The Monetary Future

paysafecard Could Be Huge

noreply@blogger.com (Jon Matonis) — Fri, 27 Jan 2012 10:56:00 +0000

By Jon Matonis

Yes, that is my professional opinion for the potential of paysafecard. How do they become huge? All they have to do is adjust their 'Webshop' Terms and Conditions allowing online merchants to accept paysafecard for the sale of the bitcoin product. The global demand is certainly there. Sadly, paysafecard does not permit their product to be used for the purchase of bitcoin today because they do not view bitcoin as a valid consumer end-product -- but as a monetary intermediary. However, bitcoin is not defined in any jurisdiction as a monetary instrument, currency, or prepaid item and it is more of a fun 'cryptography product' than anything else.

The paysafecard group is an international company based in Vienna, Austria. They have more than ten years of experience in the area of prepaid online payment solutions and operate in 28 countries worldwide. paysafecard makes Internet payments as simple as using cash and ensures absolute protection against data abuse. No credit card or bank account is required and financial privacy remains fully guaranteed when making payments. The prepaid solution works like a prepaid calling card for mobile phones. The p2p transferable 16-digit code purchased at sales outlets is sufficient to carry out a payment transaction and the paid amounts are booked from the credit of the paysafecard, which may be accessed at any time online. Codes can be purchased in several denominations and then up to ten codes may be combined to make a single purchase not exceeding the equivalent of 1,000.00€ in most jurisdictions, well below the threshold for most anti-money laundering guidelines. With 350,000 sales outlets worldwide, including many in the United States, there are fourteen different currencies supported and a currency converter helps you pay in foreign currencies.

Now, a workaround does exist for purchasing bitcoin if you are willing to go through a virtual currency as a conduit. Currently, the virtual world exchange, VirWoX, accepts paysafecard for the purchase of Linden Dollars, the virtual currency of Second Life. In April 2011, VirWoX started accepting bitcoin and enabled two-way trading between bitcoin and Linden Dollars, which are in turn convertible to CHF, EUR, GBP, USD, and the other virtual currencies traded on VirWoX, the Open Metaverse Currency (OMC) and Avination's C$.

Astonished by these foreign exchange gymnastics, we decided to ask paysafecard about this apparent virtual currency exception which allows users to acquire bitcoin with paysafecard indirectly. Following is the official response received from paysafecard UK:

"Paysafecard is an anonymous payment option – there is no customer identification. By establishing a connection with another anonymous payment service as Bitcoins we would not only lose complete control over the flow of funds but also collide with local AML regulations. At this point we will not work with bitcoin exchanges."

"We allow paysafecard to be used on Virwox as Linden Dollars is a closed loop payment method, it can only be used for 2nd Life. The concern we have with working with a bitcoin exchange is we would enter into a payment cycle where we lose an element of control. If someone uses paysafecard to buy bitcoins we have not control how those bitcoins are used. They could be cashed out through another payment method or used on sites such as Silk Road, which goes completely against our merchant acquisition policy."

If the Mt. Gox floating-rate bitcoin exchange is any indication of market demand, the volume for paysafecard transactions could be substantial. In the last 30 days, the cumulative trading volume of $19.2 million at Mt. Gox alone would estimate a conservative $4.8 million per month for casual retail purchases of bitcoin, assuming a 25% small-denomination retail demand component. This amount does not even include the existing trading volume at other exchanges, such as TradeHill and Crypto X Change, and the volume that is sure to come from the newer category of fixed-rate exchanges, such as GetBitcoin and blizzcoin. At an extrapolated annual turnover of $57.6 million, paysafecard would do well to garner a piece of that up-for-grabs payment processing.

Bitcoin: A Universal Complementary Currency?

noreply@blogger.com (Jon Matonis) — Sun, 22 Jan 2012 15:43:00 +0000

By Pierre Noizat
ParisTech Review
Friday, January 20, 2012

http://www.paristechreview.com/2012/01/20/bitcoin-universal-complementary-currency/

Bitcoin is a new payment application available on the internet since January 2009. In a way, by virtue of its open source publication, it is similar to the World Wide Web, the hugely successful internet application of the internet that now enables so many others. Much like the WWW has redefined the way mankind produces and shares knowledge, bitcoin transforms the social code underlying money supply to bring about a new degree of economic freedom. Can it be seen as a new monetary reform vehicle?

The relevance of complementary currencies is acutely underlined by the emergence of a global economy dominated by the rules of finance where state sponsored currencies are competing for growth and trade surplus. Until 2009, ideas for a monetary reform could revolve only around money supply mechanisms orchestrated by governments and the banking system. With the inception of a universal currency harnessing the transforming power of the web, new avenues may be explored for economic and social changes: here is why a universal currency like Bitcoin can help redefine money.

The Bitcoin Database of Transactions
The bitcoin protocol specifies how to build and maintain a distributed database of transactions on the internet. Transactions are published and signed electronically (using asymmetric cryptography and key pairs). The protocol enforces confirmation of every transaction by the network nodes.

Because all transactions in the database are linked together cryptographically, a property that explains why the bitcoin database is usually referred to as the bitcoin “chain”, any change in a past transaction would require computing an entirely new database from that point on.

Signatures by private keys ensure the title of property to any given amount of bitcoins: knowledge of the private key associated to the receiving address is required to send a part or the whole of any transaction output. The bitcoin transaction database holds all the necessary information for an address owner to receive and spend any amount of bitcoin: the database and the communication protocol together bring to life a new electronic currency.

Bitcoin Money Supply
Moreover, the bitcoin protocol specifies a money supply mechanism. Bitcoins are generated gradually by the network until a maximum quantity of 21 million bitcoins is reached. Bitcoins are created ex nihilo, pretty much in the same way as dollars are created when a commercial bank lends money to someone who is buying a house. The house existed before the loan. In fact, the seller is walking away with the dollars, de facto transferring the ownership of the house to the bank. The bank essentially created the money in its ledger out of thin air: it recorded the amount of the loan as a bank’s liability upon crediting with it the account of the borrower and that same amount was recorded as a bank’s asset, i.e. as a loan that must be paid back to the bank. Even top bankers and economists, including Nobel Prize winner Maurice Allais, call it magic.

Bitcoin builds on the recognition of the fact that the monopolistic aspect of the money supply mechanism in today’s banking system deserves at least to be revisited, if only because it has lasted for several hundred years. If only because of the continued effects of the financial crises, Bitcoin allows us to experiment with a new concept for money.

Bitcoin, as a new universal currency, is a true innovation, building on numerous prior attempts to create a sustainable currency and doing so independently of any state or centralized organization.

Towards the growth of a Bitcoin Economy?
Some bankers I spoke with shrug off Bitcoin on the somewhat circular logic that it cannot be backed by any assets in the real world. Well, thanks to merchants accepting bitcoins and to online exchanges trading bitcoins just like any other currency, a Bitcoin economy is emerging. If the economy of the euro or the dollar collapses, the expectation of a backing by the central banks is based on the assumption that a government has unlimited taxation power over said economy. The current financial crisis in Greece or, to a lesser extend in the US, demonstrates that actual use of this theoretical power is a stretch of economic reality. The truth of the matter is that 90% of the money today is created in the books of the banks and that price stability is the determining factor towards continuing public support of the central banks view.

There are over 140 state sponsored currencies in use across the world today. It is hard to prove that a new complementary currency will jeopardize the world’s economic outlook only because this new currency, unlike all the others, stems from a distributed monetary system without a central authority. The innovative feature of bitcoin that truly sets it apart from anything that existed before is simple: it is cash online without the necessity for a central organization or third party. As such, it is making other forms of cash transaction comparatively less convenient. Removing the necessity does not affect the usefulness of a third party in some cases. Transaction processing between merchants and their customers will always entail some kind of dispute resolution system, regardless of the currency that is being used for payments.

E-gold, as a tentatively universal currency backed by gold, was created in 1996 and failed mainly because it relied on a central organization to manage an inventory of gold. The quantity of gold needed was supposed to grow with the e-gold economy, which was impractical, dangerous and fundamentally useless in a digital age. (Another shortcoming of e-gold was the lack of a specific protocol: relying solely on a web browser to conduct irreversible transactions makes it difficult to secure them.)

Bitcoin money supply mechanism simulates the extraction of a rare metal with a mathematical model, using a clever recipe proven in electronic signature schemes and hashing algorithms that can be found today as ingredients in most banking systems.

One can think of bitcoin as a currency backed not by gold but by a metaphoric substitute of gold, since the quantity of bitcoins is limited by design: 21 million bitcoins.

Like gold, bitcoins can be seen as bonds that never mature but unlike gold, bitcoins bear virtually infinite divisibility and liquidity with no vaulting costs. According to 2010 year-end estimates by GMFS, total above ground stocks of gold are 166,600 tons worth US$6,500 Billion by 2010 average gold price, of which around US$2,400 Billion are held privately or by official reserves, in the form of coins and bars. The total stocks minus approximately 30,000 tons held in official reserves worldwide as of august 2011, gives us an estimated “market” size of US$1,230 Billion for gold as a private store of value. If we were to compute a fictitious exchange rate with the dollar based on these numbers, we would project an exchange rate of around US$600 for one BTC, if bitcoins were to capture only a 1% fraction of the private market for gold as a hedging instrument.

By the same token, if the bitcoin economy were to grow up to 5% of the US GDP, i.e. approximately US$750 Billion USD, and assuming the velocity of bitcoins to be the same as that of the dollars (around 50), then one bitcoin would represent the equivalent of US$700.

The numbers translate to a $15 Billion future valuation estimate for the bitcoin network. They are consistent with the market capitalization of Visa, Inc. ($55 Billion as of august 2011) or MasterCard ($39 Billion). Buying bitcoins today is like buying stocks of a new global electronic transaction network. At $10 as of august 2011, Bitcoins can be considered undervalued even if it is likely that other universal currencies might try to step in at some stage.

One would think at first that such a valuation would provide an investor with the rationale for purchasing the most powerful computer on earth (“K” in Japan as of June 2011) to take over the bitcoin network. However, doing so would drive away today’s “mining” participants and, at least temporarily would reduce the value of the bitcoins to zero. The supercomputer would stay idle, acting as a deterrent to any seller of bitcoin, waiting for the intruder to back away. In other words, to mitigate this risk, the new operator himself or herself would have had to acquire a large amount of bitcoins beforehand to keep the bitcoin economy running after the takeover, in the hope that more sellers would return after the more or less chaotic transition.

Additionally, by the time the attack is ready, it is unclear whether said supercomputer would be able to match the majority of the hashing power of the current nodes while this cumulative power is going up day after day. The uncertainty surrounding the outcome of this kind of hostile takeover makes it more likely that a rational investor would simply buy bitcoins much in the same way he or she would buy stocks in a start-up venture.

Another, more naïve attack would consist in buying “pools” of miners that are thriving these days on the bitcoin network. By joining a mining pool, a miner aims at gaining a share of the steady flow of bitcoin expected with a large amount of aggregate hashing power. The share is prorated according to the hashing power contributed by the miner. Conversely a solo miner can go for a long period before he/she earns the 50-bitcoin reward associated with the computation of a new block of transactions. Statistically, the expected rewards are the same though, only the income flow is steadier in a pool. Hence a miner would have no incentive to stay with a pool under the control of a hostile investor. He or she would simply switch to another pool or start mining solo.

This analysis remains true even after all the bitcoins have been minted. In fact, the incentive to “mine” transaction blocks will sustain the decline in the rewards by virtue of the increasing transaction fees combined with the increase in value of the bitcoins.

Electronic Money and Trust Management
Bitcoin is backed not only by this kind of projection but also by the trust of the “network nodes” that is materialized in the aggregate computing power of this group of people. Anyone with a personal computer and a graphic card (GPU) can join in and start participating in this giant transaction processing pool that defines the bitcoin network. It requires only downloading a piece of free software known as “mining” software in reference to the bitcoin money supply rules. Today, there are several tens of thousands of such “miners” around the world.

In contrast, Ripple, launched in 2004, attempted to create a universal currency by knitting together a web of Local Exchange Transaction Systems (LETS): IOUs issued in any LETS could be forwarded to any participant in the network, across a Web of Trust mechanism. However, a Web of Trust requires a central authority to manage trust certificates and to prevent fraud, raising lots of practical issues: the thorny problem of registering people to link them to a secure digital identity can lead a technological innovation to its demise even before it reaches any sizable roll out stage.

Bitcoin proof of work protocol avoids the need for a secure web of trust, relying instead on the assumption that a majority of the computing power is in the hands of honest participants: “honest” here simply means that they will cooperate to make the network confirm legitimate transactions. Legitimate transactions on the bitcoin network are those that can be linked cryptographically to the “genesis” transaction via the “longest” chain: the chain “length” refers to the depth of its proof-of-work, not to the number of transaction blocks. The “genesis” transaction is one that took place in January 2009 and got things started. This concept of cloud computing applied to the confirmation of transactions is very consequential: only two years after the launch of bitcoin, it takes already as much computing power as the “K” computer to take over the network. Taking over the network today with such a powerful machine would not prevent the network from operating but would disturb transaction confirmations until participants find a way to overcome the attack and regain control of the operations. Recovery strategies could be applied to resume operations normally thereafter. In other words, even assuming that a government or a large organization would be able to harness so much computing power to engage in such heavy-weight counter measure against the bitcoin network, its expected outcome is uncertain at best. This property makes bitcoin as resilient as a transaction network can be.

A universal currency like Bitcoin, which is using digital signatures and asymmetric cryptography, has the interesting additional property that it can go back and forth from digital to fiduciary status. The old boundaries between electronic transactions and cash transactions are blurred: the file containing the key pairs (public receiving address and secret key to sign the outgoing transfer of the amount received) can be printed. Let us say the public key is left apparent and the secret key is hidden underneath a cover: the cover can only be removed in a non-reversible manner. In doing so we have created a new e-note containing the bitcoins received on the public address that cannot be spent until the secret key is revealed. The e-note can be traded as long as it is not tampered with. The amount received on the public address can be printed also in a tamper-proof process: the amount received on the public address becomes the denomination of the e-note (7). When the cover of the secret key is removed, the e-note amount in bitcoins can be redeemed electronically for any payment using bitcoins. In further contrast with old notions of fiat money, e-notes without denomination are also possible: the amount received on any address can be checked by the recipient in the public bitcoin transaction database.

Decentralization and Deflation
By definition, a truly decentralized universal currency must start without a central authority regulating its money supply mechanism: this precludes establishing any form of correlation between the money supply and any set of economic parameters or measurements. Such systemic correlation would yield endless discussions between the users, hence requiring a governing body capable of moderating the discussion and enforcing the rules by some yet unknown universal democratic standards.

For the same reason, the new transaction software must be free software to escape the limitations and opacity of proprietary software. As Richard Stallman summed it up in his now famous statement: “The point of free software is either the users control the software or the software controls the users”.

To a large extend, state sponsored currencies like the euro or the dollar are created in a black box, with a lot of media attention focused on interest rates rather than money supply. A central organization promoting a currency system based on proprietary software would not be a game changer.

Therefore the money supply mechanism must be hard coded and published in the specifications from the outset, with little or no room for the currency to wiggle out of it to its possible demise. In the same logic, it is neither possible nor necessary to predict the rate of adoption and growth of the user base for the new currency: these numbers cannot be factored in with precision. The money supply model is therefore deflationary, defining a maximum quantity, unless the rules of generation are bound to the number of users by a user authentication protocol. This requirement is not compatible with an objective to design a decentralized currency since user authentication requires issuing identity certificates either in a web of trust or with a certification authority.

The Bitcoin specifications not only fulfill the requirement for a limited money supply but also make provisions for transaction fees to provide a sustainable incentive for miners to keep mining even after the rewards for the generation of new bitcoins have dwindled to zero.

Because Bitcoins are traded electronically, unlike gold, they are infinitely divisible and enjoy a high velocity, so a deflationary spiral can only reduce the scope of bitcoin to the function of a store of value, a more practical process than is used for gold. In fact, the deflationary spiral would have adverse economic consequences only if bitcoins were the exclusive currency in a given territory. That’s not the case: as a complementary currency, bitcoins are supposed to coexist with the local state sponsored currency not to replace it. Prices will most likely be expressed in local currencies. In an electronic online transaction, the price expressed in a universal currency can be easily adjusted in real time for exchange rate variations. Only for off line transactions, price stability is a strong requirement for a new universal currency.

In short, deflation will augment the attractiveness of bitcoins as a store of value and will only marginally affect its application as a trade currency.

Conclusions
Where do we go from here? In a global economy, the inception of one or more universal currencies is bound to happen as soon as technology permits it.

Bitcoin, as the first, is paving the way for new applications. In particular, bitcoin can greatly enhance the efficiency of money transfer where it is lacking, specifically development aid that was once famously characterized (by economist Peter Bauer) as “an excellent method for transferring money from poor people in rich countries to rich people in poor countries”. Bitcoin can leverage the generalization of mobile phones in developing countries to enable a money transfer directly to the recipient, bypassing all state bureaucracies and banking intermediaries. The institution or non-governmental organization responsible for the transfer could simply assign bitcoin addresses to recipients and their local merchants then fulfill the money transfers and payments in bitcoins.

The technology is enabling both a new kind of transaction network and a new universal currency.

By analogy, it is worth noticing that the World Wide Web does have a governing body, namely W3C, a non-profit organization made of more than 300 members among the largest companies in the high tech sector. Clearly, any leverage applied by a government to one of its constituents in W3C can be balanced out by the others if it does not fit the bill of the general interest. Because this principle holds successfully for the technology enabling new ways of producing and sharing as valuable an asset as knowledge, one is permitted to hope that a similar organization can also deal one day with the Bitcoin protocol specifications at a technical level to maintain its immunity from the hazards of macro-economic measurements.

Reprinted under Creative Commons.

A Virtual Fortune: Property Rights in Virtual Economies

noreply@blogger.com (Jon Matonis) — Fri, 20 Jan 2012 15:53:00 +0000

Press Release
The Public Interest Advocacy Centre
Wednesday, January 11, 2012

http://www.piac.ca/consumers/consumers_should_be_wary_of_risks_in_virtual_worlds/

The Public Interest Advocacy Centre (PIAC) today released a report entitled “A Virtual Fortune: Consumer Protection for Banking and Consumer Fraud in Virtual Worlds”. The report studies virtual worlds, which are sometimes described as “massively multiplayer online role-playing games” (MMORPGs) that provide an immersive virtual experience for many players that many players consider to be “real”. Many virtual worlds have developed virtual economies based on a virtual currency that may be exchanged for real-world currency. Players will play the role of consumer and entrepreneur within virtual worlds.

As virtual economies grow, there have been instances of fraud in these virtual worlds. PIAC’s report studies examples of economic fraud conducted in virtual worlds such as Second Life, Entropia Universe, EVE Online, and World of Warcraft. For example, there have been cases of bank runs, securities fraud, and theft of virtual property. These situations have resulted in a financial loss to consumers in virtual worlds. Notably, virtual world operators in most cases stated that these fraudulent schemes are “part of the game” while denying responsibility and liability and refusing to compensate players who have lost money to fraud in virtual worlds. Efforts to set up in-world justice systems have not been successful.

“Where a consumer falls victim to fraudulent activity within a virtual world, they are not likely to be successful in seeking redress or compensation for their losses,” said Janet Lo, Legal Counsel at the Public Interest Advocacy Centre and author of the report. “Virtual world consumers must be aware of potential risks to their in-world assets and property, such as in-world fraudulent schemes or unilateral actions by virtual world operators dealing with user accounts.”

Given that individuals view their virtual world avatar as an extension of themselves, the report explored whether real-world rights should extend to the avatar and whether traditional notions of property rights and consumer protection should apply to virtual avatars participating in virtual economies. The report noted the use of End-User License Agreements (EULA) or Terms of Service by virtual world operators to limit their liability and stipulate certain mandatory forms of dispute resolution. The enforceability of these terms in real world courts have been questioned but real world case law has not yet clarified the legal status and rights of virtual world users.

The report notes that real-world regulators around the world continue to examine virtual world economies and contemplate whether real-world regulation should be applied to financial transactions conducted in-world. For example, securities and payment regulations could be applied with a view to providing greater consumer protection to virtual world users.

“As virtual world experiences blend into social networking websites and other areas of commerce, regulators will need to consider how consumer protection will operate and whether the application of real-world regulations will be sufficient to protect consumers,” said Lo.

The Final Days of e-gold: Interview with Doug Jackson

noreply@blogger.com (Jon Matonis) — Wed, 18 Jan 2012 08:30:00 +0000

Douglas Jackson Interview 2012 e-Gold

Could Bitcoin be the Future of Internet Betting?

noreply@blogger.com (Jon Matonis) — Wed, 18 Jan 2012 01:36:00 +0000

Hartley Henderson has published a prospicient article at Off Shore Gaming Association, "Could Virtual Currency be the Future of Internet Betting?". The author has identified a man known as R.C. who emphatically endorses bitcoin as a means of payment for online gambling and casinos across almost all jurisdictions. This supports our thesis that bitcoin is the digital equivalent of a physical casino chip. Henderson summarizes his discussion:

'If I had any say, all transactions at our book would be done in bitcoins,' the man said. 'They are untraceable and totally out of the control of any government. And most importantly they are an investment which someday I’m confident will rival silver prices.'

The author then asks R.C. specifically what makes bitcoins a better option than cash for online gambling:

"As you know, money transfer is vital to the sports betting, casino, and online poker industries. Bitcoin is an amazing solution. Through a combination of math and cryptography - it is a completely decentralized currency/commodity. That means no entity is in control, it is managed by all the nodes of the network, collectively. You can think about it like bitTorrent, if you are familiar with the file sharing protocol; purely peer to peer with no central management.

Through this cryptography and decentralized design, each node on the network is a 'bookkeeper' of which bitcoin addresses own which coins. You cannot fake or forge a transaction or create coins outside of the system. Each node has a record and will not accept forgeries. So, even though there is a public record of all bitcoin transactions, the key is that nobody knows who owns a particular address and thus those bitcoins. So on the one hand it is completely transparent - all coins and transactions are public, but on the other hand nobody knows who owns those coins/bitcoin addresses. You can see how it could be useful to gamblers."

Peer-to-peer wagering, or social betting, is gaining quickly in popularity and Henderson makes the point that companies receiving a membership fee are distinctly different from companies that receive a commission on the winning bets:

"What R.C. didn’t mention is that in no country is peer to peer wagering illegal. There is nothing in the law that stops person A from wagering $20 with person B on the outcome of a game. What makes the transaction illegal in some countries is when an intermediary acts as the bookmaker. That is precisely why Betfair and Matchbook are seen as technically illegal by the U.S. government. Both are peer to peer wagering operations but they also take a commission on the winning bets. BTCSportsBet.com doesn’t do so. They simply have paid members."

Henderson also makes the bold case that bitcoin as a payment mechanism doesn't fall under the UIGEA because there is no money involved and there is no way the Department of Justice can effectively intrude. Our man R.C. perhaps explained it best:

"As far as UIGEA, there are no banks or processors involved. Moving bitcoins around is just like moving an image file or other data around. I would expect to see bitcoin-specific legislation before any attempt to apply the UIGEA. But even with legislation, I expect the future of bitcoin to be bright. There is no central authority to shut down. There are laws against file sharing copyrighted works, but due to the distributed nature of bitTorrent it cannot be effectively policed.

As far as pressure from the DOJ or other entity (it’s not a viable concern). Bitcoin can be classified as a commodity, or a currency, or nothing at all (it's just data). One can argue that it is like Facebook credits or World of Warcraft Gold. The government is not going after them. Also, the terms and conditions for BTCSportsBet.com states that the player is responsible for determining the legality of playing with bitcoins in his or her jurisdiction. Sign-ups are anonymous and the site does not know the origin of the players. No personal identification is requested; even an email address is optional. A player can sign up, send bitcoins, wager, and withdraw without the site ever knowing who he or she is. The properties of bitcoin allow this to happen. There can be no fraud, identity theft, or reversed transactions. All of those headaches are a massive cost to the industry - so you can see why bitcoin may be a significant factor in the future of online wagering."

Regarding the claims above, it remains to be seen if Facebook Credits will ever permit two-way exchange and, even if they did, that the U.S. regulatory authorities wouldn't move promptly to include them under the 'Prepaid Access Rule' for financial products. In the meantime, I agree that the resilient bitcoin is more suited to the monetary challenges ahead and it is another case of technology being ahead of the law.

For further reading:
"Leading Bitcoin Online Gambling Operator Opens Books", Bitcoin Money, January 18, 2012
"Could crypto-currency change how we pay?", Julian Bucknall, January 8, 2012
"Bitcoin and the Digital Currency Revolution", Dan Downs, January 5, 2012
"A Bitcoin Primer", Mike Koss, January 1, 2012

Virtual Currency Poker Leaves Real Money on the Table

noreply@blogger.com (Jon Matonis) — Thu, 12 Jan 2012 16:32:00 +0000

Tyler York of Betable presents some amazing numbers on how real money gaming would be supremely more profitable than virtual money gaming in "Virtual currency poker leaves money on the table".

Bitcoin, the digital version of a physical casino chip, is not discussed in the analysis. But since it currently falls into that legally unclassified area of 'not-real-money', it will undoubtedly start to appear in those gaming venues that inhabit the monetary space between real and virtual. Tyler York then asks, "given the tremendous revenue opportunity, why haven’t social game companies already offered real-money play?":

"No, not because Facebook doesn’t allow gambling.

While this was true in the past, Facebook may soon allow real-money gambling on its platform. Even so, social games are on countless other platforms where gambling is already permitted in legal jurisdictions, including Android, iOS, and Google+. These companies didn’t pursue real-money social games for any of these platforms.

No, not because gambling is illegal in the US.

While the Department of Justice opened the door for states to regulate online gambling within their jurisdictions, the fact that the US market was closed before wouldn’t have stopped major social game companies in foreign markets. The addressable ex-US worldwide gambling market contains millions of players that would give real-money social games the audience they needs to succeed.

The reason game companies haven’t implemented real-money play is because gambling licenses are tremendously expensive and time consuming to acquire.

While theoretically possible, the process is so painful that the vast majority of game companies don’t even consider it. The time (≥18 months) and money (≥$1M including all associated costs) are an enormous barrier to entry for most game studios. Even if a studio could afford those costs, steps must be undertaken sequentially and spending more money doesn’t shorten the period of time it takes to get a license. There is also the added layer of complication arises from the necessary corporate structuring and off-shoring that must take place to comply with gambling regulations.

These time and money costs are simply too great for the vast majority of small-to-medium sized game studios, and the compliance issues become increasingly prohibitive as you look at large game companies. These huge pains have prevented Zynga and other game companies from offering real-money play to non-US players in spite of the massive potential revenue opportunity. Game companies have been better off investing their limited resources into virtual currency revenue streams because they will monetize immediately, although relatively poorly."

For further reading:
"The Real 'New Frontier' of Gaming", Tyler York, December 19, 2011
"Real-Money vs Virtual Currency Gaming - Design Outside the Box", Jesse Schell, DICE 2010, May 12, 2011

The EFF's Own Chilling Breeze

noreply@blogger.com (Jon Matonis) — Thu, 05 Jan 2012 14:42:00 +0000

By Julian Noble
Wednesday, January 4, 2012

To stand up and fight to protect lawful online activity from legal threats isn’t for the faint of heart… it takes big ones.

The Electronic Frontier Foundation has a two decade history of taking on cases that set important precedents to protect rights in cyberspace. This is an organisation which has not been afraid to file lawsuits against the CIA, the US Department of Defence, the Department of Justice and other agencies, as well as major corporations like Apple and AT&T.

Recently, however, the EFF seems to be blowing some chilly air of its own and their source of gumption seems to have shrunk a little. They are no strangers to the pernicious effects of ‘self-censorship’; this is the ‘chilling effect’ where discussion, debate and activities are effectively destroyed before they even get started. It is the fear to speak freely or the fear to participate, because of vague legal threats or ill-defined laws. It is the uncertainty about where one’s rights begin and end, and the fear of crossing an invisible line. It is the providers closing or restricting customer accounts; not based on specific legal requests but based on some fuzzy margin even less well defined than the law itself.

Let’s see how the EFF explains its retreat from using one specific technology: Bitcoin, which is not inherently illegal and qualifies more than most as a frontier technology.

EFF and Bitcoin (June 20, 2011)

What then should we make of this statement from the EFF which reveals a primary motivator for avoiding a particular technology is legal uncertainty? At first glance this might make some sense, as ‘understanding the legal issues’ seems like a prudent first step, but you only need to step back into the EFF’s early history to see that their very birth was not just taking place in, but in a way inspired by an era of just this sort of uncertainty regarding electronic frontiers. Take this quote from ‘A Not Terribly Brief History of the EFF’.

"I realized in the course of this interview that I was seeing, in microcosm, the entire law enforcement structure of the United States.

Agent Baxter was hardly alone in his puzzlement about the legal, technical, and metaphorical nature of data crime."

This surely shows that the legal environment was not only uncertain – but positively muddy and misunderstood even by those tasked to investigate and enforce the law.

Arguably, law enforcement lags in their understanding of new technology just as much today. The ‘ambiguous nature of law in Cyberspace’ was almost a defining feature of the landscape, and back then, it didn’t stop the EFF from riding out into it; legal guns at the ready, if not blazing.

The EFF about-face regarding Bitcoin came shortly after a flurry of publicity regarding US Senators Schumer and Manchin raising their concerns about the use of bitcoins for illegal purchases on the silk road tor website. The senators mischaracterised bitcoin as “untraceable”. Senators seek crackdown on “Bitcoin” currency

In contrast to this sort of reaction, we have at around that time, a more measured opinion from Joseph Skocilich at US business and intellectual property law firm ‘Adler Vermillion & Skocilich LLP’
Innovation and Legal Panic—Bitcoin

"Boringly, the realistic legal issues facing Bitcoin are likely to be limited to those businesses that service the Bitcoin economy as a “money services business”, such as money transmitting, processing and foreign currency exchange. Laws which happen to be in great need of reform, as they are currently hindering innovation in the online payment industry. Simply using Bitcoin as payment for goods and services doesn’t create any legal issues beyond that of any other market exchange, where you and your business are free to accept payment in whatever form you choose."

Various organisations have been approached by the bitcoin community with offers of assistance as far as accepting bitcoin in their commercial operations, or as a low fee method of accepting donations. Some of their reactions are revealing:

A member of the SENS foundation website team cited the “possibility of BTC being made illegal in the US”. A statement from someone at Kiva.org (a technical person, not a legal rep) was particularly illustrative of the chilling effect:

"We talked to some fellow non-profits, and the lawyer from one particular organization gave us some strong reasons to not move forward. We then talked some with our lawyer, who cautioned against doing anything that could distract from Kiva’s core mission by bringing about controversy."

When the founders of Humble Bundle were approached they replied:

"Hey there, we have talked with the EFF and an attorney about this and it is very complicated to say the least. The stakes are very high and there are some extremely serious unknowns about using Bitcoins. While the concept is great, we are not prepared to be its first major test case, after listening to the advice we’ve been given."

How many such organisations have looked at the EFF’s stance on this and taken their self-censorship lead?

In some cases – there may be specific legal roadblocks with regards to adopting a new technology such as this. Charities in particular are highly regulated. Some government agencies such as the NGO Affairs Bureau in Bangladesh, require that each foreign donator fill out and sign a specific form giving authorisation for the donation, which obviously puts a damper on micropayment donations using a somewhat privacy-enhancing electronic payment system.

But the EFF’s published concerns are less specific than that.

If any of their fear is based on a perceived conflict of interest for having a financial interest – they should note that ‘holding bitcoin’ is not a prerequisite for using them as a payment mechanism. There are services which allow merchants or non-profits to receive their bitcoins in USD, avoiding any interim volatility or any position as a speculator.

Whether or not you see the value or likelihood of success for a technology such as bitcoin, it’s clear that one of the most pressing impediments to adoption is not violation of any particular law, but general legal ‘fear’. What does it say to the merchants and charities of the world, when even the EFF, the giant slayer, cites vague legal concerns in it’s refusal to even use a technology in a relatively passive manner?

For the bitcoin community, a sense of betrayal doesn’t seem entirely unreasonable here. It is not that the EFF should be expected to ‘endorse’ bitcoin – but that the EFF should be perfectly happy to use frontier technologies within the space where they are not specifically legally prohibited, and be willing to work with the community in helping users (or at least not discouraging them) as they move up close to the legal lines. Did the EFF need to eschew all encryption when defending our rights to use it?

It’s been 6 months since the EFF’s public statement of legal confusion. That’s a long time in the fast-moving technology world for a chill wind of self-censorship to swirl around. As a prominent non-profit organisation supposedly at the forefront of cyberlaw, EFF’s influence is substantial. Let us consider what it might look like if the EFF took this approach to certain other new technologies.

———————————————————–————————————
Press Release: EFF withdrawing from social networks.

For several years, EFF has been following the movement around social networking, a system of electronic communication which touts itself as providing “informal communities of peers”.

We’ve been a long time user of email and have been experimenting with social messaging technologies such as Twitter and Facebook, which are at the forefront of peer-to-peer and social systems.

However, we’ve recently removed all our Twitter and Facebook accounts, and we’ve decided not to have any social network friends or followers. We decided on this course of action for a few reasons:

1. We don’t fully understand the complex legal issues involved with social networks and electronic peer-to-peer communications.
Social networks raise untested legal concerns related to privacy, bullying and harassment, fueling of riots, impersonation and identity theft, among others. While EFF is often the defender of people ensnared in legal issues arising from new technologies, we try very hard to keep EFF from becoming the actual subject of those fights or issues. Since the legal implications surrounding the use of social networks and peer-to-peer systems in general are still very unclear, we worry that our participation in social networking may move us into the possible subject role.

2. We don’t want to mislead our ‘friends’.
When people become a social network ‘friend’ or ‘follower’ of a nonprofit like EFF, they often expect us to be a genuine ‘friend’ or ‘follower’ in the more traditional sense. This can lead to legal misunderstandings as to the nature of our relationships with other participants in the social network. In 2011 Social media has been associated with the ‘Arab Spring’ uprisings as well as implicated in ‘fueling’ the Tottenham riots. This has led to renewed interest from governments in mapping the social network to identify collaborators, as well as mechanisms for shutting down certain social networks entirely in times of crisis. Because of this legal uncertainty, we are not comfortable with the number of ‘friends’ and ‘followers’ we have accumulated.

3. People were misconstruing our use of Twitter, Facebook and other social networking tools as an endorsement.
We were concerned that some people my have participated in these social networks specifically because EFF took part, and perhaps therefore believed the activity was safe and risk-free. While we’ve been following the social network movement with a great degree of interest, EFF has never endorsed Facebook or Twitter. In fact, we generally don’t endorse any type of product or service – and these are no exception. We appreciate the outpouring of support we have received from the social networking community, and we share that community’s commitment to privacy and innovation. We also appreciate their frustration with the privacy problems posed by existing on-line social networking systems. However, EFF will no longer be accepting or making friends. In upcoming meetings, we will also be reviewing and potentially withdrawing from the domain name system entirely – so that from the outside, we can better assist you in fighting #SOPA! To mitigate the risks inherent in electronic communications with the EFF, you can as always contact us via snail-mail at:

Electronic Frontier Foundation
454 Shotwell Street
San Francisco CA 94110-1914 USA

Donations using electronic methods such as credit card, bank wire or bitcoin are no longer accepted for similar reasons – we can best defend your use of these electronic systems if we are not seen to be ‘users’ ourselves. Cash in the form of notes is no longer accepted due to possible contamination with cocaine and the resulting legal risk that imposes. Gold bullion or cash in the form of coins can be delivered to the above address.

Reprinted with permission. This article first appeared at http://bitcoinmedia.com/the-effs-own-chilling-breeze/.

Virtual Currency in Virtual Economies: Implications for Income Tax

noreply@blogger.com (Jon Matonis) — Mon, 02 Jan 2012 12:20:00 +0000

"Virtual Currency in Virtual Economies: Income Characterization Issues for Social Media Companies" by Jim Carr, Jason Hoerner, and Carlos Kaplan of KPMG LLP was published in the November 21, 2011 (Vol. 64, Number 8) issue of Tax Notes International.

This article examines income characterization issues related to taxation of virtual currency. Some social media companies offer digital currency (so-called virtual currency) for online players to use in virtual words, online games, and other applications. Players can use virtual currency to purchase assets or services from other players within these online worlds. Players selling such items can convert the virtual currency to U.S. dollars or other currencies through online auction sites or the social media company that issued the virtual currency (Known as “real money trades”).

The authors discuss how the characterization of income derived in connection with an offering of virtual currency is pivotal to assessing the U.S. income tax consequences of that income from a cross-border perspective and how understanding the characterization may facilitate greater planning opportunities.

I highlight some of the more interesting findings below:

Page 3: "Because of the lack of U.S. guidance, social media companies engaging in cross-border transactions with consumers face uncertainty about U.S. federal income tax consequences."

Page 4: "Other social media companies' terms of service may permit virtual currency exchanges to be operated by third parties. Players may trade the virtual currency on these exchanges with other players for real currency, usually at their own risk without any guarantees from the social media company permitting the trade."

Page 9: "There is no comprehensive definition of currency under the IRC or Treasury regulations. For a CFC [Controlled Foreign Corporation], factors to consider in the typical transaction that may be relevant for this determination could include:

● whether the player can purchase anything with the virtual currency outside the opportunity to play the MMOG;

● the extent to which there are restrictions placed on what a player can buy and/or transfer to another player;

● the right of the social media company to terminate a player's virtual currency at its sole discretion or if certain conditions occur; and

● the ability of the player to exchange the virtual currency for true cash, whether through the MMOG or through third-party exchanges."

For further reading:
"Virtual currency: regulation and taxation issues", e-commerce law & policy, November 2008

The Ten Most Anticipated Bitcoin Projects for 2012

noreply@blogger.com (Jon Matonis) — Fri, 30 Dec 2011 16:53:00 +0000

By The Bitcoin Trader
Friday, December 30, 2011

http://www.thebitcointrader.com/2011/12/10-most-anticipated-bitcoin-projects.html

I'm not so sure that Satoshi Nakamoto could have anticipated the wave of projects that have been and continue to be inspired by his creation. At this very moment, one can only imagine the development progressing in secrecy among the hundreds, if not thousands of computer programmers, investors, financial types, marketing gurus, or otherwise, that have found their second wind thanks to the possibilities of Bitcoin.

Unfortunately, I'm not privy to the closely-guarded secrets behind most of Bitcoin's projects, however many there may be. Many developers, however, are more than happy to share their ongoing work with the community, enough to definitely get us excited about Bitcoin's prospects for next year. So, without further adieu, these are The 10 Most Anticipated Bitcoin Projects for 2012:

10) BitSynCom and the MeshNet

Though somewhat mysterious about their plans, BitSynCom recently announced a massive project to assist the growing effort to launch what can only be described as "the peoples' Internet." Called MeshNet, it would be a peer-to-peer version of the Internet, dependent on its users for owning and operating the supporting infrastructure.

BitSynCom hopes to integrate Bitcoin with MeshNet to act as a payment system to reward those who maintain the infrastructure and provide bandwidth, and to charge those who use it. The development time for such an ambitious project will likely extend well past 2012, but we may see it get legs next year, especially if SOPA comes to pass in its current form. For more information, you can watch an interview with Yifu Guo of BitSynCom, here.

9) The Bitcoin Bond

"JackH" first mentioned the concept of a Bitcoin Bond back on October 25th of this year. The idea is that a publicly traded entity could be used as a vehicle through which investors could buy a piece of the Bitcoin pie while not directly purchasing any Bitcoins. The Bitcoin buying would be the responsibility of an agent associated with the "company." It's an arrangement that would sound familiar to anyone who dabbles in gold and silver ETFs.

The main driver of the project is to mitigate the fragility of the current relationship between banks and Bitcoin exchanges, as there were several instances of banks suspending their accounts with Mt.Gox, Tradehill, and Intersango over the last few months (though it's been quiet as of late).

The latest hurdle facing "JackH" is the cost of developing the legal framework for the company, which was quoted at over 200,000 British Pounds. Yikes! Apparently Mr. H. does have interested investors, though their pockets aren't quite deep enough to come up with that chunk of change. He continues to look for cheaper lawyers...

8) Bitcoin Browser Extensions

Though several attempts have been made at a browser extension, none have really proven effective nor have caught on with Bitcoin users, and most of the development in this field came to a grinding halt when the bubble burst in June. At the moment, it does not appear that anyone in the community is working on an extension, but with the pending implementation of the URI scheme and release of a thin version of the Satoshi client, a browser extension would be the next logical step and would make Bitcoin incredibly user-friendly. Hopefully we'll see one develop in 2012.

7) Bitcoin Options and Futures Trading on the Major Exchanges

2011 will no doubt be remembered as the year that Bitcoinica took Bitcoin by storm. With leveraged trading, playing the Bitcoin markets went from tee-ball to the big leagues, seemingly overnight. 2012, however, will take things to a whole new level. Mt.Gox and Tradehill have both hinted at the fact that they will be unveiling futures and options markets as part of their development plan, with Mt.Gox possibly bringing the features online as early as next month when they are set to unveil... well, something.

6) ICBIT Stock Exchange

Giving Mt.Gox, Tradehill, and Bitcoinica a run for their money will be the ICBIT Stock Exchange. Currently in alpha testing, the exchange promises options and futures trading, as well as the ability to buy traditional stocks using Bitcoins, all of the above on margin, of course.

Having access to derivatives will help to smooth out the volatility that we currently see in Bitcoin trading, and will also give merchants and miners the ability to hedge their holdings (or future holdings). These are key components to establishing a respectable currency market, and will surely generate a lot of interest outside of the Bitcoin community.

5) Electrum Overlay Network

Still looking for an official name to distinguish itself from the Electrum client (I like Overbit, myself), the Electrum Overlay Network is looking to integrate many of the services that are currently found elsewhere, as well as some that do not already exist, and bring them under the umbrella of a single platform. Features will include:

Client integration of BTC/fiat exchanges;
Wallet storage for diskless or extremely low-resource clients;
Server-side escrows (sending bitcoins to an email address);
Integration of bitcoin laundry;
Exchange calculators (to display the “fiat” equivalent value of BTC in clients);
Firstbits support;
Mining support for clients; and
Various transport protocols (especially HTTP Push, which allows PHP websites to integrate easily with Bitcoin).

This feature-rich software will be extremely popular and likely catapult Electrum to the front of the client-race, though you never know what the next guy has in his back pocket. Speaking of which:

4) Bitcoin Client Upgrades

Though not scheduled for the 0.6 version of Bitcoin, Gavin Andresen has hinted several times at his increasingly urgent desire to release a thin version of the standard client. Motivated primarily by the poor first-time user experience that comes with the full blockchain download, Gavin's dev team will likely deliver a thin version of the client in 2012. The blockchain is already topping out at 1.2 GB, and we'd hate to see what it will look like by the end of next year. In fact, most of us would rather never see it again as long as we know the friendly miner community is keeping tabs on it. Please Gavin, make the blockchain go away!

Also sorely needed is the implementation of the Bitcoin URI scheme. Currently, most Bitcoin transactions happen through the copying and pasting of ugly-looking strings of numbers and letters (i.e. public keys) that have to be manually checked and re-checked before a transaction can take place. With the URI Scheme, the click of a link in a browser will automatically launch the client and incorporate the address into a transaction. It's much needed, and we hope to see it next year.

3) New Bitcoin Transaction Types

I touched on this topic with my post about Bitcoin 0.6, but it's important enough that it needs to be repeated. The upcoming version of Bitcoin, and there will no doubt be more than one iteration in 2012, will support new transaction types. Essentially, the new version will allow for transactions with multiple signatures, thus allowing for escrow-type contracts with third-parties involved.

Having the option for multiple signatures will also add a new layer of security to Bitcoin, where you will be able to require that your transactions be signed by two different private keys, stored in physically separated devices. This added level of security will stop potential hackers and wallet thieves in their tracks, and make credit cards look downright irresponsible. It's the reason why new transactions types are number three on our list.

2) Open-Transactions (OT)

Already in private alpha-testing on a live server, OT, the brain-child of Fellow Traveler, is going to be extremely important in 2012. Really, its relationship with Bitcoin only tells part of the story, but it's an important relationship nonetheless. Bitcoin is the oil lubricating an OT machine that will enable such a vast array of financial instruments and contracts that lawyers everywhere will beg for retirement packages before they are inevitably smacked in the face with pink-slips as their jobs are made redundant.

OT will allow for truly anonymous, off-the-blockchain, instantaneous transactions, thus silencing some of Bitcoin's harshest critics. This will be a capability so powerful that integration with TOR will almost be a necessity. Multi-asset trading and smart contracts will be OT's killer apps, though the power of OT will only be limited by the imagination.

1) Max Keiser and the LoveBitcoins.org Campaign

Announced at the European Bitcoin Conference, Max Keiser is teaming up with lovebitcoins.org with the goal of bringing 1,000,000 new users to Bitcoin in 2012.

In addition to his radio and web presence, Max (I'm assuming we're on a first-name basis) has his own segment on Russia Today called the Keiser Report, with a huge audience that is sympathetic to the Bitcoin cause.

Equally important here is the structured marketing organization starting to develop within the Bitcoin community that will be extremely important to promoting the technology in 2012.

---

2011 was a year of growing pains for Bitcoin. It was both loved and hated by the media and subject to a huge bubble that topped out with a market cap of over $200 million. Hackers and miscreants took shots at exchanges and Bitcoin users alike, yet the currency and the community proved their resilience.

Bitcoin is positioned better than ever to prove to the world its significance and utility. These incredible projects only hint at some of what's to come in 2012, which will no doubt be the year that Bitcoin comes of age.

Reprinted with permission.

Digital Currency Systems: Emerging B2B e-Commerce Alternative During Monetary Crisis in the United States

noreply@blogger.com (Jon Matonis) — Tue, 13 Dec 2011 10:19:00 +0000

By Constance J. Wells, M.S.
Aspen University
Tuesday, February 8, 2011

From the Abstract:
Digital currency systems form the triumvirate nexus of government policies, money, and technology. Each has a global reach and responds to the needs of business and consumers. E-commerce depends on private and government financial institutions to enable payment transactions; the basis of e-commerce. As the United States financial crisis continues B2B enterprises may need to abandon traditional payment transaction systems and look to alternatives, in the form of Web based digital currency systems accessed via the Internet. The various types of digital currency systems generally fit into five categories: Barter Exchange Software Systems, Non-Bank Digital Currency Payment Systems, Digital Precious Metal Systems, Online Value Transfer Software Systems, and Online Stored Value Transaction Software Systems. Digital currency systems are not online banking. Digital currency systems use private electronic monies: electronic tokens, barter-exchange currencies, digital cash, and stored value e-cash vouchers. We explore the history of money against a backdrop of banking and government policies that cause cyclic monetary crisis's, how these current digital systems operate, how business can thereby benefit in their use, and why digital currency systems are such an underutilized service in the United States.

Digital Currency Systems: Emerging B2B e-Commerce Alternative During Monetary Crisis in the United States

View more documents from cjwells

Why Bitcoin is a Foundational Change That Won’t Go Away and Could Change Everything

noreply@blogger.com (Jon Matonis) — Fri, 09 Dec 2011 10:15:00 +0000

The following bitcoin article was posted at the P2P Foundation website on November 26, 2011:
Why Bitcoin is a Foundational Change That Won’t Go Away and Could Change Everything Reprinted with permission from ID3.org.

Air Guitars and Bitcoin Regulation

noreply@blogger.com (Jon Matonis) — Fri, 25 Nov 2011 10:50:00 +0000

By Jon Matonis

No one really sends or receives bitcoin. They merely transfer their ownership and specific control rights to the block chain on the giant public ledger in the cloud. It's like an air guitar. The bitcoin itself exists because we all say that it exists.

The same can be said of bitcoin's exchange value – it has value because we all say that it has value. That is both its weakness and its brilliance. Its intangibility prevents its confiscation. Where are your bitcoins Mr. Anarchist? Well sir, they are right over there stacked next to my new air guitar. What, you don't see them? I swear that they are there. I don't think governments will ever declare that they can see them too! Because if governments did see them, then bitcoin would be imputed with tremendous legal monetary value and they don't want to do that. Governments will want to diminish the credibility of bitcoin – not enhance it.

Now, to the exchanges. This is where the enforcement and regulations will hit first. Trading bitcoin in and out of national currencies is currently necessary because many transactions still have to be settled in that manner. Of course, this will adjust over time as more and more bitcoin value can remain in the bitcoin ecosystem for necessary daily transactions. But in the meantime, regulation is increasingly possible in this area due to exchanges requiring a certain degree of jurisdictional presence and centralization. As with buying and selling air guitars on eBay, regulators can exert influence because there is a centralized point of exchange. It matters not what is being exchanged.

Regulatory Bias With Some in the Bitcoin Community

"We are working with the government to make sure indeed the long arm of the government can reach Bitcoin."
--Jeff Garzik, Bitcoin Developer

"Regulation would allow the proper authorities to find and charge those who use bitcoins for illegal activities."
--Amir Taaki, Co-founder of Bitcoin Consultancy

"Norman is pushing to bring Bitcoin away from its roots and closer to a traditional currency — he is reaching out to regulators, looking to get legislation to oversee the system."
--CNBC on Donald Norman, Co-founder of Bitcoin Consultancy

These are the big three bitcoin regulatory proponents within the bitcoin community. There are certainly many more outside of the community. Now, let me see if I can summarize their rationale because these quotes are not isolated incidents and they are not taken out of context. I believe that the rationale is twofold: (1) a reaction to the anonymous online drug company Silk Road tainting the fledgling currency; and (2) a belief that bitcoin exchanges given a regulatory blessing will be in a position of strength for customers exchanging in and out of national currencies.

Both of these rationales are misguided, especially when bootstrapping a decentralized P2P cryptocurrency. Bitcoin was designed from the outset to route around centralized, authoritarian interference. Bitcoin's designer(s) anticipated regulatory termination and asset confiscation because bitcoin itself is a direct challenge to the privileged money monopoly of the sovereign. The issue is not whether bitcoin as a digital currency embodies libertarian political and economic beliefs – it was simply designed to survive. However, it is supremely naive and daft to think that a government will not soon erect laws and regulations to prevent anonymous and untraceable transactions. Additionally, government tends to tax that which it regulates and a sanctioned bitcoin will soon be transformed into an 'approved' and useless digital currency.

Bitcoin exchanges are constantly under attack in various parts around the globe and even with partially-regulated exchanges, laws can always be modified to accomplish the aims of the State. The solution is to create decentralized exchanges and to promote business models and closed-loop paradigms that make fitting into the current institutional structure irrelevant. It is a perpetually losing battle to seek minor legal victories within the confines of an arbitrary, subjective court system.

In differentiating between the fear of punishing coders and the fear of punishing the consumers and merchants that openly choose to transact in bitcoin, James Westlock summed it up nicely in his comment to the "Bitcoin and Agorism" article:

"Everyone here understands that a Bitcoin exchange is nothing to do with Bitcoin clients and the source code that is compiled into them. The imbeciles who run exchanges in police states like the USA will be scrupulously avoided by anyone with a brain cell, and those who set up exchanges in free(er) countries will reap the benefit. Anyone developing a Bitcoin client cannot be charged with conspiracy with regard to the uses that the client is put to, in this case exchanges. The client is neutral, just as browsers are neutral. You can use a browser to commit a crime, but culpability for that criminal act cannot be passed to the people who code the browser (Mozilla, Google, Apple)."

To be sure, David Norman and Amir Taaki have many more pro-regulation references and citations available at their website. For instance, Taaki gives a radio interview with the Katherine Albrecht Show in the U.S. Then, reporting in the Independent, Stephen Foley quotes David Norman on the hackers that brought down the largest bitcoin exchange:

"In the UK, supporters of Bitcoin made an urgent appeal to the Financial Services Authority to regulate the largest London-based exchange, so as to reassure people that using Bitcoin is safe. 'Unregulated businesses don't usual cry out for regulation,' said Donald Norman, co-founder of the exchange Britcoin. 'But because we are unusual, and because we are dealing with people's money, and because of all the scary stories around Bitcoin, we would like nothing more than to have a government authority looking into our accounts – especially now.'"

In order to gain legitimacy for a decentralized P2P cryptocurrency that comes with user-defined anonymity and user-defined traceability, the Statist apologists have gone out of their way to seek clear and concise guidelines from the government on what will and will not be permitted with respect to bitcoin activity. They may soon get their wish.

UK Financial Services Authority on Bitcoin Regulation

A response purporting to be from the FSA appeared recently in the Bitcoin Forum. In reading the well-referenced text, it appears obvious that bitcoin itself cannot be regulated as money but that exchangers would fall under the guidelines of FSA regulation because they are deposit takers and holding balances in national money before and after the bitcoin exchange takes place. A bitcoin service that simply provided a matching service, such as bitcoin-otc, where buyers and sellers settled on their own would not therefore fall under the regulation.

This is important because of various claims circulating that there is a coordinated effort on the part of EU-based financial institutions to freeze or impede bank accounts that are acting as agents for bitcoin exchanges or bank accounts of bitcoin exchanges themselves. In August 2011, the French bank CIC froze MtGox client funds and closed the bank account paving the way for a court case and final decision on October 18th, 2011. Then on October 21st, 2011, MtGox released this statement:

"While Bitcoin at a European level is so far not directly impacted by this decision, the Bank de France (France's central bank) has confirmed that because of European banking rules, monetary transfers (deposits and withdrawals) through a single entity are subject to financial regulation and therefore can only be performed by licensed financial institutions such as banks or Payment Service companies (the European Equivalent to a Money Service Business). This decision has forced us to find other payment processing partners within Europe that will allow us to quickly resume all EUR transactions for our European customers soon."

Seeking legal opinions and regulatory clarification will only result in more disappointments. Therefore, in order to obtain the ruling that the bitcoin regulation proponents seek, bitcoin exchanges and bitcoin merchant applications will have to be adapted to support the enforcement of AML rules regarding money service businesses and identity verification for prepaid access products, such as the recent FinCEN regulatory changes from the United States.

In the future, we are likely to see regulations and enforcement against the bitcoin exchange infrastructure as well as restrictions on bitcoin transactions at the large online and offline merchants subject to establishment transactional reporting requirements. Both enforcement avenues will be deployed in an effort to undermine the usefulness and acceptance of bitcoin, because quite frankly that will be the only option available to authorities.

Cryptocurrencies are Not Virtual Goods

Vili Lehdonvirta works as a researcher at the Network Society research programme at Helsinki Institute for Information Technology in Finland and he is Visiting Scholar at the Interfaculty Initiative for Information Studies at the University of Tokyo. His research examines the social and economic impact of new information technologies, especially online games, social networks, virtual currencies, and virtual taxation.

He believes that the bitcoin currency goes way too far in providing user-defined anonymity and user-defined transaction traceability. Although he doesn't mention how the transition to a digital cash society can justifiably deny the very same attributes enjoyed with physical paper cash today, he seems to promote his own "ideal" vision of how the future cashless society should be constructed. This is the most dangerous type of thinking when discussing a cashless society because we are at a critical nexus that will define our relationship with money in the cyberspace frontier. Either we respect individual financial privacy or we restrict it and pave the way for an even more frightening and suffocating vision of the future.

Quoted on the Bitcoin Forum,Vili had this to say:

"I am fascinated by Bitcoin, and I also think I have something of value to contribute to the Bitcoin community. The first is that as a researcher, I have studied payment and digital currency design and user adoption issues, and I think this is an area where the Bitcoin ecosystem could do better. The second is that as a long-time member of Electronic Frontier Finland, I have spent a lot of time thinking and publicly debating about privacy and digital freedom issues. I am worried that Bitcoin is a step too far as it leaves no possibility for even democratic governments to enforce their laws. This is a topic I would love to debate with the community and hear opposing views. I think the end result could be a better understanding for me, but also a better understanding for the Bitcoin community on how to live in harmony with democratic authority."

In the co-authored 2010 landmark paper, "A New Frontier in Digital Content Policy: Case Studies in the Regulation of Virtual Goods and Artificial Scarcity", Vili Lehdonvirta states:

"The law has commenced its long course to recognize digital goods as a form of property. One finds it in court decisions concerning the interpretation of criminal law and related damages. The behavior of gamers and other online users has, both in quantity and quality, exceeded the limits of contract law (Fairfield 2008). Other areas of law, including but not limited to those of criminal law, law of damages, defamation, and law of property, will slowly step into play. But the natural inertia of law can sometimes be a good thing in creating the rules that shape behavior (Bohannan 1965)."

For the most part, I respect Vili Lehdonvirta's academic work on virtual goods ownership, but he harbors confused thoughts on the broader acceptance of bitcoin through dilution of its most beneficial properties, because he mistakenly extends the notion of virtual goods legal recognition to virtual currency legal recognition. While this might be appropriate for a virtual currency that evolved out of a virtual commodity within a proprietary gaming environment, it is wholly inappropriate for a decentralized P2P cryptocurrency that does not depend upon physical property rights for its valuation.

Lawyers' Take On Bitcoin Regulation

Just as the economics profession, the legal profession is still struggling to catch up with bitcoin. I expect much more detailed legal research in the coming months. One of the lawyers in the forefront, John William Nelson, had this to say in his article, "Extending real-world laws to virtual worlds is a terrible idea":

"Government regulation, either directly or indirectly by forcing common law theory into a virtual world setting, will destroy the ability of virtual worlds to create these fundamental characteristics. The game conceit—the imaginative construct upon which the world is based—will, as Dr. Bartle says, 'evaporates upon contact with . . . reality.' The world will no longer be free to evolve—its evolution will be constrained by the laws injected into its sphere. The world’s support for the hero’s journey will be conditional upon the rules and regulations of laws from the outside—laws from the real world."

In a follow-up piece, "Bitcoin Isn't a Security", Nelson also concludes that bitcoin in-and-of-itself is not a security that can be regulated under U.S. federal securities law:

"But if currency can be a security, then Bitcoin is a security because it’s a type of currency, right?

Wrong. Bitcoin is not really a type of currency, at least not of the type recognized as securities. No entity or assets back up Bitcoin value. Bitcoin value is entirely virtual—a Bitcoin is only worth what another person thinks its worth. This is different than currency issued by countries.

A country’s currency is backed by that country’s government. This backing can either be by fiat (government regulation or law) or by commodity (such as the gold standard the U.S. used to use). Some compare Bitcoin’s value to the value of fiat money, because like fiat money it is not backed by a commodity, but this is where the similarities between Bitcoin and fiat money end.

Bitcoin is backed by no entity, no commodity, no organization. Bitcoin value is not based on government regulation or law mandating its use in a country. Similarly, it is not backed by a whole bunch of gold sitting in Fort Knox."

In answering the question of whether bitcoin investors should worry about securities regulations or laws, Nelson emphasizes that securities law is generally broad enough to capture any enterprise where investment for profit is involved, because a common economic scheme exists where a profit is expected based on the efforts of a third party. In "Bitcoin Isn't a Security", Nelson states:

"Bitcoin investors should absolutely worry about securities laws. The securities definitions outlined above might not apply to Bitcoins themselves, but they are flexible enough to apply to Bitcoin exchanges that convert a Bitcoin to real-world currencies. Securities law might even apply to exchanges converting Bitcoin to other virtual currencies such as Lindens."

Ultimately, laws erected to protect the State's coveted monopoly over the issuance of money will not be slayed through a minor technicality nor will bitcoin suddenly be blessed by a newly-converted regulatory regime. At Yale Law School, Reuben Grinberg writes in "Bitcoin: An Innovative Alternative Digital Currency":

"Most importantly, Bitcoin currently operates in a legal grey area. The federal government’s supposed monopoly on issuing currency is somewhat narrow and statutes that impose that monopoly do not seem to apply to Bitcoin due to its digital nature. However, a bitcoin may be a 'security' within the meaning of the federal securities laws, subjecting bitcoins to a vast regime of regulations, including general antifraud rules. Furthermore, other legal issues that have not been analyzed in this paper are probably significant, including tax evasion, banking without a charter, state escheat statutes, and money laundering."

The great promise of a nonpolitical bitcoin lies in what its decentralized nature immune to shutdown actually enables – the ability to maintain financial privacy and to transact with entities that may be despised by the government.

For further reading:
"Why the quoted price of Bitcoin doesn’t matter", Blogdial, October 17, 2011
"WikiLeaks and the protect-ip Act: A New Public-Private Threat to the Internet Commons", Yochai Benkler, September 15, 2011
"Precursors to Bitcoin legislation emerge", Blogdial, September 2, 2011
"On the virtual money?", Charis Palmer, Banking Review, August 7, 2011
"Bitcoins are Baseball Cards", Blogdial, August 3, 2011
"Bitcoin: A Bit Too Far?", Edwin Jacobs, Journal of Internet Banking and Commerce, August 2011
"Innovation and Legal Panic—Bitcoin", Joseph Skocilich, June 27, 2011
"Is Bitcoin Legal?", TechnoLlama, June 16, 2011
"Bitcoin exchanges offer anti- money-laundering aid", Reuters, June 15, 2011
"The Coming Attack On Bitcoin And How To Survive It", Anthony Freeman, June 7, 2011
"Money Transmitter Legislation and Bitcoin’s Legal Status", Bitcoin Money, June 2, 2011

Switchpoker Adds Bitcoin as Deposit and Withdrawal Method

noreply@blogger.com (Jon Matonis) — Tue, 22 Nov 2011 13:16:00 +0000

Press Release
via Marketwire
Tuesday, November 22, 2011

http://www.marketwire.com/press-release/switchpokercom-adds-controversial-virtual-currency-bitcoin-as-deposit-withdrawal-method-1589809.htm

World's First Real Money Poker Site for Apple Mobile Devices is First to Offer Revolutionary Online Virtual Currency Bitcoin

DUBLIN, IRELAND (Marketwire) -- Switchpoker.com, the world's first real money online poker site compatible with the iPhone, iPad, and iPod Touch, today announces it is the first real money poker site to offer the revolutionary virtual currency Bitcoin as a deposit and payment method.

Bitcoin is a distributed currency that operates without any central point (such as a bank) and without any governmental control. It is very much like gold is in the offline world. Bitcoins can be exchanged from one person to another directly, anonymously and without fees.

It has proved controversial due to its decentralized nature and the inability of governments to track its use. It has already attracted the negative attention of the Chinese government, the CIA, the US government and many lobby groups around the world.

Conor McCarthy, spokesman for Switchpoker.com, said, "The advantage of the Bitcoin currency is that it has the ability to remove all payment processing related barriers of entry for poker and gambling sites around the world. It would allow any person to play for real money completely anonymously.

"Players will be able to now send us funds directly without a 3rd party being privy to the transactions, and we will be able to send funds directly back to the user. It also means that people without a Skrill or Neteller account will be able to play. Players can get Bitcoins on sites such as Bitcoin247.com"

Switchpoker.com, launched in October 2010, offers a simple web-based solution to online poker players who wish to play their favourite games on the move - no download is required, simply visit Switchpoker.com using your mobile Apple device, sign up for an account and start playing immediately.

Switchpoker.com can be played by anyone over 18-years-old with an iPhone, iPad, iPod Touch or using standard web browsers including Internet Explorer 8, Internet Explorer 9, Firefox, Chrome, Safari or Opera.

Switchpoker.com is not currently available to U.S. residents.

About Switchpoker.com

Switchpoker.com is the world's first real money online poker site for use with iPhone, iPad, and iPod Touch mobile devices. The software company which developed the platform used by Switch Poker was formed in Ireland in 2010.

Contact Information:
Poker Media Consulting
Brendan Murray
+353863057469
Brendan.murray@pokermediaconsulting.com
www.Switchpoker.com

Why Facebook Never Built P2P Credits Payments

noreply@blogger.com (Jon Matonis) — Sun, 20 Nov 2011 08:46:00 +0000

I have always maintained that a 'true' virtual currency will have at least three attributes: two-way convertibility, floating exchange rate, and privacy (or anonymity). Any currency without those attributes is merely an extension of the existing payment structure or a surrogate currency like a glorified coupon. There are some strong legal reasons for companies electing not to support those attributes, including regulation as a US-based licensed money service business and strict AML (anti-money laundering) guidelines. In writing for TechCrunch, Josh Constine explains why Facebook doesn't allow its Facebook Credits virtual currency to be used for person-to-person payments:

"But why hasn’t Facebook built its own way for friends to send money to each other using its virtual currency Credits? Because of significant fraud risks and its focus on making Credits work better for virtual goods purchases where it earns 30%."

"The primary reason Credits can only be spent in games and apps, not sent to other users, is fraud. There are several ways for users to earn Credits instead of paying for them, such as completing on-site offers, or making off-site purchases that are incentivized with Credits rewards through companies like ifeelgoods. If users could transfer Credits to someone else, the occupation of 'Credits Miner' would emerge. These people would earn Credits any way they could and sell them to others for more than they cost to earn but less than Facebook sells them for. This would essentially create a secondary market for Credits and undermine Facebook’s ability to make money on them."

Mining for 'credits' is not necessarily a bad thing and it can tend to increase the overall demand for the nonpolitical currency unit. The so-called fraud (or unfair profit) can always be addressed by floating, rather than fixing, the exchange rate for Credits in the way that Linden Labs has done for the economy of Second Life. Constine correctly hints that the close partnership between PayPal and Facebook is what prevents Facebook from entering the payments business directly:

"To be competitive, Facebook would only be able to take a few percent on transactions, and still it wouldn’t have the base of merchants PayPal cultivated through eBay. Instead, Facebook is focusing on Credits as its platform’s mandatory virtual goods payment processor for developers, where it earns its juicy 30% cut. That business is growing thanks to gaming giants like Zynga, so there’s no need to move into a risky sector such as P2P payments that’s outside its core competencies and dominated by incumbents."

While I believe that to be true for the moment, if Facebook were to address the fraud issue and the legal and regulatory issues of two-way convertibility, it would have an enormous opportunity that PayPal would not -- the ability to create currency at will and earn seigniorage.

For further reading:
"Virtual Currencies, Real Potential", Keith Button, Bank Technology News, November 1, 2011

Alan Szepieniec Presents Bitcoin at Polish Mises Institute

noreply@blogger.com (Jon Matonis) — Mon, 14 Nov 2011 10:44:00 +0000

In a step ahead of their U.S. namesake, the Polish Ludwig von Mises Institute hosted Alan Szepieniec to present bitcoin during the 2011 Summer Seminar in Warsaw.

Some of the more recent Mises Institute discussion surrounding the decentralized cryptocurrency bitcoin and its Austrian detractors can be found here and here.

Another notable video presentation was given at DEFCON 19: "Hacking the Global Economy with GPUs or How I Learned to Stop Worrying and Love Bitcoin".

Also, watch Jeffrey Paul presenting Financing The Revolution @ Chaos Communication Camp.

U.S. Treasury's FinCEN Issues Guidance on Prepaid Access Rule

noreply@blogger.com (Jon Matonis) — Sat, 05 Nov 2011 07:41:00 +0000

By Financial Crimes Enforcement Network
Wednesday, November 2, 2011

http://www.fincen.gov/news_room/nr/html/20111102.html

The Financial Crimes Enforcement Network (“FinCEN”) is issuing these Frequently Asked Questions (“FAQs”) to assist providers and sellers of prepaid access in understanding the scope of the final rule imposing certain recordkeeping and reporting requirements under the Bank Secrecy Act (the “BSA”). The Prepaid Access Final Rule (the “Rule”) was issued July 29, 2011¹ and has generated many questions. These FAQs are intended to provide interpretive guidance for the Rule; they do not supersede or replace any part of it.

The Rule establishes a more comprehensive approach for regulating prepaid access and requires providers and sellers of prepaid access to (1) file suspicious activity reports (“SARs”), (2) collect and retain customer and transactional information and (3) maintain an anti-money laundering program. These BSA requirements are similar to those that apply to other categories of Money Services Businesses (“MSBs”). The Prepaid Access Rule amends some of the provisions within FinCEN’s MSB regulations.

1. What types of prepaid access arrangements are covered under the Rule?

The Rule defines a “prepaid program” as “an arrangement of one or more persons acting together to provide prepaid access.” Prepaid access arrangements can vary greatly, ranging from travel programs to university campus programs to public transportation programs and many others, all with specific features and characteristics targeted to different audiences and activities. The Rule details types of activities that would and would not subject a specific prepaid access arrangement to BSA requirements. The Rule excludes certain low-risk prepaid access arrangements from being subject to regulation.

Three types of prepaid access arrangements are excluded from the definition of a prepaid program under the Rule, those that: 1) provide closed loop prepaid access to funds not to exceed $2,000 maximum value on any day; 2) provide prepaid access solely to funds provided by a government agency; or 3) provide prepaid access solely to funds from certain pre-tax flexible spending arrangements for health care or dependent care expenses, or from Health Reimbursement Arrangements for health care expenses.

There are two types of prepaid access arrangements that have a qualified exclusion but that, if they can be used in any of three particular capacities, are not entitled to that exclusion and are therefore prepaid programs subject to regulation. The rationale is that the expanded capacities may obscure financial transparency. Open loop prepaid access that does not exceed $1,000 maximum value on any day, and prepaid access to employment benefits, incentives, wages or salaries (”payroll”), are not prepaid programs subject to BSA regulatory requirements so long as the prepaid access cannot (1) be used internationally, (2) allow transfers of value from person to person within the arrangement, or (3) be reloaded from a non-depository source. If any one of these features is part of the arrangement, it will be a covered as a prepaid program under the Rule.

2. Who is a provider of prepaid access?

A provider of prepaid access can be determined in one of two ways under the Rule.

A. The provider of prepaid access for a prepaid program is the participant in that prepaid program who registers with FinCEN as the provider of prepaid access for that program. Determination of which participant should register is a matter left to the participants. However, it is presumed that the participant registering as the provider of prepaid access has agreed to perform all of the duties required for providers of prepaid access under the Rule.

B. If none of the participants in a prepaid program registers with FinCEN as the provider of prepaid access for that program, the provider of prepaid access is the participant in the program with principal oversight and control over the program.

See also question 9 below.

3. Who is, and who isn’t, a “seller of prepaid access” under the Rule?

A person that accepts payments for an initial or subsequent loading of prepaid access, including a general purpose retailer such as a pharmacy, convenience store, supermarket, or discount store, is not considered a “seller of prepaid access” if:

(a) it does not sell prepaid access under a prepaid program that can be used before the user’s identification needs to be verified; and
(b) it has policies and procedures in place that are reasonably adapted to prevent the sale of more than $10,000 of any type of prepaid access to any one person on any one day.

Such a person is considered a “seller of prepaid access” if it either sells prepaid access described in item (a) above or doesn’t have policies and procedures, and does engage in sales, described in item (b) above.

Seller Questions:

4. How do I know whether my policies and procedures are “reasonably adapted” to prevent a sale of more than $10,000 to any person during any one day?

There is no one set of policies and procedures that is “reasonably adapted” to prevent sales of prepaid access that exceed $10,000 to any person during any one day. Such policies and procedures must be risk-based and appropriate to the particular retailer in question, taking into account facts such as its typical customers, its location(s), and the volume of its prepaid access sales. The fact that a retailer sells over $10,000 in prepaid access to one person in one day does not in and of itself mean that the retailer’s policies and procedures are not “reasonably adapted to prevent such a sale.”

5. Are businesses deemed “sellers” under the Rule for distributing prepaid access to other businesses ?

No. Distribution of prepaid access products to other businesses for further distribution or sale to end users/consumers by those other businesses is not the type of activity intended to be covered by the Rule. This type of activity would not subject a business to the prepaid access regulation regardless of whether the activity exceeded $10,000 to one business (i.e., person) in one day. The definition of “seller” is intended to address sales to the end user/consumer of the prepaid access product, not to apply to businesses in the distribution channels that move the prepaid access products to the market.

6. Are businesses deemed “sellers” if they provide non-depository reloads to prepaid access under the Rule?

It depends. An entity reloading prepaid access from a non-depository source is a “seller,” subject to the provisions of the Rule, if it (1) reloads funds onto prepaid access that is part of a prepaid program not subject to initial customer verification, or (2) both reloads in excess of $10,000 for any person on any given day, and does not have policies and procedures reasonably adapted to prevent such reloading for any person on any given day.

Persons providing non-depository reloads of funds or the value of funds to prepaid access are not sellers if:

they reload less than $10,000 of prepaid access that is not part of a prepaid access program covered under the Rule for any person on any given day;
they reload less than $10,000 of prepaid access that is part of a prepaid program covered under the Rule, but is subject to verification procedures after the initial sale of the prepaid access, for any person on any given day; and
they have policies and procedures reasonably adapted to prevent the reloading of $10,000 for any person on any given day.

7. What does the Rule require sellers to do with respect to non-depository reloads? Do these requirements include customer information collection requirements?

A person that qualifies as a “seller of prepaid access” because of the person’s reload business (see question 6 above) has the same obligations as any other “seller of prepaid access,” including AML program, SAR filing, and recordkeeping requirements. However, such a seller does not have to obtain customer identification information under 31 C.F.R. 1022.210 from customers that have already provided customer identification information with respect to the prepaid access that they are reloading.

8. What are the Rule’s requirements for “sellers of prepaid access?”

Sellers of prepaid access will need to develop and implement an effective AML program, report suspicious activity, and comply with recordkeeping requirements related to customer identifying information and transactional data. Sellers, as agent MSBs, will not have to register with FinCEN as MSBs.

9. Can a bank be an MSB, such as a provider of prepaid access?

No. The BSA regulations preclude a bank from being deemed any category of MSB; accordingly, a bank cannot be a provider of prepaid access subject to the requirements of the Rule. In situations in which a bank exercises “principal oversight and control,” no participant is required to register as the provider of prepaid access; however, if a participant other than a bank chooses to register, that participant is the provider of prepaid access and has the responsibilities under the rule notwithstanding the bank’s participation in the prepaid program. The Rule does not relieve banks of their existing BSA obligations, including with respect to prepaid programs with which they are involved.

10. Is a prepaid access program manager that is a participant in a prepaid program subject to the Rule if it is not the provider of prepaid access for that prepaid program (i.e., another party has registered as the provider of prepaid access)?

A program manager that is not the provider of prepaid access has no obligations under the Rule.

Prepaid Program Questions:

11. Is an arrangement that provides reloadable temporary prepaid access devices a “prepaid program?”

Such an arrangement is excluded from the definition regardless of whether the temporary device is reloadable or not, so long as the features of that device are limited in specific ways. If its maximum value, use, or withdrawal limit is less than $1,000 on any day, and it cannot be used internationally, reloaded at a non-depository source, or used to transfer value among the users, it is not subject to the Rule. Its temporary or reloadable nature is irrelevant in this analysis.

12. Is a provider or seller of phone cards subject to the Rule as a prepaid program provider or seller of prepaid access?

It depends. There is no specific exclusion from the Rule for phone cards. A provider or seller of phone cards usable solely to obtain phone service is providing or selling closed loop prepaid access. A provider of closed loop prepaid access is not a prepaid program provider unless the amount of the closed loop prepaid access associated with any one prepaid access device exceeds $2,000. Note that the ability to use the device internationally – which we understand is often the case with phone cards – would not change this analysis for closed loop prepaid access. The closed loop exclusion applies irrespective of whether the prepaid access can be used internationally.

A seller of phone cards that are usable solely to obtain phone service is a seller of prepaid access if it both sells in excess of $10,000 in phone cards to any person on any given day, and does not have policies and procedures reasonably adapted to prevent such sales to any one person on any one day. If so, it is deemed an agent MSB and does not have any registration requirements.

13. Are devices sold for future access to products or services (e.g., songs, iTunes, telephone minutes, megabytes, wireless top-up, games, software, etc.) prepaid access devices under a prepaid program subject to the Rule?

Many of these products would likely be considered prepaid access. However, depending on the structure of the program, they would probably be considered closed loop prepaid access and as such would not be part of a prepaid program under the Rule unless they allowed maximum value or loads above the $2,000 threshold.

14. What does “loading additional funds or the value of funds from non-depository sources” mean?

“Loading additional funds or the value of funds from non-depository sources” means providing funds or the value of funds intended for prepaid access by means of an entity that is not a depository institution, where that entity will then arrange for the funds to be available through the prepaid access. An arrangement under which prepaid access devices can be reloaded in this manner is a prepaid program under the Rule. Re-loads that are made through a depository institution would include but are not limited to ACH transfers from a bank account, cash or other deposit at a bank, or a check drawn on a bank and payable to the provider of prepaid access. Re-loads that are not made through a depository institution would include but are not limited to, reloads through retail store transactions (e.g., cash, check or credit card), wire transfers originating at money services businesses, or checks payable to a payee other than the provider of prepaid access.

Closed Loop Questions:

15. Is closed loop prepaid access that can be used domestically and internationally subject to the Rule if it is below threshold?

No, closed loop prepaid access below the $2,000 threshold that can be used internationally is not part of a prepaid program.

16. Is it correct that the $2,000 threshold for closed loop prepaid access attaches to the device or vehicle, not the person?

Yes, that is correct. The $2,000 threshold for closed loop prepaid access is per device or vehicle. It does not require aggregation of all purchases of separate (i.e. distinct) closed-loop prepaid access devices or vehicles bought by an individual in a single day. Note, however, that businesses that sell more than $10,000 of any type of prepaid access to an individual in a day may be sellers of prepaid access under the Rule.

17. How does the Rule’s $2,000 daily limit apply to closed loop prepaid access that can be reloaded?

No more than $2,000 can be associated with each closed loop prepaid access device or vehicle in one day. Accordingly, if the closed loop prepaid access arrangement permits either individual reloads of more than $2,000 per device, or cumulative reloads per device that total more than $2,000 in one day, the arrangement no longer qualifies for the “closed loop prepaid access” exception from the definition of a prepaid program under the Rule.

For example, if a closed loop prepaid access device or vehicle has a value of $1,500, and the holder spends $1,000 and subsequently reloads $600 before the end of the day, this prepaid access would fall within the definition of a prepaid program because $2,100 has been associated with the prepaid access within one day.

18. Is FinCEN developing a special SAR form for providers and sellers of prepaid access?

No, providers and sellers will use FinCEN Form 109, the same SAR form that all MSB filers use.

Virtual Currency: Beyond Fun and Games

noreply@blogger.com (Jon Matonis) — Wed, 26 Oct 2011 14:27:00 +0000

Karen Epper Hoffman writes in the September 2011 issue of Digital Transactions, "Beyond Fun and Games":

"A fixture in online gaming, virtual currencies are moving into other digital markets and may break into the physical world. But will acceptance costs and regulatory concerns stymie their growth?"

"'Online gaming has been a key driver for virtual currency,' says Beth Robertson, payments research director for Javelin Strategy & Research, Pleasanton, Calif. 'But that's beginning to change because of the move to broaden the use of virtual currency... potentially even to physical goods.'"

After briefly mentioning the decentralized bitcoin and a previous centralized online currency provider, Karen Epper Hoffman provides some insight on potential challenges for the regulators:

"Government oversight could put boundaries around usage in individual countries. But since virtual currency, like the digital goods it pays for and the platforms on which it operates, is global in nature, it's hard to say if that alone would quell any risk."

"In developing a system where users exchanged different currencies for a virtual one, it had created an unregulated foreign-exchange marketplace."

For further reading:
"Facebook currency takes to the web", Paul Dantanus, October 25, 2011
"Getting the Goods on Virtual Items: A Fresh Look at Transactions in Multi-User Online Environments", Justin A. Kwong, William Mitchell Law Review, Fall 2011
"Virtual Currency and Social Network Payments – The New Gold Rush: How Emerging Virtual Transactions Will Alter the Payments Landscape Forever ", Javelin Strategy, June 2011

Bitcoin: Dangerous to Surveillance State

noreply@blogger.com (Jon Matonis) — Sat, 22 Oct 2011 07:06:00 +0000

By Hack This Zine, V.13
Fall 2011

https://hackbloc.org/svn/htz/HTZ13_DRAFT_READ.pdf

BitCoin is an online crypto-currency, computer program, and peer-to-peer network that has been called “the most dangerous open-source project ever created”. Politicians, bankers, and police alike have become terrified that people may be able to untraceably send money to each other through the internet. For those in control of the financial and political systems, this is scary and not without reason: the system they depend on to keep them at the top of the pyramid may very well be replaced by one written by some rebel programmers. So what is this crypto-currency and why should anybody care? Let’s take a look. This article is targeted towards an audience that isn’t technically savvy so please keep reading even if you have no idea what cryptography, peer-to-peer networking, or distributed hash tables are.

Bitcoin, unlike traditional payment methods such as cash, debit cards, or Paypal is decentralized, censorship-proof, provides strong anonymity, and can easily traverse large geographical areas without incurring significant transfer fees. You have hopefully heard about the banking blockade that is currently taking place against Wikileaks. Currently PayPal, Visa, MasterCard, and Bank of America are all refusing to allow their customers to send money to the organization[blockade]. Paypal in particular has a long history of suspending accounts and stealing hundreds of thousands of dollars for no reason from organizations such as Cryptome, Tortoise SVN, a Katrina relief fund, Courage to Resist/Bradley Manning Support Network, and Minecraft just to name a few [paypalfreeze]. BitCoin is one example of a technology that can prevent this type of situation from happening in the future.

So, how is Bitcoin different than current online payment systems? Let’s take a quick look at some of the things that make it so unique and useful for activists.

About Bitcoin Anonymity

In the past couple of years, we’ve seen a number of organizations such as local copwatch programs, groups that support political prisoners, and online news sites for activists start to accept donations through Paypal (and consequently debit/credit cards). This nice as it allows groups and causes to quickly and easily receive money from all over the world. Unfortunately, we’re also taking quite a hit in terms of security.

In the same ways that email communication and Facebook give the state an incredible tool for mapping and supressing social movements, so do our current methods of sending money to each other. If your area is lucky enough to have a fundraiser for your favourite political prisoner, then you can just donate cash but chances are this may not be the case and the organizers of this event are probably sending the money via bank wire or paypal anyways. The FBI, Department of Homeland Security, and other organizations in charge of repressing dissent know the biggest threat to U.S. power comes from decentralized, leaderless, geographically dispersed groups of people who we call activists, dissidents and revolutionaries. These types of threats are most easily countered by finding important nodes in the network, and removing them. To do this requires a detailed map of the social network. When you see the police coming down on a comrade or an organization in your movement, this is because their social network intelligence has lead them to believe that they are the ‘key players’ whose removal will deal a below to the movement’s effectiveness. Often times their analysis of who/what is important and difficult to replace is true and the data they use to reach that conclusion is given to them by our poor security culture, the methods through which we communicate, and how we send money.

Bitcoin transactions provide you with payment anonymity. There is no central site or organization with whom you must register or send the transaction through. Instead, you simply run the BitCoin software which creates a pseudononymous address for you on the network which is randomly generated and looks something like this: (1QFnuvD5jK6JMVG4PtDv4GUmDrCnpBRShq). Your address is like your bank account, anybody can send and receive money to it. You can create as many addresses as you like which can each have their own BitCoin balances. This identity is not associated with your real name unless you post it on your Facebook or somewhere else that would be. This is comprable to the name you would use on a web forum or a chat room.

Each BitCoin spent is uniquely tracked through the network, so if you receive a bitcoin or send a BitCoin, anybody can see that transaction. This has to be part of the network to insure that any individual bitcoin isn’t spent twice. Since your real identity is not tied to your BitCoin address, this shouldn’t theoretically be a problem.

So let’s take an example: At a large demonstration, a bunch of people are arrested and a group which we’ll call the Defense Committee quickly forms to raise some legal fees. They set up a website with some information on how to donate. Some people live close enough to the events such as parties, fundraisers, and skate nights they are putting on to simply go there and donate cash. Since there is so much repression going on, the group needs to solicit money from outside their local area so they set up a Paypal account. Over 800 people donate a little under $10,000 which covers most if not all of the legal fees (yay!). A couple days after the legal fees have been paid, Agent Smith comes along and decides to see just who donated all this money. He asks Paypal who happily hands the information with no or barely any legal justification and he now has a list of everybody who donated. He has just been given a powerful tool for mapping the social networks of these dedicated activists which he can use to launch campaigns of repression against them. He also has the justification he needs to perform additional surveillance on these individuals who otherwise may not have even appeared on the radar. These are the same reasons that informants attempt to become administrators on mailing lists, get people’s cell phone records, take video cameras to protests, and become treasurers for fundraising groups: so that they can map out who are the ‘key players’ and neutralize them.

Let’s say that instead of PayPal, the defense committee prefers BitCoin and posts their BitCoin address online. Luckily for them, a number of people and groups in their movement are already familiar with BitCoin and send them a bunch of BitCoins (which they exchange for real cash from a BitCoin exchanger which we’ll get to in a bit). Agent Smith now has a problem on his hands: He has no idea how BitCoin works because it’s a new technology, which means his agency has probably never heard of it. He has to send a frantic email to somebody in another branch of the agency asking what the hell BitCoin is. After some investigation, he is able to see all the BitCoin addresses which sent BitCoin to the Defense Committee’s BitCoin address. Like many organizations, the Defense Committee encourages people to contact them for a “private” BitCoin address. Agent Smith has no idea what those addresses are or who sent BitCoins to them. He spends a couple days researching all these addresses and finds that only a couple of them have ever been posted online before and most of those happen to belong to other legal defense groups so he’s at a dead end there. In the end, Agent Smith is left pretty much empty-handed after exhaustive investigative work which he now decides he probably won’t even be doing in the future.

Lack of Intermediaries

When you wire money through a bank, use a credit card, or use an online payment system like Paypal, you usually pay a transaction fee in exchange for the service they provide you. Depending on which method you use to transfer money, the fees may be small or large and the general rule is that if your money has to cross national borders then the fees go up exponentially. You also end up paying an exchange rate so you can convert your money to some other currency.

With BitCoin, you transfer your money through the BitCoin network (which is run by volunteers and anybody who runs the BitCoin program) and there’s no mandatory fee for transfers. Transfers only take a few seconds but take longer for the network to “confirm” in the same way that you might have pending charges on your bank account/debit card. The lack of intermediaries also makes BitCoin extremely resistant to censorship and the ups and downs of many national economies. The latter feature is particularly useful if your country is financially unstable or in the middle of a political crisis. A BitCoin is a BitCoin and it will be worth the same amount no matter who you send it to or where you send it from. This also means you don’t have to trust your bank or its investment decisions.

BitCoin also can’t freeze your account, has no minimum balance or monthly fees, etc.

Actually Using Bitcoin

1. Download BitCoin

This step is pretty easy. Whether you’re on Windows, Linux, or Mac you can get BitCoin running in less than five minutes (think of how long it takes you to open a checking or paypal account if this seems like a long time). Download BitCoin from bitcoin.org.

2. Get Some BitCoins

Now that you have BitCoin set up and a BitCoin address, we need to get you some BitCoins. You can either buy BitCoins or have somebody give them to you. If you’re setting up BitCoin for an organization that is accepting donations, simply copy your “receiving address” onto your website, blog, or wherever you solicit donations from people. If you have no friends who use BitCoin yet but want to see what a transfer looks like, you can get some free BitCoins at the BitCoin Faucet https://freebitcoins.appspot.com/. You do not need to have the BitCoin program open to receive BitCoins. The network will remember the transaction and it will appear in your program when you start it next. If you don’t see a transaction you expect, keep waiting until the number of blocks at the bottom of the program stops going up. If you’re looking to buy things using BitCoin such as web hosting, pre-paid debit cards, or clothing then you’ll need to buy some BitCoins first. There are a number of places online (and in real life) that will sell you BitCoins which are called “exchangers”. They all offer a certain rate which is pretty close to the actual value of a BitCoin and cheaper in bulk. Depending on which exchanger you go with, you can buy BitCoins with cash, money orders, paypal, credit cards, or checks.

There’s a frequently updated list of currency exchangers at: https://en.bitcoin.it/wiki/Trade#Currency_exchanges. The big exchanges at the moment are Mt. Gox and BitCoin7 but there’s plenty of smaller ones, some of which may be physically near you such as the London BitCoin Exchange.

Since BitCoin is fairly new, the price of BitCoins isn’t incredibly stable at the moment so unless you’re trying to invest in them, just buy enough for whatever transaction you’ll be doing. Keep in mind that your BitCoin exchanger may record your IP address and your BitCoin address, removing much of the anonymity BitCoin
provides.

3. Convert Your BitCoins to Cash!

If you have BitCoins left over or just got a bunch of ‘em and want to turn them into your currency of choice, you’ll need to sell them. You can do this through the same exchangers that you bought them through.

Common Questions

Below are a couple common questions about BitCoin. There are a whole slew of myths out there, so please research them before dismissing this online payment system. For a list of a bunch more (or more technical explanations of the ones below), see https://en.bitcoin.it/wiki/Myths.

How Anonymous is BitCoin?

When used properly, BitCoin can provide you a very high degree of anonymity. The way it is configured by default, it provides you with more anonymity than any major payment system but you probably shouldn’t publicly do anything with it that would get you in hot water. There’s a good explanation of what anonymity it
provides and how it can be improved at https://en.bitcoin.it/wiki/Anonymity. There’s an article about an interesting study into the level of anonymity most BitCoin users have at http://www.newscientist.com/blogs/onepercent/2011/07/bitcoin-is-not-inherently-anon.html. If you want to maintain a high degree of
anonymity, you should use a “mixing service” and proxy your BitCoin connection but that’s beyond the scope of this article.

Can’t Anybody Just Make Fake BitCoins and Spend Them?

This simply isn’t true. BitCoins are made by doing very intensive computations (which become more and more difficult as the network grows). In the same way that counterfeiting money is extremely difficult, counterfeiting BitCoins is because of the cryptography used in it. The “minting” of BitCoins is done by part of the network who donate their spare CPU cycles in order to support it (called mining). In exchange, they get a small amount of BitCoins which often times is less than they spend on electricity and hardware. In other words, you can’t just make a bunch of BitCoins and spend them because you’d have to do the cryptography first which you can’t fake as it’s verified by the rest of the BitCoin network. The more computation that is done, the stronger the network will be.

BitCoin is a Giant Ponzi Scheme/Early Adopters are Unfairly Rewarded

A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value while risking time and money. Late adopters profit from the usefulness of a stable and widely accepted p2p currency. The vast majority of the 21 million possible Bitcoins still have not been distributed. By starting to mine or acquire bitcoins today, you too can become an early adopter.

Isn’t BitCoin Illegal? Don’t People use BitCoin to do Illegal Things?

HELP! THE WORLD IS SCARY! If the in-game currency in World of Warcraft, Gold, and coupons become illegal then BitCoin will be as well. BitCoin is simply a commodity you can buy and sell just like precious metals, jewelry, or cardboard. Their value is determined by what others are willing to pay for them. People use BitCoin to do all sorts of things, the majority of which are legal. Of course people will do illegal things with BitCoin just like they do with cash, cell phones, or knives. Cash is actually more anonymous than BitCoin in many ways and less likely to get you caught. BitCoin also can’t be shut down as long as the internet still exists and is decentralized so the government trying to do so isn’t a huge issue.

Where can I spend BitCoin?

You can spend it at all sorts of places to buy things from web hosting to design services to music and books. Here’s a quick list of places that accept it: https://en.bitcoin.it/wiki/Trade

What happens if my computer crashes?

If you lose or have your “wallet” stolen, which is a file on your computer that BitCoin stores your information in, then you will indeed lose access to all of your BitCoins. This is why if you’re going to have a lot of them or use it frequently then you might want to consider making backups and securing your computer. You can also use an eWallet service, which is a site that runs BitCoin for you and holds your wallet. If you do this, make sure the service has a good reputation and is worthy of your trust.

Links and additional resources:

[paypalfreeze] Paypal Freezes Bradley Manning Support Network/Courage to Resist:
http://www.techdirt.com/articles/20110224/05013913241/
paypal-cuts-off-account-bradley-manning-support.shtml http://
tinyurl.com/5wl2kpr

Paypal freezes Katrina aid:
http://www.wired.com/science/discoveries/
news/2005/09/68788 http://tinyurl.com/5rysdn

Paypal freezes Cryptome:
http://www.theregister.co.uk/2010/03/10/cryptome_paypal/
http://tinyurl.com/3l9km97

Paypal freezes Minecraft:
http://notch.tumblr.com/post/1096322756/working-on-a-fridayupdate-
crying-over-paypal http://tinyurl.com/33zao5f

Paypal Freezes TortoiseSVN:
http://tortoisesvn.net/howpaypalscrewsopensourceprojects.html
http://tinyurl.com/2ckqdx2

[blockade] http://wikileaks.org/Banking-Blockade.html

Getting started with BitCoin:
https://en.bitcoin.it/wiki/Getting_started

Some BitCoin FAQs:
https://en.bitcoin.it/wiki/FAQ
http://bitcoinfaq.com/

A good discussion on the Anonymity of BitCoin:
https://bitcointalk.org/?topic=241.0

Reprinted with permission.

For further reading:
"Cryptocurrency", James Surowiecki, MIT Technology Review, October 2011
"The World's First Bitcoin Conference", Morgen E. Peck, IEEE Spectrum, October 2011
"An Analysis of Anonymity in the Bitcoin System", Fergal Reid and Martin Harrigan, September 30, 2011
"Easily Anonymous Bitcoins", Michael Hendricks, September 30, 2011
"Anonymizing Bitcoin", Andrew Badr, September 10, 2011
"Why Bitcoin is not as anonymous as most users think", Jacob Aron, July 26, 2011
"Bitcoin: A Technical Introduction" (video), Brian Warner, July 21, 2011
"Bitcoin: More Covert than it Looks", Thomas Lowenthal, July 14, 2011
"Bitcoin, gold and the demise of fiat money", Detlev Schlichter, June 30, 2011

Cash Transactions Banned by Louisiana

noreply@blogger.com (Jon Matonis) — Fri, 21 Oct 2011 12:21:00 +0000

By Thad D. Ackel, Jr. Esq.
Ackel & Associates L.L.C.
Tuesday, October 11, 2011

http://ackelandassociates.com/cash-transactions-banned-by-louisiana/

Government Takes Private Property Without Due Process

This summer, the State Legislature and Governor of Louisiana passed a law that bans individuals and businesses from transacting in cash if they are considered a “secondhand dealer”. House Bill 195 of the 2011 Regular Session (Act 389) broadly defines a secondhand dealer to include “… Anyone, other than a non-profit entity, who buys, sells, trades in or otherwise acquires or disposes of junk or used or secondhand property more frequently than once per month from any other person, other than a non-profit entity, shall be deemed as being in the business of a secondhand dealer. ” The law then states that “A secondhand dealer shall not enter into any cash transactions in payment for the purchase of junk or used or secondhand property. Payment shall be made in the form of check, electronic transfers, or money order issued to the seller of the junk or used or secondhand property…” The broad scope of this definition can essentially encompass everyone; from your local flea market vendors and buyers to a housewife purchasing goods on ebay or craigslist, to a group of guys trading baseball cards, they could all be considered secondhand dealers. Lawmakers in Louisiana have effectively banned its citizens from freely using United States legal tender.

The law goes further to require secondhand dealers to turn over a valuable business asset, namely, their business’ proprietary client information. For every transaction a secondhand dealer must obtain the seller’s personal information such as their name, address, driver’s license number and the license plate number of the vehicle in which the goods were delivered. They must also make a detailed description of the item(s) purchased and submit this with the personal identification information of every transaction to the local policing authorities through electronic daily reports. If a seller cannot or refuses to produce to the secondhand dealer any of the required forms of identification, the secondhand dealer is prohibited from completing the transaction.

This legislation amounts to a public taking of private property without due process or compensation. Regardless of whether or not the transaction information is connected with, or law enforcement is investigating a crime, individuals and businesses are forced to report routine business activity to the police. Can law enforcement not accomplish its goal of identifying potential thieves and locating stolen items in a far less intrusive manner? And of course, there are already laws that prohibit stealing, buying or selling stolen goods, laws that require businesses to account for transactions and laws that penalize individuals and businesses that transact in stolen property. Why does the Louisiana State Legislature need to enact more laws infringing on personal privacy, liberties and freedom?

Motivating the introduction of this legislation was an increase in criminal activity, necessitating law enforcement to develop additional tools in tracking potential criminals. Thefts of copper and other precious metals have risen recently with higher commodity prices and mounting pressures from the economic downturn. The added restrictions under this recent legislation have come about under the pretense of cracking down on crime and helping the government take care of you, all at the cost of your individual privacy, economic, civil liberty and freedom.

Interestingly enough, although Pawnshops are still required to obtain clients personal information and transmit their client database information to law enforcement, they are exempt from the restriction of cash payments. A jeweler next door to a pawnshop cannot offer clients the same payment method offered by its competing pawnshop neighbor.

Act 389 passed by unanimous consent of the Louisiana House of Representatives and only mustered one nay vote (Senator Neil Riser) from the State Senate. The governor signed the legislation into law on July 1, 2011.

Thad D. Ackel, Jr. serves as lead counsel at Ackel & Associates L.L.C. and Broker of Tribute Real Estate. Reprinted with permission.

For further reading:
"Tool Time: LA Bans Cash For 2nd Hand Goods" (video), Russia Today, October 21, 2011
"Repealing the Ban on Cash / Constitutional Amendment" Thad Ackel, October 21, 2011
"Louisiana Law Bans Cash for Second Hand Transactions," Chuck Wolk, October 20, 2011
"Turn In Your Bin Ladens", Jonathan Lipow, The New York Times, December 17, 2010

Why the State Demands Control of Money

noreply@blogger.com (Jon Matonis) — Mon, 17 Oct 2011 14:32:00 +0000

By Hans-Hermann Hoppe
Mises Daily
Thursday, October 13, 2011

http://mises.org/daily/5749/Why-the-State-Demands-Control-of-Money

Imagine you are in command of the state, defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax, i.e., to unilaterally determine the price that your subjects must pay you to perform the task of ultimate decision making.

To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief. Not from your point of view, of course, but mischief from the point of view of those subject to your rule as ultimate judge. Predictably, you will use your position to enrich yourself at other people's expense.

More specifically, we can predict in particular what your attitude and policy vis-à-vis money and banking will be.

Assume that you rule over a territory that has developed beyond the stage of a primitive barter economy and where a common medium of exchange, i.e., a money, is in use. First off, it is easy to see why you would be particularly interested in money and monetary affairs. As state ruler, you can in principle confiscate whatever you want and provide yourself with an unearned income. But rather than confiscating various producer or consumer goods, you will naturally prefer to confiscate money. Because money, as the most easily and widely saleable and acceptable good of all, allows you the greatest freedom to spend your income as you like, on the greatest variety of goods. First and foremost, then, the taxes you impose on society will be money taxes, whether on property or income. You will want to maximize your money-tax revenues.

In this attempt, however, you will quickly encounter some rather intractable difficulties. Eventually, your attempts to further increase your tax income will encounter resistance in that higher tax rates will not lead to higher but to lower tax revenue. Your income — your spending money — declines, because producers, burdened with increasingly higher tax rates, simply produce less.

In this situation, you only have one other option to further increase or at least maintain your current level of spending: by borrowing such funds. And for that you must go to banks — and hence your special interest also in banks and the banking industry. If you borrow money from banks, these banks will automatically take an active interest in your future well-being. They will want you to stay in business, i.e., they want the state to go on in its exploitation business. And since banks tend to be major players in society, such support is certainly beneficial to you. On the other hand, as a negative, if you borrow money from banks you are not only expected to pay your loan back, but to pay interest on top.

The question, then, that arises for you as the ruler is, How can I free myself of these two constraints, i.e., of tax-resistance in the form of falling tax revenue and of the need to borrow from and pay interest to banks?

It is not too difficult to see what the ultimate solution to your problem is.

You can reach the desired independence of taxpayers and tax payments and of banks, if only you establish yourself first as a territorial monopolist of the production of money. On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. (Normally, no one would accept worthless pieces of paper as payment for anything. Pieces of paper are acceptable as payment only insofar as they are titles to something else, i.e., property titles. In other words then, you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing.)

Under competitive conditions, i.e., if everyone were free to produce money, a money that can be produced at almost zero cost would be produced up to a quantity where marginal revenue equals marginal cost, and because marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into "real values") — and the more so the cheaper the money commodity.

In a way, you have thus accomplished what all alchemists and their sponsors wanted to achieve: you have produced something valuable (money with purchasing power) out of something practically worthless. What an achievement. It costs you practically nothing and you can turn around and buy yourself something really valuable, such as a house or a Mercedes; and you can achieve these wonders not just for yourself but also for your friends and acquaintances, of which you discover that you have all of a sudden far more than you used to have (including many economists, who explain why your monopoly is really good for everyone).

What are the effects? First and foremost, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. There exist just as many other goods around as before. This immediately refutes the notion — apparently held by most if not all mainstream economists — that "more" money can somehow increase "social wealth." To believe this, as everyone proposing a so-called easy-money policy as an efficient and "socially responsible" way out of economic troubles apparently does, is to believe in magic: that stones — or rather paper — can be turned into bread.

Rather, what the additional money you printed will affect is twofold. On the one hand, money prices will be higher than they would otherwise be, and the purchasing power per unit of money will be lower. In a word, the result will be inflation. More importantly, however, all the while the greater amount of money does not increase (or decrease) the total amount of presently existing social wealth (the total quantity of all goods in society), it redistributes the existing wealth in favor of you and your friends and acquaintances, i.e., those who get your money first. You and your friends are relatively enriched (own a larger part of the total social wealth) at the expense of impoverishing others (who as a result own less).

The problem, for you and your friends, with this institutional setup is not that it doesn't work. It works perfectly, always to your own (and your friends') advantage and always at the expense of others. All you have to do is to avoid hyperinflation. For in that case people would avoid using money and flee into real values, thus robbing you of your magic wand. The problem with your paper-money monopoly, if there is one at all, is only that this fact will be immediately noticed also by others and recognized as the big, criminal rip-off that it indeed is.

But this problem can be overcome, too, if, in addition to monopolizing the production of money, you also set yourself up as a banker and enter the banking business with the establishment of a central bank.

Because you can create paper money out of thin air, you can also create credit out of thin air. In fact, because you can create credit out of nothing (without any savings on your part), you can offer loans at cheaper rates than anyone else, even at an interest rate as low as zero (or even at a negative rate). With this ability, not only is your former dependency on banks and the banking industry eliminated; you can, moreover, make banks dependent on you, and you can forge a permanent alliance and complicity between banks and state. You don't even have to become involved in the business of investing the credit yourself. That task, and the risk involved in it, you can safely leave to commercial banks. What you, your central bank, need to do is only this: You create credit out of thin air and then loan this money, at below-market interest rates, to commercial banks. Instead of you paying interest to banks, banks now pay interest to you. And the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still submarket interest rates (to earn from the interest differential). In addition, to make the banks especially keen on working with you, you may permit the banks to create a certain amount of their own new credit (of checkbook money) in addition and on top of the credit that you have created (fractional-reserve banking).

What are the consequences of this monetary policy? To a large extent they are the same as with an easy money policy: First, an easy credit policy is also inflationary. More money is brought into circulation and prices will be higher, and the purchasing power of money lower, than would have been the case otherwise. Second, the credit expansion too has no effect on the quantity or quality of all goods currently in existence. It neither increases nor decreases their amount. More money is just this: more paper. It does not and cannot increase social wealth by one iota. Third, easy credit also engenders a systematic redistribution of social wealth in favor of you, the central bank, and the commercial banks within your cartel. You receive an interest return on money that you have created at practically zero cost out of thin air (instead of on money costly saved out of an existing income), and so do the banks, who earn additional interest on your costless money loans. Both you and your banker friends thereby appropriate an "unearned income." You and the banks are enriched at the expense of all "real" money savers (who receive a lower interest return than they otherwise would, i.e., without the injection of your and the banks' cheap credit into the credit market).

On the other hand, there also exists a fundamental difference between an easy, print-and-spend money policy and an easy, print-and-loan credit policy.

First off, an easy credit policy alters the production structure — what is produced and by whom — in a highly significant way.

You, the chief of the central bank, can create credit out of thin air. You do not have to first save money out of your money income, i.e., cut your own expenses, and thus abstain from buying certain nonmoney goods (as every normal person must, if he extends credit to someone). You only have to turn on the printing press and can thus undercut any interest rate demanded of borrowers by savers elsewhere in the market. Granting credit does not involve any sacrifice on your part (which is why this institution is so "nice"). If things then go well, you will be paid a positive-interest return on your paper investment, and if they don't go well — well, as the monopoly producer of money, you can always make up losses more easily than anyone else: by covering your losses with even more printed paper.

Without costs and no genuine, personal risk of losses, then, you can grant credit essentially indiscriminately, to everyone and for any purpose, without concern for the creditworthiness of the debtor or the soundness of his business plan. Because of your "easy" credit, certain people (in particular investment bankers) who otherwise would not be deemed sufficiently creditworthy, and certain projects (in particular of banks and their main clients) that would not be considered profitable but wasteful or too risky instead do get credit and do get funded.

Essentially, the same applies to the commercial banks within your banking cartel. Because of their special relationship to you, as the first recipients of your costless low-interest paper-money credit, the banks, too, can offer loans to prospective lenders at interest rates below market interest rates — and if things go well for them they go well; and if they don't, they can rely on you, as the monopolistic producer of money, to bail them out in the same way as you bail yourself out of any financial trouble: by more paper money. Accordingly, the banks too will be less discriminating in the selection of their clients and their business plans and more prone to funding the "wrong" people and the "wrong" projects.

And there is a second significant difference between a print-and-spend and a print-and-loan policy and this difference explains why the income and wealth redistribution in your and your banker friends' favor that is set in motion by easy credit takes the specific form of a temporal — boom-bust — cycle, i.e., of an initial phase of seeming general prosperity (of expected increases in future incomes and wealth) followed by a phase of widespread impoverishment (when the prosperity of the boom period is revealed as a widespread illusion).

This boom-bust feature is the logical — and physically necessary — consequence of credit created out of thin air, of credit unbacked by savings, of fiduciary credit (or however else you may call it) and of the fact that every investment takes time and only shows later on, at some time in the future, whether it is successful or not.

The reason for the business cycle is as elementary as it is fundamental. Robinson Crusoe can give a loan of fish (which he has not consumed) to Friday. Friday can convert these savings into a fishing net (he can eat the fish while constructing the net), and with the help of the net, then, Friday, in principle, is capable of repaying his loan to Robinson, plus interest, and still earn a profit of additional fish for himself. But this is physically impossible if Robinson's loan is only a paper note, denominated in fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because he has consumed them all.

Then, and necessarily so, Friday must fail in his investment endeavor. In a simple barter economy, of course, this becomes immediately apparent. Friday will not accept Robinson's paper credit in the first place (but only real, commodity credit), and because of this, the boom-bust cycle will not get started. But in a complex monetary economy, the fact that credit was created out of thin air is not noticeable: every credit note looks like any other, and because of this the notes are accepted by the takers of credit.

This does not change the fundamental fact of reality that nothing can be produced out of nothing and that investment projects undertaken without any real funding whatsoever (by savings) must fail, but it explains why a boom — an increased level of investment accompanied by the expectation of higher future income and wealth — can get started (Friday does accept the note instead of immediately refusing it). And it explains why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory.

But what's a little crisis to you? Even if your path to riches is through repeated crises, brought about by your paper-money regime and central-bank policies, from your point of view — from the viewpoint as the head of state and chief of the central bank — this form of print-and-loan wealth redistribution in your own and your banker friends' favor, while less immediate than that achieved with a simple print-and-spend policy, is still much preferable, because it is far more difficult to see through and recognize for what it is. Rather than coming across as a plain fraud and parasite, in pursuing an easy-credit policy you can even pretend that you are engaged in the selfless task of "investing in the future" (rather than spending on present frivolities) and "healing" economic crises (rather than causing them).

What a world we live in!

Hans-Hermann Hoppe, an Austrian School economist and anarchocapitalist philosopher, is professor emeritus of economics at UNLV, a distinguished fellow with the Ludwig von Mises Institute, and founder and president of The Property and Freedom Society. Reprinted with permission.

U.S. FinCEN Director Expands Prepaid Access Regulations

noreply@blogger.com (Jon Matonis) — Thu, 06 Oct 2011 14:21:00 +0000

The following remarks were made by James H. Freis, Jr., Director of Financial Crimes Enforcement Network on October 5, 2011 at the Money Transmitter Regulators Association Annual Conference.

The full transcript is published here, but I highlighted the "prepaid access" regulatory changes below:

"Let me first discuss the most recent expansion of FinCEN’s AML/CFT regulations to establish a more comprehensive regulatory approach for prepaid access. Because prepaid access is a type of money transmission, FinCEN issued a final rule in July of this year, that puts in place suspicious activity reporting (SAR), and customer and transactional information collection requirements on providers and sellers of certain types of prepaid access similar to other categories of money services businesses.

The final rule:

- Renames 'stored value' as 'prepaid access' to more aptly describe the underlying activity.

- Adopts a targeted approach to regulating sellers of prepaid access products, focusing on the sale of prepaid access products whose inherent features or high dollar amounts pose heightened money laundering risks.

- Exempts prepaid access products of $1,000 or less and payroll products if they cannot be used internationally, do not permit transfers among users, and cannot be reloaded from a non-depository source.

- Exempts closed loop prepaid access products sold in amounts of $2,000 or less.

- Excludes government funded and pre-tax flexible spending for health and dependent care funded prepaid access programs.

- Clarifies that a 'provider' of 'prepaid access' for a prepaid access program can be designated by agreement among the participants in the program or will be determined by their degree of its oversight and control over the program – including organizing, offering, and administering the program. Providers are required to register with FinCEN."

In closing, Director Freis referenced an even broader international objective focused on money service businesses located in foreign jurisdictions:

"Finally, I would like to build upon the closing point in my speech at this event last year. Now that FinCEN has established a solid regulatory framework for prepaid access in the United States, we must continue to promote analogous steps in foreign jurisdictions to mitigate risks of criminal abuse while still facilitating legitimate consumer demands. I welcome industry and governmental cooperation to that end."

For further reading:
"Regs Would Require Travelers To Declare Prepaid Cards At Border Crossings", Joe Palazzolo, WSJ Blogs, October 5, 2011
"FinCEN's New rule adaptable to 'internet system'", Bitcoin Money, October 5, 2011
"U.S. aims to track 'untraceable' prepaid cash cards", M. Alex Johnson, msnbc.com, September 1, 2011
"FinCEN Brings KYC Requirements To Bitcoin?", Bitcoin Money, August 5, 2011
"Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to Prepaid Access", Federal Register, July 29, 2011

Insolvency Risk in the Network-Branded Prepaid-Card Value Chain

noreply@blogger.com (Jon Matonis) — Mon, 03 Oct 2011 17:50:00 +0000

Philip Keitel of the Payments Cards Center at the Federal Reserve Bank of Philadelphia published "Insolvency Risk in the Network-Branded Prepaid-Card Value Chain", September 2011.

From the summary:

The value chain for network-branded prepaid cards involves more parties than those commonly present in credit- or debit-card issuing arrangements: the merchant acquirer, processors, a payment network, and a card-issuing bank. These additional participants may include a program manager, a distributor, and a seller. Since a number of independent businesses make up the chain, each one, as well as cardholding consumers, could be exposed to losses resulting from the insolvency of another party in the value chain. This risk is both real and manageable, as illustrated by two recent incidents involving network-branded prepaid cards: the failures of Silverton Bank, N.A.. and Springbok Services, Inc.

Ron Paul Hoists the Flag of Hayek

noreply@blogger.com (Jon Matonis) — Fri, 30 Sep 2011 07:25:00 +0000

By Seth Lipsky

The New York Sun
Thursday, September 29, 2011

http://www.nysun.com/opinion/ron-paul-upping-the-ante-in-his-campaign/87502/

The first time I met Friedrich Hayek was in 1980 at California, where he was staying at the home of another economist. Then a young editor for the Wall Street Journal, I’d asked to call on the Nobel laureate for a book review I was writing. His host invited me for dinner. Before the meal, Hayek and I retreated, alone, to the far end of the host’s living room, for a chat.

We were but a few minutes into our conversation when, suddenly, Hayek clapped a hand over his nose and mouth and started coughing convulsively, before slumping onto the couch. I raced back to the host to exclaim that Professor Hayek seemed to be in trouble, only to be told that it was okay, he was just taking his snuff. A jolt of the divine herb, it seems, and the sage was back on his feet.

Hayek died 12 years later at the age of 93. I never came to know him well. But this week I found myself imagining that were his long-ago collapse-into-a-coughing fit to occur in front of me today, I’d whip out a copy of a new bill in Congress, H.R. 1098, called the Free Competition in Currency Act of 2011, and wave that under the great economist’s nose. It’s hard to think of anything, even a pinch of the strongest snuff, being a greater pick-me-up for his spirits.

For Hayek was an advocate of, among other things, private money — competing currencies — and HR 1098 would end a ban on them that has obtained here in America since the Civil War. The new bill in Congress, introduced in March by Rep. Ron Paul, would repeal the legal tender laws, prohibit taxation of certain coins and bullion, and clean up other sections of our coinage laws.

It is not a measure the Congress is going to pass in a hurry. But it is being nursed by advocates of monetary reform, and it would be unwise to discount it entirely. Few, after all, gave Congressman Paul much of a chance to win passage of a measure to audit the Federal Reserve, but when it eventually passed it was with an overwhelming, bipartisan vote. It may yet be enforced by the courts.

The Free Competition in Currency Act is far more important. It comes amid a historic collapse in the value of the dollar to less than a 1,600^th of an ounce of gold. The dollar has gained a bit of value in recent days, but it is still worth less than a sixth of what it was worth as recently as, say, the start of President George W. Bush’s first term.

One of the things the government has done in the face of that collapse is seek to enforce a prohibition against private “uttering” — that is, putting into use — of coins of gold, silver, or other metal as current money and making or even possessing likenesses of such coins. H.R. 1098 would end the ban on private uttering of coins and, presumably, stop any current prosecution of such uttering.

The drive for the bill is animated, if only in part, by the case of Bernard von NotHaus, who was convicted in March of issuing a private medallion called the Liberty Dollar. The government prosecuted von NotHaus even though the coins he issued were made of silver and are today worth much more, in terms of Federal Reserve Notes, than when they were issued.

Read the rest of the article.

The Free Competition in Currency Act of 2011

noreply@blogger.com (Jon Matonis) — Mon, 19 Sep 2011 06:10:00 +0000

STATEMENT ON HR 1098 THE FREE COMPETITION IN CURRENCY ACT OF 2011

SEPTEMBER 13, 2011
_____________________

Lawrence H. White
Professor of Economics, George Mason University

House Committee on Financial Services
Subcommittee on Domestic Monetary Policy and Technology

Chairman Paul, Ranking Member Clay, and members of the subcommittee: Thank you for the opportunity to discuss my views on HR 1098, the Free Competition in Currency Act of 2011 (hereafter “the Act”). As an economist specializing in monetary systems I have studied and written for many years about the role of free competition in currency. Indeed the second book of my three books on the topic, published in 1989 by New York University Press, was entitled Competition and Currency.

The benefits of currency competition
It is widely understood that competition among private enterprises gives us technological improvements in all kinds of products, delivering higher quality at lower cost. For example, the competition of FedEx and UPS with the US Postal Service in package delivery has been of great benefit to American consumers. Currency users also benefits from competition. My research indicates that currency has been better provided by competing private enterprises than by government monopoly. For example, private gold and silver mints during the American gold rushes provided trustworthy coins until they were suppressed by legislation. Scientific appraisals have found that the privately minted coins were produced even more precisely than the coins of the US Mint. Private bank-issued currency was the most popular form of money around the world until government-sponsored central banks, with few exceptions, gained exclusive note-issuing privileges.

We do not rely on the Treasury or the Federal Reserve, but rather private financial institutions, to provide our checking accounts, credit cards, and traveler’s checks. The consumer benefits from the competition in payment services among banks. Consumers would likewise benefit from free and fair competition among coin issuers. Although Federal Reserve Notes and Treasury coins should of course be protected from counterfeiting, there is no good case for them to enjoy monopoly privileges in the market for currency.

HR 1098 would give currency competition a chance. It would not remove the Federal Reserve from the currency market, but it would give the Fed a stronger incentive to deliver the kind of trustworthy money that consumers want. The dollar already faces salutary international competition from gold, silver, the euro, the Swiss Franc, and other stores of value. HR 1098 would allow salutary domestic competition between the Federal Reserve Note and other media of exchange. The Fed will have little to fear from competition so long as it provides the highest quality product on the market. Continuing to ban competition from the domestic US currency market, or keeping it at a legal disadvantage, limits the options of American consumers who use money, to their disadvantage.

What sort of competition might we see if currency were free from legislated restrictions? Here is one example. In 1998 a non-profit organization launched the “American Liberty Currency,” a private silver-based currency intended to compete with Federal Reserve currency. In the year 2000 I wrote an article about the project, entitled “A Competitor for the Fed?,” published by The Foundation for Economic Education’s magazine The Freeman (vol. 50, July 2000). I was skeptical that the project would attract many users, absent high inflation in the dollar. But I noted then, and I reiterate today, that in a high-inflation environment “silver-backed currency with widespread acceptance would provide a useful alternative to the Federal Reserve’s product. Then, if you don’t like the way the federal government manages (or mismanages) the value of the fiat dollar, you aren’t limited to complaining. You can switch to the private alternative.” If double-digit inflation should unfortunately return to the United States, then the American public, as I wrote, would “find a very practical advantage in a silver-backed alternative to the free-falling Federal Reserve note.”

The Act offers three reforms. I will comment on them in turn.

Section 2 of the Act repeals 31 USC, §5103, which presently declares that “US coins and currency (including Federal Reserve notes …) are legal tender for all debts, public charges, taxes, and dues.”

What are the likely economic consequences of removing legal tender status from US Treasury coins and Federal Reserve notes? The immediate consequences would be minimal. New forms of currency will not be introduced into the market any faster than the public is prepared to accept them. The longer-run consequence will be to enable a more level playing field for competition in the issue of currency.

Legal tender status is more limited in its scope than is sometimes believed. That Federal Reserve notes and Treasure coins have “legal tender” status does not mean that they are the only legal way to pay. Any seller or creditor may (of course) voluntarily accept payment by transfer of bank-account balances, that is, by ordinary bank check, debit-card transfer, direct deposit, or wire transfer. Traveler’s checks or cashier’s checks may be accepted. The seller or creditor may even accept foreign currency or barter. Measured by dollar volume, payments in Federal Reserve notes or coin are a tiny share of all final payments in the United States (less than 20% of consumer payments, nearly 0% of business-to-business and financial payments). The great bulk of payments are electronic transfers of non-legal-tender bank balances.

Nor does legal-tender status mean that acceptance is mandatory when offered at a point of sale in a spot transaction. Large-denomination Federal Reserve notes are refused at many points of sale, and lawfully so. Vending machines refuse pennies. Mail-order sellers may refuse cash of any denomination. Millions of legal-tender one-dollar coins are piling up in the Federal Reserve’s vault in Baltimore because nobody wants them.

Legal tender relates to the discharge of debts. The phrase “Legal tender for all debts” in 31 USC, §5103, quoted above, means that if Smith owes Jones $125, then Smith’s offering Jones $125 in US coins or Federal Reserve notes legally extinguishes the debt, even if Jones would prefer payment in some other form (say, a check). In other words, the creditor is barred from refusing payment in legal tender notes or coins.

There is already an important exception, however. Debts in gold-clause contracts, made since 1977, are not unilaterally discharged by offer of US coin or Federal Reserve notes. 31 U.S.C. §5118(d)(2) reads: “An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. This paragraph does not apply to an obligation issued after October 27, 1977.” [emphasis added] That is, the holder of a gold-clause bond is free to insist on receiving payments in gold, or in an amount of dollars indexed to the price of gold, whichever the bond contract specifies.

Removing legal-tender status from US Treasury coins and Federal Reserve notes generally, as Section 2 of the Act does, essentially broadens the gold-clause exception to allow contractual obligations to specify payment in, or indexed to, any medium that is an alternative to Treasury coins and Federal Reserve notes. It opens the competition not just to private checks and banknotes, but also to gold units, silver units, units of foreign currency, Consumer Price Index bundles, wholesale commodity bundles, Bitcoins, and whatever else a lender and a borrower might agree upon. If they prefer a unit for denominating their debt contract other than the Fed or Treasury dollar, they would be free to write a specifically enforceable contract in the unit of their choice.

Hand-to-hand currency does not need legal tender status to make it circulate easily. In jurisdictions where private commercial banks may issue circulating currency notes or “banknotes” (found today in Scotland, Northern Ireland, and Hong Kong), banknotes have the same legal status as checks. That is, they do not have legal tender status. Any creditor might refuse them if he preferred to be paid in another medium. (In Scotland and Northern Ireland, only pound sterling coins are legal tender.) I have spent a fair amount of time in Northern Ireland, visiting the Finance Department at the Queen’s University of Belfast, and have observed the circulation of banknotes there first-hand. There are four private banks that issue notes, and all of their notes are universally accepted. Legal tender status is clearly not necessary to have currency that circulates widely and is commonly accepted for payment of debts. Currency notes do not need legal tender status any more than credit cards, checks, debit cards, or traveler’s checks.

Section 3 of the Act rules out federal or state taxes on precious-metal coins, whether minted by a foreign government or by a private firm. This section would allow precious-metal coins to compete with the US Treasury’s token coins (made of base metals, and denominated in fiat US dollars) without tax disadvantages (sales taxes on acquisition and capital gains taxes on holding, from which Federal Reserve Notes are exempt), and thereby a level playing field for competition among monetary standards.

Section 4 of the Act repeals Title 18 §486 (relating to uttering or passing coins of gold, silver, or other metal) and §489 (making or possessing likeness of coins).

Section 486 is a relic of the Civil War, part of an effort to bolster the use of the wartime paper “greenback” currency by banning competition from the private gold coins I previously mentioned. The repeal of §486, combined with the previous section, would allow silver and gold coins to compete with the Treasury and the Fed on a level playing field.

I previously mentioned the American Liberty Currency project. The mover of that project, Bernard von Not Haus, was convicted in March 2011 of violating §486, and presently awaits sentencing, for the victimless crime of producing one-ounce silver coins, of original design, that he hoped would compete with the Federal Reserve’s currency. Regarding this case I commend to your attention the article by Seth Lipsky, “When Private Money Becomes a Felony Offense,” Wall St. Journal, 31 March 2011.

The repeal of §486 would avoid a repeat of the injustice done to Mr. von Not Haus. I share Mr. Lipky’s view that “it’s a loser’s game to suppress private money that is sound in order to protect government-issued money that is unsound.”

Title 18 §489 of current law outlaws making or possessing “any token, disk, or device in the likeness or similitude as to design, color, or the inscription thereon of any of the coins of the United States or of any foreign country issued as money, either under the authority of the United States or under the authority of any foreign government”. Von NotHaus was also charged with violating this section. In my view §489 is redundant at best and over-reaching at worst. It is redundant at best because if there is any fraudulent intent in making or passing such a device, it is already outlawed under §485, which bans the counterfeiting of US coins. To outlaw “likeness or similitude as to design, color, or the inscription” [emphasis added] in cases where it is not counterfeiting and has no fraudulent intent, is far too sweeping. Taken literally, §489 outlaws all commemorative silver medallions—and if you go on eBay, you’ll find that there are thousands of them for sale—because it says that you are in violation of the law if you make or own any disk that merely has a color similar to that of a US quarter.

Conclusion
Competition in general creates incentives to provide a high quality product by taking business away from low-quality producers. Competition in currency is a practical idea that offers sizable benefits to the public when the quality of the incumbent currency becomes doubtful. In particular, US citizens would benefit from freedom of choice among monetary alternatives though the removal of current legal restrictions and obstacles against currencies that could compete with Federal Reserve Notes and US Treasury coins. HR 1098 would give currency competition a chance.

Source:
http://financialservices.house.gov/UploadedFiles/091311white.pdf

U.S. Government — Tracking Cash Cards?

noreply@blogger.com (Jon Matonis) — Thu, 15 Sep 2011 16:41:00 +0000

By Kelly Holt
The New American
Thursday, September 8, 2011

http://www.thenewamerican.com/usnews/crime/8903-us-government-tracking-cash-cards

The U.S. government has found another way to invade privacy in the name of fighting terrorism by proposing legislation that would track prepaid debit cards. As usual, the real losers would be, not terrorists who won’t comply anyway, but innocent Americans, or travelers, and card issuers burdened with yet another layer of record keeping and compliance procedures. The Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department, has drafted rules, taking effect Sep. 27, to establish a “more comprehensive regulatory approach for prepaid access.”

It’s important to distinguish between these prepaid debit cards and the debit cards attached to your bank account. Once known as “stored-value cards” the cards will be renamed “prepaid access cards” — because they aren’t tied to a bank account, the money paid for them in advance could be anywhere, currently outside the reach of monitoring by the government. Which is precisely the point. An assessment of financial security threats in 2005 by the Treasury Department noted that the 9/11 hijackers opened bank accounts, signed signature cards and received wire transfers, which left a financial trail. The assessment noted: “… had the 9/11 terrorists used prepaid … cards to cover their expenses, none of these financial footprints would have been available,” according to MSNBC.com last week.

FBI Director Robert Mueller even called the use of prepaid cards a shadow banking system. The Treasury Department's assessment urged action to crack down on misuse of prepaid access cards, saying it was convinced that the shuttling of criminal proceeds across the border, "whether in the form of bulk cash or stored value" (on prepaid cards), poses "a significant threat to national security."

ACI Worldwide of New York creates and manages electronic payment systems for banks and major retailers. Senior product manager Jim Schlegel said the new rules are well-intentioned, but he questioned just how big a problem money laundering through prepaid cards really is. In an interview he said:

It's "such a small percentage of the overall problem, and attempts to propose very heavy legislation and requirements around it put a drag on an otherwise growing and profitable sector."

Agencies and bank regulators claimed that there’s no way to know how much money moves undetected across U.S. borders via the use of these cards, but according to a Government Accountability Office report from October 2010, it’s estimated that criminals smuggle $18 billion to $39 billion a year in bulk cash across the southwest border.

But, according to MSNBC, criminal organizations load prepaid cards with amounts just under the $10,000 minimum that must be reported, then cards are sent across borders and/or to associates who can convert the amounts to cash — effectively a form of money laundering. The Financial Action Task Force (FATF) reported last year in an examination of the cash cards that the United States is the biggest user of prepaid cards and that by 2017 will account for 53 percent of the worldwide market.

The traditional problems of smuggling large amounts of cash are almost eliminated with the use of prepaid access card.

Jasbir Anand, a senior consultant at ACI, said the funds represented on such cards, which you can easily buy online, could:

travel across borders without limitation. The net impact of these rules would be an increase in the overall cost of debit cards for consumers for record-keeping and storage and so on that will eventually trickle down to fees on the debit card and a limitation on features.

MSNBC continued, “Even as it warns about the potential money laundering threat, the [FATF] also acknowledges that tight restrictions on prepaid cards could have a significant impact on lower-income people unable to ‘take full advantage of mainstream financial service providers’ because they have a poor credit record, for example, or because they have no permanent address and can't qualify for a bank account. That's more than 17 million Americans, the Federal Deposit Insurance Corp. says, and for them, prepaid cards can be the only way they can gain "ready access to services."

The new rules could cause another problem. Overseas companies and banks that wish to continue doing business here might comply, but U.S. rules can’t be imposed on the thousands of merchants in other countries.

And what about traveling with large amounts of cash? Three Senators — Amy Klobuchar (D-Minn.), Tom Udall (D-N.M.), and Jeanne Shaheen (D-N.H.) — introduced legislation last month to close that loophole. It would require travelers to declare "prepaid cards totaling more than $10,000" when they enter or leave the United States, just like cash. But then entities issuing prepaid cards are placed at a competitive disadvantage to traditional or other standard bank cards if travelers find the prepaid cards less attractive. And trying to determine a card’s balance while in flight, or at a gate is burdensome.

FinCEN is developing regulations, as required by the Credit CARD Act of 2009, to address gaps in regulations related to the use of stored value for criminal purposes, but much work remains. And even more vigilance on the part of Americans trying to hold on to both their privacy and their cash.