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.

[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.