The Old Allure of New Money

Practically no one, outside of computer science departments, can explain how cryptocurrencies work, and that mystery creates an aura of exclusivity, gives the new money glamour, and fills devotees with revolutionary zeal. None of this is new, and, as with past monetary innovations, a seemingly compelling story may not be enough.

.. the true public justification for creating the European currency in 1992 was a kind of “groupthink,” a faith “embedded in people’s psyches” that “the mere existence of a single currency…would create the impetus for countries to come together in closer political embrace.”
..  in 1932 the economist John Pease Norton, addressing the Econometric Society, proposed a dollar backed not by gold but by electricity. But while Norton’s electric dollar received substantial attention, he had no good reason for choosing electricity over other commodities to back the dollar. At a time when most households in advanced countries had only recently been electrified, and electric devices from radios to refrigerators had entered homes, electricity evoked images of the most glamorous high science.
..Each of these monetary innovations has been coupled with a unique technological story. But, more fundamentally, all are connected with a deep yearning for some kind of revolution in society. The cryptocurrencies are a statement of faith in a new community of entrepreneurial cosmopolitans who hold themselves above national governments, which are viewed as the drivers of a long train of inequality and war.
And, as in the past, the public’s fascination with cryptocurrencies is tied to a sort of mystery, like the mystery of the value of money itself, consisting in the new money’s connection to advanced science. Practically no one, outside of computer science departments, can explain how cryptocurrencies work. That mystery creates an aura of exclusivity, gives the new money glamour, and fills devotees with revolutionary zeal. None of this is new, and, as with past monetary innovations, a compelling story may not be enough.

Why the I.R.S. Fears Bitcoin

Many, including the Federal Reserve chairwoman Janet Yellen and the billionaire investor Warren Buffett, have warned about a “Bitcoin bust” that could rival the dot-com crash of 2000 and wipe out speculators.

.. But the bigger concern about cryptocurrencies may be the damage they could do, in the long run, to government finances through lost tax revenue.

.. The Internal Revenue Service estimates that it loses around $500 billion annually because of unreported wages alone. And the underground economy in the United States — estimated at 8.4 percent of output — is relatively small compared with those of other countries.

.. The I.R.S. understands this, which is why it has been pushing to break the anonymity of cryptocurrencies. In November, it persuaded a federal judge to order Coinbase, a popular Bitcoin exchange, to reveal the identity of the customers for more than 14,000 accounts (representing nearly nine million transactions).

.. The I.R.S. can observe all the transactions between A, B and C on the Bitcoin blockchain, but it cannot disprove that B and C are “arm’s length” counterparties (that is, independent and not colluding). Rules in the United States that require financial institutions to verify the identity of address holders do not solve the problem, because as far as the I.R.S. knows, B and C could have been set up by a foreign institution that does not comply with such rules.

It is inconceivable that the government would simply accept enormous revenue losses from a larger underground economy and from tax dodges on trading profits. The only question is how heavy-handed the response would be.

.. More likely, the United States would take a tougher approach and attempt to ban cryptocurrencies.

.. While cryptocurrencies open opportunities for tax evasion and illegal operations,

  • they also offer drastic reductions in the cost of financial transactions, especially for the poor, and
  • less reliance on banks, which can increase the power of the Federal Reserve to control money supply and reduce the risk of bank runs.

.. A smarter response would be for the government to switch from taxing income when it is received to taxing income when it is spent. Many economists support moving to this kind of consumption tax, but it would require a major overhaul of the tax code.

.. For cryptocurrencies to survive long enough to be an effective means of performing everyday transactions, the cryptocurrency community will need to find a way to prevent tax evasion. This will involve a tricky balancing act, preserving anonymity while providing the I.R.S. with sufficient information to prevent tax evasion.

More generally, cracking down on tax evasion will require that the community learn to trust government. Since this goes against the very ethos of the cryptocurrency movement, it poses the most difficult — but no less necessary — challenge.

Russia and Venezuela’s Plan to Sidestep Sanctions: Virtual Currencies

Russian and Venezuelan officials are hoping virtual currencies can help their countries make an end run around American sanctions.

Both governments, with ambitions to create state-sponsored cryptocurrencies, are looking to take advantage of the promise that Bitcoin introduced to the world financial system: a new kind of money and financial infrastructure, outside the control of any central authority, particularly the United States.

.. “When it comes to state-sensitive types of activities, this instrument suits us very well,” one of Mr. Putin’s aides, Sergei Glazyev, said last month in a conversation about the crypto ruble, according to several Russian news outlets. “We can settle payments with our business partners all over the world regardless of sanctions.”

Peter Thiel’s Founders Fund Makes Monster Bet on Bitcoin

Few mainstream investors have bought large sums of bitcoin, scared off by concerns about cybersecurity and liquidity

Founders bought around $15 million to $20 million in bitcoin, and it has told investors the firm’s haul is now worth hundreds of millions of dollars after the digital currency’s ripping rise in the past year.

.. He previously ran a multibillion-dollar hedge fund focused on global macroeconomic trends, and had some success navigating the financial crisis before racking up investment losses by investing in safe havens and missing out on the subsequent rebound.

.. Founders has more than $3 billion under management and has taken stakes in more-than 100 companies, including Facebook, Airbnb Inc., SpaceX and Lyft. More recent investments include the crypto-focused hedge funds Metastable Capital and Polychain Capital, which puts money into blockchain companies.

To Stop North Korea, Act Like Israel

So far, these crime bosses have been masterful at circumventing the sanctions that have primarily hurt the enslaved North Korean population.

That’s why the United States and its allies ought to take a page from an Israeli playbook and wage financial warfare against Mr. Kim and his cabal.

.. The notion behind using money as a weapon against terrorism belonged to Meir Dagan, a legendary soldier and spymaster who developed the idea in the nascent days of Israel’s fight against Hamas and terror groups supported by Yasir Arafat’s Palestinian Authority.

Mr. Dagan rightly believed that money was the oxygen that fueled the groups’ suicide bombing campaign against Israel. If Israeli security services could suffocate the funds that paid for the bloodshed, the attacks would stop.

.. Harpoon targeted the banks that held accounts belonging to Palestinian terrorist commanders, and the unit encouraged lawyers — including me — to launch suits in United States federal court seeking monetary damages for victims of state sponsors of terror

.. Harpoon went after Hezbollah’s cocaine business in Venezuela and in Lebanon, as well as its money-laundering activities in West Africa and America.

.. And when the Hezbollah hierarchy was cash strapped, Harpoon targeted the financial institutions that allowed the terrorists to move their cash across continents, ultimately shutting down the Lebanese Canadian Bank

.. Most military commanders acknowledge that there are very few, if any, feasible solutions to today’s standoff with Pyongyang. The only effective path is to unleash an offensive press against Kim’s inner circle.

.. This effort ought to include a full-court press of dirty tricks, coercion, heavy-handed threats and even direct action, all covert and deniable, against Kim’s financial wizards who handle the finances, dispense the narcotics and hijack Bitcoins.

.. Only when the money dries up will the loyalty of the men in Kim’s inner circle be compromised and cut away. The North Korean dictator will then be under enormous pressure to do whatever he can to alleviate the effects of the spies tapping into his cash and control.

Why decentralized social services fail

>The “why” is not technical.

This is one of thr few essays about decentralization that understands that the problem isn’t technical.

However, I’d go further than his explanations of incentives and say that the fundamental problem is that decentralized technical protocols do not solve the centralization of how money is spent.

Examples of that misunderstanding:

– SMTP the protocol is decentralized (technical) and yet we have giant email providers GMail/Hotmail/Yahoo which is centralized (money). The big providers spent $$$ on 1 gigabyte mail storage + backups + convenience. SMTP specifies how fields are laid out but it doesn’t put money in everyone’s bank account so they can run residential SMTP servers so the email ecosystem stays decentralized.

– Git the protocol is decentralized (technical) but Github the service is centralized (money). Why? Because Git the technical protocol is not a bank fund that gives every programmer a free $10 VPS account to host their own git repo. The centralization of money spent (Github invests in a datacenter but individual programmers do not) results in centralization.

– Bitcoin protocol is decentralized (technical) and yet the phenomenon of giant China “mining pools” emerges which is centralization (money). The ability to spend money on liquid cooled ASIC chips in a datacenter located near the Artic Circle is “centralized” to the entities that can spend that vast amount of money. The exceeds the ability for the home enthusiasts to compute hashes on a spare computer in their bedroom.

The common theme: technical protocols can be decentralized but the real-world implementation of those protocols end up centralized because physical things like cpus, harddrives, network bandwidth, etc cost money.

This pattern of decentralized technical protocols vs centralized economic behavior is ignored by virtually all decentralization enthusiasts.

So the real puzzle to decentralization is, “How do we _decentralize economic behavior_ when everybody doesn’t have the same amount of money to spend?” Nobody I’ve read about so far has figured that out . That includes Sandstorm/IPFS/Filecoin/Mastadon/Diaspora/Ethereum etc.

> The common theme: technical protocols can be decentralized but the real-world implementation of those protocols end up centralized because physical things like cpus, harddrives, network bandwidth, etc cost money.I agreed with you up until here. Not convinced that centralization is due to the economics of running a computer on a network. It’s also a due to reputation and trust.

People use gmail and hotmail, not just because they don’t want to pay for the computer, it’s because they trust these companies will do it properly and reliably.

Github isn’t the best example either. It didn’t spring up because of the economics of running a git server. It got big largely because of its social features, and also because it was a pretty trustworthy git repository. I feel far more confident pushing to a git repo than to some physical server somewhere. There’s a trust aspect.

I’ll skip Bitcoin and got to another mostly decentralized system: paper currency. Exchanging paper currency is largely decentralized, but most people deposit it in a bank, in part due to interest, but largely due to the trust the bank provides.

The common theme to centralized services isn’t the cost of computing hardware, but rather raising trust/reliability in the service, outsourcing expertise, and risk mitigation. Big central service providers are good at exactly this.

Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero

The digital currency’s value depends on it becoming digital gold—or on criminals

There is no chance whatsoever that bitcoin can displace the dollar, for the simple reason that it is badly designed. Bitcoin can handle a pathetically small number of transactions, and uses an inordinate amount of electricity to do so, making it entirely unsuitable to replace ordinary money.

.. Even if bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum that bad money drives out good. Given the choice of spending inflationary government-issued money or something which holds its value, everyone would spend the bad paper stuff and hoard the bitcoin. You wouldn’t want to be the person who spent 10,000 bitcoins on two pizzas in 2010, when a bitcoin was worth a fraction of a cent. Those bitcoins are now worth $40 million. But if no one spends bitcoin, it will never get established as a currency.

.. There are two somewhat less ambitious claims for bitcoin that could give it value.

  1. The first is that it is a limited form of money because of its usefulness for dealing illegal drugs and dodging capital controls.
  2. The second is that it is a form of digital gold: an insurance that will keep its value even if governments confiscate or inflate away the buying power of the currencies they issue.

In any currency, the money supply multiplied by how often it circulates equals

  • the price level times
  • the number of transactions.

For bitcoin we can estimate three of the four variables

.. Assume that all drug dealing moves online, that bitcoins circulate as rapidly as ordinary currencies and estimate a $120 billion-a-year market for illegal drugs, and the formula spits out an ultimate value of $571 for a single bitcoin. The more drugs traded, the higher the value, and the more bitcoin hoarded rather than spent, the higher the value.

.. On this basis the recent price of $3,950 is mostly speculation, and J.P. Morgan Chase & Co. Chief Executive James Dimon’s comparison to the 17th-century Dutch tulip mania is apt.
.. the potential to replace gold gives us some figures to work with. Thomson Reuters GFMS estimates there were 2,155 metric tons of gold held in exchange-traded funds. Switch all of that into bitcoin and it would justify a price of about $5,500 for the 17 million bitcoins currently outstanding.