ECB paper on Bitcoin and virtual currencies

[flix]

This:
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf


Means that the central bankers are paying attention now. This sort of academic paper normally precedes attempts to regulate. It also include the potential excuses that they will use to do so.

We have been warned.

[1715051638]

1715051638

[1715051638]

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[flix]

http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

The following ideas are generally shared by Bitcoin and its supporters:
– They see Bitcoin as a good starting point to end the monopoly central banks have in the
issuance of money.
– They strongly criticise the current fractional-reserve banking system whereby banks can
extend their credit supply above their actual reserves and, simultaneously, depositors can
withdraw their funds in their current accounts at any time.
– The scheme is inspired by the former gold standard.

[flix]

All these issues raise serious concerns regarding the legal status and security of the system, as well
as the finality and irrevocability of the transactions, in a system which is not subject to any kind of
public oversight. In June 2011 two US senators, Charles Schumer and Joe Manchin, wrote to the
Attorney General and to the Administrator of the Drug Enforcement Administration expressing
their worries about Bitcoin and its use for illegal purposes. Mr Andresen was also asked to give a
presentation to the CIA about this virtual currency scheme. Further action from other authorities
can reasonably be expected in the near future.

Oh well, nothing new then.

[cunicula]

This:
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf


Means that the central bankers are paying attention now. This sort of academic paper normally precedes attempts to regulate. It also include the potential excuses that they will use to do so.

We have been warned.

This is a well-written and balanced account of bitcoin. It is a policy brief, not an academic paper. The ECB clearly calls for 'wait and see' and not regulation. Barring a very dramatic expansion in usage (e.g. 50-fold rise in price), the ECB will do nothing at all in the near future. I hope that people pay attention to the ideas presented in the paper and not just the identity of the author.

That said, I think there are some misleading points. Most obviously, they do not understand how consensus works in the bitcoin system. This leads to some significant misunderstandings. For example, imposition of a reserve requirement makes no sense where there is no central issuer and no semi-centralized financial system. You can't make every user back 10% of his bitcoin with Euros. Hell, you don't even know who the users are!

Further action from other authorities can reasonably be expected in the near future.

I'm anticipating that this will be misinterpreted to mean future action by the ECB. It very clearly refers to future action by law enforcement, not monetary authorities.

[flix]

This is a well-written and balanced account of bitcoin.

I agree. It is well documented as well. Looking at the references is an interesting exercise.

It is a policy brief, not an academic paper.

I stand corrected.

I'm anticipating that this will be misinterpreted to mean future action by the ECB. It very clearly refers to future action by law enforcement, not monetary authorities.

Sure, the ECB is not an enforcement agency, but they do have a lot of clout... someone else will do the regulating..

Personally I see this kind of attention from the ECB more significant than a lot of major media mentions.

[pyra-proxy]

That said, I think there are some misleading points. Most obviously, they do not understand how consensus works in the bitcoin system. This leads to some significant misunderstandings. For example, imposition of a reserve requirement makes no sense where there is no central issuer and no semi-centralized financial system. You can't make every user back 10% of his bitcoin with Euros. Hell, you don't even know who the users are!

Devils-advocate here... a reserve could in fact be setup, it's just more difficult and more costly in Bitcoin, essentially if european central banks were to buy up say 30%+ of all bitcoins that were ever to be made and establish a fixed buy/sell rate between the Euro and bitcoin you would have a fully functioning reserve, but the act of acquiring said amount of bitcoin would be particularly costly, however on the flipside the systems, people and property needed to administer it would likely be considerably cheaper than the current reserve system infrastructure.  The optimal approach to this would be to quietly over a longer period of time establish this system and be the first to do it.  With all that said the costly part at current impact is nowhere near being much of a blink of an eye for this level of financial entity.

[bit-joker]

But people can simply just accept REAL Bitcoins and not other currency. It was easier with gold since nobody likes to carry heavy stuff around. With Bitcoins, that's not the case.

[franky1]

very well written especially then making a point about separating the term electronic money from the term virtual currency.

if you did not already know electronic money is displayed as the FIAT amount using FIAT symbol so it remains regulated as it clearly represents a FIAT equivelent EG paypal balances. where as virtual currency can be points, credits or crypto that does not look anything like a FIAT balance.

as long as the AML/KYC stick to their electronic money and paper FIAT and leave virtual currencies to fend for themselves and adopt their own best practices it will all be good.

[pyra-proxy]

But people can simply just accept REAL Bitcoins and not other currency. It was easier with gold since nobody likes to carry heavy stuff around. With Bitcoins, that's not the case.

True, but what you described even happened with Gold, and a significant reason why the USD dropped the Gold standard as it saw its Gold reserves being depleted at record pace.  In the end the ultimate goal is price fixing (illegal for the common man, common practice for big gov) and that is within the realm of power for this size of an institution and even easier in collaboration with comparable entities (i.e. US and EUR).

[ercolinux]

Devils-advocate here... a reserve could in fact be setup, it's just more difficult and more costly in Bitcoin, essentially if european central banks were to buy up say 30%+ of all bitcoins that were ever to be made and establish a fixed buy/sell rate between the Euro and bitcoin you would have a fully functioning reserve, but the act of acquiring said amount of bitcoin would be particularly costly,

Don't see it particurarly costly for a central bank: 30% of every mined bitcoin at today is near 25 Milion euro, 0.005% of the 526 billion of total reserve of the ECB. Even if the bitcoin value jumps of a 100X for that is still only the 0.5%

[hazek]

very well written especially then making a point about separating the term electronic money from the term virtual currency.

if you did not already know electronic money is displayed as the FIAT amount using FIAT symbol so it remains regulated as it clearly represents a FIAT equivelent EG paypal balances. where as virtual currency can be points, credits or crypto that does not look anything like a FIAT balance.

as long as the AML/KYC stick to their electronic money and paper FIAT and leave virtual currencies to fend for themselves and adopt their own best practices it will all be good.

Oh wow that's a great point. I actually used their definitions against them trying to make the case that they admit that apart from electronic money's physical counterparts being legal tender there's no difference between fiat currencies and bitcoins. But now I actually think it's better for us if there is a difference and we adopt their distinction because it absolves us of the current laws regulating electronic money.

[BCB]

very well written especially then making a point about separating the term electronic money from the term virtual currency.

if you did not already know electronic money is displayed as the FIAT amount using FIAT symbol so it remains regulated as it clearly represents a FIAT equivelent EG paypal balances. where as virtual currency can be points, credits or crypto that does not look anything like a FIAT balance.

as long as the AML/KYC stick to their electronic money and paper FIAT and leave virtual currencies to fend for themselves and adopt their own best practices it will all be good.

Oh wow that's a great point. I actually used their definitions against them trying to make the case that they admit that apart from electronic money's physical counterparts being legal tender there's no difference between fiat currencies and bitcoins. But now I actually think it's better for us if there is a difference and we adopt their distinction because it absolves us of the current laws regulating electronic money.

Thank you!

[BCB]

I guarantee you that distinction will not matter to the US Government won't.  If a digital currency can be used as a "stored value" or as "prepaid" asset,  believe me they'll regulate it.

[cunicula]

Devils-advocate here... a reserve could in fact be setup, it's just more difficult and more costly in Bitcoin, essentially if european central banks were to buy up say 30%+ of all bitcoins that were ever to be made and establish a fixed buy/sell rate between the Euro and bitcoin you would have a fully functioning reserve, but the act of acquiring said amount of bitcoin would be particularly costly, however on the flipside the systems, people and property needed to administer it would likely be considerably cheaper than the current reserve system infrastructure.  The optimal approach to this would be to quietly over a longer period of time establish this system and be the first to do it.  With all that said the costly part at current impact is nowhere near being much of a blink of an eye for this level of financial entity.

I think you are slightly misunderstanding what they mean.

The ECB views issuers of virtual currency as debtors. In particular, they see bitcoin itself as debt. Bitcoin is perceived like a letter of credit issued by some 'bitcoin bank.' In the event of a panic, bitcoin value could collapse just like any other illiquid debt [honestly, this collapse is quite likely to happen at some point]. They worry that a panic could have broader ramifications for the economy (not now, but perhaps later if bitcoin became widely used). Debtors who held bitcoin assets in their portfolio would go bankrupt and their creditors would suffer (potentially leading to a credit crunch in conventional bank land).

To deal with this, they feel that the 'bitcoin bank' should perhaps have a reserve requirement, say 10% of bitcoin value in Euros. The reserve would be used as a buffer to buy bitcoin in the event of a panic. It would also constrain the 'bitcoin bank' from issuing too much bitcoin. Essentially this reserve would put a floor on the exchange rate. If the reserve ran out because of a bank run, then the ECB could step in as a lender of last resort. They would lend to the 'bitcoin bank' to prop up bitcoin value. The 'bitcoin bank would pay them back later... Bitcoin users would anticipate ECB backing and would therefore be unlikely to panic.

This idea make sense for Linden Dollars (if the currency was widely used). There is a real bank like entity there, "a nonfinancial coroporation". For bitcoin, there is no such concept as the 'bitcoin bank'. There is no corporation to regulate. Sure, the ECB could assume the role of 'bitcoin bank', but I don't think this is what they had in mind. They imagine that there must be some entity that can unilaterally print more bitcoin or take bitcoin out of circulation. They think it might need regulation. As a defender of central banks, even I have to admit this is funny.

For both bitcoin and Lindens, they don't want to do anything now. They are just thinking about what to do if the currencies became widely used in the future. Their attitude towards bitcoin is positive, but their plans for how one might regulate bitcoin are quite confused.

[Technomage]

I think this report is a massive boost to the legitimacy of Bitcoin. It is creating a lot of buzz everywhere today. Even made it to some mainstream Finnish news sites which is rare for a Bitcoin related piece.

[SebastianJu]

I wondered the most about them saying that all currently available bitcoins are hold by only 10,000 persons... i really thought the community is bigger.

[Carlton Banks]

Tremblings about the enforcement agencies "enforcing" regulation are not warranted. Any regulation requires the co-operation of the Bitcoin-ing party, or a major overhaul to the system, or an even more major overhaul of the TCP/IP protocol.

These criminal "enforcement" agencies that can't even enforce laws against their own corrupt financial traders will not be gaining any co-operation from me, and I sincerely hope that the rest of you will feel similarly.

[SebastianJu]

Tremblings about the enforcement agencies "enforcing" regulation are not warranted. Any regulation requires the co-operation of the Bitcoin-ing party, or a major overhaul to the system, or an even more major overhaul of the TCP/IP protocol.

These criminal "enforcement" agencies that can't even enforce laws against their own corrupt financial traders will not be gaining any co-operation from me, and I sincerely hope that the rest of you will feel similarly.

But isnt there the bitcoin-foundation yet? That means they have a clear contactpoint where the developers sit. Which means they could go there and force them by threat of jail or something to rewrite the software. Automatically the community will update to the newest version and ready. And i think the most users will be catched in this even though there would be a fork created with hidden traffic and whatsoever.

If that wont work the most exchangesites are .com. They can close it.

Then they could go after shopowners that allow btc. At the end you have bitcoins but cant do much with them which would be the dead for them.

I only mean they could do a lot harm.

[nobbynobbynoob]

Tremblings about the enforcement agencies "enforcing" regulation are not warranted. Any regulation requires the co-operation of the Bitcoin-ing party, or a major overhaul to the system, or an even more major overhaul of the TCP/IP protocol.

These criminal "enforcement" agencies that can't even enforce laws against their own corrupt financial traders will not be gaining any co-operation from me, and I sincerely hope that the rest of you will feel similarly.

+1

Very tough even to try to regulate Bitcoin...

Not so tough to regulate Bitcoin-fiat gateways. They already regulate the living daylight out of fiat.

[Technomage]

I wondered the most about them saying that all currently available bitcoins are hold by only 10,000 persons... i really thought the community is bigger.

That number is flawed. Very flawed. Let me run up some real numbers for you.

Unique (by IP) Bitcoin nodes in late 2011 (3 month period) = 800 000
Bitcoin Reference Client downloads in 2012 = Over 600 000
Mt. Gox userbase = Over 200 000
Bitcointalk.org userbase = 70 000
Blockchain.info My Wallet userbase = Over 30 000
Reddit Bitcoin subscribers = Over 11 000

Heck, our Finnish Bitcoin portal (Bittiraha.fi) has had over 1000 people buying and selling coins through our site within the last 6 months. And our site is only for the Finns (a country of 5,5 million people).

The conclusion is that the larger Bitcoin userbase has to be a 6 figure number. I can provide the sources for all that data btw if you guys are interested.

[SebastianJu]

Sounds good Technomage... i wonder if the underestimation of bitcoinusers is good or bad for bitcoins.

[blablahblah]

This:
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf


Means that the central bankers are paying attention now. This sort of academic paper normally precedes attempts to regulate. It also include the potential excuses that they will use to do so.

We have been warned.

Skipping over most of the 'working', some of the concluding remarks are the most poignant for me:

Although in practical terms virtual currency schemes are only an evolution, from a conceptual
point of view they do present substantial changes when compared to real currencies and payment
systems. Firstly, conventional actors like financial institutions, clearing houses and central banks
are absent from these schemes.

A warning to the bloated banking sector? The banking lobby getting told where they can stick it?

virtual currency schemes:
...
could have a negative impact on the reputation of central banks, assuming the use of such systems
grows considerably and in the event that an incident attracts press coverage, since the public may
perceive the incident as being caused, in part, by a central bank not doing its job properly;

So, if Bitcoin appears to be working better than the rest of the financial system, it might "accidentally" go viral? What kind of incident?

do indeed fall within central banks’ responsibility as a result of characteristics shared with
payment systems, which give rise to the need for at least an examination of developments and
the provision of an initial assessment.

A pretty clear claim that Bitcoin falls within the ECB's realm of responsibilities.

[BCB]

residential and cloud hosted ip's change with each connection/restart
users down updated versions of the reference client multiple times on multiple machines in any given year
A large percentage 25/30% or more of Mt. Gox and BCT user account are likely inactive

I'd venture to guess 125,000 - 175,000 active active users at any given time.

[Boussac]

1/ The wording "virtual currency" applied to systems competing against the central bank monopoly is deceiving: all currencies are virtual since 1973 when the convertibility of all central bank currencies was ended. The EURO and the Dollar are virtual currencies. (even if they can be printed on paper like bitcoins).

The "legal tender" qualification to set "traditionnal" currency apart from "virtual" currencies is irrelevant since, in a democratic system, the people could vote the "virtual" currency as legal tender (not an option today because there is NO monetary democracy).

A currency is backed solely by the people using it. For central bank currencies, the people using them are people forced to use them as legal tender.


2/

Virtual currency schemes could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly;

LOL
As if the nomination of Mario Draghi, ex Goldman Sachs executive involved (directly or indirectly) in the fradulent scheme set up by Goldman Sachs that led Greece into quasi bankruptcy and earned Goldman Sachs 600 million €, was not enough to ruin the BCE reputation FOR EVER...
I am not even talking about the nomination of Jean-Claude Trichet (first president of the BCE) who was involved (as Head of treasury in France) in the cover up of the fraudulent destruction of bank archives (Credit Lyonnais now owned by Credit Agricole) in an arson fire.

[BCB]

Boussac and hazak

I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.

If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

[vokain]

Boussac and hazak

I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.

If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

Bitcoin's cool because as long as people want bitcoins (in the hopes they can exchange them for something else later) then you can trade bitcoins for something else now. With minimal transactional friction other than having standard unit value until the market decides on a set price as to what that is.

[blablahblah]

2/

Virtual currency schemes could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly;

LOL
As if the nomination of Mario Draghi, ex Goldman Sachs executive involved (directly or indirectly) in the fradulent scheme set up by Goldman Sachs that led Greece into quasi bankruptcy and earned Goldman Sachs 600 million €, was not enough to ruin the BCE reputation FOR EVER...
I am not even talking about the nomination of Jean-Claude Trichet (first president of the BCE) who was involved (as Head of treasury in France) in the cover up of the fraudulent destruction of bank archives (Credit Lyonnais now owned by Credit Agricole) in an arson fire.

Doesn't matter. To me it seems like a chess move. See how old the paper is? At least a few months. Why release it now, just days before the US elections? Something is going on.

[kjj]

Just FYI, the phrase "legal tender" means that if you attempt to settle a debt with it, regardless of the denomination of the debt, no court will hear a lawsuit for default if the lender doesn't accept.  It doesn't mean that it is "backed" by any one or any thing, and it doesn't mean that everything else is illegal.  I'd have to dig through my copy of Pieces of Eight to be sure, but if I recall correctly in the US, the Spanish Real was established as legal tender prior to the minting of the first local coins.  At any rate, once the US started minting new gold and silver coins, those coins certainly became legal tender (otherwise no one would trust the new unknown coins).

If I lend you 3 BTC, and you offer repayment with $30 cash (or whatever the spot price is that day), I can't sue you for breach of the note.  Exactly the same situation if the loan had been for an ounce of silver.

It doesn't mean that BTC or silver are not-money, it just means that dollars occupy a special place in the legal system as "money that must be accepted for repayment of debts".

[BCB]

Good point kjj.  I did not know that.  May have to check out that book.

There is an interesting debate about both bitcoin and fiat being "virtual currency" on this thread.

https://bitcointalk.org/index.php?topic=121186.msg1307004#msg1307004

have you seen it?

[oOoOo]

I thought  that paper was neutral, until i read this:

From the analysis of the existing information it is already possible to draw an initial conclusion:
it is very complicated to obtain a clear overview of the situation regarding virtual currency schemes
at this stage. Almost all of the information that can be found is on the internet, written in blogs
or on web pages where personal bias cannot be excluded (see, for instance, the references listed
in the Annex). With the exception of a few articles from respectable media sources or economics
journals, it is almost impossible to find any comprehensive papers on this issue, since no
international organisations have published statements. A similar problem exists with regard to the
quantitative information and statistics that would be needed in order to assess the speed at which
these virtual currency schemes are growing and the point at which they could become a real threat.

[Technomage]

I'd venture to guess 125,000 - 175,000 active active users at any given time.

That is a good guess. I would guess something along those lines as well.

[BCB]

 Technomage

This paper has really got the community talking and thinking.

Are you following the debate over here:

https://bitcointalk.org/index.php?topic=121186.msg1307004#msg1307004

I think this a great opportunity for us as a community to more clearly define our term for the general public, refine our position and make clear how we see bitcoin fitting into the fiat financial system.

I think the more clarity we bring to the discussion as a community NOW the less regulation we'll have imposed upon us when regulators catch up to figuring out what this bitcoin thing is all about.

[vokain]

I thought  that paper was neutral, until i read this:

From the analysis of the existing information it is already possible to draw an initial conclusion:
it is very complicated to obtain a clear overview of the situation regarding virtual currency schemes
at this stage. Almost all of the information that can be found is on the internet, written in blogs
or on web pages where personal bias cannot be excluded (see, for instance, the references listed
in the Annex). With the exception of a few articles from respectable media sources or economics
journals, it is almost impossible to find any comprehensive papers on this issue, since no
international organisations have published statements. A similar problem exists with regard to the
quantitative information and statistics that would be needed in order to assess the speed at which
these virtual currency schemes are growing and the point at which they could become a real threat.

In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).

[/quote]

Well yeah, the whole point of the ECB is to inform the banks on upcoming market trends, including possible disruptors. From the tone the author is taking, it seems like it's just something they'll have to plan for compete against for their own survival. I interpreted the bolded line as the banks will have to have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival. The only avenue they have against bitcoin is through manipulation of legislation to regulate Bitcoin-fiat exchanges, but if Bitcoin plays out how the creators envisioned this protocol faster than the slow process shutting something P2P like Bitcoin down, then that won't matter as we move into a Bitcoin-denominated marketplace.

[genuise]

Well yeah, the whole point of the ECB is to inform the banks on upcoming market trends, including possible disruptors. From the tone the author is taking, it seems like it's just something they'll have to plan for compete against for their own survival. I interpreted the bolded line as the banks will have to have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival. The only avenue they have against bitcoin is through manipulation of legislation to regulate Bitcoin-fiat exchanges, but if Bitcoin plays out how the creators envisioned this protocol faster than the slow process shutting something P2P like Bitcoin down, then that won't matter as we move into a Bitcoin-denominated marketplace.

What if they can implement a concerted actions in cooperation of several big banks to buy and hold substancial reserves of BTC to be able to organize protective/regulative (sell offs) mesaures against other market participants? So called open transations window?

[ArticMine]

I feel the ECB report is one of the most significant news for Bitcoin ever. It's creating a lot of buzz everywhere today, it even made it to some mainstream Finnish news sites which is very rare for Bitcoin related news. The legitimacy of Bitcoin in general got a massive boost thanks to the report. I rarely get the "buy while it's cheap" feeling but this is one of those times.

Here was an interesting quote I read:

In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).

and who would they impose those requirements on? 

It is on this very point that the ECB report makes a crucial error by attempting the generalize between Linden Dollars and Bitcoin. Linden Dollars are in reality a private form of fiat currency that operates in the same fashion as CAD USD or EUR, but with Linden Labs acting as the central bank. As such it should have minimum "foreign" currency reserves including gold (or Bitcoin?), as any other government fiat currency. Bitcoin acts in this respect like gold or silver, so minimum reserve requirements make no sense, a point that the report completely missed.

Cross posted from the Speculation forum.

[vokain]

Well yeah, the whole point of the ECB is to inform the banks on upcoming market trends, including possible disruptors. From the tone the author is taking, it seems like it's just something they'll have to plan to compete against for their own survival. I interpreted the bolded line as the banks will have to have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival. The only avenue they have against bitcoin is through manipulation of legislation to regulate Bitcoin-fiat exchanges, but if Bitcoin plays out how the creators envisioned this protocol faster than the slow process shutting something P2P like Bitcoin down, then that won't matter as we move into a Bitcoin-denominated marketplace.

What if they can implement a concerted actions in cooperation of several big banks to buy and hold substancial reserves of BTC to be able to organize protective/regulative (sell offs) mesaures against other market participants? So called open transations window?

Well, they need to find sellers for those substantial reserves first.

I feel the ECB report is one of the most significant news for Bitcoin ever. It's creating a lot of buzz everywhere today, it even made it to some mainstream Finnish news sites which is very rare for Bitcoin related news. The legitimacy of Bitcoin in general got a massive boost thanks to the report. I rarely get the "buy while it's cheap" feeling but this is one of those times.

Here was an interesting quote I read:

In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).

and who would they impose those requirements on?  

I interpreted that as they'll have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival.

It is on this very point that the ECB report makes a crucial error by attempting the generalize between Linden Dollars and Bitcoin. Linden Dollars are in reality a private form of fiat currency that operates in the same fashion as CAD USD or EUR, but with Linden Labs acting as the central bank. As such it should have minimum "foreign" currency reserves including gold (or Bitcoin?), as any other government fiat currency. Bitcoin acts in this respect like gold or silver, so minimum reserve requirements make no sense, a point that the report completely missed.

Cross posted from the Speculation forum.

Is the report wrong and I'm interpreting it incorrectly or vice versa?

[mccorvic]

I'm not finished reading, but I think the report is actually very good.  It details Bitcoin in a way that is fairly easy to understand and does seem to try to be balanced.

My fav quote thus far:

However, practically identical problems can also occur when using cash, thus Bitcoin can be considered to be another variety of cash,  i.e. digital cash. Cash    can be used for drug dealing and money cash can also be used for tax evasion purposes.

All of you who are already donning your conspiracy theorist caps (assuming you ever take them off), you should try to refrain from doing so.  I feel that this is a big opportunity to silence critics and be like, "See, this very official document published by people who have every reason to be openly hostile to Bitcoin thinks you're wrong".

[ArticMine]

Well yeah, the whole point of the ECB is to inform the banks on upcoming market trends, including possible disruptors. From the tone the author is taking, it seems like it's just something they'll have to plan to compete against for their own survival. I interpreted the bolded line as the banks will have to have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival. The only avenue they have against bitcoin is through manipulation of legislation to regulate Bitcoin-fiat exchanges, but if Bitcoin plays out how the creators envisioned this protocol faster than the slow process shutting something P2P like Bitcoin down, then that won't matter as we move into a Bitcoin-denominated marketplace.

What if they can implement a concerted actions in cooperation of several big banks to buy and hold substancial reserves of BTC to be able to organize protective/regulative (sell offs) mesaures against other market participants? So called open transations window?

Well, they need to find sellers for those substantial reserves first.

I feel the ECB report is one of the most significant news for Bitcoin ever. It's creating a lot of buzz everywhere today, it even made it to some mainstream Finnish news sites which is very rare for Bitcoin related news. The legitimacy of Bitcoin in general got a massive boost thanks to the report. I rarely get the "buy while it's cheap" feeling but this is one of those times.

Here was an interesting quote I read:

In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).

and who would they impose those requirements on?  

I interpreted that as they'll have reserve requirements on holding virtual currencies as that'll be the only way they'll be able to hedge against virtual currencies taking over as a matter of survival.

It is on this very point that the ECB report makes a crucial error by attempting the generalize between Linden Dollars and Bitcoin. Linden Dollars are in reality a private form of fiat currency that operates in the same fashion as CAD USD or EUR, but with Linden Labs acting as the central bank. As such it should have minimum "foreign" currency reserves including gold (or Bitcoin?), as any other government fiat currency. Bitcoin acts in this respect like gold or silver, so minimum reserve requirements make no sense, a point that the report completely missed.

Cross posted from the Speculation forum.

Is the report wrong and I'm interpreting it incorrectly or vice versa?

It depends on the virtual currency.

For Linden Dollars the report is right. Your interpretation is only part of the story since it could make sense for a central bank to hold reserves of Linden Dollars; however I believe the intent in the report is a legal requirement on Linden Labs to hold minimum reserves of USD, EUR, CAD or some other convertible currency.

For Bitcoin the report is wrong and your interpretation is the only reasonable course of action for the central bank to take; namely hold reserves of Bitcoin.

[evoorhees]

We published a thorough response to the study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

I was quite happy with the ECB's study. They did a far better job than the average journalist in trying to really understand Bitcoin from a philosophical point of view. I was also very pleased that they discussed how cash is comparable in many of the risks of Bitcoin (money laundering, drugs, fraud, theft, etc). Kudos to the ECB - they did as well as a central bank could be expected to do.

[Grinder]

For Bitcoin the report is wrong and your interpretation is the only reasonable course of action for the central bank to take; namely hold reserves of Bitcoin.

It's not wrong, it's just not possible to implement for Bitcoin. If such a law is implemented anyway it might for instance make it illegal to trade bitcoins.

[flix]

That number is flawed. Very flawed. Let me run up some real numbers for you.

Unique (by IP) Bitcoin nodes in late 2011 (3 month period) = 800 000
Bitcoin Reference Client downloads in 2012 = Over 600 000
Mt. Gox userbase = Over 200 000
Bitcointalk.org userbase = 70 000
Blockchain.info My Wallet userbase = Over 30 000
Reddit Bitcoin subscribers = Over 11 000

Heck, our Finnish Bitcoin portal (Bittiraha.fi) has had over 1000 people buying and selling coins through our site within the last 6 months. And our site is only for the Finns (a country of 5,5 million people).

The conclusion is that the larger Bitcoin userbase has to be a 6 figure number. I can provide the sources for all that data btw if you guys are interested.

I am very interested. I would really like to see a good estimate of how many Bitcoin users there are worldwide.

IMHO 10 million users is the key threshold to pass before going totally mass market.

My own rule-of-thumb guesstimate is to multiply the forum members (68k) x10 = 680k active users.

[sunnankar]

I am very interested. I would really like to see a good estimate of how many Bitcoin users there are worldwide.

The Bitcoin Magazine #2 had a very in-depth article about that. Around 700,000 estimated.

[molecular]

That number is flawed. Very flawed. Let me run up some real numbers for you.

your numbers are inflated:

Unique (by IP) Bitcoin nodes in late 2011 (3 month period) = 800 000

I am probably responsible for about 512 of these. (dynamic IP address)

Bitcoin Reference Client downloads in 2012 = Over 600 000

I never downloaded, but "git pulled" probably 20 times.

Mt. Gox userbase = Over 200 000

I have 2 accounts, probably many deceased.

Bitcointalk.org userbase = 70 000

also: many puppets, forgotten pws, people that left without ever getting coins,...

Blockchain.info My Wallet userbase = Over 30 000

I made about 5 of these

Reddit Bitcoin subscribers = Over 11 000

that one, I don't know. It might not be so heavily inflated.

Still, 10,000 is way too low. Probably 30-50,000

[Realpra]

So, if Bitcoin appears to be working better than the rest of the financial system, it might "accidentally" go viral? What kind of incident?

Bitcoin is there waiting for an opportunity, their ENTIRE fancy plan for 2010-2020 (and beyond perhaps) is adding a more centralized and corporatized EU to their control through the ECB and their printing press first.

They can't control the EU through the euro if people start running to bitcoin.

A "flash crash" is what they fear where overnight fiat currency is obliterated. ONE wrong story goes viral, one case of hyperinflation where Bitcoin is accepted (ANY country) and their power is GONE.


I LUVE this thread!

[fivemileshigh]

Don't see it particurarly costly for a central bank: 30% of every mined bitcoin at today is near 25 Milion euro, 0.005% of the 526 billion of total reserve of the ECB. Even if the bitcoin value jumps of a 100X for that is still only the 0.5%

I can't wait for the ECB to try to buy 3,000,000 btc  

Of course, some teenager in Ukraine is going to hack their wallet the next day and steal all that loot back  

[Technomage]

Good points molecular. Remember that with the node count the numbers go both ways. One node can actually represent thousands of users in some cases. My best guess for the userbase is something like 100 000, anyways. 10 000 is way too low, we can all agree on that.

Here are the sources for my earlier data, for those who are interested.

Unique (by IP) Bitcoin nodes in late 2011 (3 month period) = 800 000
http://blogs.umb.edu/williamfleurant001/2012/01/13/bitcoin/

Bitcoin Reference Client downloads in 2012 = Over 600 000
http://sourceforge.net/projects/bitcoin/files/stats/timeline?dates=2012-01-01+to+2012-10-30

Mt. Gox userbase = Over 200 000 (by now)
https://mtgox.com/press_release_20120831.html

Bitcointalk.org userbase = 70 000
https://bitcointalk.org/index.php?action=stats

Blockchain.info My Wallet userbase = Over 30 000
http://blockchain.info/about

Reddit Bitcoin subscribers = Over 11 000
http://www.reddit.com/r/Bitcoin/

If you can find any other good ways of trying to estimate the userbase, please inform me.

[molecular]

It can be concluded that, in the current situation, virtual currency schemes:
−− do not pose a risk to price stability, provided that money creation continues to stay at a low
level;

Am I understanding this correctly as: "If these guys would print more serious amounts of money, that would inflate the EUR money supply, because these linden dollars / bitcoins are being used a tokens for Euros, yet used directly as if they where "real money" (similarly to when back in the days receipts of gold deposits where used as money)?

I mean, if merchants accept both bitcoin and EUR for payment, then bitcoin actually _does_ inflate the FIAT money supply, right? For example: let's say there €100 money supply. Now one bitcoin is mined and people value it at €10 for whatever reason and all merchants accept it as payment just like a €10 bill. Didn't we then just effectively inflate the money supply to €110?

Could this be the "reputational danger" they're talking about? People see price inflation as a result of money supply inflation (this will be the case anyhow, I think) and will then blame it on the central bank, even if they didn't do all the inflating themselves? After all, part of their job is to "regulate the money supply". This would also explain why they consider virtual currencies to fall into their domain. Will they then even try to blame the price inflation on the "issuance" and use of virtual currencies?

[molecular]

If you can find any other good ways of trying to estimate the userbase, please inform me.

I will inform everyone here in BIG LETTERS .

One the one hand it's pretty sad for comunity to not even be able to determine its own size. One the other hand, of course, this is a feature, not a bug.

[Realpra]

I think about 1 million people are using Bitcoin based on the valuation that would be 200$ on average which seems plausible.

Some have a lot, others just change from free outlets, but most perhaps 200$ as experimentation or for buying a few drugs.

Myself I have ~10 times that. Even 100k users would mean an average of that (2.000$) which I find hard to believe as many still see this as experimentation and I am from a richer country than most.
An average of 20.000$ as would be implied by 10k users would be crazy. Most of us are normal guys with costs, wives and stuff - we might be able to access that kind of money, but not for an experiment our wives/family don't get/hate

Likewise an average of 20$ is too low as it is troublesome to get so few BTC through a wire transfer without huge percentage costs.

1 mil also kinda fits with the various numbers of users here and there put together and corrected for a couple of double accounts etc..

Also BTC value comes from its usage - 100k or 10k hoarders would not be worth 200 million dollars or generate so much activity I'm guessing.

[Technomage]

Realpra,

Bitcoin holders and active Bitcoin users are a totally different statistic. We were talking about the relatively active userbase which probably is somewhere between 50 000 and 150 000.

I agree with you that the amount of people who own bitcoins is much larger. Most definitely over 1 million. I know so many people around me who own at least some coins. Some of the people I know have even invested significant amounts. But they have literally never used Bitcoin, some of them perhaps once or twice.

So there are different types of users, some Bitcoin holders have simply tried it out and hold some bitcoins and some have invested in bitcoins and hold a lot of bitcoins. Neither of these user groups actually use Bitcoin for transacting with it. So these are different demographics entirely.

I think it's smart to separate Bitcoin holders and Bitcoin users since there are probably ten times more holders compared to those that use Bitcoin occasionally or regularly.

[marcus_of_augustus]

Technomage

This paper has really got the community talking and thinking.

Are you following the debate over here:

https://bitcointalk.org/index.php?topic=121186.msg1307004#msg1307004

I think this a great opportunity for us as a community to more clearly define our term for the general public, refine our position and make clear how we see bitcoin fitting into the fiat financial system.

I think the more clarity we bring to the discussion as a community NOW the less regulation we'll have imposed upon us when regulators catch up to figuring out what this bitcoin thing is all about.

My approach would be ... tell them nothing, let them do the leg work to figure it out.

Central Banks are past masters at keeping their servants (the public) in the dark and bull-shitting them for decades ..... what goes around, comes around.

Kind of surprised the ECB hasn't got it's too hands full with the massive cock-up they have wrought on the 400 million minions of Europe with the Euro centralised currency rort ... to be writing fluff pieces about virtual currencies threatening their system ... they seem a little panicked, like they are losing legitimacy.

[molecular]

I have to speak more of my mind on this paper. The reception has been too positive (I do agree it's well researched):

They got it all backwards with the naming concept. I think the connotations of the terms they use are quite misleading.

They contrast "virtual" vs. "real" (bitcoin: virtual (not really real), EUR: real, money of the "real economy").

In my mind, bitcoin is way more real than FIAT money. I wouldn't use "virtual" at all, because it implies "not really existing, just hot air". As for the terms they use for the Euro, they're very unfitting: it's neither "real" nor is it "money".

I'd suggest to use the following terms:

bitcoin and precious metals are "real money" or "commodity money" (bitcoin being a "digital commodity money", while FIAT currencies are, well, "virtual currencies" or just "currencies": mere units of account, unfit for storing wealth in the long run.

Since I know the above is controversial, here's a categorization of types of money taken from "The Creature from Jekyll Island" which I like:

• commodity money
• receipt money
• fractional money
• fiat money

The characterizations of these are much more relevant to the functioning of a money and the implications of its use in society than wether or not a money scheme has in-/outflow to/from a certain FIAT currency.

Again: I don't think calling it a "virtual currency scheme" does bitcoin justice. It's a money for heavens sake!

[BCB]

molecular

I've been arguing that bitcoin is a virtual currency and that fiat is not a virtual currency but I like you point.  If fiat is actually the virtual what is bitcoin it can't also be a virtual currency as it implies they are both the same thing which they are not.


Digital - yes.   a commodity - yes.   money  - in what sense?  is stores value?  it has value, it certainly has a perceived value.

a digital comedity money ?   too much  too academic.  

Needs to be more clear.   But you are on to something!

[Grinder]

In my mind, bitcoin is way more real than FIAT money. I wouldn't use "virtual" at all, because it implies "not really existing, just hot air". As for the terms they use for the Euro, they're very unfitting: it's neither "real" nor is it "money".

There is no way you're going to be able to convice average Joe about this, though, and it's not really important at all. Nitpicking on issues like this will make Bitcoin supporters look unnecessarily nerdy, and lower the chances of convincing the public that Bitcoin is a good idea.

Instead we should just use terms like this in the way other people are most likely to understand, and focus on what Bitcoin can do better than other currencies. The paper actually mentions some things, and it would be much more beneficial to discuss how to use this to promote Bitcoin.

[BCB]

Grinder

Can you be specific?

[yoyoceramic]

[evoorhees]

Here's how money should be categorized:

Physical Money
-Gold/Silver/PMs

Digital Money
-Fiat currencies
-Gaming currencies (WoW gold, Linden$, etc)
-Crypto-currencies (Bitcoin)

If you don't think fiat currencies belong in Digital Money category, see this

One might ask where "cash" falls in this organization. Cash is a physical bearer bond for digital fiat currency stored at your bank. It is no different than Casascius Coins which are bearer bonds for digital BTC.

[Realpra]

Bitcoin holders and active Bitcoin users are a totally different statistic. We were talking about the relatively active userbase which probably is somewhere between 50 000 and 150 000.

Oh if we are talking regular users I think the 10K would be spot on. I would like to buy my groceries with BTC, but its not happening yet.

50-150k would likely include users who have used it now and then, but not weekly by any means. The estimation becomes very difficult if you include degree of "user".

Even savings/hoarding is a kind of use and the other reason I include them is because they make up sleeper-bitcoiners: In the event of high inflation or other crisis they would be likely to switch to BTC since they know about it and have a client etc..


Also; it may actually be bad the ECB is noticing us so soon. We could be set back a year or two if they crack down hard right now. Dunno.

[molecular]

Here's how money should be categorized:

Physical Money
-Gold/Silver/PMs

Digital Money
-Fiat currencies
-Gaming currencies (WoW gold, Linden$, etc)
-Crypto-currencies (Bitcoin)

If you don't think fiat currencies belong in Digital Money category, see this

One might ask where "cash" falls in this organization. Cash is a physical bearer bond for digital fiat currency stored at your bank. It is no different than Casascius Coins which are bearer bonds for digital BTC.

well, except the legal tender status fiat-cash has.

I think we'd need to use at least 3 dimensions to have a meaningful system of categorization for money/currency.

[grishnakh]

Well, I never liked the term they called Bitcoin a 'virtual currency scheme'. Somehow I thought it had a bit of a negative connotation.

[molecular]

Bitcoin holders and active Bitcoin users are a totally different statistic. We were talking about the relatively active userbase which probably is somewhere between 50 000 and 150 000.

Oh if we are talking regular users I think the 10K would be spot on. I would like to buy my groceries with BTC, but its not happening yet.

50-150k would likely include users who have used it now and then, but not weekly by any means. The estimation becomes very difficult if you include degree of "user".

Even savings/hoarding is a kind of use and the other reason I include them is because they make up sleeper-bitcoiners: In the event of high inflation or other crisis they would be likely to switch to BTC since they know about it and have a client etc..

Also; it may actually be bad the ECB is noticing us so soon. We could be set back a year or two if they crack down hard right now. Dunno.

the ECB will not "crack down" at all. They are just not in that business. Other arms of the same beast 'd be used for that.

For ease of argument, let's call a certain group of mostly men "the establishment" (the old money) and let's consider their options assuming they have identified bitcoin as a threat to their plans (of a "new world order" or something):

• crack down hard: will generate loads of publicity and might even spawn discussion about what money is, how it works etc... and as a result leave us with an educated public => very bad
• sneakily manipulate public opinion in such a way that bitcoin can maybe even be blamed (at least in part) for the bad shit that is going to happen. More generally: manipulate opinion in such a way that the public will say: "we have enough, look at the rich and the poor: capitalism has failed, we need more central authoritarian control, a world government that runs shit for us and fixes prices at affordable levels so our children can live long and prosper"

[molecular]

Well, I never liked the term they called Bitcoin a 'virtual currency scheme'. Somehow I thought it had a bit of a negative connotation.

you mean it sounds like: "vapormoney scam" ?

[pyra-proxy]

Well, I never liked the term they called Bitcoin a 'virtual currency scheme'. Somehow I thought it had a bit of a negative connotation.

you mean it sounds like: "vapormoney scam" ?

agree whole heartedly here ... scheme naturally makes one think scheming or to scheme and while their use of the word is more akin to the definition that aligns with a system, the scheming term humans often get in the back of their mind when they see the word feels more like the definition akin to scam i.e. to scheme as opposed to a scheme

[molecular]

good assessment with road runner image by sunnankar in another thread about this: https://bitcointalk.org/index.php?topic=121187.msg1306412#msg1306412

[Grinder]

Grinder

Can you be specific?

If you mean the positive sides about Bitcoin it says this on page 21: "Users have several incentives to use Bitcoins. Firstly, transactions are anonymous, as accounts are not registered and Bitcoins are sent directly from one computer to another. Also, users have the possibility transactions are carried out faster and more cheaply than with traditional means of payment. Transaction fees, if any, are very low and no bank account fee is charged."

It also mentions other sides of Bitcoin which are more neutral, but which have some positive consequences which can be focused on. It would be would be much more constructive to look for these than the "Look how clever I am, I found a tiny issue that in some respects is slightly incorrect"-attitude that a lot of Bitcoin users have.

[Binford 6100]

Very tough even to try to regulate Bitcoin...

just wait for an ambitious bureaucrat who wants to climb the career ladder and chooses bitcoin as his agenda

Not so tough to regulate Bitcoin-fiat gateways. They already regulate the living daylight out of fiat.

[pyra-proxy]

Very tough even to try to regulate Bitcoin...

just wait for an ambitious bureaucrat who wants to climb the career ladder and chooses bitcoin as his agenda

Not so tough to regulate Bitcoin-fiat gateways. They already regulate the living daylight out of fiat.

Could be wrong here but I always assume when people say "tough to regulate bitcoin" and comments akin to this they are referring merely to the fact that bitcoin could exist and function as a black market medium, i.e. impossible to shut it down without global supporter cooperation.  This is actually a good argument for why governments should NOT regulate it if they are smart enough to connect the dots... essentially all those bad things they fear could happen will become the primary use of the system (drug trade, money laundering, terrorist organization funding, tax evasion, etc), while left unregulated or even mildly supported the uses for good can thrive and by the very nature that bitcoin is less anonymous than cash governments can then use the system to much more easily find the negative users in the system (as has been proven in past case studies on the anonymity factor of bitcoin), if it goes dark however I can't see a scenario where tracking negative users is as easy since most users would be using it for these purposes and they would all be purposefully doing things to avoid detection (i.e. common practice to use TOR based coin mixers, binary tree balance dispersion, most servers head to anonymous style hosting etc. whereas currently many of the ins and outs of the system are public and well known and a majority of users are satisfied with the current level of anonymity and there is a certain level of self-policing going on if nothing else than for the purposes to shut down scams as quickly as possible.)

The misguided perception here is a possible failing to see that with government regulation in several key jurisdictions (Euro, U.S., China etc.) then Bitcoin becomes "effectively" shutdown in that it will not be able to garner general public acceptance.  While the 2 points are individual, they go hand in hand with each other.

[Carlton Banks]

crack down hard: will generate loads of publicity and might even spawn discussion about what money is, how it works etc... and as a result leave us with an educated public => very bad

You forgot to mention a secondary permutation to this one: crack down hard, and also crack down hard on reporting of the crackdown. Maybe in countries where Bitcoin is more widely used, like Finland and Germany, it would be impossible to stop the stories becoming news. But it's not difficult to prevent those stories from reaching countries where Bitcoin is not as widely used. Then, all you have to do is quell your German and Finnish dissenters, and Bitcoin is officially discredited as illegal money.

[SebastianJu]

http://www.dgcmagazine.com/the-old-radical-how-bitcoin-is-being-destroyed/

I wondered why some here suggested to bind bitcoin to a dollar or so. I mean when this happens then bitcoin wouldnt be a protection against fiat-crashs and somewhat useless because in most cases you would be better to use usd then anyway. Why change in btc?

But i dont quite understand the author. I mean when governments all over the world want to kill bitcoins they effectively should have success. Not because they can block it but they can make it practically useless. I mean nearly all websites for bitcoin are .coms. Can be cancelled. Exchanges .com... are gone. Shops that allow bitcoin... gone... less use for bitcoins. Somewhere have to come updates to the wallet... the developer could be catched. They could make changes into wallet that most users adapt automatically.

And even when there will be other developers that create a fork and a wallet with encryption and so on (could be learned from some previous p2p-projects where isps wanted to make them useless) then... what could be done with btc? I mean a currency lives from its possibilities and his value. The value can be stopped from falling at some point. But useability? How big would the use be when you have to fear the government and could only pay someone in hidden? I think that could practically kill bitcoins.

How you imagine this would work in such case? And are there precautions? I doubt the developers, for example, are anonymous. At least the downloadplace isnt and the software there could be replaced from government.

What do you think?

[nobbynobbynoob]

The value can be stopped from falling at some point. But useability? How big would the use be when you have to fear the government and could only pay someone in hidden? I think that could practically kill bitcoins.

Ask anyone in the drug trade, where we know that government prohibition coupled with extremely strong enforcement has destroyed the value of cocaine and heroin.

[Carlton Banks]

extremely strong enforcement has destroyed the value of cocaine and heroin.

Precisely the opposite, in fact. Increased arrests and seizures push the price upwards, thanks to our old friend supply & demand.

Edit: switching sarcasm detector back on...

[db]

I mean, if merchants accept both bitcoin and EUR for payment, then bitcoin actually _does_ inflate the FIAT money supply, right? For example: let's say there €100 money supply. Now one bitcoin is mined and people value it at €10 for whatever reason and all merchants accept it as payment just like a €10 bill. Didn't we then just effectively inflate the money supply to €110?

The euro can take damage from being outcompeted but the minting rate of the competitor is not relevant. It is all about the relative demand for payments using the two currencies. If no one actually paid in bitcoin (even though all merchants accepted it) the euro market would be completely untouched. Minting of new bitcoins would only increase the bitcoin denominated prices but not affect the euro denominated prices. If everyone paid in bitcoin instead of euro then euros would be just as worthless no matter how many bitcoins were minted or not minted.

[misterbigg]

Ironically, the Bitcoin section of this paper is the most well written, accurate, and easily understood description of the virtual currency that I've seen. Anyone who is writing or speaking about Bitcoin should definitely crib some of that paper.

[BCB]

Jon Matonis,

Gives a great interview about bitcoin and contributes to the discussion of "defining" bitcoin and identifying how is it distinct from other "electronic" or "digital" currency.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2012/10/31/jon-matonis/bitcoin-crypto-currency-is-digital-gold-the-future-of-money

[nobbynobbynoob]

Jon Matonis,

Gives a great interview about bitcoin and contributes to the discussion of "defining" bitcoin and identifying how is it distinct from other "electronic" or "digital" currency.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2012/10/31/jon-matonis/bitcoin-crypto-currency-is-digital-gold-the-future-of-money

Looks at my end to be guarded by a US$ paywall - ironic, much?

[BCB]

If they were SMART they would have offered BITCOIN as a payment option!

Here you go:

http://downloads.payloadz.com/217507/fsn2012-1031-1-matonis.mp3?AWSAccessKeyId=012NFZM3D44FSG20CP82&Expires=1353426926&Signature=6%2BbqHxlKBDW9T9OReXOi4SnDLzc%3D

[evoorhees]

Grinder

Can you be specific?

If you mean the positive sides about Bitcoin it says this on page 21: "Users have several incentives to use Bitcoins. Firstly, transactions are anonymous, as accounts are not registered and Bitcoins are sent directly from one computer to another. Also, users have the possibility transactions are carried out faster and more cheaply than with traditional means of payment. Transaction fees, if any, are very low and no bank account fee is charged."

They also forgot another positive side... users use Bitcoins because they can't be debased through inflation

[BCB]

@ Grinder  this is continuation:

bitcoin is way more real than FIAT money.

I wouldn't use "virtual" at all, because it implies "not really existing, just hot air".
** I dont' agree as virtual just means it exists but not in a physical sense. 

the Euro is  neither "real" nor is it "money".
*** this is where I have a problem  You can make that statement but unless you clearly and simply explain it the "average Joe" is going to think you are a "neerdy Bitcoin Supporter".  As far as they "average joe" is concerned their dollars and euros may be devalued by inflation, but they can still use them to PAY TAXES and buy stuff. 


There is no way you're going to be able to convice average Joe about this, though, and it's not really important at all.

Nitpicking on issues like this will make Bitcoin supporters look unnecessarily nerdy, and lower the chances of convincing the public that Bitcoin is a good idea.
***Again I'm not nitpinking, I'm saying we have to clearly and simply define our terms so as the a broader media and public discovers Bitcoin we have a clear defininton of:

1.  what it is
2.  How is it different

Or else those terms will be defined for us by a misinformed or even hostile media/governments


Instead we should just use terms like this in the way other people are most likely to understand, and focus on what Bitcoin can do better than other currencies.
***YES!

[molecular]

@ Grinder  this is continuation:

bitcoin is way more real than FIAT money.

I wouldn't use "virtual" at all, because it implies "not really existing, just hot air".
** I dont' agree as virtual just means it exists but not in a physical sense. 

the Euro is  neither "real" nor is it "money".
*** this is where I have a problem  You can make that statement but unless you clearly and simply explain it the "average Joe" is going to think you are a "neerdy Bitcoin Supporter".  As far as they "average joe" is concerned their dollars and euros may be devalued by inflation, but they can still use them to PAY TAXES and buy stuff. 


There is no way you're going to be able to convice average Joe about this, though, and it's not really important at all.

Nitpicking on issues like this will make Bitcoin supporters look unnecessarily nerdy, and lower the chances of convincing the public that Bitcoin is a good idea.
***Again I'm not nitpinking, I'm saying we have to clearly and simply define our terms so as the a broader media and public discovers Bitcoin we have a clear defininton of:

1.  what it is
2.  How is it different

Or else those terms will be defined for us by a misinformed or even hostile media/governments


Instead we should just use terms like this in the way other people are most likely to understand, and focus on what Bitcoin can do better than other currencies.
***YES!

Although I don't quite know who wrote what, I pretty much agree my usage of the terms is not fit to communicate with the masses.
I also agree with that last sentence.

[Roger_Murdock]

The fact that the founder of Bitcoin uses a pseudonym -- Satoshi Nakamoto -- and is surrounded by mystery does nothing to help promote transparency and credibility in the scheme.

Good point. I mean, it's not like the founders of the current monetary scheme, er... I mean "system" cloaked their activities in secrecy and used pseudonyms when they got together and planned it at Jekyll Island. What's that? Oh, they did? Yeah, ok, but that was years ago. Still, you gotta admit that the current operations and decision-making process of the Federal Reserve is a helluva lot more transparent than some open-source software that absolutely anyone can review or modify. Right?
 
Edit: And of course, that comparison is really unfair to Satoshi. The planners of the Federal Reserve tried to keep their involvement anonymous to deceive the public. My guess is that Satoshi simply wanted to preserve his privacy and/or avoid becoming the target of violence from the assholes whose racket is rightfully being challenged by Bitcoin.

[paraipan]

The fact that the founder of Bitcoin uses a pseudonym -- Satoshi Nakamoto -- and is surrounded by mystery does nothing to help promote transparency and credibility in the scheme.

Good point. I mean, it's not like the founders of the current monetary scheme, er... I mean "system" cloaked their activities in secrecy and used pseudonyms when they got together and planned it at Jekyll Island. What's that? Oh, they did? Yeah, ok, but that was years ago. Still, you gotta admit that the current operations and decision-making process of the Federal Reserve is a helluva lot more transparent than some open-source software that absolutely anyone can review or modify. Right?
 
Edit: And of course, that comparison is really unfair to Satoshi. The planners of the Federal Reserve tried to keep their involvement anonymous to deceive the public. My guess is that Satoshi simply wanted to preserve his privacy and/or avoid becoming the target of violence from the assholes whose racket is rightfully being challenged by Bitcoin.

^Thank you, had a good laugh and realized how misguided most people are.

[molecular]

The fact that the founder of Bitcoin uses a pseudonym -- Satoshi Nakamoto -- and is surrounded by mystery does nothing to help promote transparency and credibility in the scheme.

Good point. I mean, it's not like the founders of the current monetary scheme, er... I mean "system" cloaked their activities in secrecy and used pseudonyms when they got together and planned it at Jekyll Island. What's that? Oh, they did? Yeah, ok, but that was years ago. Still, you gotta admit that the current operations and decision-making process of the Federal Reserve is a helluva lot more transparent than some open-source software that absolutely anyone can review or modify. Right?
 
Edit: And of course, that comparison is really unfair to Satoshi. The planners of the Federal Reserve tried to keep their involvement anonymous to deceive the public. My guess is that Satoshi simply wanted to preserve his privacy and/or avoid becoming the target of violence from the assholes whose racket is rightfully being challenged by Bitcoin.

well spoken, sir.

you really got me, I was _this_ close to quoting "The Creature from Jekyll Island" once again before reading on .

On the matter: Bitcoin doesn't really need credibility, because it's "advertising" doesn't tell you anything that can't be fact-checked. Now of course there's the problem that average Joe can't read the sourcecode and/or as I've come to believe: understand the basics of the system.

I'm not sure the ECB-authors have dug in deep enough to have the bitcoin-aha-effect.

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation that tries to assure him his money is safe, no matter how many "very"s you put there! Even if you tell them something like: "It's like rolling 100 dice and they all come up '6'", they'll still think it could happen at some point because, well: they've seen 5 dice come up '6' and that's only 20 times more and there's a lot of time in the future and people generating addresses.

The analysis we're talking about here can help a lot because it's understandable and doesn't feature any of the technical details. It's really a good introduction to bitcoin. I especially like that libertarian austrian economics in-a-nutshell "grey box".

[misterbigg]

They also forgot another positive side... users use Bitcoins because they can't be debased through inflation

Well...actually no. People "hoard/save/speculate" Bitcoins because they can't be debased. I believe that the ECB paper was discussing Bitcoin purely as a payment system. For which, inflation doesn't matter since in theory the Bitcoins are held for a brief enough duration that fluctuations in purchasing power are effectively nil.

[Boussac]

Boussac and hazak

I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.

If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

I am afraid I have to stand by what I said: the distinction is NOT along the "virtual" line as bankers would like to make people believe but along the centralized vs decentralized divide.
Bitcoin is a decentralized P2P currency while the Euro belongs to the same "centralized" category as Linden Dollars, Frequent Flyer Miles or Facebook credits.
The word "virtual" is meant to hide the fact that central currencies are backed just by the people using them, like any other currency.

[Boussac]

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation that tries to assure him his money is safe, no matter how many "very"s you put there! Even if you tell them something like: "It's like rolling 100 dice and they all come up '6'", they'll still think it could happen at some point because, well: they've seen 5 dice come up '6' and that's only 20 times more and there's a lot of time in the future and people generating addresses.

You raise a good point.

The way I put it generally is "cyberthieves are billions of times more likely to break your bank account information and passwords than to break your bitcoin private keys."
It works.

[BCB]

Boussac and hazak

I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.

If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

I am afraid I have to stand by what I said: the distinction is NOT along the "virtual" line as bankers would like to make people believe but along the centralized vs decentralized divide.
Bitcoin is a decentralized P2P currency while the Euro belongs to the same "centralized" category as Linden Dollars, Frequent Flyer Miles or Facebook credits.
The word "virtual" is meant to hide the fact that central currencies are backed just by the people using them, like any other currency.

So then the operative word for bitcoin must be "decentralized" currency.

[paraipan]

They also forgot another positive side... users use Bitcoins because they can't be debased through inflation

Well...actually no. People "hoard/save/speculate" Bitcoins because they can't be debased. I believe that the ECB paper was discussing Bitcoin purely as a payment system. For which, inflation doesn't matter since in theory the Bitcoins are held for a brief enough duration that fluctuations in purchasing power are effectively nil.

I think they didn't forget about that, you have it on page 23...

Economic foundations of Bitcoin

The theoretical roots of Bitcoin can be found in the Austrian school of economics and its
criticism of the current fiat money system and interventions undertaken by governments and
other agencies, which, in their view, result in exacerbated business cycles and massive inflation.

[nobbynobbynoob]

If they were SMART they would have offered BITCOIN as a payment option!

Here you go:

http://downloads.payloadz.com/217507/fsn2012-1031-1-matonis.mp3?AWSAccessKeyId=012NFZM3D44FSG20CP82&Expires=1353426926&Signature=6%2BbqHxlKBDW9T9OReXOi4SnDLzc%3D

Thanks!

[misterbigg]

Boussac and hazak
I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.
If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

"Legal tender" laws are nothing more than regulation. As regulation always protects the incumbents, it's easy to see how legal tender laws, despite their claimed purpose, have the actual effect of eliminating competition.

[BCB]

Boussac and hazak
I think your effort to argue that "legal tender" fiat is also "virtual currency" is confusing the issue.
If bitcoin and fiat are both virtual currencies then the only distinction is: one is government backed 'legal tender' and the other is not.

"Legal tender" laws are nothing more than regulation. As regulation always protects the incumbents, it's easy to see how legal tender laws, despite their claimed purpose, have the actual effect of eliminating competition.

again  PLEASE design your terms. 

Is legal tender a "law" enacted by congress or parliament or is it a "regulation" defined by a Federal/National Government Agency or is it a "ruling" or "interpretation" defined by a high court.

[Wekkel]

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation [..]

Actually, somebody on this board explained it as a chance that is even billions less than that (i) you life for 80 years, (ii) from the moment of your birth, lightning strikes your head 200 billion times per second (iii) for the rest of your entire life. He got the numbers behind it and it makes completely clear how small that chance is.

I cannot find that thread just now

[molecular]

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation [..]

Actually, somebody on this board explained it as a chance that is even billions less than that (i) you life for 80 years, (ii) from the moment of your birth, lightning strikes your head 200 billion times per second (iii) for the rest of your entire life. He got the numbers behind it and it makes completely clear how small that chance is.

I cannot find that thread just now

I found it...

Comparatively speaking, your odds of being struck by lightning in a given calendar year are about 1 in 280,000. The odds of winning my local lottery are about 1 in 176,000,000. So finding a collision on your first try is roughly equivalent to being hit by lightning 16,540,000,000,000,000,000,000,000 times per second for an entire year or winning the lottery 830,000,000,000,000,000,000,000,000,000 times.

...but I think it's wrong. Off by many orders of magnitude in fact. Hopping over to that thread.

[Binford 6100]

Bitcoin is a decentralized P2P currency while the Euro belongs to the same "centralized" category as Linden Dollars, Frequent Flyer Miles or Facebook credits.

this. decentralized vs world. but still a good introduction paper

The word "virtual" is meant to hide the fact that central currencies are backed just by the people using them, like any other currency.

and taxes. they are not collected in Lindens

So then the operative word for bitcoin must be "decentralized" currency.

translates in the ECB paper to virtual, type 3 ; )

[evoorhees]

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation [..]

Actually, somebody on this board explained it as a chance that is even billions less than that (i) you life for 80 years, (ii) from the moment of your birth, lightning strikes your head 200 billion times per second (iii) for the rest of your entire life. He got the numbers behind it and it makes completely clear how small that chance is.

I cannot find that thread just now

I found it...

Comparatively speaking, your odds of being struck by lightning in a given calendar year are about 1 in 280,000. The odds of winning my local lottery are about 1 in 176,000,000. So finding a collision on your first try is roughly equivalent to being hit by lightning 16,540,000,000,000,000,000,000,000 times per second for an entire year or winning the lottery 830,000,000,000,000,000,000,000,000,000 times.

...but I think it's wrong. Off by many orders of magnitude in fact. Hopping over to that thread.

When odds are that unlikely, just say it's impossible.  Seriously.

[molecular]

That's why it's possible that people actually think we might be telling them lies: our facts are complicated. And, well, to be honest: "It's very very very astronomically unlikely that someone accidentally finds the same key" is a shitty fact to tell someone in a conversation [..]

Actually, somebody on this board explained it as a chance that is even billions less than that (i) you life for 80 years, (ii) from the moment of your birth, lightning strikes your head 200 billion times per second (iii) for the rest of your entire life. He got the numbers behind it and it makes completely clear how small that chance is.

I cannot find that thread just now

I found it...

Comparatively speaking, your odds of being struck by lightning in a given calendar year are about 1 in 280,000. The odds of winning my local lottery are about 1 in 176,000,000. So finding a collision on your first try is roughly equivalent to being hit by lightning 16,540,000,000,000,000,000,000,000 times per second for an entire year or winning the lottery 830,000,000,000,000,000,000,000,000,000 times.

...but I think it's wrong. Off by many orders of magnitude in fact. Hopping over to that thread.

When odds are that unlikely, just say it's impossible.  Seriously.

That's not a good idea if the person learning about bitcoin just discovered by himself the possibility of an address collision.

I'd like to be able to say something like "it's about as likely as getting struck by lightning every time you take a piss for the rest of your life".

[franky1]

i think half of the posters did not read the full article and are trying to grasp how to legally classify bitcoins compared to digital version of fiat so here goes...


if the value in digital form represents the same numeric value (minus commissions/fee's) as the FIAT payment made to obtain it, and also the digital balance uses the FIAT symbols £ $ Euro etc then this is called 'E-Money' which is regulated by financial institutions. EG paypal, moneygram, online bank account balance
if the digital numeric balance has no obvious comparison to the FIAT amount paid and does not use FIAT symbols this is called virtual currency.  which is not regulated by financial institutions. EG 23Bunny points for $1 or 1BTC  for $11

e-Money regulated. Virtual currency not regulated. they are separate classifications and not the same thing.

the virtual currencies are then divided into sub categories depending on their use and impact to real world markets
type 1 (least impact) where you can purchase points but not redeem them back for FIAT. EG facebook credits, microsoft points.
type 2 where virtual currencies can be traded back and forth for FIAT
type 3 like type 2 but also used as means of trading real life products and wages.

if you skip down to chapter 4 of the PDF :THE RELEVANCE OF VIRTUAL CURRENCY SCHEMES FOR CENTRAL BANKS it has a few things to note about it.

regulations do not affect the bitcoin community by controlling what you do with coins to purchase products. so if you buy gold. you are 100% free of income taxes (but the sellers value stil incorporates sales tax if they are a legitimate business that requires sales tax in that country).

BUT if you want FIAT for your BTC then regulations do come into play once a fiat request happens or when fiat exchanges hands. which is where MTGOX, Bitinstant have to be regulated. but the guy selling alpaka socks for BTC does not have to be regulated.

they cannot find enough evidence that it is a ponzi scheme due to the fact that there is not one single entity in control of it to in human terms. close the doors and run off with all the FIAT equivelent of all the coins.

but they can class it as high risk due to the monopoly where there is a lack of multiple main payment gateways in and out. basically bitinstant mtgox holding the largest value exchange with a few dozon very small in comparison exchanges.

that due to this if a majority stake was to cash out it would easily destabilise the market.

EG the 5 people with other 300k BTC could take a huge portion of the FIAT market capital. as noted by the summer 2011 events that made BTC shrink to only a few cents

[Binford 6100]

I'd like to be able to say something like "it's about as likely as getting struck by lightning every time you take a piss for the rest of your life".

And even if you'd be hit by a lightning bolt every time you pee for the rest of your life, the collision would not happen before the last strike and you'd be dead by then ; ) so don't worry about that

edit: !typo

[misterbigg]

Is legal tender a "law" enacted by congress or parliament or is it a "regulation" defined by a Federal/National Government Agency or is it a "ruling" or "interpretation" defined by a high court.

There shouldn't be any ambiguity. "Legal tender" means a lawful medium of payment. "Legal tender laws" (or "Legal tender" laws) are statutes that define what is legal tender.

A "regulation" is a legal provision that constrains a right (legal provisions which duplicate natural rights are merely redundant and not worthy of discussion). "Legal tender" laws constrain an individuals right to enter into private contracts with other consenting parties using the currency of their choice. Furthermore they give governments license to shirk the one useful function that they can legitimately be said to have, enforcing private contracts. For example, not recognizing gold clauses in contracts.

[marcus_of_augustus]

And you just know that the guy(gal(s?)) at the ECB who beavered away doing research for this report then quickly and quietly went about getting themselves a USBful of bitcoins anonymously ...  

(just for research purposes of course!).

It's the powerful ideas that are the most corrosive to the old orders ... even the established actors just give up defending the status quo and move ahead eventually.

Notice that they never discussed the merits of centralised versus decentralised monetary systems based on a systems theoretic analysis ... cause that's where they lose.

[beckspace]

I'd like to be able to say something like "it's about as likely as getting struck by lightning every time you take a piss for the rest of your life".

And even if you'd be hit by a lightning bolt every time you pee for the rest of your life, the collision would not happen before the last strike and you'd be dead by then ; ) so don't worry about that

edit: !typo

Only if you pee just 9 times in your life.

Better say something like: "it's nearly the same as winning the lottery 6 times! 6 times!!"

[Roger_Murdock]

One of the most obnoxious aspects of that paper is its use of the "virtual" / "real" terminology to distinguish "virtual" currencies (like Bitcoin) from supposedly "real" currencies (fiat). As discussed here - https://bitcointalk.org/index.php?topic=119113.msg1281236#msg1281236 - the U.S. dollar is very much a "virtual" currency and it's arguably less "real" than Bitcoin in all the ways that count.  So while there certainly are important distinctions between the two, the ECB's attempted "virtual" / "real" classification is silly.  Couldn't they have chosen more accurate (and less loaded) terms?  How about something like, oh I don't know, "voluntary" vs. "violence-based"?

[SebastianJu]

I'd like to be able to say something like "it's about as likely as getting struck by lightning every time you take a piss for the rest of your life".

And even if you'd be hit by a lightning bolt every time you pee for the rest of your life, the collision would not happen before the last strike and you'd be dead by then ; ) so don't worry about that

edit: !typo

Only if you pee just 9 times in your life.

Better say something like: "it's nearly the same as winning the lottery 6 times! 6 times!!"

That doesnt sound much then because you speak about 1! new address. Nowadays you can create million new addresses in short times isnt it? So even when its randomly hit... what would be the worst effect of having the same address?

[beckspace]

That doesnt sound much then because you speak about 1! new address. Nowadays you can create million new addresses in short times isnt it? So even when its randomly hit... what would be the worst effect of having the same address?

The key point is that Satoshi built the system so if you have that much power at your disposal, it is massively more profitable to be a miner for rewards and fees than try to crack funded addresses to transfer the coins.

[Roger_Murdock]

Ok, so I finally got the chance to read the whole thing. After doing so, I have to take issue with the folks who called this a "balanced" look at Bitcoin. I suppose it's more even-handed than I would have expected considering the source, the European Central Bank, but that statement sort of falls into the "pretty nice guy for a serial killer" category. I do get the impression, as someone else suggested, that different sections may have been written by different authors because the tone / comprehension level appears to shift at times. But when it's bad, it's pretty bad. And there are some real howlers in there, e.g.:

In these schemes, the settlement asset is the virtual currency, and therefore the finality and irrevocability of payments cannot be ensured. Only central bank money can do so, because central banks present no default risk and act as lender of last resort to the member of the system in order to stop any possible chain reaction resulting from payment incidents or unforeseeable liquidity shortages.10 Virtual currencies cannot therefore be considered to be safe money, since the likelihood of the asset retaining its value for the holder, and hence its acceptability to others as a means of payment cannot be ensured. It simply relies on the creditworthiness of the issuer of the settlement asset. The level of safety is clearly below that of commercial bank money, as commercial banks are subject to prudential requirements and are supervised in order to reduce the likelihood of default, thereby improving the safety of claims on these institutions.

Here's the tl;dr version for anyone who doesn't want to slog through it. Some of the dinosaurs have seen the asteroid. They don't really understand what they're seeing. The dinosaurs are telling themselves they don't need to be worried about it. After all, they're so big and the something is so little, nothing more than a dot in the sky. And yet... there's a tiny part of their walnut-sized brains that IS worried.

[SebastianJu]

That doesnt sound much then because you speak about 1! new address. Nowadays you can create million new addresses in short times isnt it? So even when its randomly hit... what would be the worst effect of having the same address?

The key point is that Satoshi built the system so if you have that much power at your disposal, it is massively more profitable to be a miner for rewards and fees than try to crack funded addresses to transfer the coins.

Good point...

[cunicula]

Ok, so I finally got the chance to read the whole thing. After doing so, I have to take issue with the folks who called this a "balanced" look at Bitcoin. I suppose it's more even-handed than I would have expected considering the source, the European Central Bank, but that statement sort of falls into the "pretty nice guy for a serial killer" category. I do get the impression, as someone else suggested, that different sections may have been written by different authors because the tone / comprehension level appears to shift at times. But when it's bad, it's pretty bad. And there are some real howlers in there, e.g.:

In these schemes, the settlement asset is the virtual currency, and therefore the finality and irrevocability of payments cannot be ensured. Only central bank money can do so, because central banks present no default risk and act as lender of last resort to the member of the system in order to stop any possible chain reaction resulting from payment incidents or unforeseeable liquidity shortages.10 Virtual currencies cannot therefore be considered to be safe money, since the likelihood of the asset retaining its value for the holder, and hence its acceptability to others as a means of payment cannot be ensured. It simply relies on the creditworthiness of the issuer of the settlement asset. The level of safety is clearly below that of commercial bank money, as commercial banks are subject to prudential requirements and are supervised in order to reduce the likelihood of default, thereby improving the safety of claims on these institutions.

Here's the tl;dr version for anyone who doesn't want to slog through it. Some of the dinosaurs have seen the asteroid. They don't really understand what they're seeing. The dinosaurs are telling themselves they don't need to be worried about it. After all, they're so big and the something is so little, nothing more than a dot in the sky. And yet... there's a tiny part of their walnut-sized brains that IS worried.

No. You are an idiot. You failed to comprehend the ECB report. You should revise your estimate of your own intelligence downwards and that of the ECB upwards.

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

[Wekkel]

You need central bank intervention to maintain stable prices.

It is probably what the ECB meant, but that is not how it works in real life. The proper sentence would read: "The last thing you need in order to maintain stable prices is central bank intervention."

Hello 'loose monetary policy' bubbles

[Roger_Murdock]

No. You are an idiot. You failed to comprehend the ECB report. You should revise your estimate of your own intelligence downwards and that of the ECB upwards.

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

No, you're an idiot. Thanks, friend. And yeah, I get what they meant. Still stupid.  "Central banks present no default risk"?  Only because they can conjure more of their increasingly-worthless money out of thin air. (Of course, printing new money is the functional equivalent of a partial default that falls on everyone who holds the currency.) Central banks act as a "lender of last resort to the member of the system in order to stop any possible chain reaction resulting from payment incidents or unforeseeable liquidity shortages"? This "benefit" of a central bank (propping up FRB's systemic insolvency) simply isn't relevant to Bitcoin so presenting it as an advantage over "virtual currencies" is silly.  With fiat the "money supply" is a tiny little pool of "base money" and a whole crap-ton of circulating claims on that money, i.e. debt.  Bitcoin isn't a debt-based instrument. "Virtual currencies cannot therefore be considered to be safe money, since the likelihood of the asset retaining its value for the holder, and hence its acceptability to others as a means of payment cannot be ensured"? Yeah, because central banks have such a great track record of ensuring that their currencies retain value for the holder.  By the way, who's had the job of ensuring that gold (a better analogue for Bitcoin than fiat) retains its value? Because those guys have done a bang-up job over the past century.  Maybe we should put them in charge of the central banks.  "[A virtual currency] simply relies on the creditworthiness of the issuer of the settlement asset"? That may be true of Linden dollars. Of course, it's also true of fiat. But it's NOT true of Bitcoin. That's the genius of it. "The level of safety is clearly below that of commercial bank money, as commercial banks are subject to prudential requirements and are supervised in order to reduce the likelihood of default, thereby improving the safety of claims on these institutions"? Again, the beauty of Bitcoin is that you're not holding a claim on an institution to real money. Bitcoin is "real money." Forget reducing the risk of default. With Bitcoin, you can eliminate it.  

[BCB]

For a while there I thought this thread was the big boys' board until two started calling each other idiots.  Most of the "ECB paper" threads have sparked a vigorous, enlightened  if not at times contentious debate which I thik is great.  You both have valid points.  I just don't think its necessary to start degrading the conversation with the name calling.

Thanks

[Roger_Murdock]

For a while there I thought this thread was the big boys' board until two started calling each other idiots.  Most of the "ECB paper" threads have sparked a vigorous, enlightened  if not at times contentious debate which I thik is great.  You both have valid points.  I just don't think its necessary to start degrading the conversation with the name calling.

Thanks

Hey, c'mon now. My "idiot" at least was rhetorical ("No, you're an idiot") , playful (note the winking emoticon - you can say anything if you follow it with one of those), AND in response to an unprovoked (and apparently sincere) attack. I wasn't actually suggesting that cunicula is an idiot, that he has a mental age of less than three.  And I don't harbor any ill will towards the guy. I'm sure he's a nice-enough dude. I bet his dog loves him.

tl;dr version: he started it!

[Boussac]

Some of the dinosaurs have seen the asteroid. They don't really understand what they're seeing. The dinosaurs are telling themselves they don't need to be worried about it. After all, they're so big and the something is so little, nothing more than a dot in the sky. And yet... there's a tiny part of their walnut-sized brains that IS worried.

This.

Plus they are referring to Austrian economics in a desperate attempt to connect the dots with some known territory, that of academia and mass media wehre plenty of bank-sponsored "economists" can explain how dangerous a theory can be if it is not endorsed by them.

Trouble is bitcoin IS an asteroid because none of these geniuses has ever come close to providing a solution to the world's current economic woes.

[paraipan]

For a while there I thought this thread was the big boys' board until two started calling each other idiots.  Most of the "ECB paper" threads have sparked a vigorous, enlightened  if not at times contentious debate which I thik is great.  You both have valid points.  I just don't think its necessary to start degrading the conversation with the name calling.

Thanks

Hey, c'mon now. My "idiot" at least was rhetorical ("No, you're an idiot") , playful (note the winking emoticon - you can say anything if you follow it with one of those), AND in response to an unprovoked (and apparently sincere) attack. I wasn't actually suggesting that cunicula is an idiot, that he has a mental age of less than three.  And I don't harbor any ill will towards the guy. I'm sure he's a nice-enough dude. I bet his dog loves him.

tl;dr version: he started it!

^ Don't mind Paul, he's quite famous around these parts for his inflammatory comments and blatant name calling

[molecular]

That doesnt sound much then because you speak about 1! new address. Nowadays you can create million new addresses in short times isnt it? So even when its randomly hit... what would be the worst effect of having the same address?

The key point is that Satoshi built the system so if you have that much power at your disposal, it is massively more profitable to be a miner for rewards and fees than try to crack funded addresses to transfer the coins.

to clarify: the situation that ocurred was someone asking me: "But couldn't it happen that two people accidentally find the same address?"

[molecular]

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

If that's what they mean they are wrong.

[molecular]

No. You are an idiot. You failed to comprehend the ECB report. You should revise your estimate of your own intelligence downwards and that of the ECB upwards.

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

No, you're an idiot. Thanks, friend. And yeah, I get what they meant. Still stupid.  "Central banks present no default risk"?  Only because they can conjure more of their increasingly-worthless money out of thin air. (Of course, printing new money is the functional equivalent of a partial default that falls on everyone who holds the currency.) Central banks act as a "lender of last resort to the member of the system in order to stop any possible chain reaction resulting from payment incidents or unforeseeable liquidity shortages"? This "benefit" of a central bank (propping up FRB's systemic insolvency) simply isn't relevant to Bitcoin so presenting it as an advantage over "virtual currencies" is silly.  With fiat the "money supply" is a tiny little pool of "base money" and a whole crap-ton of circulating claims on that money, i.e. debt.  Bitcoin isn't a debt-based instrument. "Virtual currencies cannot therefore be considered to be safe money, since the likelihood of the asset retaining its value for the holder, and hence its acceptability to others as a means of payment cannot be ensured"? Yeah, because central banks have such a great track record of ensuring that their currencies retain value for the holder.  By the way, who's had the job of ensuring that gold (a better analogue for Bitcoin than fiat) retains its value? Because those guys have done a bang-up job over the past century.  Maybe we should put them in charge of the central banks.  "[A virtual currency] simply relies on the creditworthiness of the issuer of the settlement asset"? That may be true of Linden dollars. Of course, it's also true of fiat. But it's NOT true of Bitcoin. That's the genius of it. "The level of safety is clearly below that of commercial bank money, as commercial banks are subject to prudential requirements and are supervised in order to reduce the likelihood of default, thereby improving the safety of claims on these institutions"? Again, the beauty of Bitcoin is that you're not holding a claim on an institution to real money. Bitcoin is "real money." Forget reducing the risk of default. With Bitcoin, you can eliminate it.  

Put a couple of newlines and paragraph breaks to make this a wonderful post! Right to the point(s).

[fergalish]

Trouble is bitcoin IS an asteroid because none of these geniuses has ever come close to providing a solution to the world's current economic woes.

It is not clear that bitcoin will solve the world's economic woes either. There *was* once a gold standard, you know, and even then there were still market crashes, recessions, booms, and all that. Not on today's global scale, though, but that might be just as much a symptom of globalization.

Tell the truth, I wouldn't be surprised if there's a yet undiscovered fundamental law of economic systems which states that a static economy is either impossible or is a contradiction in terms. I'm thinking of something along the lines of Einstein's proof that a static universe is not possible according to general relativity.

[DublinBrian]

There *was* once a gold standard, you know, and even then there were still market crashes, recessions, booms, and all that.

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

[mccorvic]

Ok, so I finally got the chance to read the whole thing. After doing so, I have to take issue with the folks who called this a "balanced" look at Bitcoin.

Sorry, we meant to say it's seems pretty balanced as a report to people who know what real life is like.  This is a report meant to be read by people who know and work in banking, not by people who default to conspiracy theory and end any conversation with "becuz of guvernmint".  It is balanced because it highlights pros and cons as they apply to everyday experiences. 

Is it perfect? Psht, of course not. Is it a much better examination and explanation that what can be found in the vast majority of posts on this forum? Probably.

[cunicula]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

[molecular]

There *was* once a gold standard, you know, and even then there were still market crashes, recessions, booms, and all that.

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Another possible criticism of a "global (fixed-supply) currency" I have heard is that the economic zones (or nationstates) would be "too different to be 'run' by a single currency". Is that a valid criticism?

[lonelyminer (Peter Šurda)]

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

If they are worried about the price level of Euro, then the only thing they need to do to mitigate it is to conduct open market operations between the Euro and Bitcoin. This is extremely trivial to do. There's very little to be done on the infrastructure, and there are no legal (Bitcoin is not owned by anyone or covered by property laws) or international (Satoshi or the Bitcoin Foundation are not going to threaten to attack the EU if they do it) obstacles. In fact the only institutions that attempt to interfere with the trade between the Euro and Bitcoin are the financial regulators, i.e. other branches of the EU and national goverments (e.g. the German BaFin).

Michael Woodford, a Keynesian and one of the economists Krugman likes, wrote about things like this in a paper called Monetary Policy in a Wold Without Money. I wrote a critique of the panicky views, partially based on Woodford's arguments, for a German online magazine, it was published here: http://www.business-on.de/saarlorlux/alternative-digitale-waehrung-wirtschaftsforscher-sieht-in-bitcoins-grosses-potential-_id14906.html

If they are worried about the price volatility of Bitcoin, the problem with this approach is that it confuses top-down monetary systems (fiat money) with bottom-up monetary systems (commodity money). With commodity money, the function of unit of account is an emergent one, and occurs relatively late at the stage of development, at a very high level of liquidity. Until that happens, the price volatility is irrelevant from macroeconomic point of view.

Fiat money is accompanied by legal tender laws, which force you to use that money in your business accounting for the purposes of taxation. So obviously a price volatility is an issue from the beginning. Furthermore, in order for Bitcoin to be used as a unit of account, it would not only have to reach a much high level of liquidity that it has now to become a unit of account, but also out-compete fiat money to such an extent that people would not worry about violating the accounting provisions of the legal tender laws.

Empirical data also supports the emergent aspect of unit of account of Bitcoin and my argument that it's not a problem. Even though there have been many failed businesses in the Bitcoin ecosphere, as far as I know, none of them failed due to price movements.

[lonelyminer (Peter Šurda)]

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

[molecular]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Not what you're looking for, but I think the Byzantine Economy was run on a commodity money standard for very long period of time (1000 years) without cycles: https://en.wikipedia.org/wiki/Byzantine_economy

[molecular]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

EDIT: increased level of quoting to include quote of DublinBrian which was omitted before.

[Roger_Murdock]

Sorry, we meant to say it's seems pretty balanced as a report to people who know what real life is like.  This is a report meant to be read by people who know and work in banking....

Yeah, when I think of "people who know what real life is like," I think of bankers. Real salt of the earth types, those guys.    But you're kind of making my point. It's pretty good ... for bankers, i.e. still pretty terrible.

...not by people who default to conspiracy theory and end any conversation with "becuz of guvernmint". 

First of all, I've gone literally days without ending a conversation with that phrase. Secondly, I didn't think the history of the Federal Reserve's founding really qualified as a "conspiracy theory" at this point. And frankly, I'm more interested in public choice theory than I am in conspiracy theory. That says that the banking industry, like pretty much all industries, will lobby for and defend policies that restrict competition from new entrants and keep their own profits artificially high.

It is balanced because it highlights pros and cons as they apply to everyday experiences.

Well, I guess it tried to do some of that but it got most of it wrong. The pros of Bitcoin over fiat are that it's more durable (resiliency of distributed networks, ability to "copy" money for security without actually duplicating it), more fungible, more reliably scarce, more provably genuine, more divisible, has radically lower transaction costs, is faster, enables greater financial privacy, is more transparent from a systems perspective, and eliminates counter-party risk for holding and transferring value. The pros of fiat over Bitcoin are inertia (network effects) and the fact that it's the preferred currency of the men with guns.

[lonelyminer (Peter Šurda)]

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

I meant his view, not this view. The Keynesians argue that during a depression, there are idle resources in the economy (for whatever reason) and this causes problems. What would persuade cunicula that these "idle resources" actually represent a move towards, not away from, an equilibrium, and that they are caused by the influence of credit on the money supply?

[cunicula]

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

What is the counterfactual here? They may not have lived up to your expectations, but that doesn't mean you'd be better off without them. You did not establish criteria for favorable performance.

Regarding evidence...

Sure, real GDP volatility is a measure of economic stability. The question is whether real GDP is less volatile when countries have a central bank acting as lender of last resort.
Everyone has a lender of last resort now. So I think you'll need historical evidence. Show me data which shows that during the 19th century, GDP was less volatile in countries that did not have a lender of last resort.
The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

(I'm not going to talk about the theory of what is really going on... It is much too speculative. Often almost useless in my opinion. I'll prefer to restrict myself to questions one can answer with data. e.g. is GDP less volatile with a central bank? are there fewer banking crises? Do banking crises have greater geographic scope? etc.)

[cunicula]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Not what you're looking for, but I think the Byzantine Economy was run on a commodity money standard for very long period of time (1000 years) without cycles: https://en.wikipedia.org/wiki/Byzantine_economy

I wasn't aware that we had annual GDP data for the Byzantine Economy. Could you please point me to it.

[molecular]

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

I meant his view, not this view.

This totally changes the meaning.

[cunicula]

Empirical data also supports the emergent aspect of unit of account of Bitcoin and my argument that it's not a problem. Even though there have been many failed businesses in the Bitcoin ecosphere, as far as I know, none of them failed due to price movements.

Firms that have liabilities in USD and assets in BTC are going to fail with high frequency. Likewise, firms that have liabilities in BTC and assets in USD will also fail with high frequency.

Bitcoinica got into trouble with this, even though it failed for other reasons. Pirate also expressed concern about this, though he failed for other reasons.

I don't understand why bitcoin would fail to 'emerge as a unit of account'. That is an Austrian economics argument (read bunkum). Neoclassical economic theory supports bitcoin having positive value in equilibrium (though there are multiple equilibria).

Read Kiyotaki and Wright

http://cas.umkc.edu/econ/economics/faculty/wray/631Wray/Kiyotaki%20and%20Wright.pdf

[DublinBrian]

The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

The "evidence" you link to is a Central Bank website. That is not a neutral source.

You dont have much credibility, IMO. I see no reason to debate with you.

[cunicula]

If they are worried about the price volatility of Bitcoin, the problem with this approach is that it confuses top-down monetary systems (fiat money) with bottom-up monetary systems (commodity money). With commodity money, the function of unit of account is an emergent one, and occurs relatively late at the stage of development, at a very high level of liquidity. Until that happens, the price volatility is irrelevant from macroeconomic point of view.

What are you talking about here? "late stage of development, very high level of liquidity" "commodity money"

Is this some vision about how we weren't ready for commodity money before due to inadequate development, but in the future we become ready and then it works well.

If not, explain what you mean.
If yes, you should put Karl Marx as your avatar.

[cunicula]

The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

The "evidence" you link to is a Central Bank website. That is not a neutral source.

You dont have much credibility, IMO. I see no reason to debate with you.

It is an academic article by a professor at Rutgers university. Economists working at central banks do whatever macroeconomics research they like. (e.g. the economists at the Minneapolis FED only write articles saying that the FED is useless).

If I may quote myself from the first page of the thread:

I hope that people pay attention to the ideas presented in the paper and not just the identity of the author.

I am so prophetic. Yay me!

[molecular]

I am so prophetic. Yay me!

Yay.

[lonelyminer (Peter Šurda)]

Firms that have liabilities in USD and assets in BTC are going to fail with high frequency. Likewise, firms that have liabilities in BTC and assets in USD will also fail with high frequency.

This makes no sense unless BTC is a unit of account, and it at the moment isn't, and as I wrote, it probably won't until we're at the stage where the fiat money system is collapsing due to its internal mismanagement.

Bitcoinica got into trouble with this, even though it failed for other reasons. Pirate also expressed concern about this, though he failed for other reasons.

Bitcoinica had a crappy hedging algorithm, and in fact was unprofitable during the time of high price stability and high liquidity (the exact opposite of what you allege). Pirate most likely did not do any trades whatsoever and was a pure ponzi (the guy has a long history of allegations of fraud and theft).

I don't understand why bitcoin would fail to 'emerge as a unit of account'. That is an Austrian economics argument (read bunkum).

I would appreciate if you read what I wrote, and produced arguments instead of ad hominem attacks. Bitcoin can evolve into a unit of account, but we're far away from that.

Neoclassical economic theory supports bitcoin having positive value in equilibrium (though there are multiple equilibria).

This "multiple equilibria" with respect to Bitcoin is also dubious. With normal fiat money, for example, the stregth of the national economy, monetary policy of central banks, transaction cost difference among forms of money, or demand for credit influence the money supply, but with Bitcoin they don't (and potentially never will).

Read Kiyotaki and Wright

I already read it. I checked my bibliography records and I made four notes on this paper. I agree with it that fiat money is more efficient with respect to storage costs than what has commonly been understood as commodity money, and also that velocity is not a good indicator of "moneyness". I disagree that "beliefs" play a significant role in the selection of money, and also the authors fail to sufficiently appreciate the heterogeneity of transaction costs (a very common mistake for almost all the authors that I read, including many Austrians).

[lonelyminer (Peter Šurda)]

I posted a paper in another thread about it. Here it is again:

They (bank panics, ed.) occurred  more  often  in  the  U.S.  than  in  other  countries.  They  usually  occurred  during  serious  recessions
associated  with  declines  in  the  money  supply  and sharp  price  level  reversals.  The  likelihood  of  their occurrence  would  be  greatly  diminished  in  a  diversified  nationwide  branch  banking  system.

This is consistent with the Austrian view, the bank panics correlate with shrinking of the money supply. Also, branch banking was prohibited in the US in the 19th century.

The Austrians also view the shrinking of the money supply (and accompanying panics) as a move towards, not away from, an equilibrium. So when evaluating central banking based on the number of panics, they reach the opposite conclusion, especially the gold standard branch (Rothbard in particular favoured bank runs as exposing the "fraudulent" nature of fiduciary media). The freebanking branch (White and Selgin), on the other hand, argues that freebanking (fractional reserve banking based on commodity standard) in Canada and Scotland was more stable than US (based on number of panics).

Also, from a logical point of view, lender of the last resort in a fiat money system is just an externalisation of costs. It does not fix anything, it just redistributes debt. No wonder if such a course of action is possible that the debtors view it positively.

EDIT: Most importantly for Bitcoin though, in a system with inelastic money supply (when credit has no effect on it), the whole concept of the lender of last resort makes no sense from the point of view of monetary policy.

[cunicula]

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

They (bank panics, ed.) occurred  more  often  in  the  U.S.  than  in  other  countries.  They  usually  occurred  during  serious  recessions
associated  with  declines  in  the  money  supply  and sharp  price  level  reversals.  The  likelihood  of  their occurrence  would  be  greatly  diminished  in  a  diversified  nationwide  branch  banking  system.

This is consistent with the Austrian view, the bank panics correlate with shrinking of the money supply. Also, branch banking was prohibited in the US in the 19th century.

As I predicted at the outset, you are immediately heading off topic to dodge the issue.

Point to data which suggests that the absence of a lender of last resort reduces GDP volatility.

If you can't point to any evidence whatsoever to support your beliefs, but still maintain them. Well ... There isn't much use in communicating with you then is there?

[cunicula]

I disagree that "beliefs" play a significant role in the selection of money.

So beliefs about the future of bitcoin do not affect its valuation and use, only its intrinsic properties.
If bitcoin succeeds than litecoin must also succeed since they are almost identical. Right? Or no? Because if the answer is no, then beliefs must matter.

[Technomage]

I don't think that the success of Bitcoin vs Litecoin has much to do with either beliefs or the intrinsic properties. It can be explained fairly well with the network effect. Bitcoin has a strong network effect and similar technologies are at a major disadvantage because of this. They have to be much more than just copies with small changes to overcome this effect.

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

[kjj]

If you can't point to any evidence whatsoever to support your beliefs, but still maintain them. Well ... There isn't much use in communicating with you then is there?

This made me laugh.  That's pretty awesome coming from the guy that can prove that proof-of-work will fail by saying it over and over again.

[blablahblah]

Wow! There's some interesting debate going on regarding the minutiae of the ECB's self-published opinions on Bitcoin. However, I wonder if someone could enlighten me by answering a few questions.

1) What was the purpose of the "Virtual Currency Schemes" publication? Why did they publish it? Surely, they could have just sent out some private memos to the interested parties instead?

2) What do they hope to achieve by involving the public? Considering that the Internet is a major communications medium, on par with television, presumably 'we' the naive Netizens have some kind of role to play. What is that role?

3) Bearing in mind the presumed intentions of the ECB, we can then speculate about what they really think. So, what's really going on? What is the ECB actually worried about?


By answering these questions myself, I can speculate that the ECB is actually trying to leverage the public into pressuring governments so they hurry up and adapt to the 21 century. Western governments and society-at-large still seem to be grappling with simpler issues like intellectual property laws (e.g.: copyright protections, patent laws, etc.), which are already difficult in their own right. The ECB poignantly mentioned "press coverage" in their concluding remarks, which I interpreted as a kind of threat or warning to the established order. However, I welcome other opinions on this.

[lonelyminer (Peter Šurda)]

As I predicted at the outset, you are immediately heading off topic to dodge the issue.

I would appreciate it if you addressed my arguments rather than complained.

Point to data which suggests that the absence of a lender of last resort reduces GDP volatility.

You brought up "GDP volatility", I was talking about price volatility. Furthermore, I was claiming that the paper you presented is consistent with Austrian viewpoint. That does not mean Austrians are right, it just means you're wrong, you did not provide evidence that the lender of last resort improves anything.

If you can't point to any evidence whatsoever to support your beliefs, but still maintain them. Well ... There isn't much use in communicating with you then is there?

I was actually very careful to formulate my post only with respect to its consistency with the Austrian position. I did not claim I believe it.

So, yet again, you show how for you, emotions take precedence over scientific neutrality.

[lonelyminer (Peter Šurda)]

So beliefs about the future of bitcoin do not affect its valuation and use, only its intrinsic properties.
If bitcoin succeeds than litecoin must also succeed since they are almost identical. Right? Or no? Because if the answer is no, then beliefs must matter.

There is a phenomenon closely related to the network effect, it's called path dependence. With money, these manifest themselves as liquidity.

Bitcoin and litecoin are very similar, but they differ in liquidity (which with technologically and legally similar money normally determines which market will prefer). So normally you'd expect the one with the higher liquidity to be preferred, i.e. Bitcoin to litecoin. Krugman wrote 2 papers in the 80s where he argues that liquidity influences the choice of money in international trade.

Or to put it in more casual terms, Bitcoin has a first mover advantage. That does not necessarily mean it will have it forever, but for the time being it looks like it is helping.

[molecular]

Wow! There's some interesting debate going on regarding the minutiae of the ECB's self-published opinions on Bitcoin. However, I wonder if someone could enlighten me by answering a few questions.

1) What was the purpose of the "Virtual Currency Schemes" publication? Why did they publish it? Surely, they could have just sent out some private memos to the interested parties instead?

2) What do they hope to achieve by involving the public? Considering that the Internet is a major communications medium, on par with television, presumably 'we' the naive Netizens have some kind of role to play. What is that role?

3) Bearing in mind the presumed intentions of the ECB, we can then speculate about what they really think. So, what's really going on? What is the ECB actually worried about?


By answering these questions myself, I can speculate that the ECB is actually trying to leverage the public into pressuring governments so they hurry up and adapt to the 21 century. Western governments and society-at-large still seem to be grappling with simpler issues like intellectual property laws (e.g.: copyright protections, patent laws, etc.), which are already difficult in their own right. The ECB poignantly mentioned "press coverage" in their concluding remarks, which I interpreted as a kind of threat or warning to the established order. However, I welcome other opinions on this.

These are very good question I cannot answer. But I'd like to speculate a little bit, too:

The official goal of the EZB is price stability in the euro zone. Maybe it's that simple and they're afraid a bit bitcoin will screw with the prices if it becomes more widely used.

hm, "adapt to the 21st century" as in "the governments should roll out a bitcoin-like system?". Well, I'd be all for it (except it shouldn't be the government rolling it out), but what would that to for the ECB or any interests behind it? Nothing good, I think.

I'm assuming this analysis was carried out by bureauocrats. Maybe there was no "greater goal from the top" and they just followed their rules (which might read: "if there's a threat to price stability, analyse it and publish the findinds").

There's this nagging voice in me that says: "The interests that ordered this are planning something really evil! Find out what it is!" But for some reason I can't think of an evil plan that would require this. Strange.

[molecular]

Just reread this part because it was quoted in the zerohedge article

In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates.

Wow, this sounds like it's actually possible to "slowly transition" from fiat to bitcoin?

(What they see as a problem (the inability for central banks to control interest rates or an "inelastic money supply"), some of us see as a goal, of course)

[blablahblah]

hm, "adapt to the 21st century" as in "the governments should roll out a bitcoin-like system?". Well, I'd be all for it (except it shouldn't be the government rolling it out), but what would that to for the ECB or any interests behind it? Nothing good, I think.

What I meant with the copyright example: several years ago, a window of opportunity came along for Western society to re-evaluate what "intellectual property" meant for them, and how various laws could be reformed to take into account the Internet age. People's values were changing, strange new concepts like "sharing partial downloads" were emerging. However, instead of conducting an honest debate with Joe Public on the matter, what did governments do? Nothing. At first they tried to heavy-handedly enforce old laws, and when that didn't work, they tried to force new legislation based on century-old values (SOPA, ACTA...). It doesn't seem very democratic, does it?

It seems that without some kind of helpful guidance, Western governments may blunder the same way with Bitcoin: they will keep ignoring it for as long as possible, then panic and attempt to dictate new legislation when their income starts disappearing. It would be a disaster for society if it ever came to that. For a government to function, it needs revenue. That usually comes in some combination of tax and inflation (in case everyone starts avoiding tax-traps by using cash). Bitcoin poses a unique threat to this old system, and governments may need to be reminded that they must behave democratically and co-operate with Joe Public to avoid a crisis.

There's this nagging voice in me that says: "The interests that ordered this are planning something really evil! Find out what it is!" But for some reason I can't think of an evil plan that would require this. Strange.

It's curious. I really do get the feeling that the report is a message from "a higher class of government", and it's implied that the various national governments (in the EU at least) are indeed "middle management" bureaucrats.

[molecular]

hm, "adapt to the 21st century" as in "the governments should roll out a bitcoin-like system?". Well, I'd be all for it (except it shouldn't be the government rolling it out), but what would that to for the ECB or any interests behind it? Nothing good, I think.

What I meant with the copyright example: several years ago, a window of opportunity came along for Western society to re-evaluate what "intellectual property" meant for them, and how various laws could be reformed to take into account the Internet age. People's values were changing, strange new concepts like "sharing partial downloads" were emerging. However, instead of conducting an honest debate with Joe Public on the matter, what did governments do? Nothing. At first they tried to heavy-handedly enforce old laws, and when that didn't work, they tried to force new legislation based on century-old values (SOPA, ACTA...). It doesn't seem very democratic, does it?

It seems that without some kind of helpful guidance, Western governments may blunder the same way with Bitcoin: they will keep ignoring it for as long as possible, then panic and attempt to dictate new legislation when their income starts disappearing. It would be a disaster for society if it ever came to that. For a government to function, it needs revenue. That usually comes in some combination of tax and inflation (in case everyone starts avoiding tax-traps by using cash). Bitcoin poses a unique threat to this old system, and governments may need to be reminded that they must behave democratically and co-operate with Joe Public to avoid a crisis.


Good points. I agree that a chance was missed with the copyright/patent debacle to re-involve the population. Mainstream media was pretty much silent on the issue (too complicated for the viewers, I guess, or maybe even command from higher up to keep it low). It shows who makes the laws/regulations.

In general I think representative democracy as we have it now in the western countries has failed: it doesn't work. We have the internet now and there are possibilities to do this differently. Politics is the process of negotiation between different interests and coming up with a tradeoff everyone can live with. One of the problem currently is that not everyone gets to leverage his interests evenly. The emergence of the internet offers a unique possibility to rethink how this process could work (not a simple: everyone votes on each issue, that won't work). That's why I like the pirate party: they're trying new ways in that regard internally.

Now for bitcoin and the governments wising up: I think that's highly unlikely. They don't want to even discuss the issue honestly, because the current system (however doomed to fail) is so favorable for them. Imagine they were not allowed to create money by selling treasuries and were forced to do prudent budget management and raise taxes in case they want to spend more!!! The government apparatus would have to be downsized incredibly (which I support, of course, but have no hope of seeing happen). This is the separation of money and state we're talking about here. I don't think it's an option for anyone smart enough in government to talk about bitcoin or other alternatives to the current debt-based fiat system with the citizens.

There's this nagging voice in me that says: "The interests that ordered this are planning something really evil! Find out what it is!" But for some reason I can't think of an evil plan that would require this. Strange.

It's curious. I really do get the feeling that the report is a message from "a higher class of government", and it's implied that the various national governments (in the EU at least) are indeed "middle management" bureaucrats.

I can't imagine a higher class of government that wants a discussion about money. Why would they shoot themselves in the foot like that?

Call me naive, but my current stance is: this report was a mistake, written by a single smart bureaucrat who looked into bitcoin based on the requests for statement the ECB might've been receiving. This guy knows all about money and economics already, maybe has a bias towards the austrian school or whatever, sees bitcoin and thinks: wow! This is cool! Digital gold! (just like us). He then tries to write an objective report, succeeds and goes buy bitcoins anonymously. We might actually have "a friend" at the ECB

Do we know who wrote this piece? Maybe we should call and ask to talk to the author

[blablahblah]

In general I think representative democracy as we have it now in the western countries has failed: it doesn't work. We have the internet now and there are possibilities to do this differently. Politics is the process of negotiation between different interests and coming up with a tradeoff everyone can live with. One of the problem currently is that not everyone gets to leverage his interests evenly. The emergence of the internet offers a unique possibility to rethink how this process could work (not a simple: everyone votes on each issue, that won't work). That's why I like the pirate party: they're trying new ways in that regard internally.

Now for bitcoin and the governments wising up: I think that's highly unlikely. They don't want to even discuss the issue honestly, because the current system (however doomed to fail) is so favorable for them. Imagine they were not allowed to create money by selling treasuries and were forced to do prudent budget management and raise taxes in case they want to spend more!!! The government apparatus would have to be downsized incredibly (which I support, of course, but have no hope of seeing happen). This is the separation of money and state we're talking about here. I don't think it's an option for anyone smart enough in government to talk about bitcoin or other alternatives to the current debt-based fiat system with the citizens.

I can't imagine a higher class of government that wants a discussion about money. Why would they shoot themselves in the foot like that?

Maybe they tried to predict how things might play out, and decided that tentatively acknowledging and embracing Bitcoin would result in the least evil? Then again, I am assuming that they're smart.

Call me naive, but my current stance is: this report was a mistake, written by a single smart bureaucrat who looked into bitcoin based on the requests for statement the ECB might've been receiving. This guy knows all about money and economics already, maybe has a bias towards the austrian school or whatever, sees bitcoin and thinks: wow! This is cool! Digital gold! (just like us). He then tries to write an objective report, succeeds and goes buy bitcoins anonymously. We might actually have "a friend" at the ECB

Do we know who wrote this piece? Maybe we should call and ask to talk to the author

Who knows? Maybe it's just like in a lot of companies: young people are hired for the cheap labour, creativity, and a fresh view on things. While bosses tend to be older and more experienced, although sometimes prone to being a bit stuffy and conservative. Maybe the big bosses were too busy fighting fires that they didn't notice they had a mutiny on their hands?

[kjj]

Call me naive, but my current stance is: this report was a mistake, written by a single smart bureaucrat who looked into bitcoin based on the requests for statement the ECB might've been receiving. This guy knows all about money and economics already, maybe has a bias towards the austrian school or whatever, sees bitcoin and thinks: wow! This is cool! Digital gold! (just like us). He then tries to write an objective report, succeeds and goes buy bitcoins anonymously. We might actually have "a friend" at the ECB

More likely in my view, is that the report is just fine, but most of the dire implications that we are finding in it exist only in the bitcoin community's collective heads.

[koin]

I really do get the feeling that the report is a message from "a higher class of government",

the paper was probably requested during the summer when there was a lot of btc/eur trading and the response to a "what's our bitcoin strategy" question was a deafening silence.  so they went to work on phase one for creating one.

[molecular]

Call me naive, but my current stance is: this report was a mistake, written by a single smart bureaucrat who looked into bitcoin based on the requests for statement the ECB might've been receiving. This guy knows all about money and economics already, maybe has a bias towards the austrian school or whatever, sees bitcoin and thinks: wow! This is cool! Digital gold! (just like us). He then tries to write an objective report, succeeds and goes buy bitcoins anonymously. We might actually have "a friend" at the ECB

More likely in my view, is that the report is just fine, but most of the dire implications that we are finding in it exist only in the bitcoin community's collective heads.

Dude, you're sobering up! Please drink more of the Bitcoin kool-aid.

[Roger_Murdock]

Just a random thought.  As others have pointed out, the three categories of "virtual currency" the ECB identifies in its paper are interesting in an academic sense, but from a practical perspective, it almost seems silly to talk about them together.  It's sort of like doing a report on the threat posed by various lizards and discussing the following:

1. pet iguanas (like WoW gold and other "Type 1" currencies, these guys are cute and essentially harmless);
2. pet crocodiles (like Linden dollars and other "Type 2" currencies, these guys could be dangerous if you let them grow large enough and didn't keep them contained, but the threat is certainly a manageable one);
3. Godzilla (Japanese-in-origin Godzilla is the "King of Monsters" and Japanese-in-origin Bitcoin is the King of Cryptocurrencies; Godzilla had the power to destroy entire cities and Bitcoin has the power to destroy an entire financial system; Godzilla started out as a villain -- and that's certainly how the establishment views Bitcoin now -- but he became a hero and defender of the people; Bitcoin is the people's currency and a powerful tool for protecting their freedom, and I think it will become increasingly recognized as such as time passes)

[BCB]

Wow.

http://www.libertariannews.org/2012/11/04/bitcoin-fear-mongering-by-an-mba-school-ranking-website/

[gollum]

ECB will need to print trillions of euros to save Spain and Greece - of course they are afraid of crypto currencies that CANT be printed to infinity.

You see, the magic of fiat currencies is that if USA (The Fed) prints 20% more dollars this year, and EU (ECB) prints 20% more euros, and Japan prints 20% more Yen,
they will have equilibrium and the market will have the illusion that all fiat currencies is just fine and business as usual.

But when you see gold prices and oil prices go up 20% each year for ten years, you start to wonder if it is a bubble in commodities ore is it simply the fiat currencies that are beinf inflated?

And bitcoin is somehow a greater threat than gold to central banks since gold is not easy to use for transactions, wheras bitcoin can be used online and in mobiles to be used in small and big transactions.

The biggest threat from bitcoin is that politicians, central banks and credit card companies can no longer have control over money flows and put sanctions on individuals, companies and organizations (Wikileaks) that they don like.

Im happy ECB is afraid of Bitcoin - it means Bitcoin is here to stay!

[molecular]

Wow.

http://www.libertariannews.org/2012/11/04/bitcoin-fear-mongering-by-an-mba-school-ranking-website/

Since when does libertariannews report on bitcoin (bashing)? It sounds like they've been "in the boat" for a while, but I didn't notice them putting anything out about bitcoin? Ooops, I take that back, using their site search one case see they've been mentioning bitcoin frequently since October 2009. Cool.

[molecular]

ECB will need to print trillions of euros to save Spain and Greece - of course they are afraid of crypto currencies that CANT be printed to infinity.

It's interesting how zerohedge says these are incomparably bigger problems for the ECB than bitcoin. I think they might blow up for them sooner than bitcoin, but it's entirely possible that these will be dwarfed by the problem bitcoin will create for the ECB and fiat currencies (mainly: death) and the greek and spanish bond market troubles might turn out to be mere footnotes in the history books.

[sunnankar]

Bitcoin poses a unique threat to this old system, and governments may need to be reminded that they must behave democratically and co-operate with Joe Public to avoid a crisis.

I really do get the feeling that the report is a message from "a higher class of government", and it's implied that the various national governments (in the EU at least) are indeed "middle management" bureaucrats.

The highest ups know and have been publicly discussing that they have serious problems on their hands with this transition into the Information Age. Some 1,600 economic and political leaders, including 40 heads of states and governments, were asked to come up with new ideas as they converged at eastern Switzerland's chic ski station for the 42nd edition of the five-day World Economic Forum. 73 year old Klaus Schwab, host and founder of the annual World Economic Forum, at the opening remarks for the 2012 WEF said:

We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations. Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole. We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual". [emphasis added]

When the ruling elite completely lose the confidence of current and future generations then things do not bode well for them. And now with Bitcoin Pandora's Box has been opened which allows for sovereign wealth that can be transferred unimpeded over distance. Completely losing the confidence means they and their bloodlines are most valuable extinct because then they will no longer be undermining social coherence. As it happened before: Qu'ils mangent de la brioche. Hopefully, we do not see something like this again but Nigel Farage has been warning about the possibility.

[marcus_of_augustus]

ECB will need to print trillions of euros to save Spain and Greece - of course they are afraid of crypto currencies that CANT be printed to infinity.

It's interesting how zerohedge says these are incomparably bigger problems for the ECB than bitcoin. I think they might blow up for them sooner than bitcoin, but it's entirely possible that these will be dwarfed by the problem bitcoin will create for the ECB and fiat currencies (mainly: death) and the greek and spanish bond market troubles might turn out to be mere footnotes in the history books.

Yes, this whole "ECB releasing a report on play money bitcoin" could go down in history as an epic example of literally ..... "fiddling while Rome burns"!

[pointbiz]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

[kjj]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

[Roger_Murdock]

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I think that's right. Money is information, but in order to serve that function, it needs to be reliably scarce. Using a commodity for money was simply one way of making sure that requirement was met. With fiat, you have to trust that the issuer will not simply decide to debase the currency. They can do so because the value of the new money they create far exceeds its marginal cost of production. But that's also why Bitcoin is more like commodity money than fiat. Its value, assuming competing suppliers, is equal to its marginal cost of production, and that's why some have called it "quasi-commodity money."

Edit: One of the reasons that Bitcoin is better than commodity money is because it is pure information. The rate of new coin creation is fixed ahead of time and known to all participants. And new coin creation is also a temporary phenomenon. If you are using gold as money, and a huge new discovery of gold is made or there's a massive breakthrough in mining technology, that's not actually a good thing from a systemic perspective. It's great that more gold is available for industrial uses, but from a monetary perspective, the information conveyed by money has become less reliable.

[BCB]

Guys Guys, you're making my head spin.

I LOVE the debate/conversation going on in these threads and buy no means want to discourage it.

But I think we should begin to simply distill what we can all agree on (if that is even possible).  There are some terrific nugget in this thread and we should try to pull them out and put them to good use:

What is Bitcoin.
What makes Bitcoin unique.
What makes Bitoin different.
What the ECB paper got right about Bitcoin.
What the ECB Paper got wrong about Bitcoin.

I think the economic theory had to be distilled to simple parable statements.

What is the one-minute distillation of this thread?

Any takers.

[molecular]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

[molecular]

What is the one-minute distillation of this thread?

Any takers.

"Bitcoin community at large is still oblivious of the fact they are actualy testing and improving our proposed one world currency system."  

"Bitcoin can be a real danger if it grows and we don't really know what to do about it once it does."

[Mageant]

What is the one-minute distillation of this thread?

Any takers.

"Bitcoin community at large is still oblivious of the fact they are actualy testing and improving our proposed one world currency system."  

"Bitcoin can be a real danger if it grows and we don't really know what to do about it once it does."

IMHO the only things they could do (and what has been going on) is spreading FUD, blocking exchanges and outright hack/DDOS-attacks.
They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

[Roger_Murdock]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

I disagree. If you have bitcoins, that shows that you did give value to society either by securing the Bitcoin network or by exchanging other goods and services for coins. I think your issue is whether you gave "enough" value to justify the potentially-huge appreciation in value you may reap if your coins become more valuable. I think so. We're taking a big risk on an untested but potentially world changing technology. If there were no chance of a big payoff, there'd be no way to bootstrap Bitcoin to the level it needs to be successful.

But no, the fiat printers didn't give value. And that's why the system is breaking down. They're only able to receive value because of a government granted monopoly backed by the threat of force. Bitcoin is voluntary and that's why the information it provides about value is more reliable.

[justusranvier]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

[paraipan]

...

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

I will be interested to know more about it, please explain

[evoorhees]

Just a random thought.  As others have pointed out, the three categories of "virtual currency" the ECB identifies in its paper are interesting in an academic sense, but from a practical perspective, it almost seems silly to talk about them together.  It's sort of like doing a report on the threat posed by various lizards and discussing the following:

1. pet iguanas (like WoW gold and other "Type 1" currencies, these guys are cute and essentially harmless);
2. pet crocodiles (like Linden dollars and other "Type 2" currencies, these guys could be dangerous if you let them grow large enough and didn't keep them contained, but the threat is certainly a manageable one);
3. Godzilla (Japanese-in-origin Godzilla is the "King of Monsters" and Japanese-in-origin Bitcoin is the King of Cryptocurrencies; Godzilla had the power to destroy entire cities and Bitcoin has the power to destroy an entire financial system; Godzilla started out as a villain -- and that's certainly how the establishment views Bitcoin now -- but he became a hero and defender of the people; Bitcoin is the people's currency and a powerful tool for protecting their freedom, and I think it will become increasingly recognized as such as time passes)

LOL +100 on this point!

The fact that all the currencies are "virtual" does not make them fundamentally similar in any way. It's absolutely silly to discuss WoW gold, Facebook Credits, and Bitcoin in the same vein. There is more similarity between USD and WoW gold than between BTC and WoW gold (central issuer, can be created out of thin air, etc)

[justusranvier]

I will be interested to know more about it, please explain

Newly-mined currency doesn't represent "value that you have given to society, that you have not yet redeemed". Currency that is accumulated via trade does represent unredeemed value.

Minting currency is necessary just because it has to come into existence somehow, and since Bitcoin is fully transparent about how this process people are willing to use it.

But in the long term it doesn't matter because the volume of trade taking place is already much larger than the amount of new coins being introduced and the creation of new bitcoins will become exponentially less significant over time.

[Luno]

If Bitcoin officially in the EU is judged a currency, all kinds of regulation will apply to Bitcoin businesses. As of now they can in their tax returns legally claim that they are trading a digital commodity. If that is going to change they'll need a licence to operate.

[evoorhees]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

Bitcoin is absolutely a commodity.

From Wikipedia:

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[3] A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[4] Petroleum and copper are examples of such commodities.[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

Bitcoin is a commodity because it is a fungible good without qualitative differentiation. Just like gold. Just like rice. Just like oil.

The fact that this commodity's primary use is "as money" does not remove the label of commodity from it. The commodity gold is used as money and jewelry. The commodity rice is used as food. The commodity oil is used as energy and for manufacturing. The commodity bitcoin is used as money.

We could call bitcoin a "purely digital commodity," but it is nevertheless a commodity and this shouldn't be contentious.

[molecular]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

I disagree. If you have bitcoins, that shows that you did give value to society either by securing the Bitcoin network or by exchanging other goods and services for coins. I think your issue is whether you gave "enough" value to justify the potentially-huge appreciation in value you may reap if your coins become more valuable. I think so. We're taking a big risk on an untested but potentially world changing technology. If there were no chance of a big payoff, there'd be no way to bootstrap Bitcoin to the level it needs to be successful.

But no, the fiat printers didn't give value. And that's why the system is breaking down. They're only able to receive value because of a government granted monopoly backed by the threat of force. Bitcoin is voluntary and that's why the information it provides about value is more reliable.

ok, maybe bitcoin fulfills your abstract money concept of "accounting of value one gave to society". It may even do so in some kind of a fair way.

Let me argue however your original question why some (or in this case I) think bitcoin can be viewed as a commodity money:

The feature about "commodity" that is relevant for a money is its "rarity". Bitcoin has that feature and can therefore be called a commodity money when talking about types of money.

I can argue tangibility in a similar way: The feature of "tangibility" that is relevant for a money is the ability for someone to deny access to the "object" (no third party risk). Bitcoin has that feature and can therefore be called "tangible" when talking about money.

Does this help you understand why maybe some say bitcoin is a commodity money?

It's quite a stretch that goes against everyday use of the terms, but I think it is very useful to categorize Bitcoin as a tangible commodity money for marketing purposes... and it's not wrong, is it?

[molecular]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

It's true that I was talking about the "bootstrapping phase". However: that phase might last quite a few generations or longer.

on other thing: you say: "the amount of coins being traded on a regular basis is many times the supply of new coins being minted". well, the same coins are being traded back and forth many times on the exchanges. Most of the volume is just playing games with bots.

I don't think the coins are well-distributed currently and they probably wont be any time soon. Strong believers are holding a tight grab on the bucketloads they have rightfully acquired. I don't, however, think that this is a problem.

[justusranvier]

It's true that I was talking about the "bootstrapping phase". However: that phase might last quite a few generations or longer.

How would that happen?

[Roger_Murdock]

molecular: I don't disagree with any of that.   And based on evoorhees' definition of a commodity, it may even be more technically correct to say that Bitcoin is "commodity money" rather than "quasi-commodity money." It seems like it's really just a question of being clear in the definition you're using. But whatever Bitcoin is, I like it!

[molecular]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

[paraipan]

I will be interested to know more about it, please explain

Newly-mined currency doesn't represent "value ...

[Bart31]

They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

I do not think they can forbid Bitcoin, because all the negative things (money laundry, drugs, illegal payments, criminal activities) also apply to CASH. They haven't forbidden cash money right?

[molecular]

They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

I do not think they can forbid Bitcoin, because all the negative things (money laundry, drugs, illegal payments, criminal activities) also apply to CASH. They haven't forbidden cash money right?

I'm pretty sure they would like to, though.

Maybe that's why they mentioned this fact about cash in the paper.

[evoorhees]

I will be interested to know more about it, please explain

Newly-mined currency doesn't represent "value ...

+1

And the absurdity of that statement is made even clearer when you realize Bitcoin is a commodity-money. It would be like saying, "newly-mined gold doesn't represent value"

Bitcoin is a commodity with exchange value (equal to about $10.50 worth of USD exchange value today). It doesn't matter if it's an old coin or a new coin... just like it doesn't matter if you buy an old ounce of gold or a new one, they are equivalent to the extent that they are commodities.

[gollum]

Im pretty sure Bitcoin will be the no1 online-currency after paypal for young people no matter what the overpaid bureaucrats in ECB says:

-Security: Bitcoin is safer than paypal if used correctly and much safer than VISA card
-No regulation, you can buy whatever you want from whoever you want without any stupid politician regulating you.
-Privacy: You can buy the legal shit you want but dont want to appear in your account statement from the bank.
-Faster and cheaper: You can make transactions in minutes instead of days using bank transactions

So mr ECB - why shouldnt we use bitcoin? What benefit do I get from the politically correct payment systems?

[kjj]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

Bitcoin is absolutely a commodity.

From Wikipedia:

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[3] A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[4] Petroleum and copper are examples of such commodities.[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

Bitcoin is a commodity because it is a fungible good without qualitative differentiation. Just like gold. Just like rice. Just like oil.

The fact that this commodity's primary use is "as money" does not remove the label of commodity from it. The commodity gold is used as money and jewelry. The commodity rice is used as food. The commodity oil is used as energy and for manufacturing. The commodity bitcoin is used as money.

We could call bitcoin a "purely digital commodity," but it is nevertheless a commodity and this shouldn't be contentious.

I didn't read very carefully, but I didn't see any part of this that wouldn't apply just as well to dollars.

[Roger_Murdock]

kjj, I think it's this part:

A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them.

Buy a fancy printer and try making your own "Federal Reserve Notes" and see how the market (and the cops) treat them.

[kjj]

kjj, I think it's this part:

A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them.

Buy a fancy printer and try making your own "Federal Reserve Notes" and see how the market (and the cops) treat them.

You've never heard of a loan, have you?  When you take out a loan, your bank produces dollars that did not exist previously.  No one cares which bank produced the dollars in your checking account, and no one even knows.

It is only physical paper dollars that have monopolized production, and those are a tiny, tiny niche in the dollar economy.

[Roger_Murdock]

kjj, I think it's this part:

A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them.

Buy a fancy printer and try making your own "Federal Reserve Notes" and see how the market (and the cops) treat them.

You've never heard of a loan, have you?  When you take out a loan, your bank produces dollars that did not exist previously.  No one cares which bank produced the dollars in your checking account, and no one even knows.

It is only physical paper dollars that have monopolized production, and those are a tiny, tiny niche in the dollar economy.

Actually, I have heard of loans. The monetary base (Federal Reserve Notes and deposits) can only be created by the central bank. It's true that other banks can create checkbook money as debt and we call those IOUs "dollars," but note that you still have to be a member of "the club" to do so. ANYONE can make bitcoins and the coins they make aren't IOUs for the "real" money; they ARE the real money.

EDIT: And banks' ability to create checkbook money is (in theory) constrained by the size of the monetary base as a result of reserve requirements.

[kjj]

kjj, I think it's this part:

A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them.

Buy a fancy printer and try making your own "Federal Reserve Notes" and see how the market (and the cops) treat them.

You've never heard of a loan, have you?  When you take out a loan, your bank produces dollars that did not exist previously.  No one cares which bank produced the dollars in your checking account, and no one even knows.

It is only physical paper dollars that have monopolized production, and those are a tiny, tiny niche in the dollar economy.

Actually, I have heard of loans. The monetary base (Federal Reserve Notes and deposits) can only be created by the central bank. It's true that other banks can create checkbook money as debt and we call those IOUs "dollars," but note that you still have to be a member of "the club" to do so. ANYONE can make bitcoins and the coins they make aren't IOUs for the "real" money; they ARE the real money.

EDIT: And banks' ability to create checkbook money is (in theory) constrained by the size of the monetary base as a result of reserve requirements.

Meh.  Turn the world 90 degrees and paper dollars become bearer certificates (IOUs) for checkbook (real) money.  It is really hard to come up with an argument for one being more "real" than the other than wouldn't apply equally well from the other side.

And in reality, banks make loans first, and then seek reserves second.  The real limit to the money supply is the product of the creditworthiness of borrowers times their desire for loans.  The reserve requirements are impotent in terms of the money supply, that is they don't actually prevent any loans from happening, but they do sometimes reveal weaknesses in specific banks.

And yes, you do have to be a member of the club to "invent" money for loans, but it is a damn big club.  Technically, that distinguishes from "anyone".  I haven't checked, but I suspect that becoming an orange grower or pork belly farmer (or a producer of COMEX-able gold bars) is a harder club to join than banker.  (Cletus isn't parked outside the Chicago Mercantile Exchange building with a truck full of pigs waiting for his short to go to delivery, he operates through a co-op and a broker and inspectors and regulators and... )

[Roger_Murdock]

Meh.  Turn the world 90 degrees and paper dollars become bearer certificates (IOUs) for checkbook (real) money.  It is really hard to come up with an argument for one being more "real" than the other than wouldn't apply equally well from the other side.

I hear what you're saying and I'm somewhat sympathetic, but I'm not sure I completely agree.  There does seem to be a difference between the IOUs for physical notes (or Federal Reserve deposits) and the notes or deposits themselves.  I agree that people treat them as fungible, but why? Shouldn't the creditworthiness of an IOU's issuer matter a great deal?  And wouldn't it matter if it weren't for government / central bank interference and guarantees?  And so doesn't it ultimately go back to the fact that you've got a monopoly producer / guarantor? 

And in reality, banks make loans first, and then seek reserves second.  The real limit to the money supply is the product of the creditworthiness of borrowers times their desire for loans.  The reserve requirements are impotent in terms of the money supply, that is they don't actually prevent any loans from happening, but they do sometimes reveal weaknesses in specific banks.

I've heard this claim before, but I honestly haven't read enough to be in a position to evaluate it.  Anything you could recommend I read to help me understand it? I guess I'm skeptical that the monetary base really doesn't matter.  Are you telling me that if, e.g., the Federal Reserve stopped buying treasuries, the system would keep humming along and that the reserve requirements wouldn't begin to bite?  Or are you saying that as a practical matter, the Fed will expand the monetary base in response to changes in the "real" money supply, i.e. the one created by bank loans?  But even if it's the latter, the system still relies on that monopoly producer, doesn't it?

[justusranvier]

+1

+1 to "argument by image macro" with a side of strawman? I had you down as being more intellectually honest than that. My mistake apparently.

[sunnankar]

Im pretty sure Bitcoin will be the no1 online-currency after paypal for young people no matter what the overpaid bureaucrats in ECB says:

-Security: Bitcoin is safer than paypal if used correctly and much safer than VISA card
-No regulation, you can buy whatever you want from whoever you want without any stupid politician regulating you.
-Privacy: You can buy the legal shit you want but dont want to appear in your account statement from the bank.
-Faster and cheaper: You can make transactions in minutes instead of days using bank transactions

So mr ECB - why shouldnt we use bitcoin? What benefit do I get from the politically correct payment systems?

Exactly. That is the real problem the ECB has which is a competitor they cannot just squash due to its decentralized nature that is cheaper in terms of time, money and privacy.

By analogy, if you have a monopoly then you can sell McDonald's hamburgers for $50 and use your profits to violently drive your competitors out of business. But if your violence is rendered inert by cryptography and someone begins selling Ruth Chris steak dinners for $2 .... well, then you will have to offer a better product or lose to market forces. And we saw what the copyright war has done for brand equity of governments among young people.

Not to mention that US bureaucrats have already trained their young people to route around them and can be easily done by having stuff you buy with bitcoins shipped to a local Fedex/Kinkos store.

[pointbiz]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

Bitcoin is absolutely a commodity.

From Wikipedia:

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[3] A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[4] Petroleum and copper are examples of such commodities.[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

Bitcoin is a commodity because it is a fungible good without qualitative differentiation. Just like gold. Just like rice. Just like oil.

The fact that this commodity's primary use is "as money" does not remove the label of commodity from it. The commodity gold is used as money and jewelry. The commodity rice is used as food. The commodity oil is used as energy and for manufacturing. The commodity bitcoin is used as money.

We could call bitcoin a "purely digital commodity," but it is nevertheless a commodity and this shouldn't be contentious.

Right.
Digital commodity or virtual commodity.

The ECB might not have jurisdiction if Bitcoin is legally defined as a commodity. They seem to prefer the label of virtual currency so they can assert their authority over it. They muddy the waters by comparing it to SLL which can clearly and easily be regulated.

They perpetuate the meme that BTC involves legal uncertainty while at the same time specifying that no current regulations apply. Hence it is legal and unregulated in the EU.

[pointbiz]

I also wanted to note mtgox and cavirtex exchanges consider BTC a commodity for legal reasons.

[molecular]

I also wanted to note mtgox and cavirtex exchanges consider BTC a commodity for legal reasons.

Someone else will make this categorization. I think in germany the BaFin or whoever has categorized bitcoins as securities, probably in order to be able to subject "bitcoin handlers" to banking regulations. I might be wrong about this, but I think it's unfortunately true.