In their 2014 appropriations bill, the subcommittee directs the FBI to report on Bitcoin, specifically what the FBI is doing to address the “challenge” that they see from the “ersatz currency“.

Page 45 of the bill…

From the wording of the bill, particularly in describing digital currencies as “ersatz” (inferior substitute – merriam-webster.com) we can guess that the members of the United States House Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies are not big Bitcoin fans.

LetsTalkBitcoin, which broke the story on Monday, sees this fear from Congress as quite predictable.

The cash-like nature of Cryptocurrencies such as Bitcoin seem to be fundamentally at odds with the identity-based financial systems we’ve used since the advent of the internet.  What the bitcoin-using community sees as the advantages of Bitcoin; trustless and irrevocable transactions divorced of official identity.  In another light this can be seen as enabling money laundering, consumer fraud and terrorism.

“It is natural for established industries and their representatives in the Senate to fear new and disruptive technologies.” explained Andreas M. Antopoulos, Expert on decentralized networks  “As with the early Internet, there are those who only look at the empowering effects on criminals, rather than on the vast majority of people who can benefit enormously. It just takes time for the lawmakers and laws to catch up to the technology and adapt”

Regulators were very concerned with LR’s anonymity which was a serious draw to the service for many people. But what was likely an even bigger factor in LR’s success was its irreversible payments. This is a very important feature for businesses that are at risk of payment fraud or chargebacks, and it’s a feature that is not available in the current regulated financial system.

Jon Matonis via PaymentsSource

In the case of Liberty Reserve, It’s not the individual infractions committed by clients of Liberty Reserve that are worrisome to the regulators, it’s the fact that a semi-reliable platform for private payments existed in the first place.

Liberty Reserve provided a service that had a true market demand from legitimate business sectors and from non-criminals, notwithstanding the government’s claim that “virtually all” its business was illicit. If banks and traditional financial institutions still respected basic client privacy and facilitated some form of digital payments that did not always involve harmful reversibility to the merchants, then companies like Liberty Reserve wouldn’t even be necessary.

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In addition to transactional privacy (or anonymity), payment finality is important here. Many users of digital currency systems probably wouldn’t object to revealing their identity if they could obtain payment finality. Otherwise known as irreversible payments, or payments without chargebacks, payment finality is required for a large number of merchant categories that aren’t serviced by traditional payment methods. Liberty Reserve satisfied that demand as well.

Naturally, merchants would prefer that all sales were final. But for some merchants, finality is a protection against cardholder fraud. As an industry that suffered a high degree of customer disputes, online gambling is instructive because when certain customers lost in the casino and “changed their mind,” it became necessary for these merchants to accept only payment methods with finality.

Gold bullion and coinage is another merchant category that experiences an abnormally high percentage of customer credit and debit card fraud so these merchants are either ignored by the card networks and PayPal or they are charged significantly higher processing fees. To protect themselves, merchants require payment finality or irreversible payment methods. That means using only international wires or services like Liberty Reserve.

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In the early days of bitcoin, exchangers and sellers of the currency suffered because Visa MasterCard and PayPal blocked any transactions involving the acquisition of bitcoin, and for good reason. The purchasing of an irreversible instrument is simply not a good match for a payments industry that offers transaction repudiation, merchant chargebacks, and also has to absorb losses from counterfeit cards. To get their money to the Bitcoin exchanges, customers were forced to rely on expensive international wires and the services of Liberty Reserve. This was done more for the payment finality reasons than any desired anonymity.

Other business sectors that benefit from payment finality include online casino gaming, sports betting, lotteries, adult services, pawn shops, credit repair services, debt settlement services, and virtual currency exchanges that involve the trade of other negotiable instruments or the loading of prepaid cards. Although operating as legal businesses in many jurisdictions, these merchant categories have typically been labeled as high-risk and subsequently restricted by the payment networks. Liberty Reserve filled the market need left by the larger payment networks.

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Widely used by foreign exchange traders where domestic central banks restricted bank transfers to foreign entities, such as in Malaysia, Pakistan, Nigeria, Argentina, and Brazil, Liberty Reserve thrived as the preferred payment method. It offered traders a fast and cost effective funding method.

Clearly, identity is not the entire agenda. Any payment service offering payment finality must be “in the system,” because according to the government, payment finality cannot be left to the free market. In the U.S., the government is the final arbiter of what transactions may or may not be reversed and it wants mandatory account identification because it facilitates the targeted enforcement. In the physical world with cash and gold, the power is exercised via seizure and confiscation. In the digital world with electronic accounts, the power is exercised through transaction reversals and account suspensions. At its essence, Liberty Reserve was an electronic value transfer service where payment finality was provided by the operator without judgment.

Choice in currency is a freedom of speech issue. Failing to recognize that fact only serves to strengthen the entrenched payment oligarchies and to undermine personal liberties in the transactions environment.

Today, voluntarily exiting the digital banking system has become a popular method of attaining a relative degree of financial independence and safety. Expect to see a lot more of these voluntary exits especially since the free market has been mostly stripped of digital payment finality and “Cyprus-ed” has become a verb.

Read the PaymentsSource article in its entirety here.

A few interesting thoughts and links as a follow up to my last post on Bitcoin.

After reading this piece by Hayek, I have to think that he would have been a Bitcoin fan. (Thank you Monetaryfreedom.org for sending the link.)

“Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner;”

“Even if, by some international treaty, the gold standard were reintroduced, there is not the slightest hope that governments will play the game according to the rules.”

“the gold standard is a partly effective mechanism to make governments do what they ought to do in their control of money, and the only mechanism which has been tolerably effective in the case of a monopolist who can do with the money whatever he likes. Otherwise gold is not really necessary to secure a good currency.”

“The interesting fact is that what I have called the monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money. We do not even quite know what exact qualities we want because in the two thousand years in which we have used coins and other money, we have never been allowed to experiment with it, we have never been given a chance to find out what the best kind of money would be.”

“I think we ought to start fairly soon, and I think we must hope that some of the more enterprising and intelligent financiers will soon begin to experiment with such a thing. The great obstacle is that it involves such great changes in the whole financial structure that, and I am saying this from the experience of many discussions, no senior banker, who understands only the present banking system, can really conceive how such a new system would work, and he would not dare to risk and experiment with it. I think we will have to count on a few younger and more flexible brains to begin and show that such a thing can be done.”

Adding a twist to the Bitcoin regulation debate, could governments use key disclosure laws to confiscate Bitcoins? Key disclosure laws are already in use in the UK, Australia and South Africa. Jon Matonis discusses the possibilities here.

“Key disclosure laws may become the most important government tool in asset seizures and the war on money laundering. When charged with a criminal offense, that refers to the ability of the government to demand that you surrender your private encryption keys that decrypt your data. If your data is currency such as access control to various amounts of bitcoin on the block chain, then you have surrendered your financial transaction history and potentially the value itself.”

Maybe instead of arguing goldbugs and Bitcoin users could get together and offer a gold backed version of Bitcoin? No doubt there would be many structural and technical specifics to work out, but it’s a very interesting idea.

Bitcoin may be the first one to really catch on, but it is not the only cryptocurrency out there. LiteCoin and SolidCoin are just a few of the other options. In fact LiteCoin sells itself as “silver to Bitcoin’s gold”. Should cryptocurrency use continue to grow no doubt many more options would spring up to compete with and be used alongside Bitcoin.

Here are a few links that discuss Bitcoin off shoots. (Thank you Eliel)

https://bitcointalk.org/index.php?topic=101197.0

http://yoniassia.com/bitcoin-2-x-or-currency-2-x-initial-specs/

BitPay, an automated payment processing system for Bitcoin, announced that they now have over 1,000 merchants accepting Bitcoin. “The sheer volume of new merchants has started to explode over the last month as more businesses begin to see the value in accepting bitcoin payments,” http://pymnts.com/news/businesswire-feed/2012/september/11/bitpay-exceeds-1000-merchants-accepting-bitcoin-20120911005855/

There really isn’t anything about this Mitt Romney/Bitcoin ransom note story that I approve of. I’m not a fan of Romney, theft or ransom notes and Larry Flynt just creeps me out. But you’ve got to admit, this whole saga is very amusing! The plot continues to thicken. http://rt.com/usa/news/flynt-romney-records-tax-802/

Read Flynt’s post here, http://larryflynt.com/larrysworld/larrysstatements/what-is-mitt-romney-hiding-reward/

Attention Digital Currency providers; your US market has grown by 8.2% as “more Americans have limited or no interaction with banks.” Beyond all the issues with fiat, the Fed’s banking system is inefficient and expensive. As such, more and more people who are struggling in a tough economy are simply ‘opting out’. http://www.washingtonpost.com/business/economy/more-americans-opting-out-of-banking-system/2012/09/12/6380b986-fcf1-11e1-a31e-804fccb658f9_story.html

Money laundering rules are not only ineffective, but they hurt the poor. Just like the above story, these rules raise the price of banking and price a lot of people right out of the market. http://www.forbes.com/sites/danielmitchell/2012/04/20/world-bank-study-shows-how-anti-money-laundering-rules-hurt-the-poor/

As the Euro Tumbles, Spaniards Look to Gold “According to Marion Mueller, vice president of the Spanish Precious Metals Association (AEMP) … ‘Up until very recently, to speak about gold as an investment or as wealth protection insurance was grin-provoking. That is changing,’ … She notes that since 2010, when the Spanish economic downturn became inescapable, a growing tendency to invest in physical gold developed among Spanish investors, brokers, and financial institutions.” http://www.resourceinvestor.com/2012/09/10/as-the-euro-tumbles-spaniards-look-to-gold?ref=hp

John Williams of Shadowstats.com, discusses ‘virtually assured’ hyperinflation.

“the Treasury actually publishes financial statements that are based on generally accepted account principals, GAAP accounting, … You’re seeing an annual deficit right now of about 5trillion dollars per year. …  That’s beyond containment. You could raise taxes to 100%, take all peoples wages and salaries and you’d still be in deficit.”

“If you’re a politician and you raise an issue like that, you have to have a solution or you don’t get re-elected. … They don’t have a way out of this.“

“right now inflation is running above the Treasury bill so your losing money in real terms. … Yet, if you went out and bought canned goods you would probably make more on that over the next year.”

http://usawatchdog.com/hyperinflation-is-virtually-assured-john-williams/