Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Sunday, March 30, 2014
Bitcoin Updates March 30 , 2014 --Mt. Gox Used Client Money for Operations and Extravagances, Allege Staff ..... Auroracoin Airdrop: Flop or too early to really tell ? BTC-e: trustworthy or recipe for disaster ? Items from before - reported trading ban in China effective April 15 , 2014 , UBS report on Bitcoin encouraging banks to " absorb "the benefits of bitcoin technolgy .......
Mt. Gox allegedly spent money from its clients’ deposits on operating expenses including extravagances as early as two years before it went bankrupt, according to new claims by employees.
In a series of exclusive interviewsgiven to Reuters in Tokyo, the small group of anonymous current and former Mt. Gox employees claim to have approached CEO Mark Karpeles about their concerns in early 2012, but their requests to view the company’s financial records were rebuffed.
Mt. Gox spent money, said Reuters‘ report, on rent in the same high-status Tokyo office building as Hulu and Google, office equipment that included a robot and a 3D printer, and a special edition Honda Civic imported for CEO Mark Karpeles from the UK.
This occurred just as the company, and bitcoin itself, were beginning to expand and gain interest from investors.
Staff kept in the dark
The employees, worried that Gox was spending more money than was coming in, requested a formal meeting with Karpeles and asked for proof that client deposit amounts were protected.
After a one-hour meeting, Karpeles assured them customer money was not being used improperly but would not provide any evidence, leaving them dissatisfied.
It fits with other unofficial reports of a general malaise in the office and personal dissatisfaction with Karpeles, who employees have claimed paid little attention to Mt. Gox’s exchange business and an excessive amount on side projects like the company’s planned Bitcoin Cafe and its transaction processing system.
Legally, Mt. Gox was under no obligation to release any financial details in the time it operated, since it was a privately-held company 88% owned by Karpeles.
Extensions and refusals
In other Gox news, the company website has been updated to announce that the deadline for an examination report issued by the Tokyo District Court has been extended to 9th May.
Late last week it was also revealed Karpeles is refusing to travel to the US for questioning, as part of the Gregory Greene lawsuit.
Greene and Joseph Lack had requested a US judge order Karpeles to the US to testify, “in order to protect domestic creditors.” Karpeles, apparently, has declined to go to the US and offered instead to go to Taiwan, for questioning by lawyers live or via video link.
Steven Woodrow, a lawyer for the plaintiffs in the case, expressed disapproval at Karpeles’ decision, saying anyone seeking protection from US courts should be prepared to enter the country to justify such protection in person.
The Auroracoin Airdrop took place on March 25th with the result in line with what was predicted by CryptoCoinsNews – A dramatic price drop. The Auroracoin Airdrop was a method of distributing 10.5 million Auroracoins to about 330,000 Icelanders or 31.8 Aurorcoins each. In some ways, the idea is quite good. Crypto coins could operate as a national currency. If they did, we would see how adoption by a nation could cause greater stability in price and also greatly increase the value of the coins. As such Auroracoin gained much popularity, and at one point its’ market cap was higher than that of Litecoin. In the CryptoCoinsNews article, we did point out that these market cap estimates were exaggerated because the premine was not yet distributed. The final result of the airdrop has been less than ideal with some calling it a scam, dramatic price falls, and finally a ‘fork’ that, though planned, caused a lot of fear among those less in the know.
Regarding the scam accusations on Bitcointalk it was theorized in a post that:
“The airdrop was just a premeditated smokescreen designed to provide the developers an opportunity to launder their stash of premined coins.”
Endless accusations and counterclaims appear in the thread.
The Auroracoin site claims 7% of the Airdrop coins are currently in circulation, which throws a wrench into most Auroracoin premine conspiracy theories. This means that, despite whatever action has happened in the exchange rate, some real Iceland natives have been introduced to Digital Currency through Auroracoin.
Check out this twitter conversation between people in Iceland that just discovered they could buy bacon with their Auroracoin.
It will be interesting to see what percent of the coins are ever claimed by the Icelanders. If there is a substantial distribution of coins to the Icelandic people then that would represent something that other coins have not yet achieved.
AuroraCoin Price Drop
The price of Auroracoin has fallen from a peak price of nearly 0.1 Bitcoins to a current value of less than 0.004 Bitcoins. That’s a 96% decline if you are counting. Cryptsy CEO Paul Vernon stated:
“It’s just market driven, The fact that there is a drop is because people are getting rid of the coins.”
Sadly the Icelanders will not be able to cash in at the peak value. If the price goes much lower, it might not be worth it to cash in at all. Nevertheless, at these prices the coin is cheap. This price fall scenario was predicted but what will happen next? Very optimistically, some Icelanders may choose to hold their coins, price will stabilize, and the coins might be used at some point.
The BitcoinTalk forum claims there have been several hard forks that were caused by a 51% attack. The fork is causing problems as blocks are no longer being found at the correct rate. These problems just increase the uncertainty and confusion surrounding the release. The Aurarocoin community is currently trying to resolve this problem by increasing mining power on the network. Most likely the forks can be resolved and price may hopefully hit a minimum somewhere above ZERO.
The Case For Digital Currencies In Iceland
A story of compelling merit almost gets left out due to all the drama and charges of scamming. Iceland has been a country ravaged by the central banking system, and in many ways represents the cause of all decentralized currencies. In the next chart we can see how the Icelandic currency the Krona has fallen in value due to central bank printing. This printing represents what we are constantly told are necessary ‘monetary controls’.
Icelandic Dropping Krona
Due to central bank printing the Iceland Krona has been devalued relative to gold by more than 99.99% in less than 50 years. The central bankers and their corporate publications argue that Bitcoin has deficiencies as a currency, but it is hard to imagine how it could not be an improvement in comparison to the results of their methodologies. In fact if a nation adopted Bitcoin that would add great value and stability to the currency, but the banksters cronies never seem to think of that argument. Auracoin offers Icelanders a distributed application (Dapp) that may help to save them from capital controls which force them to hand over foreign currency and reduces their freedom to engage in international trade.
We often see media pieces or supposed studies of Bitcoin that say things like it is ‘problematic’ that Bitcoin does not allow for monetary controls. In other words, these publications argue that centralized printing is necessary to constantly adjust inflation to some supposed centrally managed ideal. None, of this analysis, if you want to call it that, ever considers the staggering harm caused by these very same central bankers. Even if the central bank printing could work in the ideal, which it never does, it is prone to substantial abuses and often becomes a method of theft from poor to rich or to spend on nefarious government programs such as NSA snooping, government paid trolls, and drone attacks against innocent civilians.
BTC-e takes pride in remaining anonymous to its users and the whole world. Little is known about this exchange. Some scarce information can be found on the website, mostly about Bitcoin and how certain BTC-e services should be used. But what if we want to know what country BTC-e is operating from and who is behind it? There’s evidence that BTC-e is already benefiting from the Mt. Gox halt; a Tuesday update on BTC-e’s support website noted that the support system would be moved to a new platform “in order to cope with the increased number of client requests.” How safe is it to trade through an organisation that leaves everyone in the dark about all kinds of vital information?
So is this actually a problem? BTC-e is, of course, entitled to secrecy. Nobody can force the exchange to give out information and, as long as the exchange keeps working, most of its users won’t see any harm in this. But what will happens when the exchange starts facing problems? The website’s administrator will have to step up and make statements to ensure people keep faith in BTC-e’s services. That might be tricky, since it is impossible to contact this ‘person’. Not knowing his or her identity is one thing, but being completely absent on your own website is another matter. Especially taking into account the service this exchange lends to its users.
When one tries to contact the administrator, a window pops up with the following response: “Please use tickets to contact us about any questions & problems.” There is no email address easily available on the website. Several people have already tried to contact BTC-e about this lack of information, but the exchange fails to respond to any of these questions. Neither through the support system or BTC-e’s Twitter account.
Talking about that Twitter account, the contrast between its followers and people followed by the account itself is huge. Huge as in 13,000 followers versus zero people followed. A week ago, @btcecom was following one account, Charlie Shrem. The New York-based bitcoin entrepreneur was arrested in late January on charges of alleged links to the bitcoin-only drug market Silk Road. Today, the account follows no one.
Too many secrets
So exactly how dangerous is it to place money and trust in BTC-e? Nobody knows for sure. The fact that BTC-e’s location is unknown puts fear in the hearts of many traders. If anything were to happen, there would be no way to know whom to talk to. Protests like the ones outside the Mt. Gox office would prove impossible, since nobody knows where to find them. What laws does the exchange have to comply to? There’s a good chance BTC-e is based in Russia. That would be bad news, since holding ‘surrogate currency’ is illegal there. The Russian government has also indicated it is investigating BTC-e.
So far, there have been no real problems with BTC-e. Still, the amount of people that went there in the Mt. Gox aftermath make this a very large exchange. People put faith in BTC-e, they assume their money is safe there. We saw the same thing at Mt. Gox. If a similar scenario were to happen with BTC-e, this could result in a battle against unknown people. With Mt. Gox, we at least have Mark Karpeles to hold responsible.
Bottom line, beware of trading through BTC-e. When using it, always keep in mind that there’s a reason its founders are keeping secrets. In a world like BTC-e’s, keeping secrets usually isn’t a good thing…
Bitcoin trading accounts banned in China: report
A man walks past the People's Bank of China headquarters in Beijing, March 20. (Photo/CNS)
The People's Bank of China, the nation's central bank, has ordered banks and third-party payment companies to close all bitcoin trading accounts at more than 15 exchanges across the country, Shanghai-based China Business News reports.
The bank had recently issued a notice prohibiting domestic banks and third-party payment institutions from allowing bitcoin transactions, a source told the newspaper.
Accounts must be shut down by April 15, preventing investors in the currency from transferring funds, according to the source.
The measure was proposed during a meeting convened recently by the central bank to discuss ways to strengthen the prevention of risks involved in the peer-to-peer internet currency.
However, some industry insiders cast doubt on the feasibility of implementing such a ban.
Du Jun, co-founder of Huobi, China's busiest bitcoin exchange, told the newspaper that if companies' bank accounts were closed, then all records of transactions would go underground, which would make supervision more difficult.
Some industry insiders were of the view that some bitcoin exchanges had not received the notice yet.
"Our website runs normally and we have not yet received any notice," said Xu Mingxing, founding CEO of OKCoin, a bitcoin trading website.
The restrictions on the unregulated currency were the latest from the central bank, which has sought to limit dealings that might be used to launder money or evade capital controls. The central bank had issued a notice on Dec. 5, 2013 barring financial institutions and companies from receiving payments denominated in bitcoin, or making transactions with the currency or associated products.
The ban is a result of concerns that the digital currency might pose risks to China's capital controls and financial stability after a surge in trading in 2013 made the country the world's biggest trader of bitcoin, according to the paper.
The latest news had sent bitcoin prices down by nearly 10% to 3,300 yuan (US$532) as of March 27.
Global financial services firm UBS, a leading provider of retail and commercial banking services, released an extensive report on 28th March that weighed in on bitcoin’s potential to disrupt the existing financial system.
Entitled ‘Bitcoins and Banks’, the report concluded that bitcoin is not just a ‘problematic currency’ – though this garnered a mention in the headline, but more interestingly, a technology that could bring widespread benefits if co-opted by the traditional banking system.
The 31-page write-up suggested that bitcoin, as a currency or an alternative to traditional banking, poses little threat to traditional institutions, but that the underlying technology could be used to improve global payment systems provided the right business incentives could be identified.
“Setting aside its political agenda, we see Bitcoin as having some potential as a new transaction technology, where a bitcoin-like technology could provide a basis for a new shared payments and transfer system using existing currencies and securities. Such a system could reduce systemic costs, and provide faster, secure, transfers – particularly in the international arena.”
Though it was careful to describe such hypotheticals as “blue-sky ideas”, the bank noted that the distributed block chain “offers a robust and secure way of storing consumer funds”, and that current issues such as the computational intensity bitcoin requires are merely “quirks” inherent in the first implementations that could later be improved.
Further, it suggested that banks could benefit from realizing the technological implications of bitcoin:
“Rather than trying to develop a completely new financial system as Bitcoin is trying to do, it makes more sense that banks, as existing money managers, absorb the benefits of the technological innovation.”
Bitcoin technology has bright future
UBS noted that the block chain could just as easily use existing fiat currencies, and that such a system “offers a radical opportunity to drastically reduce duplication in the existing system”.
It even went so far as to offer an example of what this reimagined financial system would look like, describing a system whereby banks across the world maintained a ledger that kept track of public addresses and balances.
“Customers have control of their private keys, possibly with the option of authorizing their banks to handle their keys for them as well, while keeping the customer front-end broadly similar (i.e. with bank account numbers, etc).”
Derivatives and swaps could be attractive for banks
The report found bitcoin the currency most appealing for banks when used as an investment service, similar to an ETF, mentioning specifically the model suggested by the Winklevoss Bitcoin Trust.
In these instances, the authors noted that banks would not have to expose themselves to market risk, money laundering or other potential negatives.
Bitcoin derivatives, it said, could prove attractive, provided banks were allowed to legally participate in this sector. Further, the report stated that this could help reduce bitcoin’s volatility, while providing banks a source of fee revenue.
It seemed to suggested that this avenue would likely be one of the next ways the traditional financial system could look to safely explore alternative currencies and their market implications.
Credit card fees are more at risk
UBS suggested that the bigger risk was that a third party set up a “bitcoin-like payment system” that threatens to bring down credit card and money wire fees.
The report noted that cross-border transfers take days, whereas with the bitcoin block chain, they can take minutes. Further, it noted that bitcoin the technology has implemented security improvements that traditional service providers would need to adjust to.
“On a national level, a bitcoin-like system could enhance security and reduce fraud on an everyday level. In the US in particular, credit cards are regularly used for everyday transactions for convenience – but this leaves both the merchant and the banks open to risks of chargebacks.”
Banks, it noted, could adapt these advantages of the bitcoin system, but that they may be hesitant to do so as it would cannibalize current revenue.
“A possible incentive for banks to develop such a system would be increased money transfer volumes sufficient to offset decreased fees, or if costs are lowered enough to still boost profits, but any such projection would be highly speculative at this stage.”
Merchant acceptance has little appeal
UBS also took on the question of whether bitcoin the currency represents any cost savings for merchants. To tackle this question, it looked at the daily fees paid out to miners as a percentage of transaction volume, noting it has fluctuated over the last 15 months.
During this study period, it indicated that the 30-day moving average for these costs was 4%, though this excludes the added 1% fee merchants would need to pay to convert money to fiat.
“While these figures are more or less in line with credit card fees (which range from 1% to 3%), since the beginning of 2014, the rate has trended upwards and been significantly more volatile – peaking at 8.3% at the beginning of February.”
Notably, the report, as many other recent attempts on the subject, doesn’t take into account the services of companies like BitPay and Coinbase which handle such transactions directly; nor did it mention the success being enjoyed by early adopters such as Overstock and TigerDirect.
Disintermediation risk is low
Still, while UBS believes bitcoin the technology is promising, bitcoin the currency was given a thorough critique. In particular, UBS indicated that bitcoin “exists in a regulatory vacuum”, which is damaging to its global trust.
UBS indicated that smaller, local banks, particularly in emerging markets and countries with high economic turmoil faced the biggest threat from bitcoin the currency, but that economic turmoil is already a threat to traditional banking services, even without bitcoin.
“Without these stress factors, we see little threat from bitcoin.”
UBS noted that even those who used bitcoin the currency for transactions would likely require banking services such as deposits and lending from traditional outlets. It predicted that in the face of this pressure, either bitcoin would fail, or a bitcoin bank would emerge, which it suggested may be counterintuitive to its goal.
Still, the report noted that among certain groups, such as China (with its strict capital controls) and among libertarian thinkers, the bitcoin’s pros could outweigh the cons. Such examples were noted as part of a larger, three-part section that analyzed bitcoin as a store of value, means of exchange and unit of account.