Tuesday, December 3, 2013

Dutch Central Bank follows ECB and Fed with its warning against BitCoin , recall the parallel track for attacking BitCoin seems to be the UK co-opt plan to invade cyber currency space and make BitCoin and its cyber siblings unattractive / riskier and ultimately irrelevant ....

Regulatory action coming in 5 , 4, 3 , 2 , 1.......


One "Big" Problem With Bitcoin...

Tyler Durden's picture

Submitted by Simon Black of Sovereign Man blog,
At this point, you’d pretty much have to be living under a rock to have not heard of Bitcoin.
I actually asked this question (‘have you been living under a rock?) to someone recently who proudly proclaimed that he had never heard of Bitcoin, almost expressing gratification in his ignorance of a game-changing model.
Bitcoin is on fire. Mainstream media coverage is everywhere.
Today, in fact, the Forex Industry Conference kicks off at the W Hotel here in Santiago. And the lunchtime workshop is featuring an hour-long panel on Bitcoin, including the folks behind Coin4ce.com, Chile’s largest Bitcoin trader.
No doubt, digital currency is a growing trend in Latin America… particularly in neighboring Argentina where the government has been nationalizing everything that isn’t nailed down.
The Argentine government has imposed a series of desperate capital controls and price controls, including severe restrictions on purchasing gold and foreign currencies.
Most Argentines have been left to suffer the terrible inflation and erosion of purchasing power that comes with holding a rapidly depreciating paper currency.
But for some Argentines, Bitcoin has been a salvation. And demand for the digital currency has soared in the country as people have realized that Bitcoin cannot be controlled or nationalized by the Argentine government.
As a result, Bitcoins in Argentina frequently trade for more than 30% higher than in neighboring countries… presenting a rather interesting arbitrage opportunity.
With all the mainstream attention, though, Bitcoin has been building its share of detractors. I read an article on Forbes recently entitled something like “Why Bitcoin is doomed to fail”.
Most of these pieces roll out the same tired points– that nobody knows anything about the mysterious programmer who put it together… that it’s too volatile… etc.
True, Bitcoin is incredibly volatile. A lot of this is based solely on momentum and speculation.
Think about it– the premise behind Bitcoin is that it is an alternative to fiat currency. So is gold. Yet while Bitcoin has soared in the last few months by practically an order of magnitude, the nominal gold price has remained flat.
This suggests to me that a lot of the new Bitcoin buyers are speculators– people that are trading paper currency for Bitcoin, hoping to trade their Bitcoins back into even more paper currency at a later date.
This approach defeats the purpose of holding a fiat currency alternative. And it raises a rather interesting problem that is unique to Bitcoin: with such a huge runup in the nominal price of Bitcoin, how is it supposed to be taxed?
The capital gain rules for precious metals are very clear, especially if you’re a US taxpayer. But the IRS has literally issued ZERO guidance on Bitcoin.
If, for example, Bitcoin is considered a ‘currency’ by the IRS, then Bitcoin gains should be taxed as ordinary income according to IRC section 988(a)(1)(A).
But if Bitcoins are considered to be a long-term investment, such as shares of Google that you hold for more than a year, than it should be taxed at lower capital gains rates.
And what about if your Bitcoins are stolen? Are such losses deductible like other investment losses? Or would it be treated like personal property as if your car was stolen?
And what if you’re a US taxpayer holding Bitcoins at an overseas-based brokerage? Would this ‘account’ need to be reported on foreign financial disclosure forms?
Everything is up in the air. And while the IRS has issued fairly clear guidance on precious metals, they haven’t made a peep about Bitcoin… leaving, once again, the onus on the taxpayer to figure everything out.


Another Central Bank Warns Of Bitcoin Risks

Tyler Durden's picture

First the ECB, then the Fed, and now the Dutch central bank have come out and explicitly warned of the dangers of virtual currencieslike Bitcoin and Litecoin. Their explicit statement this morning, raising questions about deposit guarantees, central issuer responsibility, and volatility do their best to inform potential users (or traders) of the alternative currency that it is the devil incarnate. It seems, despite the mainstream media's guffawing at the swings and outrageous fortune in the market's early days, that the powers that be see these crypto-currencies as anything but benign.

Consumers should be aware of the risks of virtual currency

The emergence and growing popularity of virtual currencies (like bitcoin, litecoin, etc.) are followed by the Dutch Central Bank (DNB) with attention.

The developments around virtual currencies go fast.

At present the state of affairs as follows: virtual currencies fall outside the scope of the Act on Financial Supervision. DNB thus no monitoring of these virtual currencies. Nor, she oversees companies acting herein.

DNB suggests that consumers should be aware of this and will have to realize the risks they run when they buy currencies like bitcoin.

The exchange rate is volatile and there is no central issuer which may be held liable.

Also, the deposit guarantee scheme does not apply.
If this small market cap virtual currency is such a "gimmick" as some have said, why are the world's central banks so afraid?


Friday Humor: The ECB Explains What A Ponzi Scheme Is; Awkward Silence Follows

Tyler Durden's picture

From the ECB's Virtual Currency Schemes, aka the "Bash Bitcoin Boondoggle" (p. 27):
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity
Considering that this elucidation comes from the very same entity that launched the SMP, LTRO, OMT, EFSF, ESM, oh, and of course, TARGET2, and whose head said to not short the EUR as there is "no risk" whatsoever in holding said currency, one would expect that this definition is absolutely spot on...
* * *
And as an added bonus, here is the part in which the ECB appears to be so worried about BitCoin taking over as legitimate "legal tender" from the EUR (which the ECB's Coeure said two days ago is as "solid and longlasting as a diamond") it dedicated an entire report to bash the recently conceived electronic currency:
In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).

The substitution effect would also make it more difficult to measure monetary aggregates and, as a consequence, would affect the relationship between the monetary aggregates as measured and inflation, which is used to gauge risks to price stability in the medium to longer term.

Lastly, on this second aspect, when virtual money is created outside the realm of the central bank and virtual credit can be extended, this may have implications for the way interest rate decisions by the central bank are transmitted through the economy and the central bank’s control over money and credit developments could become less effective.
And while it is one thing for the Chairsatan to say gold is not money but is merely "tradition", it is a whole new level of panic when a major central bank is forced to defend itself against an electronic currency.
h/t woerner


UK Royal Mint Working On Plans To Issue Gold-Backed Physical Bitcoins

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The implicit, and ever more explicit, institutional acceptance of the dominant cryptocurrency Bitcoin (we say dominant because as we pointed out last week, there has been an unprecedented spike of digital currencies one can pick and choose from) continues when following the surge in vendors willing to transact in BTC over Thanksgiving, the latest news comes from the birthplace of the modern central bank, the UK, where we learn that none other than the UK Royal Minthas been working on plans since this summerto issue physical Bitcoins in collaboration with the Channel Island of Alderney.
But where the story gets downright surreal is that as the FT reports, the same symbolic Bitcoin token issued by the Royal Mint "would have a gold content – a figure of £500-worth has been proposed – so that holders could conceivably melt and sell the metal if the exchange value of the currency were to collapse." In brief: a perfect, and utterly incomprehensible, fusion of (opposing) hard, soft and digital currencies all rolled into one...
From the FT:
The tiny Channel Island of Alderney is launching an audacious bid to become the first jurisdiction to mint physical Bitcoins, amid a global race to capitalise on the booming virtual currency.

The three-mile long British crown dependency has been working on plans to issue physical Bitcoins in partnership with the UK’s Royal Mint since the summer, according to documents seen by the Financial Times.

It wants to launch itself as the first international centre for Bitcoin transactions by setting up a cluster of services that are compliant with anti-money laundering rules, including exchanges, payment services and a Bitcoin storage vault.
So, convert a digital currency into fiat, issue plastic (or some other material) tokens (appropriately covered in some goldish color) representing "value" because suddenly the currency (supposedly) has the blessing of central banks, and then store them in some basement? Brilliant.
Just how is the UK Royal Mint involved?
The special Bitcoin would be part of the Royal Mint’s commemorative collection, which includes limited edition coins and stamps that are normally bought by collectors. It would have a gold content – a figure of £500-worth has been proposed – so that holders could conceivably melt and sell the metal if the exchange value of the currency were to collapse.
Wait, what: gold-backed Bitcoins? If so, that would be truly revolutionary because for the first time a Treasury (and by implication, a central bank) is effectively hinting that not only are they willing to fiat-ize Bitcoin, but also have the symbolic BTC token (after all Bitcoin is a digital currency by definition) serve as a commodity trap. Because once enough gold-backed physical Bitcoins are locked up in some basement in the UK, who has the master key? That's a rhetorical question by the way.
Naturally, the UK Mint is not quite eager to disclose full details while the plan is still being finalized:
David Janczewski, head of new business at the Royal Mint confirmed it had been approached by the finance minister of Alderney to “explore the possibility of manufacturing a physical commemorative coin with a Bitcoin theme”.

“Discussions have not progressed further and at this stage it remains nothing more than a concept,” he added.

But the controversy around Bitcoin has made the Alderney plan a sensitive subject. The Treasury, which owns the Royal Mint, declined to comment on the plans. George Osborne, the British chancellor, also holds the title of Master of the Mint.
Since there is understandably much confusion over what the minting process of a physical gold-backed token representing a digital currency, with the backing of an entity that does the bidding of an issuer that only believes in fiat currencies, here is the FT with the blow by blow.
An independent company will provide the Bitcoins. If the price plunged, neither Alderney nor the Royal Mint would lose anything.

The company would put the Bitcoins in an escrow account at an agreed price.

Meanwhile, the Royal Mint would take customers’ orders for its minted Bitcoins and receive money from those coin sales.

The virtual Bitcoins backing the physical coins would be held in digital storage facilities by Alderney.

The Mint would issue the commemorative Bitcoin, paying for the value of the gold content itself. Alderney would receive royalties from sales of the coins.

Coins could be redeemed for sterling at any point in Alderney for the price of a Bitcoin on that day.
All we can do at this point is sit back in wonder and amusement as we hit the pinnacle of monetary confusion, whereby the UK Royal Mint, willing to take full advantage of retail confusion, will mix hard, soft and digital currency, and produce a product... that is locked away on an island that belongs to the UK.
And all we can say is "brilliant", because if there is a better plan to meld the sentiment of both hard and digital-currency (and hence, anti-fiat) advocates, and to redirect it in a "fiat" pathway, we have yet to hear it.