Bitcoin Forum

Hello everyone,

As it seems our "industry" has a problem which is float. We keep on trying to make things happen, despite the fact that most banks and financial institutions wont touch Bitcoin with a fire hose. When it comes to PayPal, Visa & Mastercard the game is even worse as complete shutdown for no apparent reason always occurs.

Well there is a way into the world of finances which is possible, and shutting "us" down would be quite difficult, none the less it would probably cause mayor headlines if such was to happen, as it plays with the foundation of capitalism - the right of ownership (compared to the right of having a merchant account).

It takes significantly more to shut down a company, which is publicly listed, has its shares spread among (X + 1000) shareholders and the company's share price is denominated in the daily price of Bitcoin.

Now you ask, how is this possible?

Well it requires that someone, pegs a public listed company to the Bitcoin price, by issuing a bond, a socalled zero-coupon bond.

Here is how it can go step by step. Mind you, this is all still in theory and would require a great amount of funds.

- Incorporate a company in Europe/Offshore (Europe/Offshore because the SEC regulations for getting a company up and running on a publicly listed exchange is quite harsh).

- Make sure the company memorandum & articles states that the company's sole purpose is to issue bitcoin denominated zero-coupon bonds.

- Make sure the company is owned by a trust with a trustee guardian (this can be a law firm), which is only bound by following the company memorandum & articles by law. Thus CEO influence is down to minimum and only on an administrative level. CEO responsibilities/profit would be paid out on a % basis of the public trade. Same goes for trustee.

- Issue 21.000.000 zero-coupon bonds and peg them to the Bitcoin daily price as per Mtgox.com/Tradehill for indication for starting point (as we assume arbitrage would be done in order to stabilize price all over)

- Trading occurs when a private person purchases a bond by sending Bitcoin to the company account, and receiving the bond OTC, or purchasing it directly on the market for dollar/euro, controlled by the trustee of the company, which is by law bound to execute order to the CEO of issuing a bond. By law the trustee is a regulated entity which will either risk loosing their license to practice or follow suit. Bond is being issued through a broker, that is usually the marked maker (aka. the Bank that helped issue the bonds on the marked to begin with).

- It does not have to be called a bond, which is a debt certificate. The instrument can be something different, a CDO (Collateralized Debt Obligations), which is backed by the company's holdings of Bitcoin. Or it can be one of the myriad of financial instruments that covers the exact need. For more types of bonds and for the sake of debate look here: http://en.wikipedia.org/wiki/Bond_market#Types_of_bond_markets

Now there are implications with this method. It more or less requires someone that wants to setup and exchange, but wants to be free of the hassle of having their bank account shut down every second month. By running a company, it is based on a complete different set of laws, and closing something like this down, just because someone doesnt like the idea is next to impossible. Actually as far as I know closing down a public company has not happened, apart from bankruptcy.

Nice idea... but how it will simplify buying bitcoins? buying bonds seems to be complicated thing

May be for the average person, but what this solves is a fast track into the money markets, where institutional investors, banks, financial companies and other legal entities can purchase a financial instrument pegged to a currency. A bit like the Eurobond that is pegged directly to the Euro, a Bitcoinbond can be pegged to Bitcoin. This allows for hedging by large corporations.

The incentive would of course be that Bitcoin offers something no other currency offers, which is basing its price on pure supply/demand. This gives Bitcoin a carte blanche into the money markets and institutional investors can start treating Bitcoin as a currency adopted by the professional markets.

Basically the company running such a scheme would be an exchange, in the same way MtGox is an exchange. But instead of basing it on old fashion "money for bitcoin" we overlay the structure with a product that is legally binding by the laws set forth in the companies act.

No shut down can occur!

@JackH, you seem to know a lot about the subject, you care to give us a hand? https://bitcointalk.org/index.php?topic=48704.0

Your complicating your issue way to much in your topic. What I am simply saying in this thread is that you dont have to invent the wheel again. You do as every large corporation or country is doing when they need money and float. Instead of treating Bitcoin as something that cannot be integrated with the money markets - start playing ball in the field where the money lies.

Banks and investors dont care much about what Bitcoin is doing to change the world, they just want to make money. Give them the means to make those money, and issue a financial instrument to THEIR ballgame they can play with.

Not only is this completely legal, but it will completely go around the system that is constantly shutting down Bitcoin. Here we are talking about issuing a financial product to the markets that people can purchase and sell as they have always been used to.

As I said, the incentive is that the instrument has a unique behavior compared to other instruments. The instrument, lets call it Bitcoinbond, will have unique properties, which will/will not be enough incentive for a professional investor to treat it as safe investment.  

Here is another way to put it so people can understand:

1) Company A is incorporated
2) Company A issues X amount of bonds and pegs them to the Bitcoin price
3) Bonds gets sold on the respective exchange to investors/banks
4) Company buys up Bitcoin for all the money it receives of the bonds

Instead of Bitcoin input Gold, and this would be a business that is completely legal and possible and is actually a reality these days.

I haven't dealt with any of the major exchangers since June, I've had nothing but positive experience with the bitcoin-OTC

If you view Bitcoin as a commodity, you could "simply" set up a Bitcoin ETC (http://en.wikipedia.org/wiki/Exchange-traded_fund#Commodity_ETFs_or_ETCs).
In fact, we discussed exactly this within our group - the problem is, that you'd need quite substantial initial capital to get the whole thing up and running.

Apart from that, it would be a great thing! If anybody knows of an organization actually willing to do that, let us know!

Very good idea! Bond-EFT's are the best solution for sure!

I have some contacts in the stock exchanges and law firms that can setup the issuing of a financial product. I will try to post more information as I get more information.

Well, money transfer is a complicated matter, one that is still not completely solved in a reasonable way by current systems. My plan was to create a system transparent to the user, easy to understand (give me your cash, get this code, send it to your friend and he'll exchange it for cash), fast and cheap. I am starting to think that's not possible, though... :(


This sounds good and the system you describe is simple enough. What I'm not sure about is how easy it would be to buy and sell bonds (or EFTs) in <random location here>. It might simply be way to complicated or expensive, or both.

Anyway, following with interest! If what you suggest is possible, count me in.

You are looking at it from a wrong perspective. Purchasing bonds is not about giving the means for each and every person to purchase a bond/EFT which is pegged to Bitcoin.

By issuing a bond/EFT you simply increase the float, ie. you increase the customer base into an environment that is dealing with trillions daily. If you list the product on the financial markets, all banks, financial institutions, and everyone that does some small time trading through trading platforms will be able to purchase the product, thus indirectly purchasing Bitcoins.

While people will still be able to purchase on Mtgox and Tradehill, a whole different class of speculators and institutions will gain access to Bitcoins through a familiar platform, which is a stock exchange such as NASDAQ, Amex, Euronext and so on. This is about float, not about giving everyone here easier access to Bitcoin - this is already possible for us through Mtgox and Tradehill.

Yet some people outside our core forum/industry does not like to purchase Bitcoin this way because the amounts you can exchange is simply to little for a bank or corporation to matter. We have to start talking 10+ million of dollars.

For the sake of simplicity imagine it as being virtual gold pegged to an EFT/bond.

Wouldnt you need to go through middlemen like stock traders ?

Stock traders are just executing orders on the market. A market such as Euronext and NASDAQ has middle men, which are banks and other financial institutions that are allowed to execute financial orders on behalf of third party. But this is not a problem per say, since you as client tell your broker (bank) to execute an order for you. You basically do that through an online system, and the bank purchases the instrument on behalf of you. There is no magic here or any chance of getting "shut down". It is just a financial instrument as all other financial instruments.

JackH - Sorry if this post takes this thread slightly off-topic but I'm happy to start a new thread if you think it better.

The shutting down issue is a major problem but I'm not sure how facilitating people to hold shares of exiting companies denominated in Bitcoin really helps. From the perspective of traction, who would be interested that isn't already a Bitcoin 'believer'?

From what you said though, would this be a more grassroots way of achieving the same goal:

1) Set up a multitude of companies with hundreds/thousands of Bitcoin users

2) Articles to require shares to be denominated in Bitcoin and transactions to be done in Bitcoin

3) List shares on a stock exchange

All products and services would be traded in Bitcoin. These companies could then be traded on a Bitcoin stock exchange for any investor to buy from (plus all the other financial instruments that can be derived from a stock trading platform).

Could this not be economically more feasible in order to get to your scenario?

There is no reason to complicate it to such an extend. By simply pegging the bond to the bitcoin price you archive float, which is the purpose. The bitcoin success only depends on float and volume. The method described allows for such.

What you describe is going to cause havoc, be many times more expensive and not feasible since it would require a company to be listed. Mind you there is a big different from listing a bond to listing a whole company on an exchange. Big difference aka. price and time

I don't mean to list on a traditional stock exchange but an exchange we would create ourselves.

I think the majority of people here are totally missing your point.

The idea is simply to leverage funds against bitcoins to allow major financial industries to speculate on the market and the value of bitcoin. Right?

This would allow BIG money to flow in and out of bitcoin completely legally. It would give a huge increase to the value opening it up to the real markets and this would be the simplest way to do it it seems.

How much funds would be needed to start this?

Do correct me if im wrong this is the way I seem to understand your proposal. I think the large number of software developers here and very few economists here does lend well to your way to access the financial markets :)

Glad to see someone really got it! You are correct, that is exactly what I want to archive!

Required funds is in the range of 10.000€ to 15.000€ depending on which stock exchange and how we eventually end up listing the bond/EFT's.

Nothing to add except that this could be a big boon.

Bitcoin is just another asset, and adding it there could allow big money to flow.

Now for a dissenting opinion:

I'm not a finance person so I can't really make an informed opinion, but what do you think of the above?

I hate to be a wet blanket, but if "they" wanted to stop this why couldn't "they" simply pass a law stating that it was illegal to buy or sell bitcoins?

Or "they" could impose a punitive tax on purchases or sales of bitcoins.

I suppose my point is: if "they" really want to make bitcoin illegal, then they will find a way to do it; I don't think creating bitcoin derivatives will help much on the legal front.

Agreed but two points
1) Other that a single politician spinning there has been no effort to make bitcoin illegal (yet).
2) There is no universal "they".  Even if bitcoin becomes illegal in the US I would gladly rent out my rigs to support network in other places.

Personally I feel Bitcoin has the most value in chaotic economies (places with rampant inflation, or unstable currencies) and totalitarian regimes (where the privacy aspects have higher utility).

Can you start to imagine the implications of voiding thousands of people's investments through a regulated entity in a publicly listed financial instrument? This is unheard of historically. We have no past comparison of a stock being removed from a stock exchange, especially if its held by private investors, banks and what not.

Banning Bitcoin would bring a lot of complications if this instrument was already out. Who would pay people's investment back?

And imagine the media attention to this, do you really think they want that? This would make Bitcoin the most talked about financial tool the world has even witnessed. Hardly what "they" would like to see happening with Bitcoin.

Regardless what, I am going to go ahead with this option, it can only bring more funds into the Bitcoin economy.

I don't think it would be that easy to outlaw trading Bitcoins for fiat.

The law surely couldn't just mention "Bitcoin". It would have to be defined what exactly Bitcoin is, without accidentally including other forms of digital goods. At the same time the law would have to be general enough to prevent Bitcoin from being modified in a way that it still works as digital cash but doesn't fall under the new legal definition anymore.

I honestly cannot think of a way to achieve that.

For example, why am I allowed to sell access codes to my online game or service, but not a Bitcoin private key? Both give me access to something of value, which can in turn be exchanged for other things or money.

Also, what exactly would be outlawed to buy/sell? The announcement of a transaction to a foreign address? A copy of an unannounced transaction? A private key printed on a paper strip? Access to a GPU cluster suitable for Bitcoin mining? What about Mt. Gox redeemable codes? What about mini private keys or passphrases for deterministic wallets? What about valid shares for a mining pool? What about GLBSE shares for a mining corporation? What about one key to an input that requires two keys to be spent? What about a link to an instawallet? What if the address of the key you bought/sold did not contain any Bitcoins at the time of purchase?

Of course, in cases like this, lawmakers tend to go after the intent behind the action instead of after the action itself. But even then Bitcoin would have to be clearly defined in legal terms without accidentally outlawing the trade with e-books, Linden-dollars or cloud computing services. Also, direct private exchanges like bitmarket.eu or bitcoin-otc would probably be not affected at all.

You'd really have to look into the legal requirements wherever you set this up.  In a lot of places the issuing of shares, securities and bonds to the public is highly regulated and requires authorisation by a specific government department and organisations which issue them have to pit out a prospectus and or product disclosure statement as well as submit audited account to the regulator.  There's bound to be somewhere where it's not so tightly regulated, but you'd need to find that place.

If someone wants to buy bitcoins with Visa/MC/Amex/PayPal, send them to MemoryDealers for some physical bitcoins and then have them use MtGox as a wallet.  Let them be our test pilots for how well it will work.  It very well might.

http://www.memorydealers.com

I like this idea, but I have a question that I don't quite understand:

Would the price of the bond/coupon (and therefore the underlying implicit USD/EUR-BTC exchange rate) be regularly pegged to the MtGox exchange rate?  OOr does this only happen at the initial setup and we then have effectively a "new" independent exchange rate, depending on the currently trading prices of the bond/coupon on the public exchanges?

Sounds like a great idea if you can get it set up for that kind of money.

I really wish there were a co-operative of the the big BTC holders to offer financial support to projects like this with the goal of increase their own holdings. In short, I wish people would just act in their own enlightened self-interest.

What if the private person purchasing the bond is a criminal, a drug-dealer or such, using the company to launder the BTC received from illegal activities?

Wouldn't the company/CEO be held liable for aiding money laundering?

Companys have to hold records of who owns bonds with them. They are fully disclosable to the IRS or w/e else tax service is in that country. I dont think the company would be held reposible aslongs they are following the system.

I could be wrong but given that situation any bond could be used to launder money otherwise.

The difference here might be that the company would be directly exchanging something of monetary value (the tradable bond) for bitcoins. No other bond works like that.

Perhaps I'm mistaken, but when creating the bonds, I think they'd be in the same position as MtGox and so would need to be careful about their customers above a certain level of USD.

if they are regulated on the stock market as long as they keep records shouldnt their responsability to vet people incase they are criminals. Isnt that the police & such forths job.

If i wanted to send 120kk to someone in japan isnt the banks job to check im a criminal. They just have to keep records incase I am lol.

They don't have to check if you're a criminal in any case but they do have to follow AML regulations, which usually requires banks to do background checks on the underlying business case and or parties involved with a bank transfer that looks suspicious. They usually also have to halt the transfer and report to the authorities in case their AML department has reason to doubt the legitimacy of your transaction.

not sure what you mean by underlying business case? Ive sent a signifcant amount all over the world for all kinds of reasons and never had any trouble (not saying I should have been lol, just may seem suspicious I guess).

I guess its all very much a grey area...

Lets implement the idea in this thread ASAP. What skills do we need? How many people? How much planning? When can we start?

It is already happening. You will soon be able to purchase Bitcoin through a financial instrument. I will announce it when its ready and the product is readily available to purchase online and through banks on the stock market.

Awesome!

I don't think you can starting offering all 21billion (i forgot how many zeros actually) shares right now, some of them will not have the equivalent 'coins currently; how will you deal with that? Also, is it wise to go with round bitcoins instead of using at least some of the decimal places?

It is 21M.  There is no need to offer every single BTC for sale through this method.  Just enough that there is availabiliy.  There is also no need to deal with fractional BTC.  Having to buy whole BTC isn't exactly a huge limitation.

Each bond has to be denominated in some sort of a price. And if I peg a bond to the price of btc then I have to find at least some similarities between the two. I am not sure yet about how exactly the whole structure is going to look like but ill let you know once I know for sure what I want to do.

Excellent idea, treats BTC as an instrument, puts it in The Market. Either it "floats" or not ;-) (could not resist pun)

bump

This is one of the most, if not the most, interesting thing going on around here right now.  Where is the funding for this coming from at this point?

JackH, your financial kungfu is strong.

He's been online recently... hope he gives us an update.  PM him?

I'm interested to know what progress has been made on this, if any.  Also, if this is being worked on, how is it being funded?

Hey everyone! Here are some updates:

- The broker in Cyprus that will take this on the stock exchange is ready and can do it as soon as I deliver him the business plan for it
- The company is about to be incorporated as I am finalizing the partners structure

However I have stumbled upon problems in regards to the legal framework that is required to be in place in order for it to be accepted by CySe (The Securities and Exchange Commission in Cyprus).

For the instrument to be listed a law firm has to draft up a legal framework on how the investors in the instrument can be protected of their investment (ie. that it is not fraud and a number of issues concerning preparing a public investment vehicle). However the pricing for that has been more than 200.000£ and currently our investors are not ready to finance that high a price, considering it is "just" the legal framework.

At the moment we are trying to find a law firm that would be interested in drafting up the legal framework for the investment vehicle, but we have come short of anyone that can take the task so far, without wanting a huge amount of money.

The other parts of issuing the bond on the market is more or less done and can be completed in less than 14 days once we deliver everything to CySe.

Thats pretty much where it stands at the moment.

Hmmm...

Exactly - a money issue. And a rather large one considering they are asking for a quarter of a million pounds.

I do expect to find a law firm that can do it cheaper, but without a cheaper price this cant move on. CySe needs the legal framework drawn up to exact standards for issuing a financial instrument. And it of course doesnt make it easier that a law firm has to handle it in regards to Bitcoin, which has to precedents they can draw upon. So far - stuck.....

But for how much cheaper could it be done?  Suppose it could be done for 50% less.  Would your investors finance it then?  At what price would those involved finance it?  Would investors be willing to take some percentage of the value of the total investment's cost in bitcoins - say, 25% - for their investment?

There is a major unmentioned problem - liquidity. The market price of the ETF/bond would only truly track the price of bitcoin if the two were convertible as a regular occurance. This is the role of an ETF Authorised Participant http://www.investopedia.com/terms/a/authorizedparticipant.asp#axzz1hhYB1nQP (http://www.investopedia.com/terms/a/authorizedparticipant.asp#axzz1hhYB1nQP) - ie. the AP would take dollars and buy bitcoins, then issue a Bitcoin ETF unit to the market. Bond ETF APs do this once a week or so, liquidity is an issue there too. But if there is insufficient liquidity, a "large" transaction isn't possible or sensible. So the market price of the ETF would detach from the market price of bitcoins.

For example, imagine an investor has $10mm USD for investing in bitcoin, and BTCUSD is $4. He will want at least 2mm BTC. I don't think that would be possible even over 1 week. The price would shoot up before even a small part of the order was filled. Any big investor will know this, so they're not interested - they don't want to give everyone else a free lunch, and anything less than $10mm isn't worth the time of day.

Before listing an ETF, we need the BTC market cap to be back at $200mm, and daily trading of $10mm.

What about creating shares in a private company, and trading on SecondMarket.com?

We are currently waiting for other law firms to give us a pricing for this structure. At the moment we cannot say anything as we still dont have a new fixed cost. Stay tuned - we are!


That is correct observed, however keep in mind that the price of the EFT/Bond cannot be pegged to the Bitcoin price, since Bitcoin is not a regulated currency, thus creating a regulated instrument pegged to an unregulated instrument is not possible.

This is why a law firm is required, as they would need to draft up the legal framework on how the investments will be used to purchase Bitcoin. Probably the starting price of the EFT/Bond will be completely different from the price of Bitcoin, in a sense so that it doesnt have anything to do with Bitcoin. It will be its own market and its own price, completely unrelated to Bitcoin.

It is also true that an investor with 10.000.000$ would give everyone a "free lunch", but this also applies to a number of Penny Stocks that are higly volatile and much less secure in their essence than Bitcoin itself is.

Issuing shares on either SecondMarket, Pink Sheets or any other OTC market in order to raise cash for this project is not something we are considering at the moment, because we are going to finance it all ourselves, especially when we get a price for the legal framework that is considered sane and in line with reality. Once again, stay tuned!

Just to clarify, this is a change from your original plan, correct?  In your OP you said:

Yes, since pegging it to the Bitcoin price cannot be sustained since Bitcoin is not regulated.

The £200,000 fee wouldn't surprise me if it includes support of some kind outside a simple drafting of contracts. What does one get for that £200k? If the answer is very little then, seeing as this is Cyprus and everytime I've been there I've been ripped off... perhaps it's about £150k too much from an opportunist.

Good luck, we're all behind you.

 -j

Lets simplify this thing.

Once we get the legal framework, we need a seed capital. With it the BTC Fund will buy a certain quantity A to be able to maintain liquidity. The Fund will hold as many bitcoins as shares/bonds issued (lets say it holds B bitcoins/bonds), but the quantity A will be something apart. Whenever the Fund issues shares in the primary market what happens is that part of this btc capital from A goes to the B holdings and that new bonds/shares are issued in the primary market. Then with the money received by selling those bonds/shares the Fund will buy enough bitcoins to restore the reserves of A to the initial value.

In fact the price of the bonds in the primary market will have to be calculated by the Fund so they not only get enough btcs to restore the number A, but to be able to pay the people that work for the corporation.

Am I wrong?

Once we get the legal framework, it pretty much states how the trading of Bitcoin bonds will occur and how Bitcoin will be held as security deposits for the Bitcoin bond.

Here is how this can work simplified:

1) Company gets incorporated and all the directors, shareholders gets nominated etc.

2) Company issues X amount of bonds through a stock exchange (This can be NYSE, LSE, NASDAQ, Hang Seng, CAC, DAX or whatever we pick (however we have a stock exchange we prefer)).

3) To purchase a Bitcoin bond, you can either trade it by contacting the market makers that trade on the given stock exchange, or purchase it through the company by sending them a wire transfer/pay with card, and allowing the company that issued to Bond to fulfill the order, ie. contact the market makers.

4) Company receives X amount of $/€/£ and purchases Bitcoin for that amount at any given time.

5) Bitcoin price rises as soon as company makes a purchase of Bitcoin, from liquidity they received from a Bitcoin bond

6) Once all X amount of bonds are issued people can start trading them among themselves, thus creating a second market of how much Bitcoin is valued, thus allowing for hedging between Bitcoin itself and the Bond.

Complications for law firm that has to draft a legal framework which can be accepted by the governing legislation of the particular stock exchange

1) Security of the investment as it is based upon a non regulated entity, ie. Bitcoin

2) If a price crash occurs, and once again in an unregulated market, how can company ensure investors of their Bond value

3) Maturity on Bond, if any

4) Zero-coupon Bond or flat payout

5) Money laundry

Do remember that the last thing the established stock market wants is another wild west OTC/Pink Sheets derivate or bearer bond, that further allows money laundry and anonymity.

I'm trying hard to get this:

Option one:  I (private person) send 100 btc to the company, in exchange for which I get a 100 btc bond guaranteed by the company to be worth the same (in dollar/euro terms) as 100 btc are worth on mtgox/tradehill?

Option two: I buy 100 btc bonds on the stock exchange market through my broker, and these are guaranteed by the company to be worth the same (in dollar/euro terms) as 100 btc are worth on mtgox/tradehill?

Is this right?

Buying a clear OTCBB company. I guess it will cost several thousands of USD. Then make this company issue more shares to raise money and use the money to buy bitcoin. Then the only asset of this company is bitcoin. People can trade the share of the company to trade the bitcoin.

This company can sell more share to raise more money to buy bitcoins.

Why should we do this?

Because the traditional financial institutions will be able to hold the bitcoin commodity without the legal risk of sending money to Mtgox as of today. You cannot image Goldman Sachs can have an account on mtgox officially. However, GS can buy a share on the OTCBB market. If lots of people have an interest related to bitcoin, there will be more people who will actually use\talk\promote bitcoin in their daily life.

Any Wall Street bankers can do this without any difficult. If you're an Wall Street banker, please make this happen in your company. As you surface on this board, I don't think you can call yourself a big name on the Street today. If you make this happen, However, you WILL be the next star in your firm.

I love the idea of tradable bonds on fiat exchanges. This needs to happen in one form or the other in my opinion.

Since BTC is effectively a commodity, its legally no different than issuing a bond against Gold as previously suggested in this thread.

The question is, can we address the high cost of issuing the bond by directly funding the bond.

21M * 4.5 = $100M

Given 6 million or so bitcoin users, we would each on average have to raise around 3.xx bitcoins or around $17. This should be fairly doable. An investment bank could underwrite this bond for a fee of about 6%. This would increase each bitcoiner's avg cost to about $18.

The second option is to issue bonds like the government at auction.

Company is formed and auctions the bonds to the public. These would be OTC and not exchange traded, but once bonds are sold (at a 6% premium), the premium can be used to list the bond on an exchange.

Does the forum really think that some investment banks, hedge funds etc, will really entrust huge sums of money to an entity which must needs guarantee that a 64-byte long hex string [the private key] cannot be copied?  Yeah, there are ways to improve security, but it requires that whoever has access to the off-line private key parts be absolutely incorruptible.  Normally this wouldn't be such a huge problem, but here we're talking about sums of money large enough to buy private islands and mega-yachts... and really nasty hit-men.  Now who said they were incorruptible?  Am I fantasising too much?

Bitcoin can be secured with passwords and multi-key signature requirements. Using a single private key is fine for petty cash, but large sums can be more secure than a Brinks truck Fort Knox.

You do realize there are mechanisms to ensure nobody has complete access to the private key.  Do you think one person at Verisign has a copy of the private key for their root cert just lying in a folder in his desk?  The value of that root key would be 10x maybe 100x the value of any Bitcoin ETF/bond/fund.  

Using your logic no bank uses an SSL issued by a Certificate Authority.

You both make good points.  But, as the few bitcoin heists have shown - bitcoins are much more stealable once you have the private key.  If verisgn's root cert leaked, it would be a major pain, but the www would be fairly quick about rejecting any certs signed from it I think.  Then they could issue a new one, and business would go on - perhaps not so well for verisign.  AND, and multi-million-dollar transactions carried out through a faked cert could be reversed - right?   Bitcoins, once stolen, do not come back.  For the people who lost them, business would very definitely /not/ go on.

I know that the keys can be multiply protected, requiring cooperation from multiple people.  Meh.  So you need 10 private islands instead of just one.

Ok, ok, I'm just playing devil's advocate.  But I can see that getting multi-zillionaires to invest is going to require the kind of security that, well you said it, that Verisign have around their root certs.  Maybe?

Well no.  If a subordinate cert is compromised it can be revoked by an order issued by root authority.  It the root authority is compromised there is no "issue a new one".  The root cert is hardcoded into the browser.  Now the browser could be upgraded but millions (probably tens of millions) of users wouldn't or couldn't.  The loss would be measured in the tens of billions of dollars.


True it will require significant security just pointing out that such security IS possible.

Like the recent diginotar revocation?     https://en.wikipedia.org/wiki/DigiNotar 

I understand the problem.  But at least the situation in that case is recoverable.  If I invest $10M in gullible-fools.com, whose SSL key is fraudulently signed by verisgn's root cert, then, given how international banking is structured, I'd have some expectation of recovering my investment assuming I realised my predicament quickly.  The investment could be followed and the final recipient identified - or at least his bank account.

With bitcoins, there would be no recovery of investment.  None.  Nada.  Zilch.

Depends on how the fraud was orchestrated.  If you wired $10M to a bank account in say Cuba due to instructions on the site w/ fake cert well the money is likely never going to be recovered. 

Of course you are ignoring the larger point.  The $10M you personally lose is nothing compared to the tens of billions of losses globally which would occur.  Verisign alone would likely be wiped out between the lawsuits, civil penalties, and loss of business.  Collectively companies would spend billions more to replace their now compromised certs with ones issues by another CA.  Billions more would be lost collectively by victims and with some victims running browsers 10 years out of date the losses would continue to trickle in for years. 

A CA which loses their root cert is bankrupt.  Totally worthless, every shareholder wiped out.  Nobody (an I mean nobody) will be buying certs from a CA which can't ensure their root cert isn't compromised.  So $10B+ is riding on Verisign's ability to prevent a compromise of the root cert.  They have a vested interest in ensuring that doesn't ever (not even once) happen.  Similarly a fund would be bankrupted if they lost their deposited BTC so they have a vested interest to ensure that doesn't happen.  If Verisign can protect a key who's compromise would result in $10B+ in losses I am sure a financial company "could" do the same for keys (no reason to only have 1 account) worth 1/1000th of that.


Well of course there is.  Just because it is difficulty it doesn't mean a thief couldn't be caught by law enforcement and forced to return stolen coins as part of sentencing agreement (10 yrs in prison conditionally on successful return of victims money vs 150 years in prison for 150 counts of wire fraud). 

:)

1. ok.
2. Yes, but I'm speaking of _individuals_ making decisions to invest $millions and how _individuals_ will feel if their investment is wiped out by bad key security.  But your point is nevertheless valid.
3. ok.
4. Yes, but bitcoin is kind of designed to be untraceable.  And a bitcoin thief will presumably be quite knowledgeable about bitcoins and will anonymize them before use.  Again I don't negate what you say.

In short - OP's idea is great and more than possible.  But it will require wonderful security, and a great PR team able to convince investors that the security is sufficient.  Cheers, good discussion.

Can you elaborate on how this could be accomplished real world? Evidence required, etc.

As far as I can see, there is no way for the bond issuing company to back their bonds, without buying bitcoins beforehand. The mechanism of synchronizing ownership of btc with ownership of bonds is nearly impossible. The only thing that comes into my mind is having some large portion of btc to be in possession of this company, say 210,000btc, or 2,1mil btc and according number of shares to be issued for trading at stock exchange. But what if you own the share and want the btc it's backed up with? What if demand and supply for btc is different from one for those shares? Would it be possible to liquidate shares when the owner demands the gold...erm, btc it's backed up with? Or automatically issue new ones when company purchases more btc? I've seen someone stating that in order for btc to be legally recognized, it has to be some country's currency.
So, how much does it cost to register a new country? Let's say it's located on the Moon, and btc is it's currency. Whats next? :)))

I would create a satellite and launch it into orbit then register it as a sovereign nation. I would then sell small parts of its surface as "land" for bitcoins. This country by design would be entirely online. There might be a bitcoin client onboard and a wallet.

Dont know how to stop the space shuttle from raping it though!

That's out of question. Chinese already tested their ability to take down satellites, and in short time Russia and US should be able to do the same.

The US already did, over twenty years before the Chinese, using a purpose-built anti-satellite missile. They then did it again, this time using a standard anti-ballistic missile. India is also developing such weapons, though they haven't (yet) tested any.

To solve the problem, we should make this Bitcoin satellite a manned space station. After all, it's against international law to fire upon civilians, and in any case it would cause way too much of a public outcry. So, does anyone want to volunteer to be the satellite's human shield? ;D

Wow, I love this idea. This would open up bitcoin for a crowd of investors that currently cannot or do not want to invest in bitcoin directly because it's too cumbersome, dangerous or doesn't fit into their set of procedures (banks, institutional investors,...).

There's one thing that's unclear to me how it should work: how would the pegging itself work?

Let's say some pension fund throws 10 million USD at the bond, which is currently priced 8.89 USD/bond because it's pegged to BTC. Our company would then have to buy 1.125 million BTC for 10 million USD, which is clearly not possible. Even for smaller purchases this does not work.

As suggested earlier in this thread, the company might have to buy some BTC in advance. But then the volume would have to be somehow limited on the real-world exchange handling the bond. For example the company could try to always keep 21,000 BTC in it's coffers and only offer 21,000 shares of the bond on the real-world exchange. Once some of them are bought, the stash of BTC will be re-filled and the bond-price adjusted?

Can the bond-price even be adjusted/fixed by the issuing company?

It seems I know too little about real-world financial markets to even begin to answer these questions for myself...

I love how people are looking for ways to "back" Bitcoin with abstractions because Bitcoin is too abstract and then don't understand why it becomes too abstract to work. If you want Bitcoin adapted to traditional markets then you'll need to remove it's liquidity and lock it contractually to a bond. This is what GLBSE does. You could also do this by creating escrows and exchanging a bond for a set amount based on the current Bitcoin price. Because the Bitcoin is escrowed and no longer liquid and under control of the bond issuer, the bond will fluctuate with the price of Bitcoin because it controls the Bitcoin liquidity. The only problem with this is the licensing required to issue the bonds are quite expensive though I'm sure some is working on it.

The reason I believe escrowing the Bitcoin for the bond is so that the bond issuer does not abscond with the entire investment and instead would only get a small percentage by default.

This.

No need to reinvent the wheel.  The easiest model to get going for a Bitcoin security is not a bond or an ETF, but a closed-end fund traded on pinksheets (and/or an overseas exchange).  This is how gold first got securitized for US investors, during the time when possession of gold was illegal in the US.  In 1961 Phillip Spicer bought a bunch of gold/siver in Canada and deposited in a warehouse.  He then created a holding company (Central Fund of Canada, AKA CEF) to own the warehoused metals, and then floated the shares of the company on the NYSE and TSX.  That way, people in the US could get direct access to a gold-linked investment without having to own the metal itself.  The price of each CEF share naturally floats towards its proportional ownership of the gold in the warehouse.

A Bitcoin fund would work similarly.  You could start it with a limited quantity of Bitcoins and a structure taken almost verbatim from CEF, with proper audits and so on.  Via a reverse takeover or merger with shell company (cost: $35K?) you could then get it floated on US pinksheets.  People would buy and sell the stock in lieu of Bitcoins, and the share price would gravitate towards the company's audited Bitcoin holdings divided by number of shares outstanding.  Managers of the fund would take a small commission (unlike CEF which requires metal storage costs, management fees would be tiny).

As a closed end fund, it would trade at a premium or discount to its net asset value, but whenever the premium gets too high, the fund simply issues more shares and uses the proceeds to buy more Bitcoins.  If NAV gets too low, it sells Bitcoins and does share buybacks.  The mechanism is self-correcting, albeit with bigger standard deviations and on a longer timescale than ETF/ETNs.  But it's an infinitely simpler structure to get set up versus getting SEC approval for an ETF or bond in the US. The initial Bitcoin holdings can be tiny, so the startup capital required is mostly the legal and listing costs.

More info:
http://en.wikipedia.org/wiki/Closed-end_fund (http://en.wikipedia.org/wiki/Closed-end_fund)
http://www.centralfund.com/ (http://www.centralfund.com/)

Unfortunately I'm just an investor and don't have professional experience or contacts in the financial industry, but if I did, I'd be looking into setting this up ASAP, there's undoubtedly going to be big demand for this kind of product.

Max Keiser the former Wall St broker, has the contacts to make this happen. Hes going to be at the Bitcoin Conference in London in september. Maybe someone should mention this topic to him.

Great idea....I plan to attend as well, I will try to find him and do as you suggest!

Damn, not enough time to make a visa...

If anyone in London wants to get together for this, lets do so. I am still interested to see where we can bring Bitcoin in relation to the public credit markets.

Very simple. When people buy bonds, you use that money to buy Bitcoins. When people sell bonds, you buy Bitcoins with the money.

Correct, so you can't issue that many bonds. You can only issue as many bonds as you can obtain Bitcoins. In the process of performing this transaction, the price of Bitcoins will go up, meaning that you have fewer bonds left to issue. One easy way to do it is to obtain the Bitcoins over time and then auction the bonds.

Mostly correct, except the bond-price has already adjusted itself.

The company simply states that it's pegged to the price of Bitcoin. Theoretically, they should publish how the pegging is done (Mt. Gox daily average?) and how redemption works (the price as of what time?) and so on.

These are all solvable problems. I'm just not sure that it actually gets you anything because you have to charge for your services and you have to "rig" things to protect yourself from exchange rate losses.

Jack, I'll make sure to PM you the week of the conference to try and meet up wrt. this topic.

I am going to push this article up as I think there are grounds for debating this further, ie. the price shows muscles. I am still open to do this, contact me if interested in pushing BTC to the credit markets.

yep count me in! ;)

I'm currently thinking about executing this idea and created a blog bitcoinfund.ch (http://bitcoinfund.ch) to publish my ideas, so anyone can track its progress.

BUMP

This is a great idea, has any progress been made? Do you have a team working on this?

in currency if a bond is bought in dollars and paid in dollars its a zero coupon bond... if the dollar buys up a btc denominated bond it's called a repo or reverse repo.i think ...if theres a repurchase provision in the bond... ie accepting dollars (cash) for startup rather than BTCowners buying up btc bonds to get started... so there could be either dollar startup or get btc already owned to buy into new btc startups using only btc

This can only be done with some serious money behind it. The best approach would obviously be to start incorporating a company and getting it listed on an exchange. Pink Sheets in the USA or equivalent in Europe such as AIM in UK would work quite well. But starting this without at least 250.000$ or more would be suicide.

not even sure why jack H thinks he is an expert.

he is obviously american. but even from his first post i had a few face palms reading his advice.

firstly
to avoid SEC/fincen he is right trade in europe.. but then your going to get hit by their eu regulations. which if you look at the history of american bitcoin exchanges trying to offer UK/EU services (covered by euro money laws) get shut down alot more harshly for not having the licences.

secondly
avoiding the licences of the country which the bank account exists in is not good legal advice.

thirdly
SEC/Fincen/EU regulations dont care about bitcoin. all they care about is the fiat side so concentrating on rebranding bitcoin as a bond wont change anything. because your still avoiding the fiat licences. so your still going to get caught.

my advice if you want to be a good exchange, be a expert money manager, with proof that you can with confidence handle large sums of fiat/bitcoin. and the best proof to achieve this is.... by putting your own money where your mouth is and pay for the fiat licences required by the law of the country you have the bank account set to.

if you want to legally avoid the liceneces/regulations. avoid FIAT. and only trade the different alt-currencies between each other.

now here is some actual practical advice.
knowing the licences are expensive here is the solution.
get 10 qualified and eager people that want to set up exchanges but cannot themselves afford the licences. combine your funds and form 1 business, and 9 subsiduaries.

for instance. bitcoin-central has licences for europe. bitinstant has licences for the US, and there is another exchange starting up in the UK which will have UK licences, all three partner up and form a official international company FIAT gateway, and then have their own business(which i already named) as the subsiduary business for each of their own area's of expertise.

A bitcoin is an Over the Counter (OTC) Credit-Swap (funded Credit Swap or fCS).

To you, it is only worth what the last guy sold it to you for and made off with. You funded "his" credit for it and the next guy (is assumed to be willing to) fund yours!

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

The reason Bitcoins/Altcoin tokens are legal is because they are OTC derivatives. Otherwise they would be a Ponzi scheme.

https://bitcointalk.org/index.php?topic=175708.msg1832923#msg1832923


The markets for them are not "exchanges", they are simply marketplaces.

Stop pretending that BTC is a national socialist "currency" backed by a national socialist economy, it is not.

There is good meat to this post.  

To the OP: Please, just promise me that a good year prior to any money changes hands you speak to an attorney.  Your plans for setting up an exchange are exciting and have potential.  Your plans to evade regulatory scrutiny, though...  are more worrisome.

Maybe I've missed something earlier on in the thread but nowhere do I see franky1 say he's setting up a business so speaking to an attorney isn't useful.

Nowhere does he mention evading regulatory scrutiny, in fact, quite the opposite.

Are we reading the same post?

inedible thanks for the defense but um.. yea.. nycsquire was talking about the OP.. meaning JackH .. not me

so nycSquire was asking if JackH would go to an attorney.

that being said. if/when i set up an exchange or anything involving fiat i will be FSA regulated.(or maybe wink wink i already am under my real life birth certified identity.. just not as this franky persona)

Bump - getting some BTC bonds on the "real markets" would be great! It may not have been as successful in 2011 when this thread was started but now we could potentially get some VC funds behind it, get the proper licenses, and start issuing.

I have neither the funds nor the contacts to help organize this but I think it's a great idea.  ;D

Sincere apologies to nycsquire - that'll teach me to jump in half-cocked.

FSA - So you're in the UK? I've had a quick look into FSA registration - I couldn't find many expenses involved as a money transmitter but I only spent a few hours looking. The only ones I have come across thus far are for registering each person involved and also for each place of business. You also need to be a fit and proper person. I don't suppose you know of any other costs?

Umm guys, I never spoke of evading any laws or jumping any regulations here. This has so far been a theoretical proposal, and due to the high requirement of funds, I have been unable to start the venture. Ironically, the majority of the funds needs to be used for legal aid, regulatory licenses and in general the legal framework.

Looks like the twins did this ;) Great job guys!