Bitcoin Forum

First, some background.  Shorting a stock makes for less violent swings in price.  This is academic theory.  One reason Bitcoin prices fluctuate so much is due to the inability for most people to short Bitcoins.  So shorting is good for the community.

Now some interesting news.  Recently there was a theft of some Bitcoins from an online storage of private keys wallet, of over $1 million USD.  The owner of the wallet, who some have accused stealing through an inside job, made an interesting promise: that he would pay back the Bitcoins to all victims.  Now some speculation with a twist:  Bitcoins are at all time high prices now.  If the owner is dishonest, he would do the following and still fulfill his promise:  he would sell the Bitcoins he stole from his customers now, and get cash.  Then, later, when the price of Bitcoins falls (even perhaps in response to the shock of the theft, affecting other Bitcoin owners who feel Bitcoin is not stable), this dishonest owner in my hypothetical would buy back all the Bitcoins he stole at a lower price.  Then he would give these Bitcoins back to their rightful owners, and "everybody would be happy" (to get their Bitcoins back), but the dishonest owner would have made money, in the amount of the difference from the price he sold the stolen Bitcoins to the price he bought them back.  This is, btw, essentially how shorting a stock works:  you make money from a fall in price.

Now for the twist in the above tale (which is hypothetical):  this activity by the dishonest owner is actually beneficial to Bitcoin owners everywhere! (except the ones ripped off by the owner).  This is because academic theory predicts 'shorting' Bitcoin makes for a more stable price in the long run, and most people like stable prices.  Whether shorting such a small amount of Bitcoins (> $1 million) makes a real difference in price fluctuations of all Bitcoins, whose value is much more than a mere million dollars, is of course debatable.

Finally, I believe Bitcoins have the ability to become like art:  finite in supply, trendy, hence valuable in the future, with a real economic value, namely anonymous payments, which btw criminals favor.  Hence when the price comes down I will be buying Bitcoins.

Thanks for reading.  My first post here so be nice. :-)

Allowed?  WTF?  How would you stop it?  You can do it on Bitfinex and other places.

After reading the post again I am even more baffled:  are you proposing that we should not be allowed to sell Bitcoins (go short)?  People should only be allowed to buy them?


I sell high and buy back low all the time.  You don't want to allow that?

Sorry to not be nice.  This post is really, really bad.

Please add the choice  "One of the stupidest polls ever" so I can have a way to vote.

Of course and that was what I thought he was discussing at first (based on the title of the thread) but a more careful reading revealed that he was concerned about simple selling and buying back - unless you consider the theft of the coins to be the "borrowing" of the coins.  Then I guess he is saying that the owner of inputs.io "borrowed" the coins and went short with the borrowed coins.

At any rate, the idea trying to prevent actual short sales of borrowed BTC is impossible.  How do you prevent people from lending and borrowing BTC?  How do you prevent people from selling the BTC they borrow?  You can't.

It is ok to be ignorant. What is not is insulting someone based on your ignorance.

Sell bitcoins = go short, when you OWN the damn coins. TradeFortress would "borrow" those coins from inputs.io. Can you grasp the subtle difference that makes you an ass for bashing the OP?

Naked short selling should be illegal in most instances as it's fraud,

but borrowing coins (for a daily fee) to sell them, then buy then back later, is fine as it helps create a market.

But yeah, you need a regulated market, to make sure the borrower returns the coins.

Contracts for Difference (CFDs) are the best way for doing this, as you can get a court to uphold a contract.

I believe the Winklevoss Twins were trying to set up a Bitcoin derivative, but I've not heard a lot about it recently.

Really the naked short market is best used by Farmers and Miners who can sell forward their own future production to guarantee todays price for their commodities.

When people say, "oh it's manipulation because more than a years supply of gold/silver is sold short into the market", I have to explain to them how futures markets work and you can sell forward 10 years!  ;)

You can borrow BTC and short sell them to your heart's (and pocketbook's) content on BitFinEx.  Not sure why you say there is no tool to do this.  I guess you are saying it is not 'official' since it is not run by a big wall steet firm?  It is not 'official' because it is not regulated by the government?

However, there currently does exist places where 'shrewd' investors can short the BTC market for as many BTC as they can borrow.  I have lent many BTC for this purpose and it works great.  If the trade goes well for the short seller I get all my BTC back plus interest.  If the trade goes against the short seller their position is automatically closed out and I get all my BTC back plus interest.  I win either way - it is a great way to make money.

My beef with the OP is the entire "forbid it" or "should be allowed" mindset.  Who is going to do the forbidding or allowing?  How is this forbidding or allowing going to be implemented?  The entire question/poll is flawed from the opening title.

Check it out.  You can also lend out USD to traders who want to borrow USD to buy BTC for a long position.  Same deal - if they are right I get back my USD plus interest, if they are wrong I also get back my USD plus interest.  Always win-win for the lender.

Shorting bitcoins is "allowed" and you can do it on any exchange.

To short you have to borrow. Last time i checked gox doesn't lend bitcoins to anyone...

I don't see how this could work without entrusting your coins with someone else.  If you're doing that, you should expect the worst; anyway, shorting is not something you can simply "ban", just avoid by disallowing people from borrowing your coin.

You can vote with your coins by not loaning them.  I will continue to loan them out at a great daily rate to those traders that want to short the market.

you can short on bitfinex. i see no reason why not. leverage in theory does mitigate volatility, BUT in an illiquid market like bitcoin there is the fear of margin call. regardless of anything, yes, it should be allowed.

There is no "allowed" in Bitcoin.

People do short Bitcoins, people will continue to short Bitcoins.   There is absolutely nothing you could to prevent people from shorting Bitcoins.

Welcome to the decentralized future.

Sounds like a win-win situation to me ;D

No different than shorting anything else.  You can't short a stock without someone lending shares.  Usually (not always but usually) you don't lend your shares (or Bitcoins) to the counterparty you lend them to the broker or exchange who lends them to the person going short.  Granted this doesn't eliminate the counterparty risk but it does allow shorting to exist if both parties trust the broker or exchange even if they don't trust each other.

i have shorted on bitfinex. got out with some profit never doing that again. almost had a heart attack when the market moved against me for a bit, couldnt wait to exit. i will stick to holding btc and selling if i get a whiff of a correction. no leverage for me!

For the trading newbies..

this is how a short stock market really works (0:00-1:33)

https://www.youtube.com/watch?v=AQ8HjDRrHt0

Funny but true! :D

Thanks for your and the others replies.  It seems one of the posters discovered Bitfinex, which is still beta after thinking a bit more about the OP (I am skeptical of this member's claim that they use Bitfinex, but that's just my intuition), but keep in mind Bitfinex is beta and "The Bitfinex Exchange and Trading platform is currently in a beta phase (testing phase). The company is incorporated in Hong Kong with limited liability and once the beta phase is completed the system will go live under the company name."

So if Bitfinex goes under, who are you gonna sue?  You will not get sympathy for collecting on a short trade in bitcoins from a communist country court (Hong Kong). See here for what can happen if a cybercoin site shuts down:  http://www.coindesk.com/phenixcoin-ashes-developer-goes-awol/  And one word: "TradeFortress" anyone?

I work in a developing country as a programmer, but have experience with the politicians of a developed country; I used to work for them.  This country will soon be having hearings on whether or not to regulate bitcoin.  When and if bitcoin goes mainstream, you can be assured that bitcoins will be regulated.  That's the "should" in my title.  Bet on it.  Actually I think it would be a plus, not a minus, for the bitcoin community as it would attract the suburbanites and family people out there, who own the bulk of the money anyway.

Cheers

TonyT

It demonstrates the mechanism of pushing the price down, so newbies sell, and then buying back the stock ,below cost, to close the position at profit. If you cannot see the similarity with what happened this weekend you have no sense of humor.  :D

I don't appreciate being called a liar by a noob but it does not really matter if you believe me or not.  I know I have lent thousands of USD and thousands of BTC on BitFinEx.  In fact, I was one of the first to do it and those were the days!  Because there were only a few of us lending the interest rates were much higher than they are today.

WARNING, WARNING TonyT:  Take a good look at the about screen on your Bitcoin-QT wallet, it says "Bitcoin version v0.8.5-beta".  And, worse yet it goes on to say "This is experimental software"!!!

OMG it is still beta!  You should stop using it until such a time as it is out of beta because according to your statement above you believe that beta is just Greek for "bad".

EDIT:  With respect to unclescrooge/Raphael, he has always done the right thing.  Every single time there was a glitch in the system he has refunded losses due to the glitch.  If you cannot trust unclescroodge/Raphael then you really cannot trust anyone here - which is great advice for the risk adverse.

Yes, as long as naked shorting is not allowed

Thanks anth0ny.  But surely you confuse "can" with "should"?  I *can* enter into an illegal gambling agreement with a bookie--but unless the agreement is enforceable, *should* I?  The bookie can honor the bets I make most of the time, let's say 99% of the time, and pay out.  But one day I make a really big bet, and the bookie decides they don't want to pay me.  Instead the bookie takes my money and shorts some stock called TradeFortress (TF), pun intended, and promises to pay me 'someday', while I end up on this forum, with Stockholm Syndrome written all over my face and keyboard, hoping and praying the price of TF does indeed drop so the bookie can make tons of money off the short and then pay me back (sorry for the hijack thread but I had to get that in, LOL).  So I sue the bookie in Hong Kong and ask the communist judge about making me whole, about enforcing the illegal contract I had with the bookie.  The judge mutters something about 'unclean hands' or something legal like that (yes I Googled that phrase), and refuses to honor my contract with the bookie.  That's what might happen with an unregulated market.  Against that, a magistrate in Brooklyn last month I believe did say bitcoins are 'money' and, for money laundering purposes (they were trying to convict some guy laundering money, that's why the government bent over backwards to say bitcoins were money), bitcoins are money and presumably therefore a contract in bitcoins is enforceable in court (whether short or long).

The counterargument to the above is that a lot of diamond dealers in Belgium and elsewhere never have any kind of formal contract, but it's understood that they will not be dishonest with one another.  But that only works in a small, close-knit community, of which the bitcoin community is increasingly not.

You're right BurtW. If you really are like the Vandervoss Twins then whatever I say means nothing.  :D

As for beta software, I think bitcoin stuff is really alpha software.  It's basically some quant PhD thesis put into practice, and it might end up failing badly.  But, like modern art, it might be insanely profitable--for the hoarders.  The scarcity value of bitcoins and their cache in the popular imagination makes for an interesting investment proposition.  Not unlike perhaps the fable of the Emperor's New Clothes, hopefully without the embarrassing ending for us Bitcoin longs.  As for the shorts?  TradeFortress is putting my theory in the OP into practice IMO.  He/She is basically shorting the market--with other people's money.  A king-sized (emperor-sized?) naked short, pun intended. Which perhaps explains the huge trade of exactly the amount that was supposedly stolen, a few days after the alleged theft, as well as the huge drop in bitcoin prices recently.  See the other thread for details on this caper (and while you're at it, note the amusing Stockholm Syndrome replies by the Inputs.io victims, which cracked me up but if I was in their shoes I'd be saying the same thing).

Happy trading.

By now if you've read this thread with a sharp eye you can see the point I was making in the OP.  Let me make it more clear for you speed readers.

Suppose TradeFortress (TF) is indeed shorting the bitcoin market with other people's money--what's the problem with that?  Actually, nothing, for the community as a whole.  As I said in the OP, finance theory says shorting a stock leads to better 'price discovery' and a more stable bitcoin price.  So TradeFortress is doing everybody but his customers (let's assume he's a guy) that he stole from a favor--bitcoin prices will drop, TF will buy back what he sold at a lower price, and the price will rebound, which makes for a stable price (ups and downs is stable, while exponential growth or 'rocket ship to moon' growth is unstable).  But what about those Inputs.io customers?  Well chances are, since TF probably had a standard agreement saying he's not liable for anything, at any time--and these customers presumably read the fine print-- and since he did not report any crime to the Australian police (a nice excuse was that the crime cannot be solved, but a better reason is that if he were to report a crime to the police, that report itself would technically be a crime, the crime of false reporting of a crime), then since bitcoin contracts are not regulated, then Inputs.io customers really have no cause of action against TF.  The perfect crime (or un-crime if you will).  If you're OK with no regulation, then you should be OK with the above.  If you don't like the way TF treats his customers, then move on to another online bitcoin wallet service.  No crying for you crypto-anarchists! :-P

Thanks for the reply.  We're talking about pretty much any court in the world.  That which has no precedent is hard to decide, and will be decided badly.  It all depends on the judge.  That's why religious disputes taken to court are usually thrown out by a judge in the USA, and elsewhere.  It's not so much the First Amendment as it is the courts don't want to get into something that really has no precedent--how do you decide if plaintiff 'sinned' against defendant and deserved to be thrown out of the temple, or not?  See also my "TradeFortress" post, just after you posted, where I try and make things more clear.  What I am saying is this:  if somebody took your bitcoins for a year, sold them, bought them back a year later at a lower price, gave you back your coins but kept the profits from this short sale, and the fine print says he is not liable if he does that, then you're OK with this?  Because that's the state of bitcoins now, with online or even offline storage.  No regulations means anything goes, including what most people consider unethical behavior (but again, see my TF post--actually TF is doing the community a favor by 'screwing over' his customers, so you could say that for the greater good what TF did in my hypothetical is net good, not net bad).

But you are exceptional anth0ny.  Most people would be pissed, and on top of that claim they did not read the fine print or anything before they signed up.


The TF post does not rely on the premise that bitcoin contracts are illegal.  To the contrary, it relies on the premise that the contract between TradeFortress and his customers is the ONLY thing that matters, and if you read such online "bailor/bailee" (that's the legal term) contracts, they always say that the bailor (TradeFortress) has no legal obligations whatsoever (unlike in the real world).  Anything goes.  So if TF shorts your bitcoins, makes money, and a year later gives you back your coins that he "stole", he's not liable to you, even for the lost interest, and certainly not for the profits he made shorting, in any court, based on what the contract says.  Of course you are free to flame TF online, and seek another online wallet company for your bitcoins.

That's the downside of bitcoins not being regulated.  That lack of regulation is the genesis for my headline, which I admit is a bit confusing, "Do you think shorting of Bitcoins should be allowed?".  What spurred me to write this post was the realization that what TradeFortress did was not only not against the law, but actually it's completely defensible, even heroic, under the academic theory of greater "price discovery" by shorting (Google this).  Now whether or not you believe in better price discovery being a worthy goal or not, that is, whether volatility or not is a good thing for bitcoin, regardless it remains that the unregulated nature of bitcoin means what TradeFortress did could become, unless bitcoin is regulated, the "norm" in the future.  Only the threat of losing future business would prevent people like TradeFortress from doing the same thing as TF did, in the future.  And as for future business, if you make a huge profit from a 1M short of bitcoin, using other people's money, who cares about future business?  You can always open another online wallet company under a different assumed name, and you're way ahead financially from the unethical (but not technically illegal) short.  And if you believe shorting helps the bitcoin community, what TF did is not even unethical--he's in fact a hero.

TonyT

If you read the fine print of any internet bailee, they'll have language that makes them not liable for anything.  This is standard practice on internet.  In fact, no online wallet that will say they guarantee your money.  As for theft, while it's true if TradeFortress admitted to his theft, he would be prosecuted, but keep in mind what he's doing is not really 'theft' in the classic sense but misappropriation--he intends to return the coins after he's made money shorting.  In fact, I bet he sold all the coins a few days after the theft (since Mt. Gox had a big sale of exactly the amount 'stolen' at Inputs.io), and now is, as the price of BTC drops, buying these coins back with the sale proceeds, and again he intends to make money off the short sale price as explained before.  Eventually most, if not all, of his customers will get their bitcoins back, but at a lower price.  If he did this with dollar bills, as you say, it would be a different story since dollars and traditional banks are highly regulated.  You cannot just take depositors money for a while and return it a year later...you'd have government agents swarming your bank.

TonyT

If someone want's to short sell, it's his problem, let him do it. It's not like someone can conjure large sums of BTC out of thin air. And even if - how would you regulate that?

While I would act in a manner akin to described in OP. 'Lose money' when it's at it's highest and 'find it' later when it's at it's lowest I doubt that TF had this planned, because his reputation suffers even if he repays everything, and it's kinda pointless.

Same regulations as at a bank or exchange.  Shorting allowed but not naked shorting, so you must show you borrowed bitcoins before you can short.   Online wallet vendors have to post a bond with US regulators if they are based in the USA.  One reason I'm going with Kraken for my trading and thin client wallet is that they are based in the USA so more regulation than say Australia.  Regulation for banking type institutions is good.  Who needs a 'wildcatter' in this day and age?  In cyberspace anybody can pretend to be a banker.  I'm also not in favor of anonymity, but at the same time I realize the only people not hoarding BTC and actually using BTC in transactions, which keeps the price stable, are probably drug dealers, who require anonymity.  So I'm somewhat leary of making BTC less anonymous, though if you check out the Youtube video below you'll see that with a bit of effort the authorities can figure out who traded what.

TonyT

Must see Finextra Youtube video interview with Richard G. Brown, a CompSci expert who works for IBM, who is bullish on bitcoin but around 3:30 states it is not anonymous, and eventually Big Brother is going to use it to tax people under an 'asset register' scheme.

But Brown's bullish on bitcoin, even though bitcoin is not anonymous.  At 9:00 he discusses how machines can trade bitcoin amongst themselves! @10:20 "On the blockchain, nobody knows that you're a fridge"!  

@10:45 bitcoin will not be the only cryptocurrency.  Litecoin is a 'psychological' play, and others.  

TonyT

https://www.youtube.com/watch?v=gERNbqUNMm4

Finextra interview with IBM architect Richard G Brown about Bitcoin and Litecoin

You regulate it like in the NYSE in the USA.  All BTC exchanges need to go through the SEC.

I don't know if TF had it planned, but the way I described it in this thread, it's the perfect non-crime.  It's not pointless at all: he makes money, probably half the 1.5M being 750k USD, and it's fool-proof:  nobody can sue you, nobody can go to the police, and in the end TF even gets sympathy for being ripped off, and then gets more sympathy a year from now when he pays back everybody with lower valued bitcoins  supposedly 'out of his own pocket'.  TF however becomes a villain if the price of BTC continues to go up from the date of the theft, and, today I see that the price of BTC has recovered to near all-time highs, which, if my hypothetical is correct, is probably giving TF heartburn and spoiling his plans to be a Good Samaritan and refund everybody's money.

TonyT

 Just as I said in this thread: a contract to short Bitcoins cannot be legally enforced, even outside of China.  So until regulation comes along, you invest in Bitcoin at your own risk.  

Having said that, it is theoretically possible to enforce Bitcoins (except in China where they are banned) if you get the counterparty to sign an agreement.  But it has to be a signed document, possibly notarized with a lawyer (in certain countries) and in practice nobody goes through the trouble of doing this.  So bitcoins are effectively "illegal" (or rather, outside the law) in most jurisdictions.

So the original question was right on point and topical too, in view of the events of the last few days in China.

TT

PS--for those of you that might argue that an exchange will make you whole if something bad happens, I urge you to read their "fine print" that you agree to when you sign up.  All of these exchanges have "fine print" that promise NOT to make you whole if something bad happens.  That's standard business practice.

http://www.theregister.co.uk/2013/12/18/buying_virtual_currencies_risky_warns_european_banking_authority/

By OUT-LAW.COM, 18th December 2013

Buying virtual currencies, such as Bitcoin, presents a number of risks that consumers should be aware of before purchasing such assets, the European Banking Authority (EBA) has warned.

The regulator said that because virtual currency is not regulated, consumers risk losing their money by "buying, holding or trading" them.

"Currently, no specific regulatory protections exist in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business," the EBA said in a statement.

Consumers do not have refund rights when they use virtual currencies in transactions, and they may also have to pay tax on the assets, the EBA said

 http://news.ph.msn.com/regional/top-india-bitcoin-operator-halts-trade-after-bank-warning-2

More on how the lack of law is hurting Bitcoin.

TonyT

Hurting?  Nope.  News from India is all good for Bitcoin.

 More evidence that Bitcoin is at a cross-roads:  if it is not regulated it will not prosper.  But if it is regulated, it will become like any other payment service, like for example PayPal, and have costs that will make it less competitive.

This is one theme in this thread and it's recognized below by Jamie Dimon.

TonyT

Bitcoin “will eventually be made as a payment system, I think, to follow the same standards as the other payment systems, and that will probably be the end of them,” Dimon said Jan. 23 in an interview on CNBC.

http://www.bloomberg.com/news/2014-01-27/new-york-duels-california-to-write-bitcoin-rules.html

And we should trust the opinion of this known criminal why?

Of course shorting should be allowed. People should be able to bet on prices going down, not just up.

You wish comes true.  Bitcoin will be regulated, and captured by authorities.  That may even make it more stable and likely to be adopted by the masses...or it may kill it.

TonyT


http://dealbook.nytimes.com/2014/02/26/japan-studies-regulation-of-bitcoin-after-mt-gox-goes-dark/?_php=true&_type=blogs&_r=0

February 26, 2014, 8:40 am
Now, Nations Mull the Ways to Regulate Bitcoin

The Empire (governments, collectively) strikes back!

One is attempting to tax bitcoin (Japan), while the other to regulate it (with an eye towards tax or 100% transparency).

TonyT

http://www.bbc.com/news/technology-26538378

 11 March 2014 Last updated at 21:39

New York regulator plans 'regulated' Bitcoin exchanges



http://www.bbc.com/news/business-26478059

 7 March 2014 Last updated at 02:15

Bitcoin not a currency says Japan government

Japan's government said Bitcoin is not a currency but that some transactions using the virtual unit should be taxed.

"Allowed" by whom? Bitcoin is not a monarchy.

Oh yes it is! Read the below on the death of Bitcoin--if it does not elect a monarchy to govern it ("governance structure").

There's trouble in paradise...

TonyT

http://www.technologyreview.com/news/525676/academics-spy-weaknesses-in-bitcoins-foundations/

Yet signs are emerging of more subtle flaws in the vision of Satoshi Nakamoto (which may or may not be a pseudonym), with analysis suggesting the rules governing how Bitcoin operates as a currency may be far from perfect. Some researchers claim that these rules leave room for cheats to destabilize Bitcoin. Others have concluded that major changes to the currency’s rules will be needed as the number of bitcoins in circulation increases.

The only solution Kroll sees is to rewrite the rules of the currency. “It would need some kind of governance structure that agreed to have a kind of tax on transactions or not to limit the number of bitcoins created,” he says. “We expect both mechanisms to come into play.”

Same old bullshit we have been hearing for years.  Bitcoin is still here. 

uh oh...bitcoins are not fungible after all... and taxable as capital gains says the IRS.

Trouble in paradise.

TonyT

The IRS ruled that Bitcoin and other virtual currencies are property, not currency.  This means that they are subject to capital gains taxation.  And that means that Bitcoins are not fungible.  The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent.  If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. (Poor Satoshi–he’s got a lot more capital gains than most…)  This means Bitcoins are not fungible, and that makes it unworkable as a currency.  If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.  Bitcoin still works as a speculative medium, but Bitcoin’s claim has always been to being more than the latest iteration of the trading sardines–it aspired to be a commercial medium.  I don’t see that happening now.

- See more at: http://marginalrevolution.com/#sthash.G16rvTlQ.dpuf

And what about this statement by the member BurtW here?  In view of the above?  Clearly it's panic time for bitcoin lovers!:

"Bitcoin must have unqualified fungibility to survive as a form of money.  We must support all efforts that protect and improve the fungible nature of Bitcoin and stand firmly against anyone or anything which threatens this essential property."

It is simple:  the IRS is wrong.  I stand by my statement above and yes, it may be an issue for Bitcoin (and all other crypto). 

How much of an issue remains to be seen.

Of course you say it is a BIG issue.  We shall see.

Great minds think alike! 

TonyT

Should we regulate Bitcoin?

by Tyler Cowen on April 11, 2014 at 9:16 am in Economics, Law, Web/Tech | Permalink

There is a new paper by Jerry Brito, Houman Shadab, and Andrea Castillo, the abstract is here:

    The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

    In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

    Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Along related lines, you might consider Adam Thierer’s excellent new book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.
- See more at: http://marginalrevolution.com/#sthash.g3xPJrde.dpuf