ECB paper on Bitcoin and virtual currencies

[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.