Tag Archives: Wall Street

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…