands of reports. Very soon, new capacities made possible by our internal technology modernization will allow our analysts to deal with such data sets to find leads in a fraction of the time previously necessary. Very soon, we will be able to point law enforcement and other stakeholders precisely to where they should be looking. Our analysts, working hand- in-hand with our superb technology team, are now putting these new capacities into place.
But her talk really focused on "Emerging Payment Systems." Her comments have echoed mine (from an entirely different perspective) that technology (and specifically mobile apps) offer great opportunities (for free banking) and that those not well served by our current system (the "unbanked" in the US--immigrants, poor, racial and ethnic minorities--and people in countries with less mature financial systems or sound currencies) are a great target market.
As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce.
Don't worry, FinCEN is working to strangle these initiatives in their crib with their regulations.
She pays special attention to "crypto-currencies" in her talk.
We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. While probably most of today’s audience understands what these emerging payments systems are and how they work, many line analysts, investigators, and prosecutors in law enforcement may not, and part of FinCEN’s role is to help be the bridge to explain these new systems. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems.
In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas.
And, as our Bitcoin fans know--at least those who follow my posts here or my rants on our Facebook page, FinCEN has "virtual currencies" in their sights. And, remember too, it was FinCEN that shut down e-gold back in the day and crippled the crypto-currency movement last century.
I'll quote her in the entirety of her virtual currency remarks:
In fact, just last month, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies, such as Bitcoin, which has in recent weeks gained significant attention. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them.
FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.
The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance.
Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers have already registered with FinCEN as MSBs, though they have not necessarily identified themselves as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities and that all who need to, register appropriately.
The second half of her speech talked about account takeovers via malware, risks with third party payment processors, improvements they are making to their analytical work (after some false starts!), their public-private partnerships with industry, and her personal initiative "The Delta Team" ("The purpose of the Delta Team is for industry, regulators, and law enforcement to come together and examine the space between compliance risks and illicit financing risks. The goal is to reduce the variance between the two.").
And let's not forget FinCEN's dreams of global domination. They are in a partnership of 130 other "Financial Intelligence Units" as part of the Egmont Group.
The text of her remarks is available at the following link:
Next Page »