ECB paper on Bitcoin and virtual currencies

[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.

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[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.