Don’t get me wrong, I’m not suggesting you sell your gold for Bitcoins. What I’m saying is although they may not realize it, Bitcoin is a goldbugs friend. It has a real chance of changing the way the average person thinks about money and that is good news for anyone who is not a fan of fiat.
When I first heard of Bitcoin I was…unimpressed. Since having discovered the truth of how fractional reserve banking and fiat function, I have been a hard-core goldbug. And like most goldbugs, including James Turk, I felt that “BitCoins are the ultimate currency backed by nothing.” It seemed like a waste for such clever people to spend their time and energy creating money that functions wonderfully, but is backed by nothing.
I have since changed my mind. So how can a self-respecting goldbug be in love with a cryptocurrency?
While Bitcoin may not meet with Mises’ regression theorem requiring an object to have primary use value prior to having value as money, it does possess many of the same characteristics that make gold a wonderful currency. The supply of Bitcoin is finite and limited, there will never be a Bitcoin inflation. Bitcoins may be purely digital, but they are not pulled out of thin air. Producing or ‘mining’ Bitcoins comes with significant computational costs.
But beyond this, goldbugs should love Bitcoin because it could be the game changer. When alternatives are accepted, when the status quo is questioned, the door is opened.
Bitcoin is decentralized, resilient, cheap and easy to use and very difficult to regulate or shut down. But perhaps even more important is its popularity.
The biggest hurdle that DGC’s face, next to hostile regulation, is their ‘weirdness’ and lack of popularity. It is simply not practical to try to operate using DGC’s when no one knows what they are, let alone accepts them. And I’m sure most of us have had the experience of being looked at like you’re wearing a tinfoil hat when you try to explain DGC’s superiority to fiat.
But this is not the case with Bitcoin. The internet is abuzz with Bitcoin. I run across articles and posts about it at almost 20 times the rate to that of other DC’s. Bitcoin is almost, dare I say…cool!
There have been other alternative currencies that have gained some impressive numbers, e-gold, the Liberty Dollar and in Russia WebMoney, but no one’s got it going on quite the way Bitcoin does. New Bitcoin based businesses seem to spring up every other day, Bitcoin Users Org has 242,000+ ‘likes’ on Facebook, on an average day over US$220k worth of Bitcoin’s are exchanged and there was an entire episode of The Good Wife about Bitcoin. There is no doubt that Bitcoin is gaining mainstream traction in the US the way no other alternative currency has. So, the question is… why?
I believe there are three big reasons why Bitcoin is winning the DC popularity contest; Fear of change, political alliances and trust.
Fear of Change.
Much has been said about human issues with change, and while reviewing old issues of the DGC Magazine, I ran across an interesting article touching on these topics. Paul Rosenberg’s “The Truth About Pioneers And Why It Could Be Different This Time” from the January 08 Issue, has some interesting thoughts.
“The group jumps forward only to the distance that an average member can handle…the acceptance of a new idea has very little to do with the merits of the idea, and almost everything to do with the psychological impact it had upon the average person…the pace of change is increasing. And that means that each jump is longer than the previous.”
I tend to agree, so why then is Bitcoin seemingly jumping faster than other DC’s?
People may be more comfortable with change, but Bitcoin looks and feels like a type of change that people have become very familiar with.
Bitcoin sells itself as “new financial technology”, and people are very used to changes in technology. For example, Skype. People are still making long distance phone calls, but now they use a fancier device than their land line phone. They’re okay with that, and expect to do lots of things on fancier devices in the future.
Bitcoin sells itself as simply a new app for making and receiving payment. The ‘revolutionary’ side of it, and what it could do to the status quo, is not advertised. Its name and its advertising message make it sound like any other new high-tech product coming out of Silicon Valley. It does not raise peoples ‘frightening new change’ alarm bells.
Bitcoin is a political blank canvas.
Because Bitcoin has not been aligned with any particular political philosophy, it is free to be loved by conservative anti-Fed guys, the bankster hating ‘occupy’ crowd, and libertarian hippies alike. Anyone who is holding a grudge against banks or government can get a chuckle out of using Bitcoin…and that’s a LOT of people!
Goldbugs will cringe, but it’s true, Bitcoin is easier for some people to trust.
To most people gold bullion is just something that gets stolen out of an underground vault in an action movie. They have no actual experience, and zero comfortability with it. And they are certainly not keen to spend money on an uncomfortable product and then entrust its safe keeping to an unknown group.
This is the biggest stumbling block that I’ve run across when trying to explain DGC’s to the non-initiated. “How do you know they won’t run off with your money?”
Giving someone unfamiliar with these topics a lecture about business models, economic incentives and auditing practices does no good here. Spending money on an exotic material and then entrusting it to a bunch of foreign dudes in a foreign place is simply way too big a leap of faith.
Bitcoin does not ask it’s users for this leap of faith. While Bitcoin’s lack of commodity backing is a negative in my mind, I think it might be the key to its growing acceptance by the main stream. This thought hit me while watching an interview on Canadian TV with BitInstant’s chief executive, Charlie Shrem. When explaining why one should have faith in his service, he explains that “You are trusting the laws of math when it comes to Bitcoin… your trusting cryptography.” I’d rather trust gold, but would most people? Is trusting a new computer program more comfortable for the main stream than trusting a group of foreigners engaged in semi-legal activities? I think so.
REGULATION…SURVIVING THE COMING ATTACK
There has been a lot of dramatic Bitcoin news lately. A Bitcoin debit card may soon be a reality which got BitInstant “a lot of attention from a lot of regulators.” The secret service and Mitt Romney are now painfully aware of Bitcoin as Romney’s un-released tax returns are being held hostage for a ransom in Bitcoin.
Brace for impact, the regulatory onslaught is coming.
But here too Bitcoin has an advantage. How exactly does one attempt to stop Bitcoin? Unlike e-gold or the Liberty dollar, there is no office or vault to raid. There is nothing tangible to confiscate, no one person to go after, no central server to shut down, no main database to erase. Like the internet, its decentralized nature makes it resilient; Bitcoin does to money what email did to communication.
Bitcoin is unanticipated and undefined. It exists in a legal grey area. For the most part authorities have refused to address it or even define it.
Where does Bitcoin currently stand in relation to US law? Well, where do we start? I’ll just give you the cliff notes, as these issues have already been thoroughly examined in these two academic papers, Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against its Regulation and Bitcoin: An Innovative Alternative Digital Currency.
- It is unlikely that regulators will go after Bitcoin users or miners.
- Bitcoin will likely not be considered a Bank.
- A contract that specifically requires payment in Bitcoin is legally enforceable.
- It is not likely that Bitcoin will be attacked in the same fashion as the Liberty Dollar.
- There is a possibility that Bitcoin could be classified as a Security and be subject to SEC regulations.
- Bitcoin could be subject to the Stamp Payment Act of 1862 prohibiting ‘tokens’ in values less than $1.
- What will likely happen is that Bitcoin exchanges will be considered to be Money Transmitters and be required to obtain licenses.
Bitcoin is already on FinCen’s radar, and their new ‘Pre-paid Access’ rules could be seen as designed specifically to cover DC’s including Bitcoin. FinCen’s director Jim Freis recently said “FinCEN took a comprehensive approach in this area revising its regulations one year ago specifically to cover mobile payments and other innovations.“
In fact BitInstant, a US based exchange, has already registered with FinCen as a Money Service Business.
Because Bitcoin exists completely outside any banking or legal structure, its weak points are the bridges between BTC and national fiat, the exchanges. And the interaction between the exchanges and regulators is what we should be keeping our eyes on.
For the moment it would seem that regulators have yet to interact with the exchanges. In fact, many exchanges are reaching out to regulators as they anxiously await action here.
A few of the Bitcoin exchanges responded to my enquires on these topics.
Mt.Gox is the largest Bitcon exchange and is incorporated as an IT company in Japan “Bitcoin is an entirely novel concept and, as far as we know, has not yet been defined as a currency by any countries including the USA… our lawyer contacted the Japanese FSA and asked them to define if Bitcoin is a type of currency and what license, if any, should be required. So far, the Japanese FSA has no answers to these questions as we wait for them to contact us back with the appropriate answers and guidelines.”
Another exchange is Bitstamp, currently based in Slovenia. “the US is not our primary market. … We are, along with our partners, investigating licensing in US. Our partner already has money transmitting license for several States… As goes for Slovenia, we did try contacting government agency’s to get details on regulations and licencing but did not get any response from them. We are following regulations to prevent money laundering and financing terrorism.”
Will the exchanges be required to obtain licenses and implement ‘Know Your Customer’ rules effectively eliminating Bitcoin’s anonymity?
Will Bitcoin be taxed and regulated like gold requiring disclosure and capital gains tax?
Time will tell. But until (and if), quantum computing becomes a reality and encryption is rendered useless, off the books transactions in Bitcoin will continue to be a viable option.
The decentralized nature of cryptocurrencies make them flexible and difficult to regulate. But what is most important about Bitcoin, is its ability to get people to think about money differently. It has the ability to draw the average Joe into the world of alternative currencies. And as such, any enemy of fiat should be a friend of Bitcoin.