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Old 11-25-2012, 04:26 PM   #1
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Default Interesting article on Bitcoin (the virtual currency)

ECB: "Roots Of Bitcoin Can Be Found In The Austrian School Of Economics" - Forbes

The article has a lot of good links that don't show up below.

The ECB (European Central Bank) has produced the first official central bank study of the decentralized cryptographic money known as bitcoin, Virtual Currency Schemes. Ignoring for a moment the ECB’s condescending and derogatory use of the virtual currency phrase and scheme phrase, the study produced at least one landmark achievement.

In claiming that “The theoretical roots of Bitcoin can be found in the Austrian school of economics,” the ECB forever linked Bitcoin to the proud economic heritage of Menger, Mises, and Hayek as well as to Austrian business cycle theory. This recognition is also a direct testament to the monetary theory work of Friedrich von Hayek who inspired many with his 1976 landmark publication of Denationalisation of Money.

Bitcoin fully embodies the spirit of denationalized money as it seeks no authority for its continued existence and it recognizes no political borders for its circulation. Indeed according to the report, proponents see Bitcoin as “a good starting point to end the monopoly central banks have in the issuance of money” and “inspired by the former gold standard.”

Economists from the 19th and mid-20th centuries can be forgiven for not anticipating an interconnected digital realm like the Internet with its p2p distributed architecture, but modern economists cannot be. From their own conclusions (on page 48) which inaccurately lump Bitcoin together with Linden Dollars, here is what the modern-day economists at the ECB are still not getting:

1. ECB concludes that if money creation remains at a low level, bitcoin does not pose a risk to price stability. This is incorrect on two levels. One, the creation of new bitcoin is capped at 21 million with eight current decimal places so it grows through adoption and usage rather than monetary expansion. And two, as with gold, silver, and other commodities having a monetary component, price stability is a function of the market not central planners;

2. ECB concludes that bitcoin cannot jeopardize financial stability due to its low volume and limited connection with the real economy. Conversely, bitcoin will tend to increase financial stability and overall soundness. Bitcoin’s connection with the real economy is only a concern for the regulated and taxed economy, whereas bitcoin independently may thrive in the $10 trillion shadow or “original” economy. Besides, with its repeated market interventions, no one has done more to jeopardize financial stability than the ECB itself;

3. ECB concludes that bitcoin is currently not regulated and supervised by any public authority. It would be more accurate to say that State-sponsored regulation is largely irrelevant because of the inherent design properties of a peer-to-peer distributed computing system. But happily, this is still a conclusion that I can agree with and recommend that it remains the case;

4. ECB concludes that bitcoin could represent a challenge for public authorities, given the legal uncertainty and potential for performing illegal activities. While public authorities will certainly be challenged by the introduction of a monetary unit that cannot be manipulated for political purposes, bitcoin in some cases does have the ability to provide tracking capability that far exceeds that of national cash or money substitutes. What authorities will find most troubling though, with bitcoin, is that money flows between individuals and businesses will no longer be exploitable for purposes of unlimited identity tracking and unconstitutional ‘fishing expeditions’;

5. ECB concludes that bitcoin “could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly.” Pretentious as it may seem, the ECB is stating here that central banks as protector of the general public with respect to payments have a role to play because it is their reputation that suffers in the event of a bitcoin-related security incident. Firstly, that is an assumed responsibility — not a delegated responsibility; and reputational impact aside, I would prefer to rely on lex mercatoria;

6. ECB concludes that bitcoin does indeed fall within central banks’ responsibility as a result of characteristics shared with payment systems. Of course it does not. Central banks are a form of centralized economic planning so their stated responsibilities are suspect from the outset. Bitcoin represents an intangible math puzzle whose existence is solely restricted to transfer rights on a cloud-based public ledger. It more closely resembles an air guitar than a payment system for purposes of oversight.

Now, in affirming the superior attributes of bitcoin in the role of financial innovation, the ECB correctly identifies why the profligate issuers of national fiat currencies will ultimately feel threatened by such a decentralized nonpolitical unit. The report acknowledges the following with respect to bitcoin: (a) “higher degree of anonymity compared to other electronic payment instruments,” (b) “lower transaction costs compared with traditional payment systems, and (c) “more direct and faster clearing and settlement of transactions” from the absence of intermediaries.

Overall, the fear of the monetary overlords is palpable as the study concludes by basically promising continued scrutiny and oversight. Also forecast for the plebeians is a possible remedy to the global scope and unclear jurisdiction of the regulatory challenge:

“One possible way to overcome this situation and obtain some quantitative information on the magnitude of the funds moved through these virtual currency schemes could be to focus on the link between the virtual economy and the real economy, i.e. the transfer of money from the banking environment to the virtual environment. Virtual accounts need to be funded either via credit transfer, payment card or PayPal and therefore a possibility would be to request this information from credit institutions, card schemes and PayPal.”

However, Michael Parsons, a former executive with Emirates Bank (Dubai), Moscow Narodny Bank, and KPMG Moscow, believes that those efforts will prove futile and he explains, “Bitcoin is ‘regulated’ by its peers and mathematics. And Bitcoin is not a currency like fiat money. It is a value transfer system which is given value only by its users. So the ECB, FED, etc. have no mandate to control a ‘virtual currency’ just because they call it (bitcoin) that! It will just go underground. Bitcoin is like Light and Air. Free to use and transfer. Owned and issued by the people and NOT the State!”

It evokes an image of central bankers huddled comfortably on the safe shoreline as they look out into the horizon and see the dangerous, unstable virtual currencies approaching. The opposite is actually the truth because it is the central bankers who are floating precipitously out at sea. As James Turk famously said about bitcoin’s analog cousin, “When standing in a boat and looking at the shore, it is the boat (currencies) – and not the land (gold) – that is bobbing up and down.”
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Old 11-25-2012, 04:45 PM   #2
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This book by Nobel Economics prize winner Fredrique Hayek, was linked:

"Denationalization of Currency:

Here's a good summary
-- quote--

The Hobart Papers are intended to contribute a stream of
authoritative, independent and lucid analyses to understanding
the application of economic thinking to private and governmental activity. Their characteristic concern has been the
optimum use of scarce resources to satisfy consumer preferences
and the extent to which it can be achieved in markets within
the appropriate legal/institutional framework created by
government or by other arrangements.

It has long been a common belief among economists since
the classical thinkers of the 18th century that one of the most
important functions of government was to create a monetary
mechanism and to issue money.

The debates among economists
have been on how far governments have performed this
function efficiently and on the means of increasing or decreasing
the power of government over the supply of money. But the
general assumption has been that government had to control
monetary policy and that each country had to have its own
structure of monetary units.

This assumption is now questioned by Professor F. A. Hayek.
He goes much more fully into the 'somewhat startling'
departure from the classical assumption which he touched on
in Choice in Currency, Occasional Paper No. 48, published in
February 1976.

Even this short expansion of the theme indicates insights into
the nature of money and its control for a wide range of readers:
they should stimulate the student and suggest precepts for
politicians. In effect, Professor Hayek is arguing that money
is no different from other commodities and that it would be
better supplied by competition between private issuers than
by a monopoly of government.
He argues, in the classic
tradition ofAdam Smith but with reference to the 20th century,
that money is no exception to the rule that self-interest would
be a better motive than benevolence in producing good results
The advantages that Professor Hayek claims for competitive
currencies are not only that they would remove the power of
government to inflate the money supply but also that they
would go a long way to prevent the destabilising fluctuations
that government monopoly of money has precipitated over the
last century of 'business cycles'
and, an urgent question in the
1970s, make it more difficult for government to inflate its own

Although the argument in places is necessarily abstract and
requires close attention, the central theme is crystal clear:
government has failed, must fail, and will continue to fail to
supply good money. If government control of money is
unavoidable Professor Hayek thinks a gold system better than
any other; but he maintains that even gold would be found
less dependable than competing paper currencies whose value
would be maintained more or less stable because their issuers
would have a strong inducement to limit their quantity or lose
their business.
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