Tag Archives: Federal Reserve

Significant Day for Crypto

13 Mar

I haven’t posted in quite a while, but the news this morning seemed significant enough to stir me to start typing.

The first thing I saw on my phone this morning was that ether, the token (or crypto-currency) of the Ethereum Blockchain, was trading at $27. When I yelled this news to my wife, she responded with “twenty eight forty three”. Thus far the high on the Kraken exchange has been $29.98 but right now fallen back below $29.85. This is a 100 to 1 increase in valuation, from $.29 in August 2014.

This certainly got me excited, so as I sat in front of CBS Morning while reading Ethnews.com on my phone I saw this headline: New Gold Backed Cryptocurrency Introduced (https://www.ethnews.com/new-gold-backed-cryptocurrency-introduced).

The story reports that a new crypto-coin, OZcoinGold, is being launched on the Ethereum blockchain, but rather than a mined coin, it is a limited edition of tokens, 100 of which grant ownership in 1/3 oz. of 24 karat gold in a vault at the Perth, Australia mint, and 2/3 oz. of gold in certified reserves in a gold mine regulated by the Australian government. The issuer of the coin is backing it with 100,000 oz. of gold, at the mint and in reserves at the mine. After March 1st, 2022, holders of the tokens will be able to redeem them for certificates from the Perth mint, which are then exchangeable for gold at gold dealers throughout the world.

The coin was launched at SXSW on March 10.

This means that with only two more pieces of the puzzle in place, the unregulated free market in ideas will have provided the world with an unshakable gold standard. It will then be up to the market in currencies to use this mechanism to supplant the corrupt central bank/creeping world bank fiat money regime that siphons our wealth to fund the eternal war.

I plan to write further on what the two remaining pieces of the puzzle are, but I am also thinking about starting a new blog under a pseudonym. If you are reading this and would like to know where to find my future posts (if that change does come to pass), please email me at gmautry@gmail.com and I’ll reply with a link to the new blog. And please let me know if you found anything on this blog useful or interesting.


Government’s Role in the Bitcoin Universe

19 Nov

With bitcoin hearings before a Senate committee underway today, plenty is already being written about what the government is or is not likely to do and how its actions could affect the future of bitcoin. That is not what I want to discuss. This post is about what the government should or should not do, and how its actions will impact the world economy and the prosperity of its citizenry.

I will make clear at the outset, that my own intellectual bias is Austrian (primarily relying on the work of H.H. Hoppe), anarcho-capitalist, and post-statist. In my view, the best thing the government could do would be to shut up shop, abandon all of its assets to homesteaders, and sink into the ash-heap of history. However, I am also a realist. I recognize that the solutions I will propose herein represent a compromise with evil, and I hope that my fellow anarchist readers can forgive me for that. I would not propose them if I did not believe them to be within the realm of reasonable possibility, and that if enacted, they would shift the balance of power within society away from the political and toward the economic means.

To begin, I wish to establish a few points of agreement with my readers. If the following statements strike you as false, you should probably not waste your time reading further.

1. If government has any legitimate functions, one of these functions is the protection and restoration of justly acquired property.

2. Bitcoin is property. All bitcoin acquired through mining is justly acquired, as the means of production may be freely obtained by anyone (freely in the sense of being without arbitrary restriction such as patent or licensing law, rather than of being without investment cost). All bitcoin acquired through voluntary, honest exchange, like any other good so obtained, is also justly acquired.

3. The existence of property in bitcoin resides in the physical integrity of the bitcoin network.

4. Ergo, it is the duty of government to protect the physical integrity of the bitcoin network, and to work to restore bitcoin obtained by force, theft, or fraud to the rightful owner.

5. It is not the duty of the government to protect the value of bitcoin, but any government policy explicitly intended to decrease or destroy the value of bitcoin, such as a ban on bitcoin software, or confiscation or punitive taxation of bitcoin balances, would constitute a crime.

These points summarize what I believe to be the level of consensus today between the actors in the bitcoin community, the broader financial community, and the American federal and state governments. The more extreme stance taken by the law enforcement and anti-terrorist elements of the federal government, that bitcoin is a threat and should be actively suppressed, does not seem to be gaining a critical mass of support. At the same time, most of the major players in the bitcoin economy seem to be advocating detente with the regulatory state rather maintaining the radically anarcho-capitalist position of the early years.

Here is how I see the concerns and objectives of the key interests:

The government’s largest concern is how to tax the bitcoin economy, and it should be assumed that all proposals coming from that side will have tax enforcement as the primary goal but will be couched in terms of anti-terrorist and anti-fraud protections in order to muster public support.

The largest concern of the banks and Wall Street is the protection of the ability to manipulate credit through the fractional reserve system anchored in the Federal Reserve. They will maintain a publicly neutral stance but will covertly and frantically lobby against any proposal (such as the one that I offer) that threatens their corrupt power.

The core concerns of the bitcoin community are the maintenance of the physical integrity of the bitcoin network and its surrounding infrastructure, including enhancement and maintenance of security measures to deter theft, and continued viability of the software as the network scales upward. There are also significant concerns arising from externalities, such as the public perception of bitcoin and the policies of the regulatory bureaucracy. These include raising public awareness and understanding of the bitcoin economy with the aim of deterring fraud, and defense against unwarranted restrictions on the free production and exchange of bitcoin.

And finally, the key concern of the public at large is to be secure in their private property rights, that is, the right to justly acquire, exchange, or use for any peaceful and honest purpose, any property, including bitcoin.

My proposal provides what I believe to be a reasonable compromise between the competing concerns of the government, bitcoin community, and the public, which although not fully just (as involuntary taxation is never just), is at least as just as the current regime. (I can find no way to reconcile this proposal with the interests of banks and Wall Street, nor do I wish to do so.)

Here is the proposal:

1. Congress should enact the Fair Tax Act of 2013 (HR 25, Wikipedia, http://www.fairtax.org) This measure repeals all federal income taxes (personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate), replacing them with a single broad consumption tax collected on the sale of new end-user goods. The tax rate is revenue neutral. A monthly “prebate”, in the amount of the tax that would have been paid on expenditures equal to the federal poverty level, is remitted monthly to each registered family. The clause in this bill relevant to bitcoin is Section 103 paragraph (d), “Barter Transactions- If gross payment for taxable property or services is made in other than money, then the person responsible for collecting and remitting the tax shall remit the tax to the sales tax administering authority in money as if gross payment had been made in money at the tax inclusive fair market value of the taxable property or services purchased.”

The enactment of this bill would satisfy the government’s objective of facilitating tax enforcement by eliminating the need to track bitcoin incomes or capital gains and instead to simply collect the sales tax in dollars on items purchased with bitcoin. The capability of calculating the tax based on the exchange rate at the time of the transaction would be a trivial addition to the functionality of already available bitcoin payment processing platforms. This single step would eliminate a huge source of uncertainty on the part of both the government and users of bitcoin. Step two would extend this benefit even further.

2. Congress should enact legislation authorizing the optional distribution of any portion of Fair Tax prebates in BTC. Taxpayers should be permitted to designate the portion to be remitted in BTC at any time more than one month prior to receiving a prebate. The prebate amount would be denominated in dollars, and the exchange rate for determining the BTC amount would be the Average Federal Bitcoin Acquisition Rate (AFBAR) for each monthly period, where AFBAR is defined as the sum of the cost in dollars of BTC purchased by the federal government during the month plus the amortized value of the GH/s employed by the government to mine BTC during the month, divided by the number of BTC distributed in prebates at the end of the month. The government would be prohibited from acquiring more, during each month, than 105% of the BTC required for the next prebate. In order to smooth the impact on market exchange rates, it would be required that purchases or sales of BTC or GH/s to make up any projected shortfall or overage in mining production be made in nearly equal daily increments, such that the total bitcoin surplus after each monthly prebate distribution would not exceed 5% of the amount distributed.

This part of the proposal is (I believe) being set forth here for the first time, and deserves some explanation. The purpose is twofold – to facilitate the acceptance of bitcoin as an alternative currency, by establishing a mechanism for widespread distribution of bitcoin throughout the populace; and to achieve rapid equilibrium in the market exchange rate between dollars and bitcoin, with minimum volatility, by making a significant fraction of the demand for bitcoin highly predictable and constant. It makes the government a significant stakeholder in the success of bitcoin, is neutral from a taxpayer perspective, and moderates the concentration of bitcoin wealth, reducing the attendant risk of market manipulation, bubbles and crashes.

Assuming these two measures are implemented while the bitcoin price in dollars is still rising, I predict the following results. Initially, few households will opt to accept the prebate in BTC, both due to unfamiliarity and to the risk that the exchange rate on the date of the prebate will be lower than AFBAR. My analysis of price data from the MtGOX exchange beginning on July 10, 2010, shows that this was the case 45% of the time. Thus, risk averse families who do not intend to save a large percentage of the prebate would be very unlikely to opt to collect in BTC. However, the data also show that if the prebate is held in savings, the risk of a negative monthly return by saving bitcoin versus dollars decreases as the period that the savings are held increases. At 22 months, the risk of a negative return by choosing bitcoin vanishes.

Under these conditions, within a few months, most families will have adopted a strategy of collecting increasing percentages of the prebate in BTC, selling BTC for dollars immediately if the exchange rate is favorable, and holding BTC in savings in the months when the rates are unfavorable. Within another few months, the most common strategy will shift to collecting 100% of the prebate in BTC, and holding these as savings as long as possible. This means that the quantity of BTC that must be acquired by government monthly will steadily increase toward a maximum, and that citizens will have a highly liquid market for selling their bitcoin prebates, at a steadily rising price.

If these measures are enacted, the economy will experience a short period, three to five years at most, of a dual currency regime. Every family will have a small, guaranteed income in a relatively deflating currency, which will significantly increase their ability to discharge debts and increase savings. At the same time, a moderately inflating currency will continue to provide the unit of account. This will moderate the shock of the transition to a truly stable currency, as dollar denominated prices and wages remain relatively steady.

In my next post, I will describe the end state of this scenario…

What backs Bitcoin?

12 Nov

In several earlier posts, I implied that the Imperial Government of the United States might be actively hostile to Bitcoin, which could certainly tend to complicate its widespread adoption. In this, I believe I was in line with the conventional wisdom (a position I have seldom fitted into comfortably). However, in the interim, several indications have arisen which suggest that the IGUS is maintaining a neutral stance vis-a-vis Bitcoin. Most notably; last month’s Federal bust of Silk Road was not accompanied by a frenzied government call for the abolition (as if that were even possible) of Bitcoin, and last week, François R. Velde, senior economist at the Federal Reserve Bank of Chicago, published Bitcoin: a primer in the Chicago Fed Letter. This is a balanced piece which includes a good technical explanation of Bitcoin. It concludes with the statement that, “[Bitcoin] represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments themselves.” I have long believed that the most rational response of the state to Bitcoin would be to embrace and profit from it along with rest of us, and this paper suggests that at least one of the court intellectuals agrees.

However, Dr. Velde makes a common mistake when he states “Fiduciary currencies” (including Bitcoin) “—in contrast with commodity-based currencies (such as gold coins or bank notes redeemable in gold)—have no intrinsic value…”. This touches directly on a criticism I answered briefly in a previous post, which is that “Bitcoins are backed by … well … nothing. It’s fiat money issued by ‘the market’…”. In that post I addressed the mischaracterization of Bitcoin as fiat money, since this designation requires the imposition of a state fiat or decree to support the value of the currency. Dr Velde correctly points out that fiat money, including the US Dollar and all other major national currencies, is also a fiduciary currency, and has no “intrinsic value” derived from its status as a commodity.

So what is the error that Dr Velde has made? You might expect that I would argue that Bitcoin has some sort of “intrinsic” value, perhaps deriving from the fact that it requires an input of energy to create new Bitcoins. I have seen this argument before, in Bitcoin forums and articles. Dr Velde alludes to this when he remarks that “The term ‘mining’ may lead one to think that bitcoin is not fiduciary.” However, this is nothing more than the Marxist labor theory of value, and holds no water in a serious economic discussion.

My argument is not that Bitcoin has intrinsic value. It is quite the opposite – I maintain that no form of money, fiduciary or commodity-based, has intrinsic value. In fact the term “intrinsic value” is an oxymoron. Things have intrinsic characteristics; gold is dense and malleable, Bitcoin is decentralized and cryptograpic, water is wet, etc. One of the intrinsic characteristics of the concept of value is that it always and everywhere is a subjective ranking reflecting the goals of a human actor and the options available to him for achieving those goals. To argue that gold has intrinsic value is to assert that there is some minimum level in the rankings assigned by every living human to every option available below which gold (in some specified quantity) can never sink. This is clearly ludicrous. A drowning man in possession of a kilogram of gold will be more likely to find positive value in letting it sink to the bottom of the sea than in maintaining his hold on it.

What is really being said by incorrectly applying the adjective “intrinsic” to the value of gold is that gold has a long established history of being relatively highly valued by many if not most people. In fact, it is so highly valued that its market price cannot be even remotely accounted for by its utility as anything other than as (primarily) a store of value and (secondarily) a medium of exchange. This explains why the vast majority of the gold currently in the hands of humanity consists of bullion bars or coins, or chains, rings and amulets that may also be used for exchange in a pinch. Only a tiny fraction is employed in such uses as decorative gold leaf or as an electrical conductor.

To quote Dr. Velde again, “a currency that has value only because of the belief that it will have value may have no value at all (for instance, if I believe that no one will accept it, I will not accept it either)”. Quite true, and applicable to gold as much as to any other thing on earth. What is at issue here is not some intrinsic value that gold can never lose, but rather the strength of the belief that gives gold as well as Bitcoin its value. I am certainly not suggesting that the strength of the general belief in the exchange value of gold is likely to be diminished anytime soon. I am merely asserting that the fact that Bitcoin is not “commodity-based” or “gold-backed” has no rational bearing on its value whatsoever.

The only difference between Bitcoin and gold, or any other currency, is that the demand for Bitcoin is 100% derived from its utility as money (that is, a medium of exchange, a store of value and a unit of account), whereas there does exist some modest demand for non-monetary gold. Gold has a history of demand spanning 5 millennia, Bitcoin has a history of demand spanning 5 years. But based on that brief history, there is no reason to think that the belief in the value of Bitcoin is in danger of vanishing.