Bitcoin - Discussion

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See our general entry on Bitcoin


Discussion Summaries

Summary of a p2p-based critique by Michel Bauwens

The great achievement of Bitcoin is that we have the very first "socially sovereign" digital currency, independent of government and corporation, that is workable, technically "peer to peer", and that it creates the enthusiasm of the hacker community, which almost certainly means it will be adapted and used later by more people. So, in this way, this is a tipping point. However, the Bitcoin design may also have some serious flaws. First of all, the way it is mined privileges the technical community itself as it can have access to networks of botnets to generate coins, in a way most people can't. Secondly it is a 'scarcity' based currency, subject to hoarding and wealth accumulation (only 21m bitcoins will be created, insuring a constant growth in value), that does not really change what is 'wrong' with the current currency system. As many so-called 'peer to peer' technologies (such as crowdfunding, crowdsourcing, etc..) it may increase wider participation and 'distribution' but without necessarily changing the dysfunctional neoliberal functioning of the market. Nevertheless, what it really shows is that socially sovereign currencies are viable, and could be created as a tool of the countereconomy, though this may require a different ruleset for its functioning. so that true 'social' peer to peer values can be integrated in the design of future 'post-Bitcoin' currencies.


A comprehensive critique of the weaknesses of bitcoin

Sebastiano Scròfina:

"Bitcoin has many advantages over the traditional currency system but it is undermined by two major security weaknesses that make it technically unreliable on the long run, and by at least three major economic weak points that will prevent it from ever becoming a real currency.

At Kakigarden we're developing a solution that is immune from those issues, and in our opinion some important things to improve are:


1) Majority attacks

As I outlined in 2010 answering How can Bitcoin be hacked?, Bitcoin can indeed be hacked. It's a beautiful concept but it's not secure. It can be exploited, which means it will. It's just a matter of time.


2) Social attacks

The scarcity of Bitcoin is not a real, hardcore scarcity such as the scarcity of gold or platinum. It's just defined in some lines of code. Those lines can be changed, Bitcoin can indeed be inflated and loose all of its appeal. There is a variety of ways in which this can happen in practice. More scarily, there is hardcore economic evidence that doing so would actually benefit Bitcoin as a currency (see below). Again, if it can, it will. It's just a matter of time.


3) Still centralized, not really P2P

Bitcoin is not really P2P. The amount of currency is decided by a central authority (the community), while the truth is defined by what 50%+1 of the nodes believe to be the truthful block chain. As always with centralization, these two weak points are also the easiest single points of failures to exploit.


4) Deflation and liquidity trap

In economics, a liquidity trap happens when people are unwilling to invest and keen to keep their assets "under the pillow". That's exactly the trap Bitcoin is falling in and will fall in. It was actually designed for it. Bitcoin is a deflationary currency, which means it's worth more and more as time goes by. Sounds good ? It did to the developers, but it actually isn't. In Gresham's terms Bitcoin is good money, while inflated central banks' money is a bad one. What would you spend first ? The bad money, because you want to get rid of it, and keep the good one for yourself. The only exception to this are illegal businesses who don't have any alternative to Bitcoin, or people where central banks have failed or are failing (as Somaliland or Zimbabwe). This means that, with the aforementioned exceptions, Bitcoin is not actually a currency as it appears to be, but rather a digital store of value that can be used as a currency.


5) Government intervention

As soon as the US government will rule against Bitcoin, which could happen sooner than we think, all US businesses will be forced not to accept Bitcoin. Maybe even running the client could be deemed illegal. This will trigger drops in BTC value because the expectations for Bitcoin as a currency will drop. As other governments will follow, as it already happened with Napster and file sharing, the use of Bitcoin will be more and more restricted to criminals and illegal activities, and people where central banks have failed or are failing (as Somaliland or Zimbabwe).


6) No lock-in

As soon as a better p2p currency comes along, people can sell their BTCs and jump on the other system. This means that as soon as a better alternative comes along, there will be an incentive to be the first to abandon Bitcoin, while the last ones will be heavily penalized: they'll have to sell their Bitcoins for a fraction of the price they bought them at. Think of bank runs: what happens usually is that the bank closes until panic has stopped. Here there's no bank, so what's gonna happen when the run starts ? If you own Bitcoins, keep your eyes open.


7) Lack of intrinsic value

The current value of BTCs is artificial. Bitcoin is in a bubble because more than 90% of people who buy BTCs with USD or other currencies are speculators. They don't buy Bitcoins because they need them, but because they expect somebody will need them in future. And you know what ? This is very risky, because Bitcoin has no intrinsic value. This means that as soon as it is hacked, or government intervenes, or a better alternative comes along, the value of Bitcoins can drop to zero. Yes, that's right: zero. That's the intrinsic value of a digital signature. Gold has an intrinsic value: it's needed for a lot of real uses, which guarantees you that however bad the gold market goes, you'll never loose everything. Bitcoin doesn't.


8) Friction

You can't buy Bitcoins with Paypal. You can't convert Bitcoins to Paypal. The value of Bitcoin fluctuates enormously every day. All this means there is friction for the average person and the average business to use Bitcoins as a currency instead of the dollar. Again, only who's got no alternatives is really driven to use Bitcoin (see above).


9) Speculation

Remember how George Soros broke the British Pound ? Currencies don't belong only to the domain of economics, but also to that one of politics. And that's why central banks have policies. If a speculator like Soros comes along with their massive buying power, they can start to use their power to do politics on the Bitcoin community, and there's no Bitcoin authority that can react. For example, a speculator can enter slowly in a massive quantity, and then sell enough and fast enough to trigger panic in the community and push Bitcoin owners to panic sell (something similar already happened in Bitcoin's "black friday" on June 10th). Such attack could be politically motivated, or financially (to buy after the price drop). Who knows ? Who cares ? Bitcoin has no protection against those types of attacks. And remember: this can happen with any commodity or precious metal, but they do have intrinsic value at least. Bitcoin doesn't have the safety net of real goods, nor the one of fiat currencies.


10) Anonymity

Bitcoin is not anonymous. As one of the lead developers already pointed out, it's fairly easy to track people down unless they don't take extreme precautions.


11) Speed

Transactions take minutes, or even hours, to be confirmed. Given it's electronic and not physical, this slowness is a bit of a paradox.


12) Fractional reserve

Bitcoin doesn't stop middlemen from practicing fractional reserve banking, thus inflating the currency at their own benefit. In fact, this is probably what will happen and what could partly relieve its deflationary nature.

This is the tip of the iceberg. There is much more to the future p2p currencies (objective value vs subjective value, scarcity vs abundance, etc), but I feel this is a concise enough answer to the question, specifically focused on Bitcoin's immediate weaknesses rather than what the mid-term future of currency might look like.

In conclusion:

As I said, think of Bitcoin as the Napster of central banking and banking as we've known them. Bitcoin represents probably just 1% of the coming currency revolution. The future p2p currencies will have to solve Bitcoin's technical and economical flaws, and totally redefine economics. Contrary to what most economists (from Mill to Schumpeter) believe, currency is not a neutral veil, but indeed the very matrix of how we interact, trade and live as a species. As every language influences the way one thinks, currency influences the way one behaves. Mainstream currency is the most powerful and spoken language on our planet, and in the next decade it's going to be totally redefined by the Internet. The next generation will have a hard time trying to understand what economics was to us." (http://www.quora.com/Bitcoin/If-one-were-to-make-a-competitor-to-Bitcoin-what-features-would-be-desirable/answer/Sebastiano-Scròfina?)


A summary of BitCoin criticisms

Adam Cohen posted on Quora:

Bitcoin, described most generously, is a system that makes digital transactions more like cash transactions. That's...fine. The problem is it does this not by offering dollar-denominated digital cash-transfers, but by bootstrapping an entirely new currency. The question to ask is why this would be at all desirable. Maybe you hate the US government, or all governments. Maybe you want to avoid bank interchange fees, or perhaps avoid tracking altogether because your payment is for something illegal, or because you're a particular private person. Or perhaps you just think that the world currency regime is going to collapse and you see Bitcoin as a technological salvation.

No matter what your reasoning, Bitcoin is a ridiculous idea that will not accomplish what you want.

Severe Problem Number 1: Seeding Initial Wealth

When the federal reserve "prints money", it doesn't just mail million-dollar checks to random Americans. It does one of two things. It either (a) purchases some other asset [generally us treasury bonds] on the free market, thereby injecting more cash into the system than there had been before, or (b), loans money to a bank, who will then loan it to other people who will then spend it.

Importantly, the people on the other end of those transactions did not just get free money. They either sold an asset for cash, or they borrowed cash that they will eventually repay (with interest).

Bitcoin does not have a central bank capable of printing and lending Bitcoin; it has an "algorithm" which through some convoluted mechanism allows Bitcoins to be "mined". Essentially it randomly allocates Bitcoin to early adopters. This is a very good system for early adopters (free money!) It is a nonsensical system for a real currency, not to mention being obviously unscalable (what happens when everyone tries to mine Bitcoin all day long?). To solve this second problem, the supply of Bitcoin is algorithmically limited, which is again good for early adopters. But that brings us to...

Severe Problem Number 2: Built in Deflation.

Econ lesson time! Deflation is the phenomenon where cash grows in value relative to everything around it (i.e. prices go down). More specifically, deflation occurs when people expect the value of cash to grow in relative value to everything around it, and prices trend down consistently.

Question: if your money is getting predictably more valuable, why would you want to spend it? Answer: marginally speaking, you wouldn't.

The supply of Bitcoin is programmed to grow at a known but decreasing rate over time, topping out relatively quickly at about 21M. The graph looks like this:

(graphic 1)

Known rate -- ok, I'm with you, predictable inflation, not necessarily desirable from an economic standpoint, but I'll go with it -- but decreasing rate? If you were designing a currency that was going to topple the world order, wouldn't you want it to look like this?

(graphic 2)

Or at least have constant in rate of growth? Yes, of course you would, because that's the only way to actually accommodate more people using it.

But Bitcoin is not designed to be a functioning currency, it's designed to enrich early adopters. Again, that is why it is a scam. Period.

As a quick thought experiment, let's say demand for Bitcoin grew as more people found out about them. Well, you'd expect the price of Bitcoin in dollars to grow rapidly. Now assume I own one Bitcoin. I also have a dollar bill. I would like to purchase a Pepsi. Which one of those will I spend? Obviously the devaluing dollar gets spent before the skyrocketing Bitcoin.

In the best case scenario [the one where it becomes popular] the limited supply of Bitcoin will cause crippling deflation, drying up most Bitcoin-denominated commerce save whatever speculative buying and selling happens on exchanges. Some new world order. All that transparency and all those low interchange fees aren't going to do you much good if you don't ever want to spend these things and no one wants to give them to you anyway.

Severe Problem Number 3: Lack of Convertibility

There is a common misconception among people that there is such a thing as an inherent value of money. There is no such thing. Paper assets are literally only valuable to the extent they can be exchanged for other paper assets. A dollar is worth a certain number of euro cents. A euro is worth a certain number of Yen. A Yen is worth a certain number of dollars. A dollar can be put in a bank for a certificate of deposit, which can then be exchanged for a dollar. It can be turned into a cashier's check or a personal check, and then converted back to cash or deposited. It can be converted to traveler's checks which can then be converted to Yen on your vacation. Even if you spend your money and buy a sandwich, the sandwich stop only took that money because it was convertible to something else, such as his payroll check and then his bank account. Paper <--> Paper <--> Paper. All the same, all different. It's a beautiful circular equilibrium. Envision a tee-pee. Paper assets are the poles; they fall over by themselves, but leaning against each other they form an edifice.

The critical point here is that exchange rates might change, but they never go away completely. The term in economics is "convertibility". For Bitcoin to work as a currency, it would have to act as a predictable store of value, which means it needs to be easily convertible to all other stores of value depending on an individual's needs or wants. It needs to be a part of that tee-pee. It isn't.

The problem here is that because Bitcoin is completely decentralized, no one is completely invested in the long-term success of the system. No one is literally making the market, saying "no matter what happens, I'll buy Bitcoins from you at some price". I understand that there are "exchanges" floating around. Their commitment to this market is (in my opinion) not credible. Anyone and everyone can just pick up their ball and leave.

As a result, my ability to turn a Bitcoin into a dollar or a euro or a yen is no greater than my ability to sell my laptop on Ebay. I can probably do it, but that doesn't mean I'm going to start measuring my bank account in macbook pros, because one day I might not be able to find a buyer, and then what?

Because of this, Bitcoin is not really a currency, it's an asset [and a particularly useless one at that]. It is being marketed as a currency to appeal to people who are crazy, idealistic, or afraid, and it is a scam.

Severe Problem Number 4: When Something Goes Wrong, It Will Die

In the early days of the great depression, some Americans started to worry that if their bank closed, they would lose all of their money. They then tried to take money out of banks all at the same time, which actually caused some banks to fail. That made even more people nervous, which caused even more banks to fail. That's called a bank run, and for obvious reasons we want to avoid them.

After that happened, the US government started explicitly guaranteeing savings deposits (as well as implicitly guaranteeing other forms of financing, see Bush, Obama et all, "Bailouts", 2008). Despite everyone's frustration with this state of affairs, it turns out to be vastly preferable to a complete collapse of our banking system, so it continues on.

Now, fast forward five years. The Bitcoin economy is roaring! Everybody owns these things. Life is great. But then...something goes wrong. Maybe it's a slight hardware glitch. Maybe there's a rogue node somewhere in the system that causes transaction delays. Maybe some people were storing their Bitcoin on AWS and they lost it when it crashed again. It doesn't really matter what: something will eventually go wrong, and Bitcoin will be tested.

Will it pass this test? People will get nervous. Some will panic. Few will run for the exits. The exchange rates will dip. Others will get nervous. Some will realize they never really had faith in the system to begin with. That will make them really nervous. Who is going to step in to backstop this system?

More importantly, is there anyone that even CAN do that? When a bank collapses, the federal reserve can honor deposits by quite literally printing money and giving people their cash back if need be. That slight increase in expected inflation (maybe) is a small price to pay for avoiding a financial meltdown. In the bitcoin economy, that's literally impossible. It's decentralized; it's a published algorithm. No one can change it, and even if they could, it's no one's job to do so. Anyone with a large stake in Bitcoin will be too busy trying to get their own money out to worry about systemic risk.

Bitcoin (and really, any e-currency) is inherently unstable. And with currency, stability is everything.

In Conclusion

So, do I think Bitcoin is a good idea? The cryptography system seems to have technical merit although I'm not a cryptologist. If it were thoughtfully integrated into a legitimate banking product it might be a good idea. But this is not a good idea, this is a scam. Someone out there is trying to become very rich off of this system, and anyone who participates will be playing hot-potato until the inevitable collapse.

More discussion

Social Issues

How the Bitcoin 1%'s manipulate the currency

Stanislav Datskovskiy:

" One of the world’s greatest cryptographers, Adi Shamir, published the following analysis:

- "We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that the subgraph of these transactions contains many strange looking chains and fork-merge structures, in which a large balance is either transferred within a few hours through hundreds of temporary intermediate accounts, or split into many small amounts which are sent to different accounts only in order to be recombined shortly afterwards into essentially the same amount in a new account.” (source: Dorit Ron and Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph.

Most bitcoins are, in fact, in the hands of a very few people. Are you surprised? I’m not.

We also learn that, of the approximately 9 million bitcoins which currently exist, less than 2 million actually circulate – that is, change hands with any appreciable frequency:

- “It is remarkable that 97% of all owners had fewer than 10 transactions each, while 75 owners use the network very often and are affiliated with at least 5,000 transactions.”

And it would appear that most of the non-circulating coins are in the hands of a very small number of people – who, one may reasonably suspect, were involved from with building and propagandising Bitcoin from its very beginning. So, who are the lords of Bitcoin?

...

The most damning fact revealed in the paper is not the extreme top-heaviness of the Bitcoin ownership pyramid, but rather the elaborate lengths to which the hoarders went in order to conceal their existence from “rank and file” users. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident.

...

Bitcoin turns out to be something other than the fully-decentralized, unkillable network which so many imagined it to be.

People who have invested serious time and wealth in Bitcoin ought to feel angry. Not from any abstract sense of fair play, but from the simple fact that Ron and Shamir’s findings reveal a serious – and quite mathematically-certain – flaw in the sytem. The total number of bitcoins in actual circulation is much smaller than previously believed. If the early adopters were to cash out and place their hoards on the market, the exchange rates (as denominated in anything) would dive through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.

Whether and under what circumstances they would press the switch, I cannot say. But the Bitcoin kill switch exists.

So, what, if anything, could be done about it? Unfortunately, the one solution which I can think of (other than the idiotic head-in-the-sand solution of not giving a damn, which the Bitcoin user community seems to favour) is a rather unlikely one, and would be quite distasteful – on a gut level – to most users. I am speaking, of course, of proscription. If the Bitcoin community – or a reasonable subset thereof – agreed that the kill switch ought to be neutralized by any means possible, it would be a fairly straightforward matter to declare the hoarders persona non grata and collectively agree to use modified Bitcoin clients (let’s call them Bitcoin-P) which act as if the particular coins currently held by A, C-F, H-K, and M-S were not bitcoins at all. And that such pseudo-coins will never be accepted as genuine in trade for any good or service. In effect, they would be retroactively shitcoined for all time.

This act would not require cooperation from every single Bitcoin user, or the imposition of any kind of governing authority. If even a minority of users were to move to Bitcoin-P, operating separate exchanges and the like, said users would be forever immune to the effects of a future market glut resulting from hoarders cashing out. Users of conventional Bitcoin would feel the effects in full, suffering the loss of most if not all of their purchasing power.

But I am under no illusions that Bitcoin-P will ever happen, given the libertarian bent of most Bitcoin users. They will mutter of dekulakization and the like. Fine, lose your hard-earned wealth to a pyramid scheme operator at some unspecified future date. But if you like the idea of decentralized cryptocurrencies without built-in kill switches, think hard about Bitcoin-P. Anyone who wants to can start using Bitcoin-P right now, without having to wait for others to be convinced of its merits. Just compile a list of the Satoshi gang’s bitcoins, and start pretending that they aren’t coins at all. It really is that simple." (http://newswax.com/2012/10/bitcoin-has-a-kill-switch-and-how-to-disconnect-it/)


P2P / Commons Issues

This very important essay in French, Le bitcoin contre la revolution des communs, explains why Bitcoin is not a Commons, https://hal.archives-ouvertes.fr/hal-01169131/document


A possible p2p critique of the current p2p protocol?

Michel Bauwens:

"The great achievement of Bitcoin is that we have the very first "socially sovereign" digital currency, independent of government and corporation, that is workable, technically "peer to peer", and that it creates the enthusiasm of the hacker community, which almost certainly means it will be adapted and used later by more people. So, in this way, this is a tipping point. However, the Bitcoin design may also have some serious flaws. First of all, the way it is mined privileges the technical community itself as it can have access to networks of botnets to generate coins, in a way most people can't. Secondly it is a 'scarcity' based currency, subject to hoarding and wealth accumulation (only 21m bitcoins will be created, insuring a constant growth in value), that does not really change what is 'wrong' with the current currency system. As many so-called 'peer to peer' technologies (such as crowdfunding, crowdsourcing, etc..) it may increase wider participation and 'distribution' but without necessarily changing the dysfunctional neoliberal functioning of the market. Nevertheless, what it really shows is that socially sovereign currencies are viable, and could be created as a tool of the countereconomy, though this may require a different ruleset for its functioning. so that true 'social' peer to peer values can be integrated in the design of future 'post-Bitcoin' currencies."


Is Bitcoin truly p2p?

Victor Grishchenko:

" The very basis of Bitcoin design assumes that every node needs to be aware of every transaction in the system just to prevent double-spending:

- We need a way for the payee to know that the previous owners did not sign any earlier transactions... The only way to confirm the absence of a transaction is to be aware of all transactions.


Thus, every “full” node needs to maintain a dossier on every “coin” out there and, preferably, to keep the entire history of transactions. First of all, that is the opposite of scalability. Such a system is not “decentralized”, but more like a “replicated center” system, as there is an absolute necessity to gather all the existing data in a single point to make any meaningful operation. Partial knowledge does not work. The authors describe those full nodes as “super-peers” saying that

- Bitcoin nodes could easily keep up with both VISA and MasterCard combined, using only fairly modest hardware (a couple of racks of machines using todays hardware)... the intention is to evolve it towards a more typical two-tier structure in which low powered client nodes connect to long-lived, high powered supernodes.


Thus, Bitcoin is only “peer-to-peer” in the sense of the British Peerage system. Bitcoin “commoners” must appeal to their “lords” who have sufficient means to judge on validity of transactions and to seal those transactions as valid, likely for a fee." (http://www.pds.ewi.tudelft.nl/~victor/bitcoin.html)

Economic Issues

Jon Matonis on the "Austrian economics" background

"Mises has written that, “Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.”

While I and other Austrians wholeheartedly agree with Mises on this, the notion of a decentralized bitcoin has eluded many in the economics profession. Peer-to-peer bootstrapped currencies secured by cryptography in a distributed computing project were not anticipated by Menger nor Mises. They are a reaction to our ‘politically-hostile’ environment for free market currencies. Public-key cryptography, as opposed to symmetric key cryptography, is a relatively new phenomenon that Austrian economics has not yet come to terms with.

Some may not like it, but bitcoin is a Mengerian-, Misean-, Rothbardian-, Austrian-currency in its purest form. Still actively debated within the Austrian economics community on whether or not bitcoin satisfies the regression theorem, I have gone so far as to propose a corollary." (http://www.forbes.com/sites/jonmatonis/2012/08/26/economist-appearing-on-max-keiser-show-forced-to-resign/)


The deflationary economics behind Bitcoin's design are libertarian

Phillip Pilkington:

"The most popular aspect of the libertarian doctrine today is probably the idea that deflation is not such a bad thing – indeed, it may even be a morally purifying cure. Uncomfortable – like a cold shower – but necessary to rid a gluttonous populace of its worst excesses.

The economic argument among actual libertarians for this view runs broadly that prices in a competitive economy should generally be tending downwards rather than upwards. The rational argument – as is typical of extremist ideologies – for the most part masks a more deeply embedded emotional appeal. Simply put, the argument plays to the hoarding impulse so prevalent among gold-bugs, who appear to overlap strongly with libertarians.

While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here, it should simply be noted that among right-wing libertarians it is often mixed up with saving. Not only are these two distinct concepts within the sphere of economics – hoarding being a removal of wealth from circulation and saving being the deployment of present wealth to procure future wealth – but they are generally recognised as distinct concepts in psychology, both popular and medical. Even children can distinguish between Scrooge and true capitalists.

The argument for deflation appeals to the idea that the saver – who is seen as the origin of wealth and production by the libertarian – benefits because the money that they have saved becomes worth more. But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.

In order to get around this inconvenient fact the libertarian supplements their argument by saying that all investments that fall as the deflation tears the economy apart were merely “malinvestments” made at a time when money was too cheap. It is thus that the wanton destruction of societal wealth is justified as a sort of Judgement Day. Those who go bankrupt are simply sinners. Thus the fact that deflationary conditions wreak havoc on all those in the economy that are not unproductive hoarders is veneered over through a moral appeal to the supposed quality of outstanding investments.

Tied to this is the idea that production that does take place in a deflationary environment is morally pure. It is seen as “lean and mean” in that it requires real effort on behalf of the investor to accomplish, this in contrast to the “profligate” investment decisions that might be made when money is easy to come by. In a deflationary environment the men, as it were, are sorted from the boys. This crass notion ignores many aspects of how modern economies actually operate; for example, the fact that monopolies, oligopolies and giant corporations will find it far easier to weather a serious recession or depression than a smaller firm simply due to size and outstanding credit relations. But it is an argument that is made nevertheless because it appeals to a sense of moral righteousness and rewards the libertarian’s anti-social hoarding tendencies.

It is here that nostalgia rears its head. Libertarians often hold the 19th century up as a sort of model for what the present should be. Unlike extremist left-wing ideologies, like Communism, libertarianism is backward rather than forward-looking. Where Communism projects into the future a mythic ideal, libertarianism mourns over an ideal past that has supposedly been lost. (Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)

For the right-wing libertarian the 19th century is the era of a true capitalism with little or no government intervention. Indeed, even warfare was limited and required little government meddling. Yes, this era was unstable – even the libertarian would not deny that – but this instability gave rise to a dynamism and a freedom that was crushed in the “statist” 20th century.

But it is not the inflationary era of high liberalism that is often looked back upon through rose-tinted glasses, but the deflationary era of the third quarter of the 19th century. This would be unusual if we did not already understand the motivations for the libertarian argument for deflation. The right-wing libertarian needs an era that was both non-inflationary and at the same time one of “free” competition as a screen on which to project their utopian fantasies. But, as we shall see, in this they are trying to have their cake and eat it.


2.

The most peculiar aspect of the argument favouring this deflationary period is that it completely ignores the broader historical picture. The libertarians, hiding as they are in the trees, completely fail to take notice of the woods all around them. For it is widely recognised by historians that this was the era when laissez faire capitalism fell and the ground was cleared for a new era characterised by government intervention, monopoly men and imperial conquest. As the great British historian Eric Hobsbawm put it in his ‘The Age of Capital’:

- The new era which follows the age of liberal triumph was to be very different. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from interference and what the Germans called ‘Manchesterismus’ (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of ‘collectivism’ began. (P. 354)

Or again:

- A new era of history, political as well as economic, opens with the depression of the 1870s. [This era] undermined or destroyed the foundations of mid-nineteenth-century liberalism which appeared to have been so firmly established. The period from the late 1840s to the mid-1970s proved not so much, as the conventional wisdom of the time held, the model of economic growth, political development, intellectual progress and cultural achievement, which would persist, no doubt with suitable improvements, into the indefinite future, but rather a special kind of interlude. (P. 63)

This new era was to be one in which trade unions grew to become a serious force while the first true wave of corporate mergers would establish a new monopoly or oligopoly structure for the capitalist system. It was also an era in which the government would begin to play an increasingly large role in economic affairs. The foundations would thus be laid for the state capitalist systems of the 20th century – the very systems that the libertarians decry – not to mention for the rise of socialism.

Indeed, when the lifeblood of cheap money had run out the era of high liberalism ground to a halt and economic forces began to become increasingly concentrated. This is no coincidence. But nevertheless right-wingers today continue to fool themselves into believing that austerity and deflation rather than easy money and credit are the path back to some sort of purified capitalism. They are no such thing. For the libertarian right-wingers are chasing an historical ghost – a ghost that never existed in corporeal form and so one that they have no chance of resurrecting. In clinging to these crude ideological notions and historical myths it is their own ability to engage in practical politics that they bury – and those politicians who embrace their creed will not last long." (http://www.nakedcapitalism.com/2012/09/philip-pilkington-the-19th-century-long-depression-how-it-fostered-oligopolistic-capitalism-and-serves-as-a-model-for-austerity.html)

Political Issues

The fallacy of a non-political currency

Yanis Varoufakis: On “The fantasy of ‘de-politicised’, ‘honest’ money

“The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.

The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.

Bitcoin enthusiasts, just like believers in the Gold Standard, understand money as if it were some commodity which has spontaneously emerged as a unit of exchange – a little like cigarettes did in the POW camp ‘economy’ that R.A. Radford (1945) described so brilliantly. This is a gross misconception based on the unexamined (and dangerously false) faith that there is no substantial difference between Radford’s POW camp and a modern capitalist economy; that, like in that POW camp, output is independent of expectations and demand is always abundant enough to absorb the produced output. As for investment, it is assumed to be uni-directionally determined by savings which are, in turn, determined by the rate at which present consumption is deferred to the future. None of that holds in an economy involving not only exchange but also production and investment. It is these two activities, production and investment, that preclude the possibility of apolitical money.” (http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/)


The (a)political economy of Bitcoin

1. Vasilis Kostakis

Bitcoin emerged as an incarnation of the fantasy of “apolitical” money, i.e., a currency of the people, by the people, for the people, as Varoufakis eloquently puts it. We are not going to describe what Bitcoin is or how it was created as this has been done in detail elsewhere. First things first: there is no such thing as apolitical – even being ostensibly “apolitical” is a political stance–, therefore, a “de-politicised currency” is not possible. Bitcoin is premised on scarcity and wherever you have scarcity, power structures emerge. For instance, we are observing the creation of a “Bitcoin aristocracy” consisted of those who entered the Bitcoin ecology early and/or those who own the so-called “monster machines”. For this and various other reasons, such as speculation and instability problems (read Varoufakis’ piece and an April BBC report on Bitcoin panic), we deem that Bitcoin is not a Commons-oriented currency designed to serve effectively social purposes, rather a manifestation of a new form of capitalism, called “distributed capitalism”. In a true Peer-to-Peer (P2P), Commons-oriented currency, the peers must be humans, not computers. In Bitcoin, the computers are peers, but some humans can have thousands of computers, and others none.

It becomes obvious that the political identity of Bitcoin is by no means apolitical.

While Bitcoin represents a model where P2P infrastructures are designed to allow autonomy and participation of many players, the main focus rests on profit-making: trading and exchanging through a currency designed for scarcity. Under such conditions, any Commons is a byproduct or an afterthought of the system, and personal motivations are driven by exchange, trade and profit. Many P2P projects, such as Bitcoin or even Kickstarter, could be seen within this context, striving for a more inclusive, distributed and participative capitalism. In Bitcoin the role of distribution is not related to the distribution of the means of production for enabling autonomous, Commons-oriented productive efforts, but as part of a vision of a virtual economy based on scarcity and, thus, on competition.

On the other hand, Bitcoin can be viewed as part of an anti-systemic entrepreneurialism directed against the traditional monopolies and a proof that the hypothesis of a digital currency is feasible. So our second argument, is that the idea for a digital, global, distributed currency is worth-trying, though with a more Commons-based orientation. A Commons-based currency(-ies) could jump start the creation of a “Global Commons” on a transnational global scale. As we notice in Commons-based peer production (CBPP) –this community-driven, hyper-productive mode of immaterial value– productive efforts are distributed and facilitated at both local and global levels. And the conjunction of CBPP with desktop manufacturing technologies (such as 3D printing) could create ecologies in which the resulting micro-factories, essentially networked on a global scale, would profit from the mutualized global cooperation both on the design of the product, and on the improvement of the common machinery. Any distributed enterprise could be seen in the context of transnational phyles, i.e. alliances of ethical enterprises that operate in solidarity around particular knowledge Commons. The participating enterprises, with the supportive infrastructure of a Commons-oriented currency, could be the vehicles for the commoners to sustain Global Commons as well as their own livelihoods.

Therefore, we, as commoners, conclude that what we need is a digital currency premised on a different political economy, one breaking the shackles of capitalist opportunism and ushering in a new era of economical transaction based on the finer aspects of the human spirit.

(http://blog.p2pfoundation.net/the-apolitical-economy-of-bitcoin/2013/07/11)


2. TripleC paper

The (A)Political Economy of Bitcoin: http://www.triple-c.at/index.php/tripleC/article/view/606

Abstract:

The still raging financial crisis of 2007–2008 has enabled the emergence of several alternative practices concerning the production, circulation and use of money. This essay explores the political economy of the Bitcoin ecosystem. Specifically, we examine the context in which this digital currency is emerging as well as its nature, dynamics, advantages, and disadvantages. We conclude that Bitcoin, a truly interesting experiment, exemplifies "distributed capitalism" and should be mostly seen as a technological innovation. Rather than providing pragmatic answers and solutions to the current views on the financial crisis, Bitcoin provides some useful and timely questions about the principles and bases of the dominant political economy.



Bitcoin is incompatible with the state system and should not seek legitimation

Jon Matonis:

"I was a radical before most of you Bitcoin users were born. That doesn't make me any better than you (hopefully I did a few things to make you better than myself), but it does give me a better perspective; time just works that way.

I've been watching the recent developments in the Bitcoin markets, and having seen this drama before (too many times), I thought I'd pass along a lesson. This will strike its target in some of you, but others of you are also likely to reject it, because it doesn't match what you want to be true.

Here's the lesson: Trying to go 'legit' will destroy the Bitcoin market.

For those of you who haven't turned away, I'll explain:

There's nothing really wrong with Bitcoin itself. The developers are doing a nice job of addressing its problems and a heartening number of people have jumped up to create new tools and new services. No problem here.

The problem is that too many people in the Bitcoin market are thinking the old way.

Understand this: Bitcoin is a new thing - it is not compatible with the old financial system.

Bitcoin and state banking systems are born enemies: only one can survive. If you are imagining that they can peacefully coexist, you are fooling yourself.

Bitcoin exposes the fraud that is state banking. If you think that politicians and bankers will calmly allow it to take over a significant percentage of world financial flows, you're in denial. States will come after Bitcoin, and hard. They have no choice. Their money can only exist if there are no competitors.

Alan Greenspan may have done a lot of bad things, but he is not stupid. And before his adventures at the Fed, he wrote this:

"(Under a fiat system), there is no way to protect savings from confiscation through inflation' If there were, the government would have to make its holding illegal, as was done in the case of gold."

What gold was then, Bitcoin is now -- times five.

So, let me try this again: Going legit gives the state a handle to grab you with. 'Legit' means registered and regulated, doesn?t it? You have to tell them your name, where you live, and where you put your money, right' It means that they can control you whenever they want to." (http://www.dgcmagazine.com/the-old-radical-how-bitcoin-is-being-destroyed/)


The Blocksize Limit Decentralist - Centralist Debate

by AARON VAN WIRDUM:

"The block-size limit debate has dominated Bitcoin blogs, forums, chat rooms and meet-ups for months on end, while many of Bitcoin’s brightest minds are gathering in Montreal to discuss the issue face-to-face at the Scaling Bitcoin Workshop this weekend.

So far, however, the two sides of the debate have made little progress coming to a consensus. At least for some part, this seems to result from a difference of visions – visions that are based on a different set of priorities.

One of these visions – represented by Bitcoin XT developers Gavin Andresen and Mike Hearn – is straightforward and clear. For Bitcoin to succeed, they believe it needs to grow, preferably fast. And for Bitcoin to grow fast, it needs to be cheap, accessible and easy to use. This, in turn, means that the block-size limit needs to increase in order for more transactions to fit on Bitcoin’s blockchain, for fees to remain low, and without having to rely on complicated and far-off alternative solutions. This could mean that some aspects of the Bitcoin ecosystem need to specialize further, but that was always to be expected.

On the other end of the spectrum, a majority of Bitcoin’s most active developers think it’s not that simple. For them, Bitcoin’s decentralized nature is sacrosanct, and they believe that an increase of the block-size limit represents a trade-off with this core feature. Some of these developers – perhaps best described as Bitcoin’s “decentralists” – even warn that too big an increase could destroy the system as a whole.

But for many outside this select group developers it still seems unclear why, exactly, big blocks could pose such a grave threat. To find out, Bitcoin Magazine spoke with four of the most prominent of these decentralists: Bitcoin Core developer Dr. Pieter Wuille, Bitcoin Core developer and long-term block-size conservative Peter Todd, hashcash inventor and Blockstream founder and president Dr. Adam Back, and well-known cryptographer and digital currency veteran Nick Szabo." (https://bitcoinmagazine.com/21919/decentralist-perspective-bitcoin-might-need-small-blocks/)

Monetary Issues

Why Bitcoin is Flawed from a Monentary Reformers' Point of View

Anthony Migchels:

"Bitcoin’s existence is very useful for all monetary reformers as it will allow us to gather information about the strategies that the adversary will use to disable it.


Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a full reserve banking system as required by bitcoin (and Gold too, by the way) would allow the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They prefer to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade.


Bitcoin is a revolution and a badly needed bit of fresh air. Peer to peer and independent of banks and Government it is an example for all of us. Yes, we should press for reform at the Government level, but no, we should not await it. There is a free market for currencies and it is ours for the taking.

However, it is not credit based and it does not allow for interest free credit. It’s deflationary by nature, which is very problematic.

Its decentralized peer to peer nature and its convertibility mechanism are its main strengths. If these can be harnessed in interest free credit based units, the Money Power would be really hard pressed.

Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow." (http://realcurrencies.wordpress.com/2012/05/18/bitcoin-impressive-but-flawed/)


Scarcity Aspects of Bitcoin

Thomas Greco writes:

"They seem to be trying to simulate gold mining and using Bitcoin as "virtual gold." If they think that scarcity is the requisite feature for a workable currency, then they're way out of bounds." (email, March 2011)


Here's a post from the Open Collective Skype chat about Bitcoin.

[05:43:48 PM] permaworld: Does anyone have information or experiences with BitCoin http://bitcoin.org ..... a new peer2peer open source digital currency? If so, what do you think of it? [05:55:27 PM] Arthur Brock: Bitcoin has gotten a lot of things right about decentralization and intrinsic integrity built into the structure of the data itself. [05:56:04 PM] Arthur Brock: However, they've confused issuance of currency with creation of value and are still building for artificial scarcity. [05:58:06 PM] Arthur Brock: It currently takes about 113 days of 100% CPU use to "mine" a bitcoin. You pay for $25 of electricity to generate a coin worth about $18. If the world switches to using bitcoin as a primary currency we can deplete our oil supplies just generating the electricity required issue them.

(via Thomas Greco)


The Difference between Bitcoin and Open Coin

Magius:

"Bitcoin and Opencoin are "sons" of David Chaum's Digicash both. Chaum is one of the most important cryptographers and freedom fighters in the world and invented in the eighties the first digital cash, that was refused, attacked and destroyed by credit card companies societies, that instead wanted to propagate a model not based on anonimity. The big difference between them is that Bitcoin is a complete currency system instead Opencoin is the system to make a currency (a digital mint). Bitcoin you need to use as-it-is, with Opencoin instead you can create your own currency system." (p2p-foundation list January 2011)


Is Bitcoin a deflationary currency?

Sepp:

"The relative value of a currency depends on two factors: The number of currency units available for exchange operations, and the combined value of items to be exchanged using the currency, which is really the size of the market the currency serves.

A currency's relative value will go up as the number of currency units or their availability decreases, or as the size of the market the currency serves grows without a corresponding growth in the available currency units. Technically, this is called "deflation".

A currency's relative value will go down as the number of currency units or their availability increases, or as the size of the market the currency serves decreases without a corresponding decrease in the available currency units. The technical term for this is "inflation".

In the Bitcoin ecology, there is no provision for keeping the currency aligned with the size of the market it serves at any given time. Bitcoin has a phase of growth which at first is fast and then slows progressively, to come to a standstill at 21,000,000 Bitcoins. So the availability of the number of currency units is set to grow, ever more slowly because of increasing difficulty to calculate blocks, and to eventually come to a complete standstill at an arbitrary figure set by the currency's initiators.

It is safe to assume that the market that is being served by Bitcoin will grow in a way dissimilar to the programmed increase of availability of the currency units. It will grow slowly at first and then - as the idea catches on - it will grow at an increasing pace. This disparity of growth between the number of coins and the size of the market will have some undesirable consequences for the stability of the value of Bitcoin. Coins will become more and more scarce, as creation of new coins gets ever slower, but market growth gets ever faster. The consequence is going to be severe deflation of the currency, meaning each existing coin will grow in value.

Prices expressed in Bitcoins will be subject to a continual decrease, while fortunes of Bitcoins obtained by the initiators and early adopters will grow in value. The price decrease will be a continual nuisance as prices need to be adjusted, and the growth of fortunes expressed in Bitcoins will be a reward to early adopters that is not commensurate with any work done. It will also act as an incentive to "sit on" Bitcoins, waiting for them to get more valuable, which takes coins out of circulation, making the natural deflationary tendency of the currency even more severe.

One way to overcome this problem would be to make the target of 21,000,000 Bitcoins mobile, by creating a mechanism that links the target to the real market size. As market size goes up, the final target amount of Bitcoin creation should move up as well, promoting stability of the relative value of Bitcoins.

In order to avoid manipulation of the currency - a concern that has been expressed by its creators - the target amount of creation of bitcoins should be adjusted in accordance with changes in the number of active nodes running the Bitcoin software. This number would give a good independent indication of the growth of market size. It also is not subject to manipulation.

Technical Issues

Mining Privileges associated with Bitcoin

TechnoLlama:

"Another problem that I have with Bitcoin is that mining for coins becomes more difficult as time goes by and the market grows. The algorithms that produce new coins increase the amount of processing power necessary to create each new block, so producing new money is more difficult as time goes by, and this difficulty is built into the system to try to keep the total amount of Bitcoins at a maximum of 21 million. So, the first block “mined” by BTC creator Satoshi Nakamoto (probably a pseudonym) was done at difficulty 1, at the time of writing there were 131301 blocks, making a total BTC of 6.56 million, and a difficulty of 877,227. That means, making a new block will be more than 800 thousand times more difficult than it was for the initial block. This difficulty will only go up, so an individual cannot hope to have the processing power to develop new coins, and this can only be done currently through pool mining CPU resources. This model is trying to replicate scarcity in the market, but it acts as a punishing disadvantage for late adopters, and means that early adopters have too much power if they hoarded coins early. More than anything else, this would lead me to be very sceptical of Bitcoin, the whole scheme screams Ponzi, but I am willing to be proven wrong.

Another practical concern is that while I found it easy to install the client, once it is open it is not very clear what to do with it. Bitcoin has reached a point where it is very difficult to create new coins, so their value has gone up considerably. I found the mining instructions difficult to follow, but was able to get a miner registered and working, although this was not easy to achieve. I would like to think of myself as a person with above-average technical skills, so I do not see the scheme catching on, particularly to a wider audience. It is possible to buy BTCs with real money in exchanges, but this didn’t strike me as straightforward either, and I did not feel inclined to invest in this currency (maybe I will regret it in the future, who knows?) The fact that the mining business seems to be a very closed niche would mean that newcomers would have to part with their hard-earned cash to acquire a virtual currency. At the time of writing, the exchange rate of $19 USD per 1 BTC seems ludicrously inflated." (http://www.technollama.co.uk/is-bitcoin-legal)


Energy Issues

Bitcoin wastes energy

Xfin:

"With the EFF’s announcement that they would being accepting BitCoin donations, the alternative money community began to take a larger interest. I certainly did, and found that there are good and bad things about this form of money. In the end, BitCoins create a perverse incentive to consume energy to “create money.” Here is why.

What is a bitcoin and how do you create one? — A BitCoin is created whenever a user’s computer churns though a SHA-256 hash repeatedly from a hash until it results in a number less than a given number. Statistically, hash functions are supposed to have very unpredictable content–that is what makes them secure. Whenever a BitCoin client churns through a hash starting from a given number issued to the network, it burns CPU time (and thus energy). The probability of getting a hash to be “less than” a given 256-bit number is quite low. Successfully determining how many SHA-256 rounds it takes for a particular nonce to hash to a number lower than some value is called the “proof of work.” If while your computer receives a new “block” from the network (meaning another computer successfully won some BitCoins), your computer must start over with a new nonce.

How much energy does it require to mine the average BitCoin? — With my “older computer,” the hash rate averages around 2000 khps on a microprocessor going full-bore consuming about 65W. The current difficulty shows that a new BitCoin can be mined by a computer at this speed on average every 113 days. So, 113 days × 24 hours = 2712 hours. 2712 hours × 65W = 176280 Wh or 176.28 KWh. The average cost of a KWh in the United States is 10.45 cents. So we’re looking at spending $18.42 to create 50 BTC (at the moment). So the electrical cost is about $0.36/BTC. BitCoins are trading now already at values below this, so I can only assume that they’re being sold at a loss or others may be externalizing the costs of electricity and not taking this into account. If you were to pay your electric bill in BTC, you would have a positive feedback loop (always a bad thing) that consumes more energy to earn money to pay back the power company. It doesn’t matter how efficient your processors are—you’re spending more money to make money." (http://xifin.wordpress.com/2010/11/18/bitcoin-a-rube-goldberg-machine-for-buying-electricity/)


Legal Issues

Is Bitcoin Legal?

Technolama:

"is Bitcoin legal? There are generally two types of currency from a legal perspective, there is legal tender and legal currency. Legal tender is simply currency that cannot be refused in the fulfilment of a debt. Legal currency is currency that is recognised by the government as a legitimate manner to pay for goods and services. In most countries legal currency and legal tender are one and the same, but there are some exceptions. For example, in the most of the UK the Bank of England notes are legal tender, but in Scotland only coins are legal tender, there are notes issued by several banks, which act as legal currency. The same applies for Northern Ireland. It is also common to see economies with a weak local currency to accept international money as legal currency.

In the United States, where most of the BTC action seems to be taking place at the moment, only the US Dollar is legal tender (31 U.S.C. § 5103). Similarly, only the Mint and the Federal Reserve can produce coins and currency, which are the only means of legal tender. Title 31 of the US Code does not seem to make the distinction between legal currency and legal tender, so to me both are one and the same (please comment if this is not the case). This is corroborated by several official documents that indicate clearly that only the USD is allowed as the official currency of the United States. According to the FBI “it is a violation of federal law for individuals, [...] or organizations,[...] to create private coin or currency systems to compete with the official coinage and currency of the United States.” I am no securities expert, but it would seem that Bitcoin would not fall under definitions of securities and commodities either(see here for a discussion on these). So in my humble opinion Bitcoin is not legal currency in the United States.

The picture is clearer in the European Union. Unlike the United States, the EU has implemented a legal framework for the regulation of electronic money.


The Electronic Money Institutions Directive 2009/110/EC defines electronic money thus (paraphrased for clarity):

1. electronically, including magnetically, stored monetary value;

2. as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions;

3. the transaction is an act, initiated by the payer or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee;

4. which is accepted by a natural or legal person other than the electronic money issuer.


If a payment system fullfils these requirements, then it is considered electronic money, and only electronic money institutions can issue electronic value. There is a high threshold for an electronic money institution, as the EMI would have to fulfil quite a lot of requirements. The idea behind this stringent regulation is evident, as what is taking place is the issuing of value into the economy. In my opinion, Bitcoin would definitely meet the legal definition, which would mean that in order to work in Europe it would need to be declared an electronic money institution, otherwise it is operating outside of the regulatory framework.

It seems like it is only a matter of time before regulators come knocking on the doors of Bitcoin. However, part of the appeal of the system is that it is completely decentralised. Just as it happens with P2P file-sharing, you could shut down the entire Bitcoin operation tomorrow and the network would still run because it does not depend on a central system. So, while Bitcoin may very well be illegal, it may also be almost impossible to shut down in any efficient manner, that is the beauty of distributed networks.

However, this point may be moot. Regulators only need to be involved if Bitcoin becomes a large source of value in a national economy. At the moment, there are 6.5 million BTCs in circulation, with a value of almost $130 million USD at today’s prices. This is no small change, and would seem to prompt some form of involvement from governments. However, I think that the value of Bitcoins may be a bubble as a result of hoarding from early adopters. Once newcomers realise that it is very expensive to enter the market, prices may drop. However, investors only invest if they see room for growth, it is perfectly possible that speculation will continue to drive prices up, therefore prompting regulation by the government. Catch 22 in my opinion, Bitcoin is better off remaining small." (http://www.technollama.co.uk/is-bitcoin-legal)