This is silly in concept and fails to grasp why the Fed exists in the first place.
The entire purpose of the Federal Reserve is to enable a system of monetary expansion or contraction on whim, which is also why the gold / silver standard had to be abandoned (they are contradictory concepts).
The modern central bank, in this case the Federal Reserve, is the very antithesis of the bitcoin / cryptocurrency concept. There can be no union of the concepts. The Fed requires the ability to debase the nation's currency at any time and for any reason it sees fit. Without the current Fed system you can't run the military industrial complex, you can't 'pay for' the entitlement liabilities via inflation, you can't hold consumer and corporate borrowing costs artificially low, you can't run wild budget deficits and then pay hyper low interest rates on that debt via debt monetization / QE, you can't arbitrarily inflate assets to fake prosperity, and so on. There's zero chance the Fed or US Government gives up any of those powers unless they have no other choice.
You are totally misundersting how it works. A cryptocurrency that can be exchanged directly (by the Fed) with cash doesn't change how anything currently works. The author points this out:
"The existence of cash doesn't get in the way of this process, nor has it ever gotten in the way. Bringing in a third liability type, Fedcoin, the quantity of which is designed to fluctuate in the same way as cash, would likewise have no impact on monetary policy."
I.E., the Fed can debase the "FedCoin" cryptocurrency just as much as they can debase USD.
>The entire purpose of the Federal Reserve is to enable a system of monetary expansion or contraction
This is just one of several mandates that the Fed has. The Fed also exists to supervise and regulate banking institutions, in addition to running the national payment system.
The author's post could fall under the latter responsibility.
> The Fed also exists to supervise and regulate banking institutions
So how, exactly, in a world where bitcoin was king (and pigs could fly) would the fed "regulate" bitcoin institutions?
You cannot do fractional reserve banking in bitcoin without all your loans being blatantly obvious and public. Users would track the coins they put in the wallets you control in their name, and if you touch them they will raise hell. You don't need consumer protections in that system because everything is public. And I don't condone whatever privacy violations would be necessary to audit a bitcoin banks wallet security infrastructure, when they can naturally (in the same way services like bitfinex and campbx have sought security accreditations) do so on their own as a competitive advantage without any unnecessary violence.
So what exactly is the federal reserve going to do to bitcoin wallet holders (aka bitcoin banks) besides the above? Bitcoin as property is just as prosecutable in court if your bank fucks up and loses your money as any other asset, I can't believe that is reason for an entire bureaucratic federal infrastructure to exist.
We did fractional reserve banking w/ the gold standard. There is no reason you couldn't do fractional reserve banking on top of bitcoin, with the bitcoin replacing gold.
I don't mean you cannot do it, you just cannot obfuscate where the money goes, since you can trace bitcoins across the block chain unless people are actively and intentionally diluting them, in which case you know where the paper trail ends and thus who was doing that.
Sure you can! Remember Fedcoins have convertability to paper, and paper has convertability to Fedcoin. That means that Fedcoin can be created and destroyed at will by the Fed.
Since nobody knows the total amount of cash in circulation (maybe not even the Fed) it's basically impossible to prove that the Fed "printed" Fedcoins by making them up rather than "legitimately" converting cash into Fedcoins.
It's not as though the Fed is going to mark the provenance of the coins to facilitate people analyzing the system. All cash that gets converted to Fedcoin comes out of the Fed's wallet and all Fedcoin that gets converted to cash goes into the Fed's wallet.
The whole point of bitcoin is that you don't need a central authority to keep people from making up an infinite number of "chits". But if you're going to have a system where there are some folks in charge there's no need to have a blockchain; it's an artifact of the need to have a decentralized authority system. If they can create and destroy at will for convertability to work, they can create and destroy at will to print money.
You cannot do fractional reserve banking in bitcoin without all your loans being blatantly obvious and public. Users would track the coins they put in the wallets you control in their name, and if you touch them they will raise hell.
Did that happened with Mt.Gox or any of the other "web wallets" where all BTC is mixed in various addresses? How do you even know if they're touching "your" Bitcoins or theirs? There's no such thing as "a" Bitcoin that you can track.
You don't need consumer protections in that system because everything is public.
The ownership of the addresses isn't. The bank just transferred X BTC to another wallet, is that an internal reshuffle or a loan?
"Users would track the coins they put in the wallets you control in their name, and if you touch them they will raise hell."
That's not a bank, that's a security service that users would have to pay for. There is nothing about bitcoin that prevents banks that run the traditional way where I loan bitcoin to the bank and the bank loans bitcoin to home buyers and such and give me back some small interest at some negligible risk.
curious why in your worldview the government bothers collecting taxes, let alone $3 trillion of it annually. (33% of the GDP.) It seems you think their budget comes from the roughly 2% annual inflation rate we've had for the past few years. (1.7% this year.)
The most important aspect of the Federal Reserve Bank is that it was established by a small British Bank and 5 private families. They automatically pass their privately held shares down from one generation to the next. It is not "federal" in any sense.
The Federal Reserve Bank is the fake name they gave the bank so that the public would not examine or challenge it. These handful of people have been ruining (yes, I meant ruining, not running) the U.S. economy since its onset for the purposes of keeping control of the U.S. financial picture and ensuring their 1% position.
The manner in which its discussed here gives it far too much importance when in fact it is a private bank that can be resolved as easily as we got rid of the pony express and outhouses.
Simply take away its power and move on. You do that by being serious about establishing crypto currency and rendering the 5 private families control obsolete.
The only importance the Federal Reserve Bank holds is the importance you continue to give it.
We used to travel by horse and buggy and we lit our homes with gas lanterns. It's time to dispense with this relic of a banking system that no longer serves any purpose other than to enrich a handful of families.
As Americans, we should all be ashamed and embarrassed that as a nation we've let this farce go on as long as it has. The only people wanting to keep it in place are those with contracts to make peripheral revenue from it as long as it holds it position.
Consider how fraudulent it is that years after its inception, this private group still has the only monopoly on printing money. The creation of the Federal Reserve Bank in itself is one of the biggest financial frauds that has ever taken place and most didn't even notice.
Yet even you guys, whom are embarking on crypto currency, considered the future world economy, still genuflect when you see a U.S. dollar.
Rather than mining, you could just let a trusted authority issue blocks which would be validated by peers, it still prevents double spend, but would allow the authority to prevent transactions.
With central servers (and today's banking system), the government can freeze bank account. Even if today's laws would prohibit that, there is no guarantee that this will also be the case in the future. Thus, the only way to plausibly guarantee that the government won't freeze your digital assets, is by issuing them on a decentralized infrastructure under the control of the public (e.g. as colored coins on the Bitcoin blockchain).
You still can freeze accounts. You merely maintain a list of "frozen" addresses, and anyone who accepts payment from them is guilty of a crime. It's actually much easier in this scenario.
Consider that wallets can be created on the fly and coins tumbled, finding the owner of a newly-created wallet is impossible until they do something else with those coins.
Make it illegal to create a new wallet without central authority approval and illegal to tumble coins. Closed those "loopholes" that "only criminals use" and the majority of people who know nothing about how bitcoin works would agree that it's not bad to do that.
Once nobody can tumble legitimately then quite literally only the criminals will tumble and there you go.
Central authorities already distinguish cash transactions with illegitimate intent (e.g. for smuggling or money laundering) and legitimate cash transactions. It's not a big stretch to think of tumbling being treated as a form of money laundering, where the nature of the transaction may be wholly legitimate, but the criminality is based on the intent of the transaction.
"If it's going to a registered account, it's normal transaction flow. If it's going to an unregistered account, it's illegal. If any funds are received from an unregistered account, they must be sent to an address provided by the central authority, or it's illegal. Registered accounts are signed periodically by the central authority and certificates can be verified automatically at transaction time."
It would have been a better joke if the author had pointed that that if it's controlled by the Federal Reserve, you don't need a proof of work distributed blockchain and you could simply allow all parties to connect to the Fed in some kind of Automated Clearing House network.
This hypothetical system would allow debits and credits to be settled electronically at very low transaction costs and could be scaled to billions of transactions, and anyone could participate in such a system by spending 10 minutes and opening a free "checking account" at a local credit union.
I think the problem (from a BTC hoarder's perspective) with that is that BTC is neither required nor desirable from an operational perspective in such a system.
From the perspective of the government, Bitcoin is only for Cowards, Crazies, and Criminals.
Cowards, who want to find technological solutions to social problems.
Crazies who are terrified that Satan will take over the Fed and decide to suddenly make dollars worthless, and in the process destroy the county.
And of course criminals who use it to buy drugs.
=====
Luckily we know better, that assuming you are one of the technical 1% who can keep your wallet from being hacked, you can (for a little extra money in conversion costs) use bitcoin to shop at overstock.com.
Precisely. It is kind of amusing to see people write something like
> The Fed would create a new blockchain called Fedcoin. Or it might create a Ripple style ledger by the same name.
Do they not realize that if a central bank or any other entity wanted to create a convenient electronic currency system that is publicly accessible, it would be much simpler for them to just set up a boring old webservice with a REST API?
With an efficient implementation, the amount of hardware required to replicate a Bitcoin level of transactions is miniscule.
This misses a major benefit of our current system - reversibility.
Currently, if someone initiates a fraudulent billion dollar wire transfer from the fed, it would quickly be reversed.
Does anyone thing the Fed or our monetary policy should be entirely subject to the rule of algorithms and undoubtedly flawed security policies and people? Isn't it better that a government agency or a court can reverse the transaction when a Putin lackey transfers $100B?
I understand the benefits of irreversibility with bitcoin, however at a certain scale, this benefit becomes a handicap. Legal systems have humans who can correct things when they go terribly wrong. Cryptocurrencies as a whole are vulnerable to the next zero-day exploit, which in this case could destroy the government and all of our hard earned currency. That's not a risk I think any of us could consider rational.
Reversibility is all about trusting a third party with your wealth, which has obvious downsides. That said, reversibility will always be there for those who are not prepared to take responsibility for their wealth.
Moreover, the scenario you propose is ridiculous. If Bitcoin wins, government will have to change, as it will no longer be able to coerce tax payment. Who would voluntarily give their bitcoins to the government in the first place? What individual or group could be trusted with the private key? I don't know how it would work, but it would have to be different.
Nope. The government derives most of its tax base from various income-based taxes (corporate and personal), or property and use taxes at the state and local level. Only anonymous entities would be able to avoid these, Bitcoin or no. It would be hard to organize significant non-digital economic activity through anonymous entities in the face of government interference, and trivial for a government to mount that interference. Some possible mechanisms include forbidding all brick and mortar + other non-anonymous entities from interacting with anonymous ones, infiltration, etc.
But it already has been the case with many businesses that knowing who your customers are is a legal requirement of carrying out transactions with them. For instance, financial, weapons, pharmaceuticals. Restrictions on trade in these industries have been deemed constitutional by SCOTUS, and there isn't any state that doesn't have some restrictions on anonymous commerce between parties in some cases.
The simpler thing that has happened in pretty much every free country already, is that a government gets to determine what currency tax debts are to be paid in. Furthermore, the state has the capacity to determine that a specific currency must be accepted "for all debts public and private". Having a standard unit of account benefits the society just as other standardizations do, by strengthening network effects.
In a non-failed state with a relatively stable currency there is just no clear path for a different unit of account to overcome these advantages and gain any significant market share (if you have an example I'd love to hear it). Even without legal frameworks enforcing the old order, backwards-compatible marginal improvements to protocols like IPv6 have had weak adoption, because the simplicity and spread of the established protocol makes it good enough. Government supported currencies are even more entrenched.
More likely is that those with a lot of Bitcoin would exit to more hospitable states like Saverin did. In addition, the tactics you propose are not only draconian, but expensive to enforce on a large population. See the War on Drugs.
Also, why would a state give up it's printing press? No clue what the Diamond Age is, but I will check it out.
The tactics he proposes are not too far from what has always been done to tax cash, except with marginally more information available automatically to authorities.
How draconian? These are much like current taxation laws for non-blockchain currencies, and other control and auditing laws that are already on the books.
> Reversibility is all about trusting a third party with your wealth, which has obvious downsides.
If you do not have reversibility, you are trusting every automated intermediary, their security practices, reliability of software, hardware, etc. You have completely subjected yourself to human and computer error, and hacks. This is completely untenable.
The nature of the legal system keeps the ultimate decisions in human hands, which is a good thing. I'm not saying humans should arbitrarily be able to interfere with arbitrary transactions, but you must have the ability for a human to reverse errant transactions some way or other.
Imagine the headline, "Fedcoin bug results in $1 trillion dollar loss to hackers." Whoops.
The most direct way to explain why these types of posts are misguided are to understand the mechanics of "rent seeking behavior" which is an incentive that always exists for a third party involved in a financial transaction. http://en.wikipedia.org/wiki/Rent-seeking
This guy just re-invented Chaum's DigiCash. DigiCash is a centrally-issued but privately transferable digital currency from the 1990s. Bitcoin is DigiCash with distributed issuers ("mining").
48 comments
[ 2.7 ms ] story [ 105 ms ] threadThe entire purpose of the Federal Reserve is to enable a system of monetary expansion or contraction on whim, which is also why the gold / silver standard had to be abandoned (they are contradictory concepts).
The modern central bank, in this case the Federal Reserve, is the very antithesis of the bitcoin / cryptocurrency concept. There can be no union of the concepts. The Fed requires the ability to debase the nation's currency at any time and for any reason it sees fit. Without the current Fed system you can't run the military industrial complex, you can't 'pay for' the entitlement liabilities via inflation, you can't hold consumer and corporate borrowing costs artificially low, you can't run wild budget deficits and then pay hyper low interest rates on that debt via debt monetization / QE, you can't arbitrarily inflate assets to fake prosperity, and so on. There's zero chance the Fed or US Government gives up any of those powers unless they have no other choice.
"The existence of cash doesn't get in the way of this process, nor has it ever gotten in the way. Bringing in a third liability type, Fedcoin, the quantity of which is designed to fluctuate in the same way as cash, would likewise have no impact on monetary policy."
I.E., the Fed can debase the "FedCoin" cryptocurrency just as much as they can debase USD.
This is just one of several mandates that the Fed has. The Fed also exists to supervise and regulate banking institutions, in addition to running the national payment system.
The author's post could fall under the latter responsibility.
So how, exactly, in a world where bitcoin was king (and pigs could fly) would the fed "regulate" bitcoin institutions?
You cannot do fractional reserve banking in bitcoin without all your loans being blatantly obvious and public. Users would track the coins they put in the wallets you control in their name, and if you touch them they will raise hell. You don't need consumer protections in that system because everything is public. And I don't condone whatever privacy violations would be necessary to audit a bitcoin banks wallet security infrastructure, when they can naturally (in the same way services like bitfinex and campbx have sought security accreditations) do so on their own as a competitive advantage without any unnecessary violence.
So what exactly is the federal reserve going to do to bitcoin wallet holders (aka bitcoin banks) besides the above? Bitcoin as property is just as prosecutable in court if your bank fucks up and loses your money as any other asset, I can't believe that is reason for an entire bureaucratic federal infrastructure to exist.
Since nobody knows the total amount of cash in circulation (maybe not even the Fed) it's basically impossible to prove that the Fed "printed" Fedcoins by making them up rather than "legitimately" converting cash into Fedcoins.
It's not as though the Fed is going to mark the provenance of the coins to facilitate people analyzing the system. All cash that gets converted to Fedcoin comes out of the Fed's wallet and all Fedcoin that gets converted to cash goes into the Fed's wallet.
The whole point of bitcoin is that you don't need a central authority to keep people from making up an infinite number of "chits". But if you're going to have a system where there are some folks in charge there's no need to have a blockchain; it's an artifact of the need to have a decentralized authority system. If they can create and destroy at will for convertability to work, they can create and destroy at will to print money.
Did that happened with Mt.Gox or any of the other "web wallets" where all BTC is mixed in various addresses? How do you even know if they're touching "your" Bitcoins or theirs? There's no such thing as "a" Bitcoin that you can track.
You don't need consumer protections in that system because everything is public.
The ownership of the addresses isn't. The bank just transferred X BTC to another wallet, is that an internal reshuffle or a loan?
That's not a bank, that's a security service that users would have to pay for. There is nothing about bitcoin that prevents banks that run the traditional way where I loan bitcoin to the bank and the bank loans bitcoin to home buyers and such and give me back some small interest at some negligible risk.
[1] Taxes collected: http://www.usgovernmentrevenue.com/current_revenue (first paragraph should obviously read 17.3% not 173%)
[2] Inflation: http://www.inflation.eu/inflation-rates/united-states/histor...
(or http://en.wikipedia.org/wiki/Taxation_in_the_United_States and https://www.google.com/search?q=current+inflation+rate+unite... )
The Federal Reserve Bank is the fake name they gave the bank so that the public would not examine or challenge it. These handful of people have been ruining (yes, I meant ruining, not running) the U.S. economy since its onset for the purposes of keeping control of the U.S. financial picture and ensuring their 1% position.
The manner in which its discussed here gives it far too much importance when in fact it is a private bank that can be resolved as easily as we got rid of the pony express and outhouses.
Simply take away its power and move on. You do that by being serious about establishing crypto currency and rendering the 5 private families control obsolete.
The only importance the Federal Reserve Bank holds is the importance you continue to give it.
We used to travel by horse and buggy and we lit our homes with gas lanterns. It's time to dispense with this relic of a banking system that no longer serves any purpose other than to enrich a handful of families.
As Americans, we should all be ashamed and embarrassed that as a nation we've let this farce go on as long as it has. The only people wanting to keep it in place are those with contracts to make peripheral revenue from it as long as it holds it position.
Consider how fraudulent it is that years after its inception, this private group still has the only monopoly on printing money. The creation of the Federal Reserve Bank in itself is one of the biggest financial frauds that has ever taken place and most didn't even notice.
Yet even you guys, whom are embarking on crypto currency, considered the future world economy, still genuflect when you see a U.S. dollar.
https://plus.google.com/u/0/+StevenFlaeck/posts/BNzLK4wwwPY
As long as mining is involved, I don't agree with that argument.
With central servers (and today's banking system), the government can freeze bank account. Even if today's laws would prohibit that, there is no guarantee that this will also be the case in the future. Thus, the only way to plausibly guarantee that the government won't freeze your digital assets, is by issuing them on a decentralized infrastructure under the control of the public (e.g. as colored coins on the Bitcoin blockchain).
Once nobody can tumble legitimately then quite literally only the criminals will tumble and there you go.
Really, you can dictate whatever you want as this central authority, but enforcing it is a whole different matter.
That could never happen in a free country.
Also there's nothing stopping someone from evaporating the coins via mining fees. So you'd have to have dictatorial control over all miners as well.
...Which we most definitely do not have.
This hypothetical system would allow debits and credits to be settled electronically at very low transaction costs and could be scaled to billions of transactions, and anyone could participate in such a system by spending 10 minutes and opening a free "checking account" at a local credit union.
Cowards, who want to find technological solutions to social problems.
Crazies who are terrified that Satan will take over the Fed and decide to suddenly make dollars worthless, and in the process destroy the county.
And of course criminals who use it to buy drugs.
=====
Luckily we know better, that assuming you are one of the technical 1% who can keep your wallet from being hacked, you can (for a little extra money in conversion costs) use bitcoin to shop at overstock.com.
> The Fed would create a new blockchain called Fedcoin. Or it might create a Ripple style ledger by the same name.
Do they not realize that if a central bank or any other entity wanted to create a convenient electronic currency system that is publicly accessible, it would be much simpler for them to just set up a boring old webservice with a REST API?
With an efficient implementation, the amount of hardware required to replicate a Bitcoin level of transactions is miniscule.
A joke on the public, by the public.
Currently, if someone initiates a fraudulent billion dollar wire transfer from the fed, it would quickly be reversed.
Does anyone thing the Fed or our monetary policy should be entirely subject to the rule of algorithms and undoubtedly flawed security policies and people? Isn't it better that a government agency or a court can reverse the transaction when a Putin lackey transfers $100B?
I understand the benefits of irreversibility with bitcoin, however at a certain scale, this benefit becomes a handicap. Legal systems have humans who can correct things when they go terribly wrong. Cryptocurrencies as a whole are vulnerable to the next zero-day exploit, which in this case could destroy the government and all of our hard earned currency. That's not a risk I think any of us could consider rational.
Moreover, the scenario you propose is ridiculous. If Bitcoin wins, government will have to change, as it will no longer be able to coerce tax payment. Who would voluntarily give their bitcoins to the government in the first place? What individual or group could be trusted with the private key? I don't know how it would work, but it would have to be different.
TL;DR: Bitcoin does not enable The Diamond Age.
That could never happen in a free country.
The simpler thing that has happened in pretty much every free country already, is that a government gets to determine what currency tax debts are to be paid in. Furthermore, the state has the capacity to determine that a specific currency must be accepted "for all debts public and private". Having a standard unit of account benefits the society just as other standardizations do, by strengthening network effects.
In a non-failed state with a relatively stable currency there is just no clear path for a different unit of account to overcome these advantages and gain any significant market share (if you have an example I'd love to hear it). Even without legal frameworks enforcing the old order, backwards-compatible marginal improvements to protocols like IPv6 have had weak adoption, because the simplicity and spread of the established protocol makes it good enough. Government supported currencies are even more entrenched.
Also, why would a state give up it's printing press? No clue what the Diamond Age is, but I will check it out.
If you do not have reversibility, you are trusting every automated intermediary, their security practices, reliability of software, hardware, etc. You have completely subjected yourself to human and computer error, and hacks. This is completely untenable.
The nature of the legal system keeps the ultimate decisions in human hands, which is a good thing. I'm not saying humans should arbitrarily be able to interfere with arbitrary transactions, but you must have the ability for a human to reverse errant transactions some way or other.
Imagine the headline, "Fedcoin bug results in $1 trillion dollar loss to hackers." Whoops.