Bitcoin is Real — Get Over It…

  • Brett King
  • August 8, 2013
  • 2

Recently I have been embroiled in an interesting debate on regarding the death of cash, or as some may classify it, the premature assassination of cash. Connected with this the threat of BitCoins have recently been extolled throughout the media with the intensity only normally afforded more existential threats such as terrorism or large scale criminal activity:

UK taxmen, police and spies look at Bitcoin threat – Financial Times
Bitcoin really is a threat to the modern liberal state – Bloomberg
Central banks looking at Bitcoin as real threat to dominance – TrueActivitst Blog

However, the far more interesting indicators are the struggles that the regulators around the world are having with the #Bitcoin phenomenon. As most readers will be aware while there has been much speculation about regulators wishing to ‘outlaw’ Bitcoin (or all virtual currencies), the reality is that we’ve only seen three jurisdictions deal with the issue of virtual currencies in any meaningful way to-date and they are China, the US and Thailand.

In Thailand, despite overzealous reporting that characterized a recent decision to make Bitcoin ‘illegal’, Bank of Thailand (the central bank regulator) basically ruled that they were unable to make Bitcoin ‘legal’ as had been requested by the local exchanges, purely becausethe existing legal framework and regulations were not robust enough to encompass a virtual currency.

In China in 2008, QQ coins were regulated by the central bank (People’s Bank) after their value rose by 70% in a very short period of time through excited trade and speculation, an economy that had already exceeded $900m way back in 2006. This didn’t outlaw QQ coins, but regulated how they could be exchanged or traded.

In Texas this week, Judge Amos Mazzant in the Eastern District court ruled that Trendon Shavers could not avoid SEC prosecution because Bitcoin was not ‘real’ money.

“Shavers argues that the BTCST investments are not securities because Bitcoin is not money, and is not part of anything regulated by the United States,” writes Magistrate Judge Amos Mazzant of the Eastern District of Texas. “Shavers also contends that his transactions were all Bitcoin transactions and that no money ever exchanged hands.”

However, the SEC prosecutors were determined to shut the door on this strategy by making clear that they considered Bitcoin a viable currency and a legal financial instrument, the court agreed…

“It is clear that Bitcoin can be used as money,” writes Judge Mazzant in a ruling on Tuesday. “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses…The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

This is a significant shift because we see that the SEC, at least, now considers that Bitcoin has enough traction to be regulated and treated as a real-world currency, although it remains virtual. This should also (eventually) shut the door on the defense made by the Bitcoin foundation who rebutted the recent cease and desist order issued from the Californian Department of Financial Institutions (DFI) that said in their cease and desist that the foundation (and others) could not trade in Bitcoins because it would contravene regulations on “financial instruments” and they needed a money transmitter license. The foundation argued that a 2001 ruling that rule financial instruments were “written instruments” meant that Bitcoin which is totally virtual was excluded from current regulations and therefore the C&D could be ignored.

The state law defines money transmitters as firms that sell or issue “payment instruments” or “stored value” or “receive money for transmission.” Hansen cited a 2001 ruling in which the department said it defines an “instrument” as “a written, signed document … similar in nature to a check or a draft.”

“This confirms that a product can only be an ‘instrument’ if it involves a writing,” Hansen wrote, and since bitcoins are digital, they aren’t instruments. Stored value is defined under California law as “a claim against the issuer that is stored on an electronic or digital medium,” but Bitcoin has no issuer, Hansen noted.
American Banker BTN – August 8th, 2013

Regulators are primarily concerned about Money Laundering and anonymity when it comes to BitCoin. While no regulator really imagines that Bitcoin will ever replace a currency like the USD or EUR, there is a perception that leaving Bitcoin unregulated will allow the free flow of illegal funds cross-border. The attempts to halt or restrict Bitcoin movement/trade, thus far, have been concentrated around efforts to stop the exchange of USD currency into Bitcoin (for example). However, the SEC ruling (as expressed through Judge Mazzant) means that rather than attempt to outlaw Bitcoin as illegal, which would just push trade underground, a more comprehensive approach is to simply treat Bitcoin like any other currency. That, however, gives Bitcoin a legitimacy that perhaps the US might have preferred to avoid for now – because if Bitcoin is considered a real currency, then preventing trade in that currency would breach a whole bunch of international rules from the WHO, FATF, G20, World Bank, and others.

Regulators can’t have it both ways. Bitcoin is either a currency or it isn’t. If it is, then the SEC can prosecute Shavers as operating a Ponzi scheme, but then trade in that currency is (by precedent) now legal, unless you want to write laws to specifically exclude Bitcoin from trade (or issue sanctions such as those imposed on Iranian Rial). If you outlaw Bitcoin explicitly by name, however, then if the name is changed or someone starts up Bitcoin v2 you have to outlaw the next virtual currency explicitly. Given the time it takes to change laws around this, that cycle could never be ‘won’. So then why not outlaw all virtual currencies?

The problem with that is if you want to outlaw all virtual currencies you have to make the laws broad enough to encompass any new configuration of a virtual currency that might arise. If you make it broad enough to accomplish that goal then you could very well end up inadvertently outlawing all non-local currencies, because at a broad level Bitcoin is indistinguishable from a real-world currency (as Judge Mazzant rightly pointed out). However, you would also make illegal more ‘legitimate’ virtual currencies such as Mint Chip, which is being incubated by the Canadian Mint currently. You’d probably end up making airline miles, zynga coins, and other such variations on the currency theme also illegal.  The upshot is that Bitcoin and all other virtual currencies or pseudo currencies cannot be made broadly illegal simply by virtue of the fact they are virtual, and current laws that define currency as a physical commodity or a financial instrument as written are hopelessly out of date and are essentially aiding the proliferation of Bitcoin.

The real concern facing the US, China, Thailand and other regulators is that Bitcoin is not the brain child of a central bank, and therefore you can’t expect the Bitcoin foundation or those who promoting it to act in accord with established convention. That, however, doesn’t change the reality that consumers and businesses can utilize Bitcoin as a real currency to buy or sell goods, or to trade. As author David Wolman pointed out in his book “End of Money”, all currencies are essentially virtual and are ascribed value only by the community who puts faith in that currency and uses it. David Birch says it well

“I wish people would stop saying that the US dollar or Euros are ‘real’ when comparing Bitcoin, WoW gold or QQ coins. The fact that a central bank issues paper doesn’t make a currency any more legitimate than any other vehicle or commodity that a community trusts or values for trade or commerce.”
Dave Birch, Digital Money Forum

While regulators might disagree and conceivably may even be able to restrict the use of a currency locally, they can’t easily restrict the use of a virtual currency in the virtual domain. They can choose to make a currency broadly illegal, but the US in this instance has figured out that isn’t going to happen and that if people are going to utilize this currency anyway it has to be treated like any other form of monetary exchange. It has to be recognized as real, and the only way to regulate it is with the existing rules on money transmission, KYC (Know Your Customer) rules, source of funds stipulations, etc.

Bitcoin may not mean the end of cash as we know it. But for those in love with the status quo, unfortunately there is no conceivable end for Bitcoin either. Even if Bitcoin is not the next big thing, the question of whether a virtual, borderless currency can gain legitimacy is already answered. A huge hurdle to the elimination of physical cash in the system, has also been circumvented. If people are permitted to use a legal, more efficient alternative to traditional cash then more of them will. While this doesn’t kill cash, it does make death by a thousands cuts increasingly likely over the next couple of decades.

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2 thoughts on “Bitcoin is Real — Get Over It…

  1. The one last question is: Is bitcoin a currency, or is it a derivative? If it’s got no underlying deliverability – similar to any other currency, true; but every other “currency” has a central bank standing behind it, with billions of dollars/ounces/pounds/yen in reserve, prepared to “stabilize” it. Bitcoin has no such user protection mechanism – therefore it more closely resembles a commodity, or a derivative. What’s the difference? Nothing in terms of AML. All transactions (even pawn shops, real estate agents, and art dealers) fall under reporting requirements – even bit coin – so all dealers/brokers (and large value private citizens) have an obligation to report trades they suspect to be ‘fishy’.

    The deal for Bitcoin, is it’s appeal to developers, primarily. To date, building a bit-coin trading and exchanging engine is easy, fun and exciting… you can set up in a few days, process transactions, without anyone saying “no” or “hold on a minute” – and your customers don’t want you to either. All that changes with the consumer protections that are law for value exchanges (money remittances, etc) – as you have to go through long “fit and proper” persons tests. It’s not easy – but it is straight forward. Further, it may cost up to $1,000,000 or more to pay for your licenses. That’s because “real” currencies are based on trust and check systems. Bitcoin doesn’t require that – it has a known number of transactions, and all transactions are approved by a swath of independent auditing computers (miners). The “old/real” banking system is still largely operated in Batch mode.. it requires trust, and end of day settlement (blind spots).

    Therefore – it’s been necessary to limit the people “with nothing to lose”, or no experience in how “banking” works from accessing it. I’ve met some very talented people in bitcoin circles who have no idea about how banking (systems, controls, protections, and operation) works. The beauty of bitcoin is they don’t need to.

    The down side of Bitcoin “supply control” is complete lack of flexibility to moderate supply (only demand). And since there is no “central” institution charged with the duty of protecting price stability (and prepared to make losses to do so) within bitcoin, bitcoin is doubly unstable. Here, you can see why, if an institution is charged with price stability, it likes to make sure that only people “with something to lose” are playing in the market. Hence regulations, and hefty buy-in prices.

    That leads into Bitcoin – is it a commodity, or a currency? As it has no “central authority” stabilizing prices, and appears more like a commodity than a currency, then the danger for the community, in my view, is that it will fall under the regulation of Commodities/Futures Trading Commission. The minimum up-front capital for that is $25m, last time I checked. It’ll make the Money Transmission licenses seem like small change.

    For the economy, the biggest revelation is that “trust” doesn’t need to be paid for anymore. And that Banker’s certainly don’t deserve to charge for it. Trusted counterparties operating at negligible cost (like dwolla, etc) are an expectation and perhaps even preferred to the Banks, who have been shown to be irresponsible, and heavily taxpayer funded/bailed out, despite the privileges of their expensive and supposedly risk reducing licenses/provisions/regulations. So why would you pay 1-5% for a regulated credit card – when the card is owned by a reckless bank, that you are also funding via taxes. May as well make transfers with Bitcoin – at least with bitcoin, *nobody is making ill-gotten money out of it, right?

    Real money will respond, and the US payments system will become more like the UK’s payment system in time (free, and instant, between every single bank) once the US regulators sort out their destructive Reg-E, and force banks to show ACH/intraday ACH payments as the primary payment option (instead of wires at $30-40 a go).

    Then bitcoin becomes as useful as a regular Stock that will never yield a dividend, nor holds/owns any assets…. that’s the danger (there’s more to that than meets the eye also)… But we do know, people love to collect things, like used stamps, reate wine, cars, and art. Bitcoin is a fairly liquid market in that regard, with no physical limits (like comic books, which have to be bought, stored, and preserved en masse). It’s impressive… but really needs a central body, able to offer interest (future value of money) – otherwise it’s a speculative tool, that the CFTC is bound to deem needs controls.

    And therefore Capital.

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