2013-06-03 CJIL: Bringing Bitcoin within the Reach of the IMF

[n8rwJeTt8TrrLKPa55eU]

26 Pages
Nicholas Plassaras
University of Chicago
April 7, 2013
Chicago Journal of International Law, 14 Chi J Intl L (2013) Forthcoming

This paper examines the potentially destabilizing effects of emerging digital currencies on the international foreign currency exchange. Specifically, it examines “Bitcoin,” a decentralized, partially anonymous, and largely unregulated digital currency that has become particularly popular in the last few years. The paper argues that the International Monetary Fund, the institution responsible for coordinating the stability of foreign exchange rates, is ill-equipped to handle the widespread use of Bitcoins into the foreign exchange market. It highlights the inability of the Fund to intervene in the event of a speculative attack on a currency by Bitcoin users. The paper concludes by suggesting two interpretations of the Fund’s incorporating document, the Articles of Agreement, which would allow it to intervene in the event of such an attack.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2248419

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  On the plus side, Bitcoin could be "legitimized" and become a reserve currency on a par with USD, with its value skyrocketing.  On the negative side, once reserves were accumulated by IMF and other central banks, Bitcoin would likely become a "managed" (i.e. manipulated) market in terms of price and supply, somewhat like gold since 1933.

An analysis of above paper, worth reading in its entirety:

The IMF’s relationship with the bitcoin economy is a most poignant one: the IMF knows that unless it acknowledges bitcoins, it cannot intervene during a speculative attack or some other destabilizing event. While the ethics/behavior of the IMF is beyond the scope of this post, we are well aware of their capacity for nefariousity (see: cyprus). If the need arose for regulation by the IMF, it would require cornering enough of the bitcoin market to make a difference. This, as you can guess, is a double edged sword because it would also give them the power to control the currency.

The IMF has no way of interfacing with bitcoin without completely undermining the decentralization of the bitcoin economy. It would appear that at one point or another this issue will come to a head, and when it does it won’t be pretty. At the moment bitcoin is quite vulnerable if there was a cooperative, concerted effort to undermine its value. Thankfully this appears not to be an immediate concern. But it will become one.

https://btcgsa.wordpress.com/2013/06/03/bitcoin-and-the-imf-friends-fornever/

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[Carlton Banks]

No, they can't achieve control that way.

1. It's not possible to accumulate a significant proportion of the current supply without pushing the price up commensurately. And as is pointed out in the OP, the legitimacy is also pushed up. Incentive to sell back to fiat is further lessened.
2. Not all supply currently exists, so this could never be a one-off, it would have to be a permanent reserve purchasing policy, as otherwise their previous position gets eroded by the newly mined supply.

Satoshi really did think of everything, or so it appears

[marcus_of_augustus]

IMF (and any other centralised body) is damned. Damned if they do and damned if they don't in the case of decentralised crypto-currencies.

But the IMF was damned before BitCoin came along, it will just hasten their inevitable demise.

[cypherdoc]

wow.  this is huge.

don't for a second believe that TPTB are ignorant of what Bitcoin implies.

[cypherdoc]

speculative attack=borrow to buy Bitcoin 

[n8rwJeTt8TrrLKPa55eU]

No, they can't achieve control that way.

1. It's not possible to accumulate a significant proportion of the current supply without pushing the price up commensurately. And as is pointed out in the OP, the legitimacy is also pushed up. Incentive to sell back to fiat is further lessened.
2. Not all supply currently exists, so this could never be a one-off, it would have to be a permanent reserve purchasing policy, as otherwise their previous position gets eroded by the newly mined supply.

#1 is not an issue.  The goal, as per the paper, is not to corner the BTC market or have absolute control over the price.  It's to have a BTC reserve of sufficient size with which to counter private actors doing, for example, what Soros did to the pound, implicitly assuming those actors have limited supply of BTC as well.

It bears repeating: they won't be trying to buy the entire stock of BTC, or even a majority, or even a large fixed quantity.  The BTC reserve would likely be measured in equivalent SDR value, or percentage versus other holdings.  So if BTC price goes up as a result of their purchases, they simply buy less.

The BTC dues would have to be either:

1. bought in the open market.
2. confiscated by force from centralized storage pools e.g. Gox, using same excuse as in 1933.
3. not mentioned in the paper, but feasible if they get going soon and have a large ASIC budget: mined.

Either way, the obtained coins would be mostly hoarded, and so supply available to market would diminish.  Hence any action based on this paper, is price bullish for BTC.  And of course, once the IMF and other countries start paying dues in or keeping BTC in reserve, it would completely neuter the irritating drugs-porn-crime objections that hang over Bitcoin.

Yes, having a BTC reserve would enable potential manipulation of prices on short-term timescales.  But as with gold, they cannot own the entire supply, so long-term fundamentals would manifest themselves regardless.

Again, the paper is not an attack on Bitcoin, or an attempt to change Bitcoin, or outlaw Bitcoin, quite the opposite.  This paper, if implemented, is a giant positive and necessary milestone on the road to Bitcoin being taken really seriously as a peer to state-issued money.

[aigeezer]

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  

Fascinating read, thanks. I speculate that the chance of this author being noticed by IMF heavyweights is slim to none because of his place in the global financial pecking order. Whether that is good or bad (or true) I can't tell.

http://www.polisci.uci.edu/node/1308

[cypherdoc]

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  

Fascinating read, thanks. I speculate that the chance of this author being noticed by IMF heavyweights is slim to none because of his place in the global financial pecking order. Whether that is good or bad (or true) I can't tell.

http://www.polisci.uci.edu/node/1308

like i said, never underestimate the understanding of TPTB towards Bitcoin.

plus, Nicholas is now at the Univ. of Chicago, home of the Booth School of Business, Keynesianism, and Milton Friedman.

[n8rwJeTt8TrrLKPa55eU]

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  

Fascinating read, thanks. I speculate that the chance of this author being noticed by IMF heavyweights is slim to none because of his place in the global financial pecking order. Whether that is good or bad (or true) I can't tell.

http://www.polisci.uci.edu/node/1308

Ah very interesting.  Too bad, he's still in law school, but still, being the first to publish a paper on this particular topic, it sets a precedent, and perhaps it will get noticed and forwarded and looked at in higher circles, or maybe the IMF will use him as a consultant.  Given our current Bitcoin-as-buzzword environment, maybe some news outlets will also pick it up and it can get some mindshare that way as well.  It seems good ZeroHedge material, so if anyone reading this has submitting privileges, please consider it.

[aigeezer]

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  

Fascinating read, thanks. I speculate that the chance of this author being noticed by IMF heavyweights is slim to none because of his place in the global financial pecking order. Whether that is good or bad (or true) I can't tell.

http://www.polisci.uci.edu/node/1308

Ah very interesting.  Too bad, he's still in law school, but still, being the first to publish a paper on this particular topic, it sets a precedent, and perhaps it will get noticed and forwarded and looked at in higher circles, or maybe the IMF will use him as a consultant.  Given our current Bitcoin-as-buzzword environment, maybe some news outlets will also pick it up and it can get some mindshare that way as well.

Sorry, that law school thing is a couple of years old. Poster above says he's now at Chicago. Gulp!

 My observation was on the level of "the old guard tend to trust each other, not rookies". If it turns out that a powerful sponsor commissioned the report that would change everything, and if it turned out that his report happens to match what they were already thinking then perhaps an academic star is born.

We'll find out, one way or another.

[apetersson]

skimmed some of the paper. it is well-written but it is way too early to call for those actions. the IMF will not have a strategic Bitcoin reserve the next 10 years. i would be willing to have a long-term bet on that.

[blueadept]

This looks like a draft transition plan of an organization of multiple smart, developed national governments to survive in a world where Bitcoin becomes the global currency. It allows the IMF to help national currencies have as soft a landing as possible while transitioning to a taxation system which would be able to function in an environment where everyone uses Bitcoin. Expect papers exploring alternative tax systems' potential feasibility in such an environment.  Hopefully technology and infrastructure will catch up quickly to help markets replace government functions that will likely be cut.

[cypherdoc]

Gigantic implications for Bitcoin's price and future if this paper leads to any IMF action.  

Fascinating read, thanks. I speculate that the chance of this author being noticed by IMF heavyweights is slim to none because of his place in the global financial pecking order. Whether that is good or bad (or true) I can't tell.

http://www.polisci.uci.edu/node/1308

Ah very interesting.  Too bad, he's still in law school, but still, being the first to publish a paper on this particular topic, it sets a precedent, and perhaps it will get noticed and forwarded and looked at in higher circles, or maybe the IMF will use him as a consultant.  Given our current Bitcoin-as-buzzword environment, maybe some news outlets will also pick it up and it can get some mindshare that way as well.

Sorry, that law school thing is a couple of years old. Poster above says he's now at Chicago. Gulp!

 My observation was on the level of "the old guard tend to trust each other, not rookies". If it turns out that a powerful sponsor commissioned the report that would change everything, and if it turned out that his report happens to match what they were already thinking then perhaps an academic star is born.

We'll find out, one way or another.

look.  

he finished an undergraduate degree in Social Sciences at UC- Irvine in June 2010.  he goes to King College in London for a year of research in International Studies.  that would put him at the end of his 2nd year at U Chicago Law School with an emphasis on International Law.

that would probably make him around 25 yo which is close to the average Bitcoiner around these parts.  

he probably is studying a minor in computer science.  he also probably is an asic miner using free electricity to run an Avalon farm in the dorms on campus, frequently cruises this forum, and understands Bitcoin as well as the best of us.

that would make him the perfect candidate to write a paper like this and the perfect consultant for the IMF to bring in on how to handle the coming onslaught of Bitcoin.  

[cypherdoc]

you know what is messed up with the premise of this whole article is that just who are the worst speculative attackers of just about every currency in the world today?

why, central banksters!  by printing and suppressing interest rates, they are encouraging speculators (Wall St) to borrow (short) the USD and buy risk (stocks, real estate, bonds, commodities, etc).  

and just who do their actions hurt the most?  citizens, producers, and savers.

so what exactly is the IMF doing about that?

[CurbsideProphet]

you know what is messed up with the premise of this whole article is that just who are the worst speculative attackers of just about every currency in the world today?

why, central banksters!  by printing and suppressing interest rates, they are encouraging speculators (Wall St) to borrow (short) the USD and buy risk (stocks, real estate, bonds, commodities, etc).  

and just who do their actions hurt the most?  citizens, producers, and savers.

so what exactly is the IMF doing about that?

Yup, and it not only hurts these people but also forces those (like retirees) to chase more speculative investments as well.  Before ZIRP, you could earn a decent amount (4-5%) from savings accounts, CDs, bonds, etc.  Now you earn practically nothing, negative yields if you factor in inflation. 

[hathmill]

If they want to corner Litecoins too that would be great, and VaginaCoin and then the immense number  of new coins that will be produced once people realize that the banksters will buy them all.  

I think they still do not fully appreciate how disruptive this could really be.

[marcus_of_augustus]

If they want to corner Litecoins too that would be great, and VaginaCoin and then the immense number  of new coins that will be produced once people realize that the banksters will buy them all.  

I think they still do not fully appreciate how disruptive this could really be.

This ... BitCoin is not a single company, there is no "The Bitcoin Company" running the bitcoin servers, or even a single decentralised network. It is open source for creating monies ad infinitum, i.e. armageddon for anybody still harbouring illusions of monopoly power over monetary issuance.

[cypherdoc]

If they want to corner Litecoins too that would be great, and VaginaCoin and then the immense number  of new coins that will be produced once people realize that the banksters will buy them all.  

I think they still do not fully appreciate how disruptive this could really be.

This ... BitCoin is not a single company, there is no "The Bitcoin Company" running the bitcoin servers, or even a single decentralised network. It is open source for creating monies ad infinitum, i.e. armageddon for anybody still harbouring illusions of monopoly power over monetary issuance.

stop with the "they don't realize, they don't understand" bullshit.

They do.

We have a battle on our hands.

[BCB]

"They " have been clearly aware of this threat dating back to:


Gavin's CIA talk June 2011
https://bitcointalk.org/index.php?topic=6652.msg97181#msg97181

FBI Report May of 2012
http://heikki.zerodistance.org/bitcoin/92797476-FBI-Bitcoin-Report-April-2012.pdf

ECB Paper in October of 2012
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

[n8rwJeTt8TrrLKPa55eU]

Tangentially related, posted today on the always-interesting Genesis Block blog:

The dollar is not the world’s first reserve currency and it almost certainly will not be the last. The same status has been achieved by an abundance of currencies over the last 2,500 years as their issuing nations gained and lost economic prominence. Accordingly, the fate of the global financial system is tied to the success or failure of individual nations and, as the chart below illustrates, the USD is approaching the average lifespan for this role.
Historical Reserve Currencies

The sentiment that the time has come for an alternative seems to be underlying the actions of financial decision makers internationally. The share of global reserves held in USD has fallen approximately 10% so far in the 21st century and calls for a replacement for the USD have been posed in recent years. China has repeatedly suggested removing the USD from reserve currency status, as has the International Monetary Fund.

One of the most popular alternatives discussed on the global stage is the IMF’s Special Drawing Rights (SDRs) – claims on a basket of currencies, the composition of which is determined by the IMF Executive Board. Given the propensity for intentional manipulation of important financial benchmarks and increasing contention caused by international monetary unions, the prospect of going further down path of consolidated power with the SDR is disconcerting. As would be expected, some countries are beginning to show visible angst towards the global fiat system in general and have begun repatriating large amounts of physical gold.

In a world of increasing global communication and trade, a nation-agnostic currency would solve many of the problems we’ve seen repeated throughout history and potentially ease the associated international tensions. An asset for which the value is determined solely by international demand, immune to influence from central planners, is a necessary step forward towards a free market.

Only recently have the technologies required to facilitate such an idea existed, so for the first time in history, the next shift in reserve currency could be to one not controlled by government(s) or banks. Bitcoin may not be the solution, but categorically speaking, there’s a strong argument that it’s a step in the right direction.

http://www.thegenesisblock.com/the-time-has-come-for-a-stateless-reserve-currency/