Dollar-Backed Digital Currency Aims to Fix Bitcoin’s Volatility Dilemma

[Peter R]

A buffer is needed to temporarily drive them above dollar again to quiesce the traders.

These problems were all resolved with SPDRs Gold Trust (ticker symbol GLD).  Greg Mulhauser is probably the most authoritative contributor here on the topic of exchange-traded products, and I recommend reviewing this thread:

https://bitcointalk.org/index.php?topic=252330.0

Yes, the market value of Realcoin may deviate from its net-asset value (NAV), but this is the mechanism that is used to either grow or shrink the trust (assuming it's modelled after GLD).  Any deviation from NAV is a risk-free arbitrage opportunity for the authorized participants, and so will be closed very quickly.  

Here's how it works in the case of the Winklevoss ETF:  

For simplicity sake assume there are 1000 bitcoin ETF shares held by investors and assume the trust holds 1000 bitcoins.  If an investor holds 1 share, he owns 0.1% of the bitcoins held by the trust.  

Now imagine bitcoin is trading at $500 on BitStamp, but the ETF shares are trading at $550 on NASDAQ.  Since 1 share = 1 bitcoin (in our example), there is an arbitrage opportunity.  Someone can short-sell 10 ETF shares for $5500 and take $5000 from the proceeds and buy 10 bitcoins from BitStamp.  So now this person has $500 cash, a debt of 10 ETF shares and 10 extra bitcoins.  He then calls up the bitcoin ETF and says "as an authorized participant, I want to execute my right to swap these 10 bitcoins for 10 newly-issued ETF shares."  The ETF is obliged to take the bitcoins and issue him new shares in return.  The arbitrager then uses these 10 new shares to close his short position, profiting by $500.  

The net result was that the ETF's bitcoin holdings increased by 10 BTC and the arbitrager earned a risk-free $500 profit.    

The same thing can also happen in reverse: if the ETF price is lower than the BitStamp price, arbitragers will do the opposite thing and coins will flow out of the ETF.  

A bitcoin ETF trading on the NASDAQ would have a significant effect on the bitcoin market.

http://thismatter.com/money/mutual-funds/etf.htm    

[Erdogan]

A buffer is needed to temporarily drive them above dollar again to quiesce the traders.

These problems were all resolved with SPDRs Gold Trust (ticker symbol GLD).  Greg Mulhauser is probably the most authoritative contributor here on the topic of exchange-traded products, and I recommend reviewing this thread:

https://bitcointalk.org/index.php?topic=252330.0

Yes, the market value of Realcoin may deviate from its net-asset value (NAV), but this is the mechanism that is used to either grow or shrink the trust (assuming it's modelled after GLD).  Any deviation from NAV is a risk-free arbitrage opportunity for the authorized participants, and so will be closed very quickly.  

Here's how it works in the case of the Winklevoss ETF:  

For simplicity sake assume there are 1000 bitcoin ETF shares held by investors and assume the trust holds 1000 bitcoins.  If an investor holds 1 share, he owns 0.1% of the bitcoins held by the trust.  

Now imagine bitcoin is trading at $500 on BitStamp, but the ETF shares are trading at $550 on NASDAQ.  Since 1 share = 1 bitcoin (in our example), there is an arbitrage opportunity.  Someone can short-sell 10 ETF shares for $5500 and take $5000 from the proceeds and buy 10 bitcoins from BitStamp.  So now this person has $500 cash, a debt of 10 ETF shares and 10 extra bitcoins.  He then calls up the bitcoin ETF and says "as an authorized participant, I want to execute my right to swap these 10 bitcoins for 10 newly-issued ETF shares."  The ETF is obliged to take the bitcoins and issue him new shares in return.  The arbitrager then uses these 10 new shares to close his short position, profiting by $500.  

The net result was that the ETF's bitcoin holdings increased by 10 BTC and the arbitrager earned a risk-free $500 profit.    

The same thing can also happen in reverse: if the ETF price is lower than the BitStamp price, arbitragers will do the opposite thing and coins will flow out of the ETF.  

A bitcoin ETF trading on the NASDAQ would have a significant effect on the bitcoin market.

http://thismatter.com/money/mutual-funds/etf.htm    

Ok, I am convinced, cautiously.

Edit: I think the important part is that realcoin has full backing, which national currencies usually do not have.

[IIOII]

"Backed" by the dollar. What a joke.

The persons doing this are either entirely clueless about bitcoin or plain scammers. Oh just wait - one of them is actually a member of The Bitcoin Foundation, that thingy that is somehow "Freeing people to transact on THEIR OWN TERMS".

God, please donate a neuron!

Ignore the title of this thread and read this post instead:

https://bitcointalk.org/index.php?topic=683675.msg7761651#msg7761651

Then you can comment on the actual idea.

I already knew this before posting. It doesn't matter if it's build on top of a blockchain-using protocol like Mastercoin. The simple fact is that nobody needs a fiat currency traded on top of a cryptocurrency that is superior in all aspects. It's idiocy.

The name "Realcoin" implies that bitcoin is not real currency, but the dollar (backed by thin air and the despotism of a central bank) is. It is fundamentally retarded to use fiat currencies as "backing" for anything, because they can be inflated at will.

In addition to the counterparty risk of using the dollar you will have an additional counterparty risk that the "Realcoin"-gang actually has the dollars it claims to have.

[ArticMine]

What is being proposed here is to issue a centralized virtual currency not unlike PayPal, e-Gold or LibertyReserve where USD, gold etc., are held in trust by the issuer to back a series of a digital IOUs. The digital IOUs instead of being represented on the issuer's servers are represented as bearer instruments on the blockchain via Mastercoin.

My take is that this will suffer from the same regulatory issues as other centralized digital currencies and payment methods with one of the following outcomes:

1) Remain limited to a small number of jurisdictions and be useless for international money transfer. Examples: Interac (Canada), M-Pesa (Kenya), Dwolla (United States) etc. (Low number of regulators).
2) Become expensive (high fees) and very bureaucratic VISA, MasterCard, PayPal, Western Union, Wire Transfers (Large number of regulators all with different sometimes conflicting requirements).
3) Get shut down e-Gold, LibertyReserve etc. (No regulators)

The key advantage that Bitcoin has is that the on-ramp providers and the off-ramp providers do not need to be related in any way and can be regulated in their respective jurisdictions independently of each other. Realcoin does not have this advantage.

[Peter R]

In addition to the counterparty risk of using the dollar you will have an additional counterparty risk that the "Realcoin"-gang actually has the dollars it claims to have.

It's the same problem with having a dollar balance sitting at an exchange.  Does Exchange X really have the dollars it claims to?  But with the Realcoin proposal, these dollar IOUs are now tokens on the highly-visible and public blockchain that can be traded in a decentralized manner.  This seems to improve transparency.

Imagine that all the exchanges follow step (assuming this is actually approved by the regulators), allowing dollar balances to be withdrawn as colored coins.  We'd have:

- Realcoins
- Stamp-dollars
- Bitfinex-bucks
- Cryptsy-cash

Assuming all the issuers are trustworthy and solvent, the tokens should all trade near par value.  But if "something fishy" starts to happen, then we'll see one of the tokens drop in relation to the rest.  This would be a market signal that something is wrong with that particular issuer.  This will improve market efficiency, because everyone will be able to see how much trust everyone else places on the various counterparties.  

For example, right now, $1 at Bitfinex is probably not worth the same as $1 at BitStamp, but we currently have no market-driven method of measuring this.  

[IIOII]

In addition to the counterparty risk of using the dollar you will have an additional counterparty risk that the "Realcoin"-gang actually has the dollars it claims to have.

It's the same problem with having a dollar balance sitting at an exchange.  Does Exchange X really have the dollars it claims to?  But with the Realcoin proposal, these dollar IOUs are now tokens on the highly-visible and public blockchain that can be traded in a decentralized manner.  This seems to improve transparency.

[...]

You argue about a problem that is only valid for fiat currencies. That problem doesn't exist with bitcoin. So why would anyone want to use a less-secure fiat currency on top of a fully-secure cryptocurrency in the first place?

Trading various dollar-tokens on top of bitcoin is like riding a horse buggy that is mounted on top of a car. The reason to do this? Some crazy art performance maybe...

(However it would make sense to trade commodities using Mastercoin.)

[Beliathon]

Is Bitcoin volatile? It all depends on your frame of reference. One could just as easily define bitcoin as the reference standard and talk about how volatile fiat currencies are compared to nice, stable bitcoin.

If folks like me are correct, and government overspending eventually leads to a hyperinflationary episode for major fiat currencies, then tying a cryptocurrency to fiat "for stability" will turn out to have been rather counter-productive.

That's right. If you zoom out on the time scale to see beyond the coming fiat crash, Bitcoin is (will become) the only truly stable store of value.

It's only the current myopic view people have that makes them think the dollar is stable and Bitcion is not.

Bitcoin's value is in reality extremely predictable, long term. It increases step-wise in a logarithmic fashion as seen here:

[ArticMine]

In addition to the counterparty risk of using the dollar you will have an additional counterparty risk that the "Realcoin"-gang actually has the dollars it claims to have.

It's the same problem with having a dollar balance sitting at an exchange.  Does Exchange X really have the dollars it claims to?  But with the Realcoin proposal, these dollar IOUs are now tokens on the highly-visible and public blockchain that can be traded in a decentralized manner.  This seems to improve transparency.

Imagine that all the exchanges follow step (assuming this is actually approved by the regulators), allowing dollar balances to be withdrawn as colored coins.  We'd have:

- Realcoins
- Stamp-dollars
- Bitfinex-bucks
- Cryptsy-cash

Assuming all the issuers are trustworthy and solvent, the tokens should all trade near par value.  But if "something fishy" starts to happen, then we'll see one of the tokens drop in relation to the rest.  This would be a market signal that something is wrong with that particular issuer.  This will improve market efficiency, because everyone will be able to see how much trust everyone else places on the various counterparties.  

For example, right now, $1 at Bitfinex is probably not worth the same as $1 at BitStamp, but we currently have no market-driven method of measuring this.  

This actually happened for a while in 2012 with BitInstant being the market maker where one could trade MTGox USD codes for BTC-E USD codes etc. The regulators killed it.

[leopard2]

Realcoin could be a great on- and offramp because it is like a digital USD that can be exchanged for other coins at exchanges

As opposed to real USD which require a lot more paperwork

...of course the paperwork will then come into play when fiat is exchanged for Realcoins...

Did Silk Road damage the value of BTC? Not much. If Realcoins had been used on SR this would have been very dangerous; indeed the feds would probably have seized Realcoins USD assets, taking RCs value near Zero.

Liberty Dollar or E-Gold reloaded.

[Peter R]

You argue about a problem that is only valid for fiat currencies. That problem doesn't exist with bitcoin. So why would anyone want to use a less-secure fiat currency on top of a fully-secure cryptocurrency in the first place?

They wouldn't.  They just don't know it yet.  

Both the Winklevoss ETF and the Realcoin product are gateways.  

[ArticMine]

You argue about a problem that is only valid for fiat currencies. That problem doesn't exist with bitcoin. So why would anyone want to use a less-secure fiat currency on top of a fully-secure cryptocurrency in the first place?

They wouldn't.  They just don't know it yet.  

Both the Winklevoss ETF and the Realcoin product are gateways.  

Yes they are gateways but there is a crucial difference with Realcoin when it comes to regulation. In the Realcoin case they have to be both the on-ramp and the off-ramp and this is a serious limitation when it comes to international transactions. Consider first a pure Bitcoin example using existing providers:

A person (say myself) in Canada purchases BTC for CAD using CaVirtex. This same person then uses the BTC to purchase goods or services from a US based merchant that uses Conbase (I have done this). Now CaVirtex only needs to concern it self with Canadian regulations since they only provide exchange services in Canada while Coinbase only needs to concern itself with US regulations since they only provide exchange services in the United States. This makes the regulatory process affordable for both companies.

Now the same transaction using an unrelated on-ramp and off-ramp would not be possible with Realcoin since Realcoin has to be compliant with regulations at both ends. This is the same limitation faced by PayPal, VISA etc.

[Peter R]

You argue about a problem that is only valid for fiat currencies. That problem doesn't exist with bitcoin. So why would anyone want to use a less-secure fiat currency on top of a fully-secure cryptocurrency in the first place?

They wouldn't.  They just don't know it yet.  

Both the Winklevoss ETF and the Realcoin product are gateways.  

Yes they are gateways but there is a crucial difference with Realcoin when it comes to regulation. In the Realcoin case they have to be both the on-ramp and the off-ramp and this is a serious limitation when it comes to international transactions. Consider first a pure Bitcoin example using existing providers:

A person (say myself) in Canada purchases BTC for CAD using CaVirtex. This same person then uses the BTC to purchase goods or services from a US based merchant that uses Conbase (I have done this). Now CaVirtex only needs to concern it self with Canadian regulations since they only provide exchange services in Canada while Coinbase only needs to concern itself with US regulations since they only provide exchange services in the United States. This makes the regulatory process affordable for both companies.

Now the same transaction using an unrelated on-ramp and off-ramp would not be possible with Realcoin since Realcoin has to be compliant with regulations at both ends. This is the same limitation faced by PayPal, VISA etc.

I completely agree that the obstacle for ideas like Realcoin are regulatory as opposed to technical.  It would be hard to argue that Realcoins are not securities, and thus Realcoins would almost certainly fall under SEC jurisdiction.  

But I don't know if I'm following what you are saying in your post.  Let's say CaVirtex received regulatory approval to issue dollar-IOUs using the Open-Assets protocol (colored coins).  It seems to me that once the product was approved, all CaVirtex needs to concern itself with is redemption of those dollar-IOUs back into account balances.  CaVirtex doesn't need to care whether those particular dollar-IOUs went through 10 sets of anonymous hands prior to making their way back to CaVirtex for redemption.  And if this is the case, someone from China might happily accept a CaVirtex dollar-IOU at face value, even though they have no plans to redeem it.  They just trust that the IOUs will always trade near face value as long as someone is able to redeem the IOUs at CaVirtex.  

In any case, as much as I'd like to see it, I really can't imagine the SEC allowing companies to issue "bearer"-IOUs using the blockchain at this point in time.  I think these types of products are at least half a decade away...

[ArticMine]

You argue about a problem that is only valid for fiat currencies. That problem doesn't exist with bitcoin. So why would anyone want to use a less-secure fiat currency on top of a fully-secure cryptocurrency in the first place?

They wouldn't.  They just don't know it yet.  

Both the Winklevoss ETF and the Realcoin product are gateways.  

Yes they are gateways but there is a crucial difference with Realcoin when it comes to regulation. In the Realcoin case they have to be both the on-ramp and the off-ramp and this is a serious limitation when it comes to international transactions. Consider first a pure Bitcoin example using existing providers:

A person (say myself) in Canada purchases BTC for CAD using CaVirtex. This same person then uses the BTC to purchase goods or services from a US based merchant that uses Conbase (I have done this). Now CaVirtex only needs to concern it self with Canadian regulations since they only provide exchange services in Canada while Coinbase only needs to concern itself with US regulations since they only provide exchange services in the United States. This makes the regulatory process affordable for both companies.

Now the same transaction using an unrelated on-ramp and off-ramp would not be possible with Realcoin since Realcoin has to be compliant with regulations at both ends. This is the same limitation faced by PayPal, VISA etc.

I completely agree that the obstacle for ideas like Realcoin are regulatory as opposed to technical.  It would be hard to argue that Realcoins are not securities, and thus Realcoins would almost certainly fall under SEC jurisdiction.  

But I don't know if I'm following what you are saying in your post.  Let's say CaVirtex received regulatory approval to issue dollar-IOUs using the Open-Assets protocol (colored coins).  It seems to me that once the product was approved, all CaVirtex needs to concern itself with is redemption of those dollar-IOUs back into account balances.  CaVirtex doesn't need to care whether those particular dollar-IOUs went through 10 sets of anonymous hands prior to making their way back to CaVirtex for redemption.  And if this is the case, someone from China might happily accept a CaVirtex dollar-IOU at face value, even though they have no plans to redeem it.  They just trust that the IOUs will always trade near face value as long as someone is able to redeem the IOUs at CaVirtex.  

In any case, as much as I'd like to see it, I really can't imagine the SEC allowing companies to issue "bearer"-IOUs using the blockchain at this point in time.  I think these types of products are at least half a decade away...

In the above example the CaVirtex dollar-IOUs would only be redeemable in Canada by Canadians. So they would would likely be accepted at face value in Canada but would likely trade at below face value in China since someone in China would eventually need to find someone in Canada to redeem the IOU for them. The discount could easily be 5% or more. The net effect of this discount is to create an effective transaction fee and we are back to the VISA, PayPal, Western Union etc. costs. Of course if they were redeemable in China then they would also trade at par there but then CaVirtex would have to also be regulated in China increasing their costs and again we are back to to the VISA, PayPal, Western Union etc. fees costs.

By the way I do agree that these IOUs are securities but unlike the United States where there is one securities regulator there are 13 separate securities regulators in Canada one for each province and territory, further adding to the compliance costs. By the way the Canadian government is trying to create a national securities regulator to simplify the compliance burden but has met with stiff opposition from Quebec and Alberta. The problem here is not dealing with one regulator, that is easy. The problem with international money transfer using IOUs is dealing with literally hundreds of different national and sub national regulators all with different and sometimes conflicting requirements, and with each regulator acting like its own little fiefdom. Ever wonder why we see so many innovative payments systems using IOUs that only work in one jurisdiction but hardly any that work internationally?

The beauty of Bitcoin is that it allows one company in Canada say CaVirtex to be the on ramp and another unrelated company in the United States (Coinbase) or in China (BTC China) etc. to be the off-ramp and vice versa. This is not possible with IOUs.

[DeathAndTaxes]

But I don't know if I'm following what you are saying in your post.  Let's say CaVirtex received regulatory approval to issue dollar-IOUs using the Open-Assets protocol (colored coins).  It seems to me that once the product was approved, all CaVirtex needs to concern itself with is redemption of those dollar-IOUs back into account balances.  CaVirtex doesn't need to care whether those particular dollar-IOUs went through 10 sets of anonymous hands prior to making their way back to CaVirtex for redemption.  And if this is the case, someone from China might happily accept a CaVirtex dollar-IOU at face value, even though they have no plans to redeem it.  They just trust that the IOUs will always trade near face value as long as someone is able to redeem the IOUs at CaVirtex.  

As described that has absolutely zero chance of being approved by the SEC.  Bearer shares and notes are explicitly unlawful under federal law.  They are unlawful for expressly that reason.  It isn't just a US thing, bearer shares have been outlawed most places on the planet.   Sure maybe you be able to issue bearer shares in Somolia but then again the coins are backed by dollars they are backed by the promise to rpeay dollars.  Any doubt on the legality of the entity casts doubt on the promise to repay.

[JorgeStolfi]

In case someone has not seen it, this article gives some background on Brock Pierce's  experience as the "king of virtual game money":

Wired Magazine, 2008-12-04
A Drive Through Laurel Canyon With Brock Pierce
http://archive.wired.com/gaming/virtualworlds/magazine/16-12/ff_ige_pierce

He does not seem to be just another bitcoin enthusiast/entrepreneur.

[keithers]

seems like a conflict of interest considering he is one of the newest members of the Bitcoin Foundation. 

[beetcoin]

this idea sounds just about as good as one for a "pedocoin." maybe they can use sandusky, brock's personal hero, as the logo.

[JorgeStolfi]

seems like a conflict of interest considering he is one of the newest members of the Bitcoin Foundation. 

Perhaps, but he is on the Board of Directors.

(BTW, I haven't been able to find a list of the directors in the Foundation's site, only a list of members and founding directors.  Also the minutes of the Board meetings seem to be open to members only, and the last one posted is 17/Mar/2014.)

[beetcoin]

i'd call brock pierce a dicksucker, but i don't want him to take it as a compliment.

[smoothie]

Problem here is what if the dollar becomes worthless?

They are printing them to infinity. Not a good currency model that holds value.

Really dumb idea in my view.