Bitcoin Regulation Answers Are Elusive

Bitcoin

The New York State Department of Financial Services Superintendent Benjamin Lawsky recently called hearings to determine whether the digital currency Bitcoin requires special regulation, but the answers, and even the right questions, were elusive.

When California decides to institute new regulations on automobiles, regulators across the nation take note and often follow suit. Californians understand cars. Regulations crafted in New York with regard to finance will likely set the precedent for law makers across the entire country. However, Lawsky and other regulators seemed in some ways only dimly aware of the challenges ahead, according to reports about the hearings.

To provide some background, a digital currency like Bitcoin differs from a fiat currency like the dollar or the euro in two ways that are of particular interest for regulators.

First, transactions with Bitcoin can be conducted anonymously and at a distance. The combination is important here.

True, transactions conducted with normal cash are anonymous (unless the bills are marked) but they must be conducted in person. Bitcoin transactions can be conducted between any two entities, anywhere, and with better portability than cash. A million dollars might fit in a briefcase but an unlimited number of Bitcoins will fit on a flash drive. The characteristics of portability and anonymity are advantageous for individual economic freedom, but transactions conducted instantaneously and across national borders are troublesome for the needs of regulators.

Second, and even more troublesome for regulators in the long-term, is that Bitcoin production is decentralized and its value is based only on marketplace activity. Bitcoin is not under the control of any single nation’s economic policies or political actions, and therefore methods of supply modification are elusive or non-existent and determinations of any single regulator’s jurisdiction are likely to raise more questions than answers.

Reports indicate that regulators now seem likely to focus on the transactions points where Bitcoin is converted into some other currency. Concerns about securing customer balances in dollar-denominated assets and filing requirements for movement of amounts exceeding certain thresholds were discussed.

Anyone who has seen Goodfellas, though, already knows that buying a lot of flashy expensive things all at once is big tip-off to the authorities that something is not quite square. Buying (or spending) a lot of Bitcoins all at once is flashy and, increasingly, expensive. After a dizzying peak of over $1,000 per Bitcoin in December of 2013, the exchange rate as of this writing is still $750 per Bitcoin.

Due to this exchange rate volatility and to its exotic history, Bitcoin was seen by many not as a currency at all but more as a speculative instrument. However, as it gains legitimacy by receiving the attention of more established financial institutions and governments, and gains acceptance by the public as just another convenient way to pay for a cup of coffee, and gains stability by an increasing market capitalization and market fluidity, Bitcoin could equal fiat currency in its most compelling and important feature for use: the expectation of reliable convertibility – not into other currencies – but for everything else.

Therein lies the real challenge for regulators. If the public demand to enjoy the benefits that the digitization of music, books, television, and film brought to them is any indiction of their likely reaction to the benefits that digital money could confer, then the answers to questions about the need for Bitcoin regulation, and how those regulations would be enforced once crafted, are perhaps not so elusive, but without timely insight and prudent action, they may be irrelevant.

By Brian Ryer

Sources

Wired
Payment Source
American Banker

One Response to "Bitcoin Regulation Answers Are Elusive"

  1. Alan Milner   March 12, 2014 at 5:54 am

    Good follow-up article. Bitcoins are a medium of exchange. There are two ways to get a Bitcoin, by mining for Bitcoins and through a barter system. You can purchase Bitcoins by exchanging fiat currency for one or more coins, or you can exchange goods and services in exchange for Bitcoins. So, how is that different from credit cards, really? The only difference is the pretense that Bitcoins are a separate currency, but Bitcoins have no value of their own. A Bitcoin’s value is expressed in terms of the fiat currency of the country where the Bitcoin owner lives. In the world at large, the value of a fiat currency is expressed in terms of its relative value against another currency, so that all currency transactions are paired value transfers. When you sell dollars and buy pounds, as an American in the UK, it take several days to stop thinking about the value of the pounds you are spending in terms of their relative value in American currency. The same is true of Bitcoins, except their relative value never becomes absolute, as pounds eventually do, after you have been in England for a couple of weeks because there is no “there” there when it comes to Bitcoins. The fantasy that bitcoins will ever become a market currency is ludicrous. Try putting Bitcoins into a parking meter, You can’t because Bitcoins have corporeal reality. There is no “them” in them. This raises a key Bitcoin issue, denomination. There is only one Bitcoin denomination, which is whatever the value of one Bitcoin has been established at according to the current redemption price of the coin, what someone else will pay in a fiat currency for the coin. This makes Bitcoin unique in currency transactions. All other currencies have coins and bills in a series of denominations, which are necessary for daily commerce to take place. How does someone give change for a partial Bitcoin transaction? I don’t know, so I am asking the question. This makes Bitcoins rather like gold (I used to be precious metal trader.) Try going to a grocery store with a one-ounce gold coin to pick up a loaf of bread and a gallon of milk when the value of that coin is $1364, and your purchase is going to cost around $4 and see what happens. I’ve done this, and I can tell you what happens. The supermarket manager will refuse to accept the coin because he doesn’t know if it is real or not, and wouldn’t know how to deposit the coin in the company’s bank account because the bank probably wouldn’t accept the coin as legal tender (which, by the way, it isn’t) for the same reasons that the storekeeper wouldn’t: it has no commercial value, only a relative value in terms of dollars. Insofar as regulation is concerned, Bitcoins are in violation of federal law in the first place because it constitutes the minting of a private currency, which is illegal in the US. So, how do you regulate a currency which is illegal to begin with? My personal view is that Bitcoins are a huge Ponzi scheme in which the early adopters are selling Bitcoins to speculators. The proliferation of these pseudo-currencies (a more accurate term than crypto-currencies) will sooner or later result in a crackdown on the whole industry as the nefarious elements become more obvious. I’ve actually thought about getting into Bitcoin mining, but the costs are non-trivial. In order to set up a bitcoin mining operation, you would need to spend anywhere from $20K to $100K and be able to absorb $15,000 a month in electrical service costs. Even so, you would probably break even within a month, according to published reports. But there is a limit to Bitcoin production, because the system is designed to only ever issue 21 million bitcoins. What happens when all of the Bitcoins have been issued? Under the laws of supply and demand, the value of the coins should skyrocket into multiple thousands per coin. The problem with that scenario is that without constant bitcoin mining activity the protective devices that maintain the cryptographic graphic integrity of the Bitcoin will evaporate. No one would be engaged in supporting the Bitcoin system any more because there would be no income forthcoming from that activity. It is a case of musical chairs because hackers would have at the currency in a matter of hours and in a matter of days, it would become worthless because the security system that the Bitcoins depend on for their value would zero out. Regulation at the transfer points will only adversely affect the value of the Bitcoins, because that’s where the taxman will be waiting to take his cut with either a sales tax or a VAT.

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