ECB paper on Bitcoin and virtual currencies

[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.