Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Saturday, June 28, 2014
Bitcoin Updates - June 28 , 2014 -- Bitcoins to Become Legal Currency in California; Bill Awaits Signing by Gov. Brown; Commodities vs. Currencies.........How the US Government’s Sale of 30,000 BTC Could Impact Bitcoin Prices ....... Commerce related items to consider ...
California Bill AB-129 Lawful Money passed the California Senate on June 19, and the Assembly on June 23. The bill now awaits signing by Governor Jerry Brown.
Existing law prohibits a corporation, flexible purpose corporation, association, or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States. AB-129 would repeal that provision.
AB-129, authored by Assembly Member Roger Dickinson, would recognize digital currencies – along with a host of other commonly-issued forms of value including points and coupons – as lawful alternatives to the US dollar. The state-backed currency would still have legal superiority, as Californian residents are not required to accept forms of lawful money.
Dickinson recently commented that the law is primarily designed to allow California consumers the ability to continue using a variety of common payment methods, and to remove penalties currently on the books for their usage.
Assembly member Roger Dickinson’s (D-Sacramento) bill AB 129 addressing alternative currencies passed the Assembly. Modern methods of payment have expanded beyond cash or credit card. AB 129 repeals an outdated restriction on the use of "anything but the lawful money of the United States." The literal meaning of the restriction indicates that anyone using alternative currency is in violation of the law. However, people commonly use digital currency, community currency, and reward points without penalty.
“In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives,” Dickinson said. “This bill is intended to fine-tune current law to address Californians’ payment habits in the mobile and digital fields.”
Bitcoin, a growing digital currency, has gained recent media attention as businesses have expanded to accept Bitcoins for payment. Long before the introduction of digital currencies, various businesses created point models that allow consumers to use points to pay for goods or services. Many communities have created "community currencies" that are created by members of a community and the merchants who agree to accept the alternative currency. These "community currencies" are created for a variety of reasons, some of which include encouraging consumers to shop at small businesses within the community or increasing neighborhood cohesiveness.
Commodity vs. Currency
Three cheers to Dickinson. At the federal level, we need a more commonsense ruling that bitcoin is a currency, not an ordinary commodity like copper.
By the way, money is a commodity as well as a currency.
In Man, Economy, and State, Murray Rothbard explains "Money is a commodity that serves as a general medium of exchange."
What About Oil?
Some believe oil should be money. The idea is silly. Oil is not easy to store, not easy to transport, not easily divisible, and most of all, oil is used up.
What About Gold?
In contrast to oil, bitcoin has no commodity use other than to facilitate trade. Similarly, gold has very little industrial use. But unlike bitcoin, gold cannot be manufactured out of nothing.
Gold's overwhelming role is still as a currency even though it is not in general use as money. After all, central banks still cling to it. They don't cling to copper, oil or even silver.
Many think gold cannot be money again "because there isn't enough of it". Others believe "the production of gold does not expand fast enough for the economy".
Both statements are easily proven false.
On page 29 of What Has Government Done With Our Money, Rothbard explains: "An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines."
I strongly recommend people read the above link from start to end. It is easy read, easy to understand, and does not contain any mathematical equation gibberish.
On Friday, 27th June, the US government is set to auction off 10 blocks of bitcoin, equaling the roughly 30,000 BTC confiscated during the shutdown of infamous online black market Silk Road.
Once complete, winners will get a bill of sale from the government, and the coins will then be transferred from government ownership to private parties. Those final movements will be seen on the block chain.
However, exactly how much information will eventually be made available about the auction and its winners through official channels is still unclear. Speaking to CoinDesk, a representative from the US Marshals Service (USMS), the federal agency charged with carrying out the sale of the assets, indicates that it is not certain whether the organisation will issue any information about the winners.
Should such a statement be made by the USMS, the representative suggested, it would not be distributed until 30th June, the Monday following the auction.
The potential absence of an official release is notable, as the identity of the buyers and the final sale price of the bitcoins is likely to influence the price of bitcoin. Still, even without such details, the day’s events are likely to weigh heavily on traders and investors.
Harry Yeh, managing partner for San Francisco-based Binary Financial, a firm that is bidding on all 10 blocks of BTC, said those involved in the market should be primed to react, stating:
“We expect on the day for there to be an increased volume of trading and heavy selling pressure.”
One of the central reasons many suspect the auction will have an effect on the price of bitcoin is the historical evidence that such news events cause turbulence in the market. For example, reports that the government would sell the roughly 30,000 seized bitcoin from Silk Road caused the price to behave erratically on 18th June.
The development is just one of a number of news events that have affected prices, a fact acknowledged by Gil Luria, managing director of bitcoin-friendly investment firm Wedbush Securities.
Addressing the impact the final auction news could have on the market, Luria told CoinDesk:
“Bitcoin has such a wide range of outcomes. I would be very surprised if the price of bitcoin didn’t fluctuate a lot.”
In the 24-hour period following the initial auction announcement, the price of bitcoin dropped more than $60 from $633.84 down to $565.28 – a 10% decrease overall.
As the chart illustrates, recoveries were also made following that day’s low.
Over that following weekend, the price dipped further, hitting $553.28 before hovering back around the $600 range.
As such, any current volatility in the market could be magnified by traders and investors who are themselves fearful of continued fluctuations. Not wanting to risk their bottom lines, some may cash out of the bitcoin market to reduce any potential losses.
Still, Brett Stapper of Falcon Global Capital, which previously sought to purchase seized coins but is not participating in the auction, told CoinDesk he believes such uncertainty has been present in the market for some time:
“I feel that the government having such a large number of bitcoins in their control has created a lot of uncertainty within the industry. Speculation as to if, when, and how they would liquidate has been a topic of discussion since October.”
Stapper’s comments suggest that traders may even welcome the final relief of knowing that the 30,000 BTC has found a home on the open market and potentially respond accordingly.
Yeh told CoinDesk that even from his perspective as a bidder, the auction process is filled with uncertainty. For example, he says his organisation hasn’t received any clarity on what amount he should bid at the auction or if its bid will be accepted.
Despite this, he believes being involved in the auction is better than trying to buy large quantities of BTC on the open market.
Binary Financial and other investment firms like SecondMarket are all putting in bids for the seized coins in part because of intrinsic advantages to bulk bitcoin buying. Many of these types of organizations buy large amounts of bitcoin over the counter or off of exchanges for principal investment funds, and they describe this experience as problematic.
Yeh said an exchange order in the thousands may not fill, or at the very least would cost a huge premium for customers.
Yeh told CoinDesk:
“If you look at the digital depth chart, which is very unique to bitcoin, for you to actually buy say 3,000 BTC on the market right now, you would end up paying $50 in slippage fees per bitcoin.”
Yeh is referring to the depth charts that have been developed to show bid and ask sides of the bitcoin market.
It’s a visualization of bitcoin orders which he says is signature to cryptocurrencies.
The more bitcoins purchased, the higher price will rise – and quite steadily when trying to procure thousands of coins on an open market such as Bitstamp.
Yeh also isn’t alone in thinking that, despite any price ramifications, the auction presents a prime buying opportunity.
Jaron Lukasiewicz, CEO of bitcoin exchange Coinsetter, said:
“It will be much cheaper to buy bitcoins through the auction than the open market. This is a great opportunity for anyone looking to make a multi-million dollar bitcoin purchase.”
It is difficult to forecast what price or prices the 10 blocks of bitcoin will go for, but since the auction bids will only be accepted on one day, Friday, 27th June – the market price on that date will likely be a baseline for making bids.
Yeh said he sees the market going either way:
“I think there’s only going to be two scenarios. There’s either going to be a ridiculous premium, or there is going to be a ridiculous discount.”
Though prospective investors might obtain large blocks of bitcoin from a government without any sort of exchange or over-the-counter added expense, there may be a premium above the market price of that day.
Still, some bidders may think buying in bulk at the auction will result in low competition for premium bids.
Taking a gamble by bidding much lower than market value is entirely possible given knowledge the government will profit from the auction regardless.
“If I was bidding, I’d probably [go] with a discounted bid,” said Dan Held, a product manager for bitcoin information resource Blockchain.info.
Avish Bhama is the CEO of Vaurum, a bitcoin exchange built for financial institutions. He confirmed that his company is helping at least two bidders in the auction.
Bhama told CoinDesk:
“I do think that the bids will be quite competitive with market pricing, so there will be a rally after the auction.”
The second auction
Despite fears of a sizable market reaction, the current auction is just a preview of what may become a larger second auction. Based on the wallet labeled “DPR Seized Coins 2”, the government has control over an additional 144,000 seized bitcoins confiscated from alleged Silk Road mastermind Ross Ulbricht.
Ulbricht sued the US government to protest the sale of the assets, temporarily keeping this large block of coins off the market.
As such, this auction may serve as a sample for how future sales of seized bitcoin will affect its price.
However, fears about this larger quantity of coins reaching the market may be overblown, suggested Luria, who has written four research reports on bitcoin for Wedbush:
“Bitcoin trades more than 30,000 BTC a day on an ordinary basis. So the auction only represents one day, or less than that, of trading volume. So [this auction] shouldn’t have that much of an impact.”
But, Luria conceded that when the news comes out regarding how much bidders paid for the blocks of bitcoin, it will have an impact on the markets.
“If the auction ends up getting done at a price lower than the market price,” he said, “when it’s announced, that will probably put a little more pressure on the price of bitcoin. If the auction is done and the price ends up being at a premium, I think that will have a positive impact on price”.
Government Sale of Bitcoin Establishes Fungibility Precedent
The US Marshals Service (USMS) will auction off the bitcoin seized from Silk Road to the highest bidder tomorrow. It amounts to 29,656.51 BTC contained in wallet files residing on Silk Road servers.
In total, there will be nine blocks of 3,000 bitcoin and one block of around 2,656 bitcoin offered in the auction, representing the amount stated in the forfeiture order by the court on 15th January, 2014.
Although the authorities hold more coins, the auction does not include the approximate 140,000 BTC contained in wallet files that resided on computer hardware belonging to Ross William Ulbricht that were seized on 24th October, 2013 and are known as “DPR SEIZED COINS”.
Establishing equivalent value
Regardless of the morality of pre-trial asset forfeiture, the sale via auction of approximately $17 million worth of bitcoin by the USMS will establish the first governmental precedent for bitcoin fungibility, which could become significant for future bitcoin-related cases involving ‘blacklisting’, or ‘tainted bitcoin’.
Fungibility refers to the concept that every unit or sub-unit remains equivalent and identical to any other unit or sub-unit. It is the property of a good or commodity in which individual units are capable of mutual substitution.
Blacklisting and the notion of tainted bitcoins refers to the concept that certain bitcoins may be treated different due to their origin and/or usage, thereby resulting in a valuation differential.
Each bitcoin sold in the government’s auction is made without representation and also without any disclaimer or restrictions on their subsequent usage and transfer within the bitcoin block chain.
In additional clarifying statements, the auction notice says:
“The USMS will not answer any questions regarding (a) the associated criminal or civil cases that resulted in the seizure of the bitcoins being auctioned, (b) Bitcoin characteristics, uses or value, or (c) specifics of the auction process other than information provided in these documents;
The USMS will not sell to any person who is acting on behalf of or in concert with the Silk Road and/or Ross William Ulbricht, and bidders will be required to so certify;
The USMS will not transfer bitcoins to an obscene public address, a public address apparently in a country restricted by the Office of Foreign Assets Control (OFAC), a public address apparently associated with terrorism, other criminal activities, or otherwise hostile to the United States;
The winning bidder will receive a signed Bill of Sale from the United States Marshals Service prior to the transfer of the bitcoins.”
A bitcoin is a bitcoin
None of these statements carry any indication that the USMS or the Department of Justice view these coins to be ‘legally different’ or ‘subject to special treatment’ by exchanges and market participants. Conversely, the USMS is attempting to maximize its return of the sale of these bitcoin assets by specifically not disrupting their implied fungibility.
No special discounts apply to the sale and if they are bulk discounted by virtue of the wholesale bidding process, it would neither be due to the source of the bitcoin assets nor their alleged use on the Silk Road for various transactions.
“For now, a legally-orchestrated sale of bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.”
Furthermore, there is no intent to blacklist or whitelist the coins for subsequent circulation, because this would negatively impact the valuation at auction. All bitcoins obtained from the auction sale process are able to be freely transferred and circulated around the world.
An interesting Scottish monetary casefrom the 1700s suggests that blacklisting or mandatory coin validation is a misguided premise. Fortunately, in that particular case, the judges upheld the principle of unrestricted fungibility.
The auctioned bitcoin are theoretically being sold at par to other circulating bitcoin. In the future, governments or free markets may determine that certain bitcoin addresses carry a taint or don’t trade at par for some reason, but, for now, a legally-orchestrated sale of bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.
As covered on Bloomberg TV, SecondMarket’s Barry Silbert even organized a bidding syndicate to allow smaller investors the opportunity to obtain bitcoin at favorable bulk pricing, where 10% of any auction fees received by SecondMarket will be donated to the Electronic Frontier Foundation.
While the government’s actions and announcements regarding bitcoin fungibility play a critical role in setting expectations for the market, the globally distributed bitcoin network spans many jurisdictions and true fungibility is ultimately determined by what the market will bear. Not all market participants have to adhere to fungibility determinations in the same way.
The list of possible Silk Road bitcoin bidders can be seen here and the introductory form to participate in the syndicate organized by SecondMarket and the Bitcoin Investment Trust can be found here.
Crypto Coin News.....
US Consumer Agency prepares to protect Bitcoin shoppers
This morning Douwe Miedema, a reporter with Reuters, is reporting that a U.S Government watchdog has told the U.S. Financial Protection Bureau,a primary Consumer Agency, that they should play a bigger role in protecting and shielding consumers from risks associated with virtual currencies. Reuters have also reported that Federal Regulators have begun to work together to gauge the level of risks associated with cryptocurrencies. This is the first time that a U.S. Government consumer agency has been told to prepare to protect consumers that choose to shop using a currency that was generated by a means outside of the role of governments. The GAO report was requested by Tom Carper, a Democrat from Delaware. Mr.Carper chairs The Senate Committee on Homeland Security and Government Affairs, and is conducting its own investigation into Bitcoin.
To date the Government has been mainly concerned with investigating virtual currencies with the view of the prevention of money laundering. The U.S. Consumer Financial Protection Bureau has not been involved in these investigations to date and the fact that it is now being prepared to weigh in on the side of virtual consumers clearly adds confidence. The U.S. Financial Protection Bureau was set up as a consumer agency to protect consumers following the 2007-2009 financial crisis.
“Recent events suggest that consumer protection is an emerging risk,” the report by the Government Accountability Office said. “However … participation by the federal government’s lead consumer financial protection agency, CFPB, has been limited.”
It has been recommended that in order to heighten consumer protection the Consumer Financial Protection Bureau should participate in inter-agency discussions. The CFPB has agreed to these recommendations. Recent developments in the world of cryptocoins such as the collapse of Mt. Gox, a Tokyo-based Bitcoin exchange, and the loss of (or possibly the theft of… or maybe just the misplacing of…) $650 million worth of client Bitcoins. Clearly issues here well beyond the role of a consumer agency!
To date, U.S. Government’s federal regulators have said little regarding Bitcoin. The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) last year moved to describe administrators or exchangers of Bitcoin as Money Transmitters, and this brings them directly under the remit of state regulators.
Reuters reports that: “The CommodityFutures Trading Commission is studying whether it has jurisdiction, given that some firms are considering offering Bitcoin derivatives. The U.S. Internal Revenue Service has designated Bitcoin as property, not currency.”
When we look at the Federal auction of some of the ‘Silk Road’ bitcoins this weekend, all sold, as well as this regulatory development we must conclude that the world of cryptocurrencies is fast going mainstream. It has been the reality that there were many charlatans, both companies and individuals, operating on the margins of our world and buying with crypto has often been found to be far from secure. The legislation that governs consumers was drawn up in a time ignorant of virtual currencies and it is almost impossible to enforce a breach of contract, in what is, de-facto, an irreversible transaction.
This involvement of a consumer agency can do nothing but act to increase consumer confidence and by doing that it must positively affect the value of our currencies.
Western Union Willing to Pick Up Regulated Bitcoin
Western Union would pick up bitcoin, if it eventually fits into regulations.
In an interview with Bloomberg, CEO Hikmet Ersek expressed a willingness to incorporate bitcoin into Western Union’s portfolio of world currencies “once bitcoin is regulated like a proper currency.” Perhaps even the world’s premier money transmitting service is coming around to bitcoin.
But Ersek seems to find this a significant “if.”
Western Union is the world’s largest money transmitting service. It deploys over 500,000 agents and 100,000 ATMs internationally. In an interview with Bloomberg, Ersek discussed the future of Western Union as it faces the spread and adoption of new technologies. and the competition from Paypal and other fresh startups. They also discussed the security concerns of transmitting large amounts of money across the globe.
Bloomberg asked for his stance on bitcoin’s potential as a currency, drawing attention to Western Union’s high fees. While Western Union fees tally up to something around 10%–although it varies by country–Bitcoin boasts something closer to 1%. “How much of a threat is Bitcoin, which is clearly much cheaper to move across the globe?” she asked.
“We pay out and settle in 121 currencies…. Once bitcoin should be regulated … like a proper currency, why not should we also use bitcoin? I mean if the customer wants to use bitcoin and it’s regulated–”
The host cut him off with an excited wave. “Whoa, back up.” she said.
But he smugly hesitant to call bitcoin a currency. “If it’s regulated as a currency. But it’s not regulated like a currency.” He repeated, “But if it’s regulated and the customers want that, why not we do it?”
When asked about his expectations of Western Union picking up bitcoin as the 122nd currency, he responded, “I’m not sure if bitcoin is a currency. Bitcoin is a system… it’s defined as an asset. It’s not issued by a reserve bank like dollars are issued by a reserve bank. It’s a regulated environment. Bitcoin does not have that.”
Ersek also defended the price of Western Union’s services, pointing to the costs of exchange rates and turning money into various currencies. The company spends billions of dollars on customer protection and security.
Earlier this year
Ersek seems skeptical, if open, to adopting bitcoin. Earlier this year in aFortune editorial he outlined many of the obstacles to widespread adoption, particularly in developing countries, but he never dismissed the burgeoning tool. He asked some questions about its immediate prospects. Unwilling to write Western Union off as an imminently antiquated service, he defended its role in the current economy. Ersek wrote:
“And a primary question remains — do such innovations, as we know them today, address the needs of consumers and businesses on both sides of an international transaction? In its current form, the answer is no, but there’s potential, and that is something I am watching with great interest.“
“Without continued enhancements to ensure consumer protection, which ultimately translates to increased reliability, I believe consumers and businesses will continue to gravitate to cash, bank accounts, and cards.“
Bitcoin could disrupt finance. As the economy evolves with bitcoin crawling around and expanding inside it, it could ultimately tip over financial giants that don’t adapt. Western Union certainly isn’t at the frontier of bitcoin adoption, but the CEO appears to be hesitantly open to evolving with the times.