On Monday 5 Foundation members, Marco Santori, Patrick Murck, Peter Vessenes, Brian Klein and Jim Harper, met with representatives from a number of US agencies including FinCEN, IRS, FDIC, Federal Reserve, OCC, FBI, DEA, Secret Service, and the Department of Homeland Security.

via CoinDesk

Murck, who is general counsel for the Bitcoin Foundation, said all parties at the meeting had a “productive and frank” discussion about digital currency. “It was a positive first step for the industry in creating an open and on-going dialog. I left feeling very encouraged that we were able to dispel some myths and misinformation about how the bitcoin protocol works.”

Another attendee, Jim Harper, director of information policy studies at Cato Institute, shared this sentiment.

He said a number of topics were discussed at the meeting, which was held at US treasury building in Washington DC, including privacy, law enforcement and how government controls have the potential to strangle the industry before it has even had the chance to really get going.

“We talked about how the weight of regulation in the US can, and does, drive bitcoin service providers to move outside of the country,” Harper explained.

He suggested the Bitcoin Foundation was able to set the record straight on a number of digital currency-related issues, and that explaining what exactly the blockchain is and how it works largely dispelled the idea that there is some “magical secrecy” to bitcoin.

Marco Santori also commented on the meeting via BitcoinTalk

I, of course, discussed regulatory challenges.  I discussed some of the ways in which the regulatory landscape in the US did not achieve the government’s policy goals.  In particular, I spent a few minutes just going through the ambiguity in the March FinCEN Guidance, and emphasized the importance of supporting innovation in the Bitcoin industry.  I hit some points very hard – like how the regulatory environment has disincentivized businesses from launching in the US and from servicing US customers.  I also discussed how some businesses were simply picking up and leaving the US entirely.

Tuesday, in another meeting at Capitol Hill, Foundation members Peter Vessenes, Patrick Murck and Marco Santori meet with representatives from the offices of several congressmen and senators.

Via CoinDesk

Santori, who is chair of the foundation’s Regulatory Affairs Committee, said the attendees raised a number of concerns including privacy and anti-money laundering issues, but most just wanted to know how the protocol works.

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There were also people at the meeting who had a very in-depth understanding of bitcoin. Santori said he was surprised to find there were a few attendees who knew more about bitcoin than he did.

In this situation many Bitcoin businesses are faced with a choice, comply or go underground. But how can you run a business ‘underground’? How do you establish trust when there is no authority to give you a stamp of approval? How do you gain customers when your users know that you can simply disappear with their money?

The recent attention gained by anonymous stock broker service, TorBroker, has brought attention to these issues. Bitcoin Magazine has taken the time to look at the issues of Anonymous Finance and Trust.

In late March, the cryptic underworld of the Tor hidden service ecosystem added a new service to its midst: TorBroker, a gateway for Bitcoin users to the stock markets of the mainstream world. … TorBroker on the other hand is, as its name suggests, a fully-fledged broker, allowing users to buy and sell any of nearly a thousand different stocks and exchange traded funds at any time. It is also the first such service to accept customers anonymously, using Tor to protect their anonymity and not asking for any identifying information beyond a username and password.

The service has seen some usage in the months since then, but many people remain highly skeptical. There are two reasons behind this: legality and trust.

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As a further legal safeguard for their service, TorBroker’s representatives have chosen to remain anonymous. Explaining their decision, TorBroker wrote to Bitcoin Magazine: “By going public we would attract the attention of local authorities who would be inclined to work on new regulation – or even just try to find some non-essential technicality that we’re unwittingly violating – to stop our service. By keeping our jurisdiction secret, we avoid attracting such attention.” Howevver, this strategy has its costs. Out of all the major anonymously operated services in the Bitcoin economy, many, including Bitscalper, TorWallet and Bitcoin Savings and Trust, have turned out to be scams, eventually suddenly disappearing with thousands (and in the latter case, over 1 million) of dollars of deposited customer funds. Other anonymous sites, on the other hand, have survived, and Silk Road in particular may well now be the single most trusted cryptographically anonymous entity in the world, so on the balance the question of whether or not one can ever trust an anonymous service remains hotly debated.

The general consensus view is that it depends on the precise nature of the service in question – specifically, the trust to profit ratio. On the Silk Road, an eBay-style marketplace for illegal drugs that, like TorBroker, uses Tor to help ensure both itself and its users anonymity, this ratio is fairly low, both with regard to Silk Road itself and even between buyer and seller. Each individual transaction brings a significant benefit to both the buyer and the seller (laying aside the argument that some users may be addicted and would benefit more from being forced to go cold-turkey; this is a purely conventional economic analysis), especially so because black markets tend to be very inefficient and so have high producer and consumer surplus per transaction, and Silk Road itself earns an average commisssion of about 6.3%. Thus, for both Silk Road and the anonymous merchant, profit is high. As for trust, the buyer only needs to trust the merchant to ship the goods each transaction, and needs to trust Silk Road to the same extent when depositing into their Silk Road account (or perhaps to a slightly greater extent, if the buyer also wants to have cash on hand in their Silk Road account to be able to buy a certain quantity of goods at will). Since profit is high and trust is low, the trust to profit ratio is very low, and so both Silk Road and the merchant have strong incentives to continue acting honestly – the value of the relationships is too high to justify running away at any particular point.

Now, consider Torwallet. Torwallet was essentially an anonymizing mixing service and a Bitcoin wallet all in one. Here, the wallet is usually free, although users can opt to have their coins mixed again at any time for a fee of 3%. Thus, profit is considerably lower than on Silk Road. As for trust, Torwallet is intended to be used as a wallet, encouraging users to deposit significant quantities of money into the wallet and, importantly, store them there for a long time. Thus, compared to Silk Road trust is very high. Thus, predictably, TorWallet eventually ran away. Bitscalper and Bitcoin Savings and Trust have even higher trust to profit ratios, as the service (in both cases, investment returns) requires the user to keep their money deposited for an extended period of time.

Unfortunately, TorBroker falls squarely on the “untrustworthy” side of this analysis. This is not their fault; it is simply a characteristic of the financial industry that trust to profit ratios are high, and this model, combined with an understanding of the more subtle, and legal, ways a business can probabilistically “run away”, even perfectly explains the recent global financial meltdown. However, there is one unique factor that does rest strongly in TorBroker’s favor. BitcoinStore’s Roger Ver made a post in TorBroker’s introductory thread on Bitcointalk, writing:

“I don’t know TorBroker or any of the people behind it, but about a month and a half ago they contacted me, and at least one other well known member of the Bitcoin community and asked us to publicly hold 1,000 BTC as a security bond that would be used to refund customers if TorBroker ever disappeared with their customers money.
While I fully support TorBroker’s efforts to bring additional economic freedom to traditional financial markets, legally it didn’t seem safe for me to be the front man for this.”

TorBroker has also tried to place this bond with many other prominent Bitcoin community members (who won’t be named to protect privacy), and, if trust proves to be too insurmountable an obstacle, is even willing to consider placing the bond with Silk Road’s own Dread Pirate Roberts. This would change the trust to profit calculus considerably; the extent to which TorBroker would benefit from running away would then be reduced by 1000 BTC, and, presumably, if TorBroker does run away the funds would then be proportionately distributed to depositors. For now, no security bond has been placed, but the fact that they are willing to voluntarily do so does suggest that they are attempting to build a viable and lasting business.

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More recently, TorBroker has come up with several upgrades to their platform. In early June, they released a better securities list interface, an improved order system, performance and stability enhancements and reducing the minimum fee to $5 until July 11. They also released a promotional video explaining the benefits of their service:

The video begins by highlighting the three main disadvantages of traditional stock brokers: that they are “overregulated and complicated”, leading to bureaucratic inconvenience and a prolonged process in order to set up an account, they require minimum deposits that can be as high as $10,000, and “Big Brother is watching all your transfers.” TorBroker, of course, has none of these flaws. However, it does have weaknesses. Although it bypasses the inefficiencies of government regulation, its anonymous nature also sacrifices the main benefit that government can provide: trust. As discussed above, this is not an easily solvable issue, although there are many ways that TorBroker can mitigate it.

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If it survives and continues to grow, it may well be an interesting experiment in the growing field of “crypto-economics”, and an example for more commercial hidden services to come.

“This is a story that started with the end of the First World War, and involves a world which replaced laissez-faire with political motivation in economic and monetary affairs, moving away from wealth-creation into wealth-destruction in the cause of the common good.”

“…government and central bank manipulation of their economies and fiat monies has succeeded in deferring the bankruptcies and liquidation of accumulated malinvestments, to the point where their cost can no longer be sustained.”

“Never in modern history have we seen so many governments agreeing to make the same mistakes; and it is hard to see, with the underlying inter-connectivity of their banks, how there is room for dissent.”

“The global banking system for the last five years has struggled with insufficient capital, over-valued collateral, and an underlying tendency for balance sheets to deflate. Their respective governments through their central banks are back-stopping these insolvent institutions by flooding them with both sovereign debt and fiat money, and manipulating credit markets to maintain valuations.”

“Take these distortions away and we see the private sector economy still contracting four years after the credit bubble burst, a fact that is concealed by the expansion of both government spending and fiat money. Otherwise, bank balance sheets would have contracted, wiping out their aggregate capital, in some cases several times over.”

“The manipulation of credit, money and prices has made economic calculation impossible.”

“There is little difference in this respect between the communism of failed states in the past and the regulated and planned economies of today, except perhaps in the degree of state interference. As happened with the Soviet Union, eventually ordinary people, by acting in their individual interests, will bring about the downfall of their governments. It is bound to happen unless governments reverse course.”

“Banks are interconnected through interbank and cross-border loans. They are also linked by counterparty risk in derivatives and by off-balance-sheet hypothecation of collateral. … The level of bank capital behind on- and off-balance sheet liabilities is inadequate to cover either hidden losses, systemic contagion or a resumed downturn in the global economy. … Systemic risks include sovereign defaults, significant falls in collateral values, and counterparty failure in derivative markets.”

“The banks have become corrupted institutions continually on the verge of failure.”

“The US economy … outlook is therefore one of deteriorating government finances, and a possible need to raise interest rates sooner than expected to curb the inevitable price-inflation effects of accelerated money-printing.”

“The burden of the euro-system on Germany, the Netherlands, Finland and Austria is far too great for them to bear, and we can expect mounting political dissent in this election year for Germany. … The eurozone’s banking system is under-capitalised and already bankrupt on realistic assumptions.”

“In Japan … savers are now dissaving at an accelerating rate, leading to a developing trade deficit.”

“The UK … is also exposed to a disproportionately large finance and banking sector with high international exposure, particularly to the eurozone, which will be an unsupportable burden on the state if the banking crisis develops further in 2013.”

“Watch out for developments in the following

• Inflation, which will pick up unexpectedly if there is a shift of preference from money to goods, the consequence being accelerating stagflation. Bear in mind that governments usually under-report inflation, and prices in the US, UK and other nations are already increasing at a significantly faster rate than CPI measures suggest.
• Interest rates, which may have to rise sooner than expected due to inflationary concerns. This being the case, an implosion of asset prices could begin if markets price in rising interest rates before they happen, destroying the ability of central banks to retain control of prices in credit markets.
• A further downturn in the US private sector economy, (excluding government).
• Rising bond yields for Spain, Italy or France.
• Deterioration in Japan’s trade balance and weakness in the yen.
• The bursting of bond market bubbles, particularly in the US, UK, Germany, Japan or France.
• Crisis meetings by governments and central banks that resolve nothing and only further public understanding of their inadequacies.
• Derivative markets, and their exposure to counterparty risk, hypothecation and rehypothecation of collateral.
• Silver markets, where there are large short positions held by the bullion banks and so are vulnerable to a vicious bear-squeeze. If this happens a sharp rise in gold prices will also be triggered, and possibly spread to other metals and beyond.
• Growing social unrest.
• Further clampdowns on personal freedom”

“We are one year closer to a renewed banking and financial crisis, the pace of which is quickening, and which can be expected to turn eventually into a fiat currency collapse. These systemic risks increased in 2012, most notably in the eurozone, but also elsewhere. None of the solutions applied anywhere did any good.

On the evidence to date, it has become less likely any Western government can or will take the right steps to avoid an eventual collapse of their currency, so 2013 is more likely to realise systemic failures than 2012.”

Read the post in its entirety here.

This frightful thought has not been lost on GoldMoney’s Alasdair Macleod who today writes “The US, UK, Europe and Japan are all implementing economic policies that must ultimately result in the complete destruction of their currencies; and if you destroy the means of exchange of goods and services, your people will starve.”

“We all look to government to supply what we used to provide for ourselves, in the naïve belief that it is our servant, it has our interests at its heart, and that it can deliver. Collectively we have chosen not social co-operation, but the disintegration and ultimate destruction of society itself. We labour under so many misconceptions about where our true interests lie that we have completely lost our bearings. We have in our time witnessed other nations destroy their own economic and social structures and do not see it happening to ourselves.“

“When reality intervenes, we deny it. The state controls money and prices. It makes economic calculation meaningless. It takes our property in the name of the common good to dispose of as it sees fit.”

“The cost is our own impoverishment and loss of freedom. The state only values us for our contributions to it. We must be controlled for our own good. The state does not fear for itself so long as there is any wealth left to sequester from us and any freedom left to us to pursue non-statist objectives.”

“governments … are running out of their citizens’ money. Together, they are destroying their capital at an accelerating rate, just so that they may survive. They rely on mutual planning in the erroneous belief that it will save them, when the only chance for any one state to survive and eventually prosper is to stop conspiring and face up to the problems of its own making.”

“Instead, next year – when the weaker governments begin to collapse under the hammer-blows of economic reality – when they cannot hide the insolvency of their state-regulated banking systems, the stronger governments will sequester the remaining resources of their own citizens to prop them up, as Germany is doing to her people today.”

“To paraphrase Macbeth at his lowest ebb: It is a tale, full of sound and fury, destroying everything.”

Read the post in its entirety here.

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/