Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Tuesday, March 25, 2014
Bitcoin and Crypotcoin news updates March 25 - 26 , 2014 .. h/t The Atlantic , IBT , Coin Desk and Cryptocoin news -- MT Gox might have found another 670,000 bitcoins ......Internal Revenue Service to Treat Digital Currencies as Property for Tax Purposes , discussions as to what this might mean ....... Zip Zap suspends BTC transactions ..... Auroracoin Airdrop: Will Iceland Embrace a National Digital Currency ..... Kraken Bitcoin Exchange Passes ‘Proof of Reserves’ Cryptographic Audit ..... Exchange Vircurex Freezes Withdrawals, Claims Lack of Reserves ..... ECB says Bitcoin is ‘economically insignificant’ ( Is that fear that I smell in the air from the ECB )
Bobby Lee has a theory on why most countries aren’t enacting new Bitcoin regulations.
While there are currently many different countries around the world making their own recommendations when it comes to how Bitcoin should be regulated, the reality of the situation is that most central banks and regulators are looking to the United States for guidance on this matter. Although many Bitcoin entrepreneurs in the United States have denounced their country’s stance on Bitcoin thus far, the truth of the matter is that New York City is still the financial center of the world. There has been a lack of real action from most countries around the world when it comes to Bitcoin’s legality as a currency or payment system, but we could see that change as the BitLicenses are sorted out in New York. For better or worse, most countries look towards the United States for guidance on AML, KYC, and other forms of financial regulation, so it would be a surprise to see this trend break when it comes to Bitcoin.
Waiting for the United States to Take Action
BTC China CEO Bobby Lee has stated that most countries are “probably mentally deferring to the United States” when it comes to Bitcoin regulation, and it would be quite difficult to find a source closer to the regulatory environment around cryptocurrency than the guy who is running one of the world’s largest Bitcoin exchanges. There was a bit of a panic in the Bitcoin community after China seemingly banned all Bitcoin transactions back in December, but it turns out that theChinese government is simply keeping banks out of the mix for now. This makes sense in a country that likes to have immense control over the economy in order to prevent large bubbles that lead to epic collapses. Whether or not these kinds of restrictions actually work is another story. At the end of the day, most other states in the US will likely look to New York for guidance when it comes to new Bitcoin regulations, which means Financial Superintendent Ben Lawskycould be the most important man in the world when it comes to Bitcoin regulation right now. What he and the rest of the New York Department of Financial Services decide to do will have a ripple effect through the United States and the rest of the world.
CryptoRush support worker DogeyMcDoge leaked inside information on the exchange. He included this screenshot as proof of the troubles CryptoRush is facing.
Big stories often take some time to emerge. When they see the light, it’s usually just the tip of the iceberg.Mt. Gox was like this and CryptoRush is just the same. Another leak appeared today, this time from one of the exchange’s support workers.
One month of hacking
DogeyMcDoge has been working for CryptoRush since late February. When looking back on his first month, it’s clear that this was an exciting job to say the least. In only a month’s time, he saw the exchange get hacked twice. On top of that, the owner’s ways of recovering losses was ‘unorthodox’.
“Around the 11th of March, I received a message from Devianttwo: “had something bad happen. All I’m saying.” I was brought into a Skype call and told that we had been hacked. I was shocked. They told me the amount, and I did not sleep well that night.”
The first hacking he witnessed cost the exchange 950 Bitcoins and 2500 Litecoins. A large amount considering CryptoRush is one of the smaller exchanges.
“Someone with an IP from Ukraine. They were looking into it, thought they found the guy. Thought they could get the BTC back. Maybe it was shock. Maybe it was just me being naive. But I believed them.”
When you work at a place like this, you feel responsible about the many customers that place their funds in your hands. Even as a support worker, you’ll feel guilty whenever something like this happens. You know how it would feel if your coins would suddenly disappear. You’ve seen exchanges get hacked before, but this time, you are part of that exchange. So you try to replace that feeling of guilt by something else. Some form of hope in a happy ending. You know it’s naive, but it’s damn well better than accepting the truth and who knows…
So-called solution
The next stage is the so-called solution. Something has to be done, and anything will work as long as people get their money back.
“I was informed of the plan to announce CryptoRushShares, a currency that would pay % fees to holders. And the kicker? Fyrstikken would announce 60% ownership of them. But in the back room?
[3/14/2014 10:48:15 PM]
:basically
: he’s helping me gain capital back from share buyers
: he started by announcing 60% shareholding
: but he actually owns only 10%”
I guess it happens often. A ‘small lie’ in order to get things done. Nobody would give a damn if it worked so why bother? Beats doing nothing. Obviously a small lie remains a lie, especially in a situation like this. Full transparency would be what every hacked exchange should go for, but that’s rarely the case. It’s probably harder when you’re on the other end of the table, trying to restore faith into your exchange.
Unfortunately, the lie didn’t help CryptoRush.
“And so time goes on, and things look OK at first. But then the BTC wallet runs out. Alex123 and fraggyb did not know of our insolvency. Daemon problems we were told was the answer.
The guilt was starting to build up inside of me. I answered very few tickets the week of the 16th. I was conflicted, but I worked at my full time job >40 hours that week, so it kept my mind off of things a little. The issues continued. I kept suggesting ways we could maybe get some BTC back, arbitrage, etc. We didn’t even have enough funds for that. I wanted so bad for the exchange to stay afloat, thinking “Maybe tomorrow will bring us back our volume!” But alas, the problems with Zeit, and BTC withdrawals killed our volume. There was no coming back.”
As if their problems weren’t hard enough, another drama unfolded. The one we witnessed yesterday. Due to a wallet that wasn’t updated fast enough, people were able to withdraw more Blackcoins than they had in their account. Drama unfolded; the rest is history.
DogeyMcDoge’s confession is real. CryptoRush’s admins provided proof for this by tweetingabout it.
“#CryptoRush@TheCryptoRush Official announcement coming in the next 24-48 hours in regards to DogeyMcDoge’s information le
On Tuesday, the Internal Revenue Service ruled that it would tax Bitcoin as a property, not a currency.
Some see the move as helping to bring the medium into the mainstream. Now that bitcoins can be taxed, they’re reportable, and the legal ramifications of buying and selling a coin are clear.
The IRS’s decision, though, may end one of the great dreams of Bitcoin. The U.S. government will now subject owners of individual bitcoins to capital gains taxes: What they gain on buying or selling a bitcoin, they must pay taxes on.
That’s a big deal, perhaps bigger than it seems, because—as a new blog post byGeorgetown Law professor Adam J. Levitin explains—it means Bitcoin can no longer function as a digital currency.
To tax Bitcoin as property, he says, destroys its fungibility: One Bitcoin can no longer be exchanged for another.
This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value. In reverse, that means: As a store of value, Bitcoin’s price had to be predictably stable, such that you could neglect to spend a single bitcoin and know its value would not fluctuate wildly. In late 2013, many argued that Bitcoin’s quickly rising price kept it from functioning as a dependable store of value, but there were no technical or regulatory reasons it couldn’t function as such eventually. As a medium of exchange,Bitcoin must be commonly desired. People must want to have Bitcoin; others must want to spend it. (Thus, it avoids the ‘coincidence of wants’ problem—in order to trade, both people don’t need to want something the other person has. Instead of trading rent for food, for example, you can rent living space from a landlord with money, and your landlord can use that money to buy food.) Finally, as a unit of account, Bitcoin had to have a standard numerical value to be used to measure profits and settle debts. It had to be divisible (which it was, since smaller units of bitcoin could be traded); it had to be verifiable (which it was—this formed the basis of its cryptosecurity), and finally, it had to be fungible, meaning that every bitcoin was the same as every other bitcoin.
And that’s where it gets interesting.
Something like a $10 bill, for example, is fungible. The $10 bill you got from an ATM is the same as the $10 bill you got back as change at the ice cream parlor is the same as the $10 bill you (on a very lucky day) find on the street. It does not matter which $10 bill you spend.
So $10 bills, in other words, are interchangeable. This is why we don’t use horses, bananas, or hand-painted ceramic ashtrays as currency. (The hand-painted ceramic ashtray you got from an ATM is unlikely to be of the same quality as the one you found on the street. This is also why art doesn’t make a good currency.)
“So,” asks Levitin, “what does this have to do with Bitcoin?”
The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. […] This means Bitcoins are not fungible, and that makes it unworkable as a currency.
And then:
If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn't work as a commercial medium of exchange.
It still works as a speculative medium, Levitin writes. But one bitcoin, per Levitin, no longer equals one bitcoin no longer equals one bitcoin. Every bitcoin you own is a little different.
MtGox CEO Mark Karpeles announces the request for bankruptcy protection, blaming "a weakness in our system."Reuters
MtGox has confirmed for the first time that a criminal investigation is taking place around the loss of millions of pounds worth of bitcoins at the troubled exchange.
In a brief statement on its website on Wednesday, Mark Karpeles CEO said that following MtGox's application for bankruptcy protection in Japan at the end of last month, the exchange "consulted with the metropolitan police department with regard to the disappearance of bitcoins which was one of the causes for said application."
According to Reuters, MtGox has been working with the police on this for the last two days.
The announcement was not the one which many customers of MtGox had been hoping for, following a tweet from Eren Canarslan, a Turkish investment banker who said he had been in touch with Karpeles, suggesting MtGox had discovered another 670,000 bitcoins.
The Superintendencia Financiera de Colombia (SFC), the government body responsible for overseeing financial systems in the South American nation, issued new guidance on its treatment of bitcoin and other digital currencies on Wednesday, 26th March.
Notably, the release was distributed one day after it was was originally expected on Tuesday, 25th March.
Despite reports that the SFC could enact harsh restrictions on bitcoin – one report suggested it would go so far as to ban bitcoin transactions altogether, the SFC issued what amounted to a boilerplate warning to consumers, and blocked financial institutions from holding, investing in or brokering bitcoin transactions.
“The Bitcoin is an asset that has no equivalent statutory legal tender in Colombia since it was not recognized as currency in the country.”
The release indicated that bitcoin fails to meet the definition of a currency according to the criteria set forth by the International Monetary Fund (IMF), as it is not backed by a central bank.
Colombia’s bitcoin warning
The SFC listed a host of concerns about bitcoin, naming the now-bankrupt Japan-based bitcoin exchange Mt. Gox, which imposed significant losses on users when it suddenly became insolvent earlier this year.
Further, the SFC reiterated that digital currencies can be used for illicit means, including money laundering and terrorist financing, and that users who are victims of theft are not able to achieve restitution through traditional means.
Read a translation of the warning:
“This Office notes that supervised entities are not authorized to guard, invest or mediate these instruments. Additionally it is for people to know and accept the risks inherent in their operations with ‘virtual currency’ risks.”
Community reaction
Carlos Mesa, director of local digitcal currency avocacy groupBitcoinColombia.org, spoke to CoinDesk about the news, noting that Colombia ended up adopting similar measures to those in China, a market where bitcoin is once again growing.
Said Mesa:
“We see this with as something positive. I know many don’t, but this may be the first step for Colombia take this topic more seriously, raise awareness and look forward to regulation.”
Roman Parra, of Colombia-based bitcoin buying and selling service providerBitcoin Suramerica, also greeted the news as a positive for the local ecosystem, saying:
“I think this is a good step on the right direction, because the goverment now recognizes that BTC exists and is helping us to make it public and avoiding in some way that unscrupulous people try to scam using it.”
Notably, Mesa had earlier scheduled a meeting with the SFC to be held this upcoming Friday, however, this has since been canceled. The local activist is, however, optimistic that he will have additional opportunities to work with the SFC as it explores the issue of digital currencies further.
The Internal Revenue Service (IRS) issued a new notice meant to clarify the tax treatment of digital currencies on Tuesday, 25th March.
Most notably, the US tax body, which has long been silent on the issue, indicated that it plans to treat digital currencies as property, not currency.
According to the IRS, the classification means that:
Digital currency payments made to independent contractors and service providers must be reported via Form 1099.
Profits and losses from the sale of digital currencies are subject to capital gains when being used as capital assets.
Wages paid to employees in digital currencies are taxable and must be reported.
The guidance comes ahead of the looming 15th April deadline for individual tax filings for fiscal year 2013.
In total, the IRS released answers to 16 frequently asked questions, including how the fair market value of digital currency assets will be evaluated, whether miners are subject to business or self-employment taxes, and whether penalties would be imposed on taxpayers who did not abide by these rules prior to the release.
Said the IRS:
“In some environments, virtual currency operates like ‘real’ currency – i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance – but it does not have legal tender status in any jurisdiction.
The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.”
For more information, read the release in full below.
_____
IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply
IR-2014-36, March. 25, 2014
WASHINGTON – The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as Bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.
In some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.
The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.
Among other things, this means that:
Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
And here is a full Q&A:
SECTION 4. FREQUENTLY ASKED QUESTIONS
Q-1: How is virtual currency treated for federal tax purposes? A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Q-2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws? A-2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
Q-3: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency? A-3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.
Q-4: What is the basis of virtual currency received as payment for goods or services in Q&A-3? A-4: The basis of virtual currency that a taxpayer receives as payment for goods or servicesin Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.
Q-5: How is the fair market value of virtual currency determined? A-5: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt.
If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property? A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.
The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.
Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency? A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets.
A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.
Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?
A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.
Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?
A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self-employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.
Q-10: Does virtual currency received by an independent contractor for performing services constitute self‑employment income? A-10: Yes. Generally, self‑employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self‑employment income and is subject to the self-employment tax. See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby.
Q-11: Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?
A-11: Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.
Q-12: Is a payment made using virtual currency subject to information reporting? A-12: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.
Q-13: Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?
A-13: Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment.
The payment recipient may have income even if the recipient does not receive a Form 1099-MISC. See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information. For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Q-14: Are payments made using virtual currency subject to backup withholding? A-14: Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee.
The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.
Q-15: Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?
A-15: Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO).
A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.
When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.
See The Third Party Information Reporting Center, http://www.irs.gov/Tax-Professionals/Third-Party-Reporting-Information-Center, for more information on reporting transactions on Form 1099-K.
Q-16: Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014? A-16: Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662.
In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.
Global cash payment network ZipZaphas temporarily halted digital currency transactions, after partner and non-bitcoin payment processorPayPoint said it needed more clarification on surrounding regulations.
ZipZap CEO Alan Safahi told CoinDesk the company had not ended its relationship with PayPoint, adding that it was still working with them for non-digital currency clients, and to add more payment locations. He said such issues were a fact of life for bitcoin businesses who needed to operate within the traditional fiat world. He added:
“They only halted digital currency processing until they have better legal clarification from government which we hope to have within weeks. Meanwhile, we are pursuing other options as well.”
Cash for bitcoins
ZipZap had allowed customers to buy bitcoins with cash by first registering at its site and verifying ID, printing out a barcode on a payment slip and then taking it to a cashier at a physical location to hand over the money.
PayPoint had reportedly halted deposits to ZipZap until the UK government and the financial conduct authority provide legal clarity on digital currencies.
Though the process of printing slips and visiting a store might seem a cumbersome way to acquire such currency, it remained simpler and much less risky then dealing with online bitcoin exchanges.
Identity and address verification requirements for exchanges have increased markedly in the past year and even seasoned bitcoin users have become reluctant to trust them with large amounts of money or customers’ personal banking details.
ZipZap allowed customers to transact within their own country, as long as it was one of the five, and with registered businesses.
Banks OK, others still wary
The company had apparently had no problems with its partners in the traditional banking world, but payment processors like PayPoint and PayPal have been treading far more cautiously with digital currency related activities.
If a solution cannot be found with PayPoint, there may still be other payment processing options for ZipZap in the UK. There hasn’t been any overt pressure from the UK’s authorities for either financial institutions or the public to avoid bitcoin transactions.
Despite hints about eliminating sales tax, there is also no legislation related tobitcoin in the UK as yet, which appears to leave businesses free to try new models but which can actually stifle innovation, as entrepreneurs and investors become reluctant to enter the unknown territory.
ZipZap, still a relatively new business, has been trying to grow across the UK and other European markets. However, it may now focus on other overseas markets (like the US) after finding Europe’s environment too challenging.
The company’s site lists its headquarters in San Francisco, and it also has operations in India and Argentina.
Auroracoin, the “cryptocurrency for Iceland”, will begin distributing auroracoins to the country’s citizens this week, starting tomorrow, 25th March.
The distribution, which is being called Airdrop, will send 50% of the total auroracoins in circulation to the country’s populace. Icelandic residents that enter their permanent resident ID on auroracoin’s official website will receive 31.8 AUR (roughly $385 at press time).
The fourth-place digital currency in terms of overall market cap, Auroracoin quickly rose to prominence amongst the myriad new digital currencies for its unique approach to community building. Further, as it climbed up the market cap leaderboard, auroracoin spawned a wave of imitators that has so far includedscotcoin and spaincoin, among others.
Part of the reason for the interest was the altcoin’s strong nationalistic message.
Auroracoin’s creator, Baldur Friggjar Óðinsson, told CoinDesk the purpose is to give Iceland an alternative form of money to the Icelandic krona, or ISK:
“They [the government] want to force people to use a ruined currency, the ISK, of which they have printed way too much and which will be heavily sold when people will be free to do so.”
This idea that digital currency could be a liberating force, quickly spread.
But, this week’s Airdop may have the final say on whether or not it has a lasting impact on Iceland and the digital currency community in 2014 and beyond.
Over the next four months, everyone in Iceland with valid permanent residency ID will be able to obtain 31.8 auroracoin. After that, there will be two additional stages where remaining AUR will be distributed. That amount will come from the remainder of the total premined 10.5M AUR set aside for Airdrop.
The stages are:
Stage 1 – Every Icelander will be able to claim a gift from me [Óðinsson] of 31.8 AUR, commencing on midnight March 25th. This stage will last 4 months.
Stage 2 – The Airdrop is reset. Every Icelander will be able to claim a part of the coins leftover from Stage 1 in the premine addresses. The amount of coins shall be calculated in the following way: (Stage 1 remaining coins / 330,000 = coins awarded). In this stage and the following, both the original recipients of the coins will be able to retrieve their gifts, as well as other Icelanders. This stage will last another 4 months.
Stage 3 - The Airdrop is reset again. Every Icelander will again be able to claim a part of the coins, leftover from Stage 2 in the premine addresses. The amount of coins shall be calculated in the following way: (Stage 2 remaining coins / 330,000 = coins awarded). This stage will last 4 months. At all stages the claimed coins will be a irreversible gift with full transfer of ownership.
Óðinsson warns on the blueprint page itself that there are uncertainties with Airdrop:
“I can not guarantee a 100% fair outcome of the Airdrop and no claim can be made against me if there are imperfections in the process.”
Experts offer predictions
Auroracoin is an intruiging effort to many, not in terms of technological innovation, but in how it could mark the beginning of a new precedent for digital currency dispersion and marketing.
Travis Skweres, the CEO of altcoin exchange CoinMKT, addressed this point when speaking to CoinDesk:
“One of the biggest problems that bitcoin faces is distribution. If [auroracoin] is wildly successful, I think we will see this model emulated in the future, it could be a very very big deal.”
Auroracoin is challenged by a lack of awareness, however, argues Dan Held, co-founder of Zeroblock and a product manager at Blockchain.info.
“I think the concept of adding cryptocurrency as a meta layer on top of a pre-existing demographic is a cool idea, [but] I highly doubt more than 1% of the Icelandic population even knows about it.”
Others indicate that auroracoin’s core technology will be its biggest obstacle.
Peter Bushnell, the founder of feathercoin, noted that scrypt ASICs, which may lead to centralized mining operations, are coming soon.
“I remember several SHA-256 coins being devastated by SHA-256 ASICs when they turned up. I am not sure why auroracoin or any other coin right now would launch scrypt coins.”
Still, until it proves successful, some simply view it as an interesting novelty.
Adam Draper, whose Boost VC incubator accelerates bitcoin startups, summed up this view, saying:
“Like bitcoin it is an experiment, however, they are claiming a nationality. I think that is an interesting concept.”
The case for auroracoin
Still, there is a powerful incentive for the country to embrace auroracoin.
In the wake of the 2008 global economic crisis when Iceland’s banks defaulted on $85b, the Iceland government enacted capital controls to protect the krona.
Over the past three years, Iceland’s rate of inflation has been over 4% annually.
Since enacting capital controls, Iceland has maintained a larger money supply. Source: Trading Economics
In 2009 the IMF published a report that Iceland’s capital controls were actually helping the country, but that over time capital outflow restrictions should be removed gradually.
But, the government has not acted on this advice yet, and there are concerns that the continued controls could cause massive sell-offs of the Krona in the future. A mix of annually high inflation numbers with anxiety about capital controls is the impetus for auroracoin as an alternative for Iceland’s population.
Óðinsson says that auroracoin is a tool to give some power back to Iceland’s people:
“One of the most important power in society is the power over money. That is why the government monopolizes the Icelandic currency.”
Government views
For now, it’s clear that the existing digital currency community has been the most receptive to auroracoin’s message.
Vice Chair of Economic Affairs and Trade, Pétur Blöndal, told a media outlet at the time that ”consumers were not warned of this medium,” as a method of exchange, while the chairman of the committee, Frosti Sigurjónsson, has written on his website that he believes auroracoin is a scam.
Predicting the results
Theories abound on how tomorrow’s airdrop will be received. Given that the general public in Iceland probably knows very little about auroracoin, much less digital currencies, many are anticipating tepid results.
Of course, a number of people could go claim their coins, dump them on the market and fill up the sell order book, dropping the price. Though counterintuitive to the purpose of auroracoin, the fact of the matter is, it’s free money for people living in Iceland, and those inclined will see the opportunity to cash out.
Exchanges see the opportunity, too. UK-based bitcoin buying and selling service Bittylicious has announced today that it will be bringing on auroracoin. Others will do so as well.
Auroracoin, in effect, will allow Icelanders to circumvent currency controls. The question is whether it will cause the price of each coin to drop precipitously.
Bitcoin exchange Kraken has passed a cryptographically verifiable proof of reserves audit with flying colours.
The audit, which was carried out by Stefan Thomas on 11th and 22nd of March, proved that more than 100% of Kraken’s bitcoins are held in reserve.
The process was designed to allow the auditor to verify that the total amount of bitcoins held by Kraken matches the amount required to cover an anonymized set of customer balances.
Covering all balances
Thomas said the audit was very strict, but at the same time it maintained “absolute privacy” for customers. He also added that Kraken have expressed interest in conducting regular audits in the future, with different auditors each time. Thomas said:
“I am attesting to is the root hash of a merkle tree containing all balances that were considered in the audit. If you are a customer of Kraken, you’ll be able to verify using open-source tools that your balance at the time of the audit is part of this root hash. If it is and if you believe that I am trustworthy, then you can be confident that your balance was covered by 100% reserves at the time of the audit.”
Using the ‘Merkle Tree’ technique originally proposed by bitcoin developer Greg Maxwell, the auditor went on to explain the gritty technical details. He was provided with a JSON file from Kraken, which contained the list of the exchange’s addresses and balances. The file was then compared against a copy of the block chain.
The results were in order, Thomas concluded: ”The actual holdings were very slightly (< 0.5%) above the required holdings, meaning Kraken had greater than 100% reserves at the audit block height.”
A competitive edge
Following the Mt. Gox crisis, many exchanges are keen to distance themselves from the troubled exchange and other bitcoin outfits with a chequered track record. Security and transparency have become selling points, hence exchanges appear to be doing their best to reassure investors on a regular basis.
Earlier this month UK-registered bitcoin exchange Bitstamp released the results of its own financial audit, which found that it held 100% of its validated BTC balance and USD funds. No issues were raised by the auditors.
Bitstamp CEO Nejc Kodrič told CoinDesk that his company plans to perform regular audits, with quarterly results posted on the Bitstamp website.
As investors demand more security and transparency, exchanges have to oblige or suffer the consequences and lose their competitive edge. Low fees are just one way of remaining competitive, but transparency and sound reporting practices might prove more important in the long run.
Beijing-based virtual currency exchange Vircurex has frozen most of its digital currency withdrawalseffective immediately, claiming it no longer has the reserves to cover customer requests.
The freeze will affect all bitcoin, litecoin, feathercoin and terracoin withdrawals. A message on Vircurex’s site says it will create a new balance type called ‘Frozen Funds’ covering all balances in the aforementioned currencies. The company maintains it won’t be shutting down, saying it intends to “gradually pay back the losses”.
That Vircurex had a reserve shortfall had been known for some time, though not the exact amount. It froze BTC/LTC withdrawals in January 2013 after reporting that wallets had been compromised, but still allowed deposits in those currencies to continue. The attacker had apparently exploited a vulnerability in Ruby on Rails posted online just the day before.
The company pledged to cover the losses from its own income and had been doing so until yesterday, when “large fund withdrawals in the last weeks” completely depleted its cold wallet reserves.
Similarities
While Vircurex’s volumes and deposits were nowhere near Mt. Gox’s levels, the story is significant thanks to the similarities: hackers supposedly lift thousands of bitcoins from an exchange, the exchange desperately tries to cover the loss before users sense something more serious is up and start a run, leading to a withdrawal freeze.
It has raised questions about exchanges operating fractional reserve systems, either openly (as in Vircurex’s case) or covertly, in both cases due to a theft.
Proof of reserves
There are now calls for online exchanges and wallets to prove their reserves somehow, possibly using a cryptographically secure proof of inclusion and proof of reserves system such as a Merkle Tree, or hash tree.
South Korean exchange Korbit announced recently it would be the first major exchange to offer such a service with its opt-in ‘BitTrust’ system. Since 21st March, 57 of Korbit’s users have signed up to participate, covering a total balance of over 580 BTC. It has kept BitTrust opt-in only for now due to trade-off in transparency vs. 100% balance privacy.
Long standing exchange
Vircurex opened for business in October 2011, and traded between BTC, USD or EUR, plus up to 18 other cryptocurrencies against each other, eliminating some less popular coins over time.
Users on bitcointalk first started noticing bugs interfering with trading and withdrawals around late February and early March, which grew in number until this week’s problems. The site then apparently stopped any-to-any currency trades late last week before announcing the freeze.
Losses will be paid back according to a ‘top-down/bottom-up’ distribution logic, according to the site announcement. That means 50% of available funds will be used to pay the largest balance holders and the other 50% the smallest, meeting somewhere in between.
“All users will eventually receive their funds, though the timeframe depends on the monthly volume available,” the announcement continued, saying the logic guaranteed new users would not be penalized and thus supporting the platform’s operations until all amounts have been returned.
The European Central Bank (ECB) has always remained silent on the topic of virtual currencies. Strange because, as a European, I know how the ECB likes to have an opinion on all financial things happening on the continent. One would think the growing adoption rate of Bitcoin would urge the European monetary authority to take a stand on this. Especially given the fact that we’re talking about Bitcoin here, a virtual currency that authorities tend to find controversial.
This changed on Monday, when ECB board member Yves Mersch delivered a prepared speech to a conference held by the Bank of Italy in Rome. Everyone was expecting another speech on how dangerous cryptocurrencies are and why people should steer clear of Bitcoin and the exchanges. Imagine the surprise when Mersch called Bitcoin economically unimportant.
“Bitcoin has gained significant value recently. Even so, the ECB stands by its 2012 report where it concluded that these alternative currencies still remain economically unimportant.” Said Mersch. This statement means that the ECB won’t change any of the bank’s policies because of the presence and usage of Bitcoin.
“In Europe, virtual currencies do not pose a risk to price stability or financial stability,” said Mersch. “Nevertheless, we are closely following developments and keeping in touch with other authorities.” He added that they “are an interesting phenomenon and should not be ignored or dismissed.”
After calling Bitcoin unimportant, ignoring the size of the cryptocurrency’s growth over the last year, he started on the obligatory words everyone was waiting for. “The ECB wants to repeat what other banks have said already. We want to warn people about Bitcoin. Speculation, security vulnerabilities and price volatility pose significant risks to consumers and investors.” said Mersch.
The Federal Reserve and the Treasury Department have confirmed what Mersch said in his speech. They also put focus on ‘Bitcoin’s insignificance’ to monetary policies, claiming this is the main reason the United States haven’t regulated Bitcoin yet.
Not all bad news
It seems some authorities are going with this ‘we don’t really care’-approach now. Calling Bitcoin unimportant and claiming it poses no threat whatsoever to the banking system could take it out of the spotlight. When you want something to lose its appeal, you simply make it abundant. Most Bitcoin fanatics will see through this, but maybe other people won’t.
The ECB and Federal Reserve are not the only authorities talking about Bitcoin at the moment. Last week, Thailand warned its people (again) for the potential risks involving Bitcoin; Columbia may be banning Bitcoin and China wants to strengthen oversight of Bitcoin. This last one was, wrongly, interpreted by the community as a ban on all Bitcoin transactions and pushed Bitcoin value down. Price volatility may be what governments are warning for, but it seems the authorities themselves are often cause of it.
Not all news is bad though. The Netherlands, for example, take a rather positive stance towards virtual currencies. They’re not openly shouting how good the concept is, but with initiatives likeBitcoin Boulevard in The Hague and a minister who openly dismisses an appeal to ban Bitcoin, it’s clear that the dutch don’t see Bitcoin as a threat. Australia shows Bitcoin can be great for business as well. With these recent developments in mind, the ECB’s stand on Bitcoin seems a little ignorant.
On Tuesday, the Internal Revenue Service ruled that it would tax Bitcoin as a property, not a currency.
