Currency circulating
today, not backed by gold or silver since August 1971, is fiat currency,
created and authorized by governments as their official currency. It has value
only because the government says it does and there is faith in that particular
government that prints the currency.
The Federal Reserve System
(a system of privately owned banks) notes today are backed by the full faith
and credit of the United States government. The Fed engages in monetary policy
to influence aggregate demand by changing interest rates. To increase or lower
interest rates, the Fed sells or buys U.S. government securities on the open
market.
In the past, American
colonists used to cut up coins in order to make change on the spot. “A half
coin was considered four bits, and a quarter coin was two bits.” (Kenneth M.
Morris and Virginia B. Morris)
A computer programmer,
using the pseudonym Satoshi Nakamoto, created in January 2009 a digital
currency called Bitcoin. This currency
does not require a third-party middleman such as a bank, Pay Pal, or Visa.
Even though the identities
of the buyers and sellers are encrypted, there is a Bitcoin transaction record
in a public ledger. The Bitcoin network is “completely decentralized,” the
users execute all parts of the deal. Compared to credit card electronic
payments or dollar debit and credit, the use of Bitcoin as electronic currency
is relatively small.
Users love Bitcoin because
it offers privacy from government intrusion, lowers transaction costs, and affords
long term protection of loss of purchasing power from inflation. Inflation has
been a serious concern lately. Escalating prices, coupled with endless quantitative
easings by the Fed are reasons for that apprehension.
The price of Bitcoin as
virtual money can be volatile, theft and fraud are serious fears, and a “long
term deflationary bias encourages the hoarding of Bitcoins.”
Congress looks at Bitcoin
for its potential use in illegal money transfers and laundering (as if that
does not occur already with U.S. dollars), protection of consumers and
investors (such stated protection did not help GM and Chrysler bond holders
even though they held contracts with legal prior claim), and whether the Fed
will be able to control “stable prices, maximum employment, and financial
stability.” (The Fed does not seem to be doing such a great job, printing in
excess of $85 billion a month to buy bonds, the U-6 is in the vicinity of 13
percent even though the official reported unemployment is an impossible 6.7% when
92 million Americans are unemployed).
From the regulatory
standpoint, Congress does not know how to grasp and include Bitcoin under
federal securities law and under foreign exchange trading. Two Senate hearings
were held:
-
November 18,
2013, Senate Committee on Homeland Security and Governmental Affairs, “Beyond
Silk Road: Potential Risks, Threats, and Promises”
-
November 19,
2013, Senate Committee on Banking, Housing, and Urban Affairs, “The Current and
Future Impact of Virtual Currencies”
The rub is that Bitcoin is
not redeemable for another commodity, it is not legal tender like the U.S.
dollar, it is not backed by any government (may or may not be a good thing),
and supply is not determined by a central bank (may or may not be a good
thing).
Because it relies on
cryptography, Bitcoin is also called a crypto currency. To understand how it
works, a primer is available, “Bitcoin: a Primer for Policymakers,” Mercatus
Center, George Mason University, 2013. http://mercatus.org/bitcoin-primer-policymakers
A decentralized public
ledger called “blockchain” is visible to all computers on the network but all account
holders’ identities are encrypted - “the public ledger verifies that the buyer
has the Bitcoin being spent and has transferred that amount to the account of
the seller.”
The ledger resolves the issue
of the double spending problem,
forgery and counterfeiting, and of the need for a bank or a credit card
company.
There are three ways to
get Bitcoins once you download the free software:
-
Fiat money such as
dollars and euros can be exchanged for Bitcoins after an exchange fee is paid based
on the size of the transaction (0.5 percent for a small one and 0.2 percent for
a larger one). The online exchanges are Mt. Gox, Coinbase, and Kraken. The
price of Bitcoin vis-à-vis other currency is based on supply and demand. Prices
are quite volatile – November 2013 price was $200, $1,200 in early December,
and $800 in mid-December.(www.fas.org/sgp/crs/misc/R43339.pdf)
The current price of a Bitcoin is found here (http://bicoincharts.com/)
-
Bitcoins can be
obtained to pay for the sale of goods and services - a dentist accepting
Bitcoin from a patient who buys dentures
-
Mining as in gold
mining (using computer power to find new Bitcoins)
According to Craig K.
Elwell, there are 12 million Bitcoins in circulation and the total number that
can be generated has been randomly capped at 21 million coins by 2140, with
maximum amount of spendable units at more than 2,000 trillion. A Bitcoin is
divisible to eight decimals. Purchased or mined Bitcoins are stored in a
digital wallet on the owner’s computer or in an online wallet service.
To determine the amount of
Bitcoin market capitalization, one multiplies the current value of Bitcoin by
12 million – the result is over $20 billion. Bitcoin daily transactions volume
in 2013 fluctuated between $20-40 million, about 40,000 daily transactions. http://bitcoincharts.com/
Bitcoin is still low
volume when compared with the money supply, credit cards, and foreign exchange
markets:
-
Bitcoin $20
billion
-
U.S. money supply
in September 2013 $10.8 trillion
-
Visa in June 2013
$6.9 trillion
-
Daily
transactions in 2012 on foreign exchange markets $4 trillion (Congressional
Research Service, R43339, December 20, 2013, pp. 6-7)
If Bitcoin takes off, its
existence might interfere with the Fed’s monetary policy by impacting the
quantity of money, velocity of dollar circulation, and potentially interest
rates.
Bitcoin use appears attractive
and desirable because of lower transaction costs, more privacy, and no loss of
purchasing power due to inflation. However, Bitcoin’s purpose as a medium of
exchange is questionable due to its price volatility, Bitcoin is no legal
tender, and hacking into Bitcoin account holders can be a problem.
Most economists would
agree that a market-based economy runs more efficiently if it operates on one monetary
unit as opposed to multiple monetary units.
Because Congress was
granted the authority “to coin money and regulate the value thereof” in the
Article I of the U.S. Constitution, it is exploring how to oversee and control
virtual money such as Bitcoin via tax requirements through the IRS, offshoring,
and “Homeland Security confronting the rise of virtual currencies.”
The Senate Homeland
Security and Governmental Affairs Committee “envisions a government-wide
approach to the threats and promises of digital currency.” SEC will definitely
be interested in regulating investing in Bitcoins. The Commodities Futures
Trading Commission might consider Bitcoin a “commodity“ and regulate it. The
Stamp Act of 1862 and the Electronic Fund Transfer Act might be applicable to
Bitcoin.
No comments:
Post a Comment