Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, April 30, 2014
Bitcoin news April 30 , 2014 -- US Lawyer: Mt. Gox Settlement Proposal Could Make Former Users Whole ....... Why Banks Hate Bitcoin, What Banks Do And Why We No Longer Need Them ...... MasterCard pays lobbyists to focus on Bitcoin ........ New US Treasury FinCEN Ruling Clarifies , Money Transmission Status Of Renting Bitcoin , Miners And Hashing Power
The ongoing legal battle over the future of Mt. Gox took a sudden turnon 29th April, when it was announced that Sunlot Holdings, the investor group seeking to buy what remains of the business, and lawyers representing the company’s global consumer creditors had struck a settlement deal.
Under that proposal, former exchange users would support Sunlot’s bid to buy and relaunch Mt. Gox in exchange for a 16.5% equity stake in the new business and settle with key defendants including former Mt. Gox chief marketing officer Gonzague Gay-Bouchery and original site creator and equity stakeholder Jed McCaleb.
But, while potentially promising for frustrated former exchange users, the plan is not guaranteed.
As Jay Edelson, managing partner of the Colorado-based law firm heading the US class action suit, explained to CoinDesk, tomorrow’s 1st May hearing will provide the first chance for the supervising judge to decide if the proposal moves forward.
“The judge will consider a number of options. The judge can accept the proposal, reject the settlement or take more time.”
Still, Edelson is confident in the plan put forth by the international legal representation working on behalf of Mt. Gox’s consumer creditors, and hopes it will be well-received due the benefits it could provide to former exchange users, some of whom have lost thousands or even millions in BTC as a result of the exchange’s collapse.
“We think that the overall plan gives consumers and creditors the best chance of being made whole or even more than whole if things go well.”
Striking the deal
Speaking to CoinDesk, Edelson elaborated on the settlement, saying that it was effectively kick-started by the sudden 16th April decision by the Japanese courts to change the status of Mt. Gox’s bankruptcy from a restructuring to a liquidation.
As a result, Edelson said the timing of key efforts needed to be accelerated.
Edelson went on to describe how the combined legal representation of Mt. Gox’s international consumer creditors and Sunlot worked day and night mediating the deal with a retired federal judge, in what he called a “larger process” than what has been portrayed in the media.
Continuing action against Karpeles
While the settlement would end the case against certain defendants, other prosecutions will move forward.
For example, Edelson said that lawyers representing international creditors will be continuing actions against CEO Mark Karpeles, Mt. Gox’s parent company Tibanne, Japan-based megabank Mizudo and other as-yet-unnamed defendants.
Edelson suggested that the settlement could also improve the position of class members against these entities, stating:
“As part of the deal, Gay-Bouchery and McCaleb and Sunlot have agreed to cooperate in the prosecution. I’m sure you can imagine that having Gay-Bouchery agree to tell us all he knows is incredibly helpful.”
Edelson also reiterated that the consumer creditors he represents will still be pursuing the funds allegedly lost by the exchange in the run-up to its insolvency.
Edelson told CoinDesk that he believes that other entities may be holding assets that belong to members of the class he represents, and that efforts are being made to determine the validity of this assertion.
“We are pursuing that through the class action and Sunlot. If they are approved to take over the company, they also have an independent obligation to pursue that, so we’ll be able to go after the money in two different ways.”
Rights of former users remain
Edelson also made clear that former exchange users who have previously not exercised their rights through any of the associated class actions are still free to do so. For instance, he noted that an international creditors committee is being formed in an attempt to contact as many affected parties as possible.
US and Canada classes are still accepting former users who may wish to join, Edelson said, while existing class members will have the ability to opt out as they wish as more individual cases in the ongoing prosecution emerge.
Banks have been a part of our society for so long that we have forgotten what exactly they do. We think of them as bastions of security and stability. They hate Bitcoin because of it’s inherent instability, right? Wrong. There is more to this than meets the eye.
Economists are now asking the question: Do we need banks? The answers they are coming up with is somewhat surprising. There is a misunderstanding out there, of the role of banks today and, in particular, where all the money they loan out, comes from. TheBank of England recently published a paper calledMoney Creation in the Modern Economy that shows Banks are, in fact, not in the business of being an intermediary between people who have surplus of money and people who have a shortage of money (e.i. depositors and borrowers). A bank is, rather, in the business of creating money.
Let me explain. When a Bank, we will call it, The Fool’s Mutual Bank, gives someone a loan of $1,000, what they do is create a deposit of $1,000 in the deposit account of the person that gets the loan, and this creates a sum of $1,000. The bank will continue to create money, by creating deposits, and the only time that this will fail to occur would be in the event that a consumer borrows a sum of money and uses it to pay off a debt to another bank, thereby creating nothing.
Banks, in their task of creating money, need to be managed, as it would be unacceptable to create an unlimited supply of money. (Look up Weimar Republic or Zimbabwe inflation). Banks are controlled in how much money they can create by Central Banks and Financial Regulators. A policy of careful regulation of the activities of banks ensures financial stability and, in particular, ensures that the volume of money created by commercial banks, is in line with the monetary policy that the central bank has decided upon. Central banks want stable economic performance and one of the tools available to them is the management of money creation; they carry out this function by the control of bank’s interest rates.
Essentially, states have outsourced the creation of money to commercial banks and the central banks control them in carrying out this function.
Here is my question: “Why do we need commercial banks to carry out money creation when money creation is, in fact, a function of the State?”
The Financial Times columnist, Martin Wolf, has shown how giving banks the power to create money can lead to credit bubbles and squeezes. Banks carry out the function of the creation of money, but commercial considerations can mean that they are not efficient in carrying out this task.
Banks need to return a profit, and to ensure this need is met, they lend money. Low risk loans return low rates of interest and high risk loans return high rates of interest. If they loan too much money to poor risks, they become exposed and the State must step in to save them. Wolf argues that banks should just be clearing houses for payments and deposits and that the power to create money should be taken from them. The economist, John Cochrane, recently advanced the same idea in the work 100% Reserve Banking.
Banks will still be able to give loans of money, but we must ensure that the assets held, by the bank, are no greater than the loans out. This also means that depositors will not have 100% access to their funds; they may have to wait, as their money has probably been loaned out. Will this work? Yes. Will it avoid a future financial banking crisis, yes it will. Will we do it? Probably not. At least, it won’t be seriously considered until the next crisis hits us. Many of us are of the opinion that the previous, or current recession (Matter of opinion) is still killing us economically.
Joseph Stiglitz, when he was asked if we will learn from the past financial crisis, answered that, in the short-term, we will learn a great deal, in the medium-term, we will learn a certain amount, in the long-term, we will learn absolutely nothing. Banks have controlled the supply of money for so long that they won’t give it up easily. Imposing a 100% capital requirement on banks will simply kill most banks and although it has merits for society’s future financial security, and has been considered by the IMF in 2012, the banks will not currently countenance it. Bitcoin is a decentralized cryptocurrency, not in the control of banks, and people are wondering why banks hate Bitcoin. Now you know.
Will we ever pay with bitcoins by using our credit card? MasterCard is officially paying lobbyists to focus on Bitcoin.
A few days ago, Coindesk reported on the first Bitcoin debit card being made by Bitcoin startup Xapo. In the article, it was rumored Xapo was tied toMastercard in this venture. Soon after publishing, the article was updated with an official notice from Mastercard stating the credit card company had no ties to Xapo or Bitcoin whatsoever. It seems this story is not entirely true, at least not when it comes to the Bitcoin part.
Paying for lobbyists
As most of you will know, United States politics are full of lobbyists. These people are paid by political parties or big companies to help tip the scales in favor of a certain ‘need’. Mass example, the democrat party will probably have paid many lobbyists to help President Obama secure his Obamacare system. It’s not always very transparent, but many times there will be a lobbyist report filed. This report shows how much was paid to lobbyists and what that money was for. Lobbyists are usually hired through lobbying firms. Peck Madigan Jones is one of these firms and their quarterly report was interesting…
In this quarterly report, which was filed this month, Peck Madigan Jones said that five of its lobbyists were concentrating on “Bitcoin and mobile payments”, on behalf of Mastercard. This proves that MasterCard is actively paying lobbyists to focus on the virtual currency, making MasterCard the first company to officially lobby on Bitcoin, according to federal disclosure records.
Of course, MasterCard knew this was going to come out soon after the report was made public. In a statement regarding this news, the credit card giant said that it was “gathering information in connection with recent congressional hearings to better understand the policy issues around virtual and anonymous currencies.”A company like MasterCard will always remain vague about sensitive matters like this. However, the importance of this report does not lie in the fact that MasterCard is investigating Bitcoin opportunities. It would be naive to think that MasterCard (or Visa for that matter) have not been looking into virtual currencies before. If not to understand the advantages of Bitcoin, surely to know their ‘enemy’. The real deal about this is the fact that MasterCard knew this news would go public. A credit card company that publicly expresses its interest in virtual currencies, it’s a rather odd picture.
Who will be first?
Does this mean we will see MasterCard credit cards with a Bitcoin logo on it soon? While some may rejoice upon reading this news and start planning their holiday on the moon, we tend to be a bit more careful when analyzing this. To me, this is a first step. MasterCard realizes virtual currencies will not be disappearing anytime soon (and believe me; that was what they were hoping for). Rather than ignoring their existence, they saw a potential market. This change in approach brings in a whole new world of fear. No longer are they just scared of Bitcoin. They are more afraid of other companies finding a way to embrace Bitcoin before them. That might be their biggest fear.
I can imagine Bitcoin giving credit card companies sleepless nights. The rise in popularity does not stop, even though authorities have been going out of their way to discredit the cryptocurrency. Which credit card company will be the first to embrace Bitcoin? Xapo already said it is working together with an undisclosed banking company to manufacture its Bitcoin debit cards. The hunt for Bitcoin adoption is open!
Responding to events in Ukraine and Crimea, the Obama administration has barred certain prominent Russians from entry to the U.S. and sanctioned company and private fortunes.Yesterday, the heads of major Russian oil and energy companies, Rosneft and Gazprom, were both sanctioned. It appears even the rumored private fortune of President Putin may be pursued if the political situation deteriorates. In 2007, the CIA and Russian political expert, Stanislav Belkovsky, claimed Putin’s worth exceeds $40bn.
In 2012, Mr. Putin declared his income as $115k and his bank account at $180k. Quite possibly true, yet a full declaration of his investment and property holdings is notable by its absence. In 2011, RuLeaks.net, the Russian version of Wikileaks reported that Putin owned a secret Black Sea dachavalued at close to $1bn. It’s unclear whether Mr. Putin indeed owns such a property or if it’s another perk provided by the Russian state to its President. A Russian opposition leader reported that Mr. Putin has 43 aircraft, 20 residences, 15 helicopters and 4 yachts as such fringe benefits.
Incidentally, Ruleaks was subsequently blockaded by Russian ISPs just as Wikileaks suffered embargo by Western bank and payment services. The two sides have more in common than they realize.
At any rate, the bulk of Mr. Putin’s reputed holdings is said to comprise holdings of major oil and energy companies. Russian commodities trading firm, Gunvor (whose part-owner Gennady Timchenko is one of several sanctioned Russian captains of industry) has been named as one such company. While Guvnor denies any links, the US Treasury Department stated in regards Gunvor:
“Putin has investments in Gunvor and may have access to Gunvor funds.”
“We remain confident that the information on the relationship between Putin and Gunvor is accurate.”
President Obama has signed into law the pursuit of assets owned by Russian or allied high officials judged guilty of “significant corruption.” America may target Putin if they ever trace his accounts, but certainly they are targeting his “inner circle” as a means to exert pressure over what it considers an unacceptable situation in Eastern Europe. This despite their involvement in creating the situation, which displays a foreign policy approach of which the world is tiring.
Yet even before the Ukraine crisis, Cyprus bank accounts were seized in a supposed effort to trap the laundered funds of Russian oligarchs. It remains possible that the economic ruin of Cyprus by bail-in was a “necessary sacrifice” towards seizing funds suspected as belonging to Mr. Putin.
According to Interfax, Russia has voiced “disgust” at fresh sanctions and vowed some form of retaliation. China doesn’t think they’re a great idea either.
Reliant as it is on Russian energy imports and trade, the EU may well lack the US appetite for increasingly severe sanctions. Yet if such sanctions ratchet up to the point where Russia has no further incentive to cooperate economically with “the West,” they won’t. And perhaps Chinawill join them. Many nations, such as France, are clearly signalling their desire for a new global reserve currency to replace the debt-laden US Dollar.
Some nations have forged ahead on their own with such arrangements. Russia and China are close to a massive gas deal priced outside of Dollars, and many similar deals have been concluded of late.
Russia and China and other nations have also been accumulating record amounts of gold for some time, a clear sign of interest in preserving wealth outside of political currency. This is a hopeful sign for Bitcoin.
It should go without saying that if the collapse of a few American investment houses was sufficient to spark the 2008 financial crisis, a significant or even majority share of the world’s population opting for trade priced outside of Dollars would… upset the apple-cart a bit, if not overturn it completely.
Undeniably, these are very uncertain times, in which any power no longer deriving particular economic benefit from the financial status quo may well consider the system’s demise as inevitable and seek to hurry the day to their strategic advantage. Citizens should prepare accordingly.
Putin and Bitcoin
It is quite likely that, whatever his wealth amounts to, Mr. Putin would object to it being denominated in USD. Nevertheless, some estimates place Mr. Putin’s private as high as $70bn. This would put him in the running for Forbes’ richest man. Even $40bn would make Putin the richest man in Russia, and no poor relation to world elites.
If we consider the “low-ball” figure as credible, then before seriously recommending Bitcoin to Mr. Putin as a wealth-preservation method, we must recognize that $40bn is least seven times the total value of all existent BTC. Currently, Bitcoin’s market cap is near $5.7bn after reaching arecord high of $13.9bn in mid-December 2013. That said, Bitcoin is the perfect tool to avoid monetary sanctions. A sophisticated user may:
transmit funds in an anonymous fashion,
with no regard to national boundaries,
Capital controls, of which sanctions are but a targeted form, are no match for the patient application of blockchain technology.
What’s missing in all the controversy over Mr. Putin’s supposed wealth is clear proof of its linkage to Vladimir Putin. It seems such proof would be politically damaging to Mr. Putin. As such, one would expect Mr. Obama to have produced it by now, if available. This implies that poor, propagandized Putin is truly of modest means… or that he has an especially clever accountant, as especially large fortunes tend to attract.
Given the latter case plus the Russian state’s apparent low opinion of Bitcoin, he may not see the need to securely diversify his portfolio through cryptocurrency. Yet surely those among his circle who face asset freezes might consider it as their best option to quietly move their funds out the East-West crossfire.
Bitcoin and Conflict
To achieve maximum success, Bitcoin must become a viable monetary option for anyone, from a migrant laborer wanting to send money home to an oligarch seeking to avoid harsh Western sanctions on his fortune.
Bitcoin must be digital Switzerland, neutral as to who uses its financial services. This is not important only for the success of Bitcoin, but to ensure negotiation between hostile nations remains possible. Diplomacy depends on national leaders having reliable means of communication and means of trade, even if the silly bastards have wrecked each others’ financial systems in an argument over whose fiat Ponzi scheme is superior.
Trade averts war. Even in cases where we strongly disagree over who owns what, we agree that things like gold and instantly-transferable and anonymisable digital assets hold value. Agreement is the basis of negotiation. Deals can be struck over mutually-acceptable assets, contracts entered into with escrow and oversight by neutral agencies. Sane people generally prefer constructive deals to devastation all round, right?
If Bitcoin is to prove the first apolitical digital currency, an asset to the people as much as to world powers, this is the path for it to take.
Steps Towards Better International Representation
Nomination of Bobby Lee to the Bitcoin Foundation board would be a positive step towards a more international composition, whatever one’s opinion of the Bitcoin Foundation as a credible institution. If Lee were to assume semi-official responsibility for accurate and accountable reports of PBOC pronouncements, that could at least reduce FUD-based market volatility.
Personally, I’m happy to write for this site in one of eight featured languages. More dialogue, trade and gathering is necessary between the world’s scattered geek tribes, even if the bigwigs are staring each other down.
The international community.
How Bitcoin’s Success Promotes Peace Through Trade
If, when or as:
1) national ports are are shutting down to foreign goods, termed variously haraam, decadent, non-kosher, unethically-sourced or illegal – “black market goods” in other words, 2) trust across the net’s getting cratered by cyberwar attacks and a proliferation of scamming, spamming, snooping, censoring, cracking, hacking and other bullshit, 3) major fiats stop trading for one another through Forex markets, causing banking shocks which shut down regular economic activity, & 4) the media’s full of sabre-rattling (not gonna name URLs here, you know it when you see it) and no one can make political jokes without a punch-up occuring.
then Cryptocurrency Might Keep the World Spinning.
For cryptocoins to serve, we must develop their economy across the following areas, in respect to the problems above:
1) secure, decentralized and anonymous markets, like Dark Market or BitWasp, hosted in the deep web below the radar and beyond the reach of censors, 2) sound cryptographic payment, verification, reputation-maintenance, communication and other associated, Bitcoin-payable services with worldwide reach, 3) a point we all agree on: increase the value of Bitcoin such that it can play in the big leagues. If it comes down to “pay me within 24 hours to offset your default, you splendid son of a bitch, or I push this damn launch button!” then gold is probably too slow and $5.6bn in BTC is probably too little. The film 13 Days is instructive here if you’re unfamiliar with the history of the Cuban Missile Crisis. 4) more dialogue, international conferences, general contact between Bitcoin community members who may find themselves nominally enemies by geographic accident of birth, 5) bonus point, smash the first idiot to suggest black-listing, reversing or seizing coins held in “enemy” wallets. The only enemy of Bitcoin is centralized control.
People and Bitcoin
Those of us who see past national media biases, which is hopefully to say most thinking people on the internet who can parse foreign news, should find the logic in peace. The more advanced the war technology, the higher the risk of annihilation, whether individual, national or planetary annihilation.
Perhaps America will dial back their military, economic and surveillance empire gracefully, rather than meddling abroad to preserve it. And perhaps Russia will restrain their burgeoning borders, pursue greater transparency and stop threatening Europe with energy embargo. Perhaps Europe will get its economic house in order. And perhaps, by international agreement, a halt will be called to the digital arms race before it runs out of control.
Ideal outcomes tend not to occur spontaneously however. Those who desire peace and prosperity should rally around Bitcoin as an apolitical currency. And if the world truly intends to fight over whose system of unpayable debt-creation is best, those of us ahead of the fiat-crash curve must conserve at least certain territories, works, relics and treasures for the aftermath.
Cryptocurrency as Global Reserve Currency
It is only a pipe dream for now. The actions of China and Russia have taken in regards to Bitcoin suggest they may prefer to to base any new system on traditional fiat currencies and commodities only. What can we all do to promote Bitcoin as the foundation upon which to build the world of tomorrow?
Washington D.C., 4/29/14, the Financial Crimes Enforcement Network (FinCEN), the enforcement arm of the United States Treasury Department, has issued its most recent ruling related to Bitcoin. A concerned American miner sent a letter to FinCEN on 2/26/14 asking whether or not the rental of computer systems for mining virtual currency would make his company an “administrator” of virtual currency or a money transmitter under the Bank Secrecy Act (BSA). The FinCEN ruling states that selling hashing power in timed contracts, which has become increasinglypopular a la CEX.io, does not a money transmitter make. That is, as long as all virtual currency mined by the third party remains the third party’s property.
FinCEN, for the purpose of guidances related to virtual currencies, forms three distinct categories to help identify who is and who isn’t a money transmitter.
An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. A “user” is a person that obtains virtual currency to purchase goods or services on the user’s own behalf.
FinCEN’s rulings were criticized for being too ambiguous by the Bitcoin community over the last year. Since the first March 2013 guidance, to the January 2014 guidance, FinCEN has always chosen its wording intentionally. That is because FinCEN guidance was formed around centralized virtual currencies first, and applied to decentralized virtual currencies as an afterthought. Even as recently as 2013, Bitcoin was not at all on the US government’s immediate radar. Centralized virtual currencies, such as Liberty Reserve, have very clear administrators; on the other hand, Bitcoin does not have an administrator. Bitcoin exchanges and services do have administrators that would be classified as “exchangers,” though, that the book can still be thrown at.
Back in January, FinCEN clarified that “users” of virtual currencies are not money transmitters. Furthermore they explicitly stated:
How a user obtains a virtual currency may be described using any number of other terms, such as “earning,” “harvesting,” “mining,” “creating,” “auto-generating,” “manufacturing,” or “purchasing,” depending on the details of the specific virtual currency model involved. The label applied to a particular process of obtaining a virtual currency is not material to the legal characterization under the BSA of the process or of the person engaging in the process to send that virtual currency or its equivalent value to any other person or place. What is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but what the person uses the convertible virtual currency for, and for whose benefit.
FinCEN also reminded Bitcoiners that:
The regulations specifically exempt from money transmitter status a person that only provides the delivery, communication, or network data access services used by a money transmitter to supply money transmission services.
This means that multi-signature transaction based escrow services, like CoSign Coin or Bitrated,are not money transmitters. It is refreshing to see the United States government respond to personal inquiries from the public in a way that is mutually beneficial for the regulators and the regulated. Though it has been over a year since FinCEN’s first mention of Bitcoin and virtual currencies, the attention is growing from all corners of US government. Concerned Bitcoinersand regulators alike have since turned their attention towards changing the IRS Virtual Currency Guidance which treats Bitcoin as property, not money.