Click to be Added / Removed.
Posted on 01/09/2014 7:16:01 AM PST by Errant
A Congressional report quietly released last month suggests that bitcoin could be a threat to US monetary policy, and makes the case for continued central banking control.
The report, Bitcoin: Questions, Answers, and Analysis of Legal Issues, was published by the Congressional Research Service, which produces research reports for US policy makers. It argues for the benefits of a single, incumbent currency (the US dollar), for stability.
“If greater use of bitcoin (and other cryptocurrencies) leads to multiple monetary units, these benefits could be threatened, particularly if these new currencies continue to exhibit a high degree of price volatility,” the paper says.
The authors suggest that too much bitcoin usage would lead to a tightening of monetary policy, because it could increase the money supply of US dollars.
This would depend on a couple of factors, though. Firstly, enough people would need to be using bitcoin for it to have an effect. At the moment, the bitcoin economy is highly illiquid, leading to the volatility that we’ve seen in the last year.
Secondly, bitcoins must be used as a currency in their own right. If they are bought into circulation when exchanged for fiat money, and then taken back out of circulation when users ‘cash out’ back into fiat, the effect on the money supply would be small, the authors suggest.
If, however, bitcoins are substituted for dollars on a more systematic, long-term basis, the situation would change, because it would decrease the need to hold dollars, and increase the supply of fiat money. The danger, according to the report, is that this could reduce the demand for dollars, which would affect the rate of circulation. This would confound things for the Federal Reserve, which effects monetary policy by adjusting the banking system’s available dollar reserves.
“In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy,” the report said. “At a minimum, a substantial use of bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain.”
Challenges to widespread adoption
But the paper questions bitcoin’s ability to become a major currency for several reasons. One of these is simply because the dollar is already highly liquid and well established, and so difficult to displace. This isn’t insurmountable, though, it admits.
Serial bitcoin entrepreneur Erik Voorhees says that bitcoin’s outpacing of the dollar is certain.
“It is a better money, and all the guns and violence and central planning the government throws at it cannot stave off the laws of economics,” he says. However, he predicts this displacement happening gradually, from the margins.
Stephen Pair, co-founder and CTO at payment processor BitPay, discounts another of the report’s criticisms of bitcoin: its volatile pricing. The authors say that this makes it more of a speculative instrument than a currency. Although it is an issue, he says that software tools make it easy to hedge exposure.
“What remains to be seen is which national currency will be preferred for use in limiting that exposure.” he says. “So far it is the US dollar, but that could quickly change if another central bank began issuing their currency directly on the bitcoin block chain and facilitated the development of an options market around their currency.”
The paper also perceives another barrier to bitcoin’s widespread adoption as a currency: a deflationary trait, which it says could lead to hoarding. “This possible outcome highlights the likely importance of the economy’s principal currency being elastic, its supply increasing and decreasing to meet the changing needs of the economy, and of the important role of the central bank in implementing such a monetary policy,” it warns.
Voorhees argues that bitcoin simply encourages more careful consumption, incentivizing savings. “Though most publicized economists will wholeheartedly claim this is a fault and calamity of Bitcoin, those of us who understand bitcoin politely disagree,” he adds.
Pair also disagrees with the hoarding argument. “We have data to back it up,” he said. “During the recent increase in value of bitcoin, we saw our daily transaction volumes more than triple. As the value of bitcoin rises, it creates a wealth effect and people begin to spend their bitcoins.”
The report also leaves the door open for prosecuting bitcoin under Counterfeiting Criminal Statutes, and the Stamp Payments Act of 1862, 18 U.S.C. §337 (something which Wired investigates further here), in addition to saying that the Commodity Futures Trading Commission (CFTC) could have the authority to regulate bitcoin. However, while it highlights these as possibilities, it stops short of recommending any such moves.
“If Congress reversed course and no longer wanted to get the benefits of bitcoin while minimizing its risks, the laws that could be used against bitcoin use would have to be stretched, perhaps to the breaking point,” responded the Bitcoin Foundation in a statement.
Bitcoins And Unicorns: The Digital Currency Lands On The Cover Of BusinessWeek
PRESENTING Bit-PAC: New PAC Launches Just To Support Candidates Who Support Bitcoin
Angry eBay merchant plans to sue PayPal for anti-bitcoin activity
After Crackdown, a New Bitcoin King Emerges in China
Bitcoin's four steps to Wall Street acceptance
The Bitcoin-Mining Arms Race Heats Up
Alibaba bans Bitcoin amid China crackdown
These Are the Brains of the Next Bitcoin Mining Monster
Singapore Government: This is How We Intend to Tax Bitcoin
Still Don’t Get Bitcoin? Here’s an Explanation Even a Five-Year-Old WIll Understand
Of course not the Federal Reserve. :-)
Our government is the main threat to the US Dollar.
Knowledge and Power - The Need for a New Economics
About the 5th analyst calling for inflation in 2014:
Bill Gross' 2014 Investment Outlook: All About Inflation
Royal Mint Runs Out of Sovereign Gold Coins on “Exceptional” Demand
The Case of the Missing Recovery [Paul Craig Roberts]
HYPERINFLATION 2014—THE END GAME BEGINS [Shadowstats - Subscription Required]
Of course! But then the Fed was created to give cover (plausible deniability), acting as bagmen for both the government and the banksters, IMO.
I suspect anything that provides a metric they can’t manipulate will be considered a threat.
I’m hoarding all of my Bitcoins for when the grid goes down. Then I’ll be sitting pretty.
On a light day, the dollar index fluctuates to the tune of 2 - 3 times the entire value of all the Bitcoins in existence. If that is a treat to the dollar, then we’re all in much worse trouble than we’re being led to believe.
Those bitcoins are stored digitally, so how are you going to get them when the grid goes down?
Be sure to keep a paper copy stashed away. When/If the grid comes back on line, you’ll be glad you did...
The problem with all of this is portability and traceability.
If I buy $10,000 of bitcoins, and I move that money to a bank in the Cayman’s then there is a digital footprint of that transaction.
That is why bitcoin will never replace hard currency or precious metals.
While I may not leave the US with more than $10k in currency without declaring it, it doesn’t stop me from moving it in smaller quantities.
It wouldn’t be a “threat” if they all weren’t a bunch of thieves.
I believe that was the joke...
Bitcoins are really only a unique identifier for a electronically distributed ledger (Just about everyone is using electronic ledgers these days - like even your bank). You can save this code by other means (e.g., Optical Disk, Thumbdrive, Paper Printout). Copies of the ledger are stored on millions of computers around the world. It's very unlikely they'll all be destroyed by anything less than a life extinction event.
And how much could you transfer in gold behind a belt buckle?
The US Dollar has a more immediate threat to its value as currency accepted as a sound currency here in the US & abroad than Bitcoin. The Fed & Treasury have been printing paper dollars at an insane rate with no credible backing as the US debt amount has grown to an amount far beyond what our economy can generate in value, growth or what taxes can be levied to back the dollar. Other countries see this and are starting to not use the dollar to settle debt or use in country to country trade. China is putting forward its currency as a world currency as China’s economy, low debt v. trade surplus and its gold holdings make the Yuan Renminbi sound.
Well, then I’m going to make digital copies and counterfeit the bc’s. There’s only 20,000 of them, right? So I’m betting that people will misplace or inadvertently destroy their storage media and I’ll move right in. hahahahahhaa
Agree.
China is putting forward its currency as a world currency...
Who wants to trust Chinese currency or any other country's currency for that matter?
Better to trust in Cryptography, IMO. I think it really as a huge potential to put the power of the purse back into the hands of the people of the entire world. Think what that would mean in the larger scheme of things.
Good luck! ;)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.