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January 12, 2014

CRS on BTC: Notes and Jokes

Filed under: Uncategorized — @ 12:00 a.m.
CRS on BTC: Notes and Jokes

CRS on Bitcoin: Let's LOL!

In which your author shares a set of notes on a piece the Congressional Research Service put together on Bitcoin so that you don't have to derp through the whole thing yourself.

The title of their report: Bitcoin: Questions, Answers, and Analysis of Legal Issues. They say little of note to those who've been watching the arena, so I've selected mostly pull quotes that support my arguments that Lady Liberty as America has known her1 is not long for this world and that it will be Bitcoin that wears away the remaining threads suspending the Damoclean sword of resource overshoot o'er her head.

The Notes

Congress is interested in Bitcoin because of concerns about its use in illegal money transfers…

There is no such thing as an illegal money transfer, just transfers that the USG doesn't like. Within its borders has some influence over who may remit what to whom, but it takes only a cursory perusal of the HSBC money-laundering case to grasp that there is only power and the wielders thereof make the rules. Sometimes their accomplices get cut off at the knees, as happened with HSBC, but let us not labor under the delusion that US regulation of financial chicanery in any way approaches rigorous enforcement.

In reference to the relative market capitalizations of Bitcoin and the USD:

For comparison, in September 2013 the U.S. money supply (the sum of currency, demand
deposits, saving deposits including money market saving accounts) was about $10.8 trillion
(about 1,000 times larger.)

At the time of this writing, there are currently ~12`214`975 BTC in circulation. At 849.88, that's a market cap of 10`381`262`953 USD, or 10.4 billion USD. That leaves just 3 more orders of magnitude of increase in BTC value before it hits market-cap parity with the dollar! The next few should take a little longer than the previous, though, to be good for everyone's health…

E-peen competitions aside, the researchers didn't miss potential problems for the Fed with regards to its core mission:

…a substantial decrease in the use of dollars would also tend to reduce the size of the Fed’s balance sheet and introduce another factor into its consideration of how to affect short-term interest rates…

My favorite way to define socialism is with the following litmus test: is the government performing capital allocation? If setting interest rates by printing currency and later pulling it from circulation counts as capital allocation2 then the USG is guilty as charged of being a socialist shithole, doomed to the same crackpot government all socialist governments bring upon their people

The Congressional Research office does understand the basics of inflation, suggesting that the price of BTC might decrease if demand for the currency were to slack relative to the supply, and that fractional reserve banking in Bitcoin might lead to an inflationary environment as well3.

While well-intentioned "bank" (for whatever value of "bank" you care to entertain the idea of w/r/t Bitcoin - let me introduce you to the concept of M-of-N transactions one of these days) operators may find themselves in a position where they could theoretically run a fractional-reserve operation, Bitcoin for whatever reason is highly immune to the practice. I suspect that reason is one of fractions: the number of people long BTC is pretty damn small to begin with (unlike the dollar). Of that tiny fraction who are long, an even smaller fraction could ever repay a Bitcoin denominated loan. Building a fractional reserve bank (much less several, serving different demographics) in Bitcoin at the moment is sheer lunacy - you'll never make the loans you'd need to stay profitable, and many people who own cryptocurrencies are capable of handling their own security4.

Most often governments (or their central bank) regulate the supply of money and credit and most often some degree of mismanagement of this government function is at the root of a persistent high inflation problem.

Those 'persistent high inflation problems' are just countries who print more of their local fiat than the US. Everyone is engaged in the same game of watching everyone else in the room and trying not to print too much more or too much less than anyone else. A delicate currency détente - except for the crazy ones like Argentina who endeavour from time to time try to buck the rules when they don't have nearly the war chest necessary to play games of high-stakes currency war.

I doubt the person who actually wrote the above about monetary supply knew how hilarious it would sound in the light of the permanent inflation rampant in the United States.

Let's see what we can do with this:

The dollar is legal tender and by law can be used to extinguish public or private debts. A creditor is required to accept legal tender for the settlement of a debt. At a minimum, the payment of taxes forces U.S. individuals to hold dollars. Arguably, for many, such a government endorsement is comforting and creates a strong underlying demand for the dollar. By contrast, a currency like Bitcoin that is linked to a complex computer program that many do not understand and that operates without accountability to any controlling entity, could be an unattractive vehicle for holding wealth for many people.

Ahem:

The Bitcoin is the world's currency and can be easily exchanged for any local fiat to extinguish public or private debts. A bearer can readily acquire any currency required to settle any debt denomination. At a minimum, the inability of fiat currencies to cease inflating their monetary base forces people to hold Bitcoin until required to pay in another, less stable currency. For many, the knowledge that no government can prevent them from sending money wherever they want or take their money is comforting and creates a strong underling demand for Bitcoins. By contrast, a currency like the Dollar that is operated by a crackpot socialist regime that prints more Dollars with which to pay their debts, accountable to none but the hordes dependent upon the United States' largesse could be an unnatractive vehicle for holding wealth for many people5.

I jest, dear friends, I jest. The laughs continue to roll in, independent of me though. Almost immediately after the above paragraph I labored so to mock the assumptions of, those fine scholars of the Establishment trot out the Deflationary argument with ne'er so much as a questioning of either its fundamental premises or the implications of the hairbrained analysis:

Because the supply is capped in the long run, widespread use of Bitcoin would mean that the demand for Bitcoin would likely outstrip supply, causing Bitcoin’s price to steadily increase. The corollary of that increase is that the Bitcoin price of goods and services would steadily fall causing deflation. Faced with deflation, there is a strong incentive to hoard Bitcoins and not spend them, causing the current level of transactions to fall.

If generalized to an economy-wide phenomenon deflation could cause slower than normal economic growth and higher than normal unemployment.

They do understand that the price of Bitcoins will semi-monotonically increase - they exist, and the irresistable (except under socialism) force of the (slow, gradual) creation of value by the precious few who are capable of imagining that value and then laboring to make it happen combined with the slow but steady decline of Bitcoins in circulation as the less-savvy lose their wallets or send coins to space will drive all "money" that wants "saving" into Bitcoin.

As for implications, well, one could not ask for a more ringing confirmation of the American elite's paradigms. Slower economic growth and higher than normal unemployment are Bad Things to these people - the economic growth nominally because we were all taught to not think of the perpetuum mobile but instead simply accept as a point of fact that perpetual economic growth is both good and desireable. As for the employment, well, there are definitely too many people and I only know of one way to fix that problem6.

It wouldn't be fair, I suppose to pit intellectuals of the Cathedral against the mouthpiece of the Socialists (they are supposed to be on the same team, after all). But hey! This is my armpit of the internet, and I'm going to do just that! Dig these two quotes in delicious juxtaposition: one says 'gold standard bad' the other that 'gold standard good'. The first is from the Congressional Research Office, and the second from a professor of economics at Rutgers7:

The perils of aninelastic currency were evident, for a period from about 1880 to 1914, when the United States monetary system operated under a gold standard. At this time, the deflationary bias of an inelastic supply of gold led to elevated real interest rates, caused periodic banking panics, and produced increased instability of output.

Other major countries joined the gold standard in the 1870s. The period from 1880 to 1914 is known as the classical gold standard. During that time, the majority of countries adhered (in varying degrees) to gold. It was also a period of unprecedented economic growth with relatively free trade in goods, labor, and capital.
The Concise Encyclopedia of Economics, Michael D. Bordo

I'm no economist, and I'm no banker. Sheeit, I don't even have a proper Bachelor's degree8. I can't possibly come up with a concise framework in which to reconcile these conflicting opinions about the gold standard. One opinion is from a bastion of the advising class, and the other is the part of the socialist machine that drums up pap for US politicians to read and regurgitate as their own thoughts. Ideas on how to reconcile these two are welcome, directed to benkay@gmail.com.

There is plenty of the classic inability to come to grips with reality under which the vast majority of Americans labor:

California’s Department of Business Oversight may have misdirected a cease and desist order to the Bitcoin Foundation because the Foundation confines itself to advocacy work.

May have. Drop those two words from the sentence and watch reality spring back to life before your very eyes.

Another moment of hidden genius, where the papers author says "look at all these legal reasons why BTC isn't under the domain of the USG until it's a real competitor":

The language of the statute, “note, check, memorandum, token,” seems to contemplate a concrete object rather than a computer file; moreover, a digital currency such as Bitcoin, without a third-party issuer, cannot be said to be an obligation. However, there are some arguments that could be made, particularly should a digital currency become pervasive enough to be considered a possible competitor to U.S. official currency.

Basically, "we won't care until it's too late and then we'll confiscate all the coins we can from all the suckers with bad operational security because we're cool like that".

Tax law notes are similarly entertaining in the "heads I win tails you lose" life under socialist rule sort of way:

The IRS…cautions: “[i]n general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income
tax return.”

Make money in virtual currencies, pay taxes. Take a loss in virtual currencies, go fuck yourself. Thanks, United States Government!

Summa

The damn thing's only five years old! How on earth can one expect a sclerotic organization like the USG to have a cohesive opinion on the thing? By the time they get around to building a cohesive opinion it'll have knocked the knees out from under the welfare state and the only opinion left for the government to take will be (of necessity) "DEATH TO THE CRYPTOSTATE".

Which will, as Shiva to the static and declining world of institutionalized socialism, laugh gleefully at the paltry arrows of asset freezes and witholding9.

Footnotes:

1

Which is to say not at all in a very long time, since perhaps the West was cleaned of her whores and Madames

2

How could it not?! The money must get printed, and then government officials must decide which of their college friends' accounts to credit with the new e-shitbuxx. Sounds like capital allocation to this idiot…

3

pp. 9

4

At this precise moment in time, at least. There'll come another moment when people will seek refuge for their funds when the price of a single BTC is more on the order of a million plus. I can't tell if it'll be classic depositary/fractional reserve institutions or multiple-signature tying-up of Bitcoins in SPOF-resistant manners.

5

Not all true yet.

6

Let them enjoy global warming is what I was thinking! What kind of monster do you take me for?!

7

Likely guilty of his own crimes, but we'll leave him alone in his tower of tenure for today.

8

This will become a benefit when, unlike the rest of the degree-bearing masses, I do not have to doctor my CV.

9

Individual citizens of the cryptostate are advised to move beyond the States' reach.

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