Congressional Report Warns of Potential Bitcoin Threat to US Dollar

Coin Desk ^ | 9 Januray, 2014 | Danny Bradbury

[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.

[Errant]

"What is often considered a very large flaw in the design of Bitcoin is that hypothetically, if a single entity contributed the majority of the network’s mining hashrate, they would have full control of the network and would be able to manipulate the public ledger (blockchain) at will.

It is an interesting concept because it is theoretically possible; the network is free and open, so if someone were to have enough computational power (which would cost a huge amount by itself), there is no bitcoin authority to stop them from doing so. In the event that such an attack successfully takes place, it is likely confidence in the currency would be lost and it’s value as a currency would decline rapidly.

“Wait, they’d have complete control of the network? They could do anything?”

Not quite. There’s only a couple things someone with 51% of the network hashrate could do. They could prevent transactions of their choosing from gaining any confirmations, thus making them invalid, potentially preventing people from sending Bitcoins between addresses. They could also reverse transactions they send during the time they are in control (allowing double spend transactions), and they could potentially prevent other miners from finding any blocks for a short period of time. That’s really about it – enough power to cause some serious mayhem (as that’s all stuff that isn’t supposed to be able to happen) but nothing that would seriously cripple the network – at least not immediately. They couldn’t reverse transactions from long ago, create new coins out of thin air (besides through regular mining), or steal coins from other people’s wallets.

In reality a 51% attack is feasible – especially with the rise of mining pools (groups of people mining together as a single unit). However the potential damage one could cause is small – though enough that it cause a panic that would seriously threaten bitcoin’s use as an online currency. At current network mining difficulty levels, not even large-scale governments could easily mount a 51% attack."

51% Attack

[RinaseaofDs]

Screw with the dollar long enough and the free market was inevitably going to step in.

Ironically, though the Chinese and Russians have been complaining against the soft tyranny and proxy world taxation by the US on every nation on earth represented by the endless printing of the dollar, they can’t countenance a currency they can’t control either.

Bitcoin is a Nobel-worthy breakthrough, in that it is the antidote to the 100 percent failure rate of fiat currencies throughout history.

The single reservation I have with bitcoin is that digital is ephemeral, and I worry about having bitcoin accounts wiped or the general failure of the world grid.

With commodity-backed currency, you can always go back to the vault and count it again, physically.

Having said all of that, the fact that the bitcoin ledger is distributed to every bitcoin participant mitigates against a massive failure of the currency (albeit not against having your digital wallet swiped).

Prediction - once central governments have figured out a way to manipulate this without us knowing about it, they will suddenly support it. If central governments are for bitcoin, it will be time to cash out.

What MAY end up happening is that there will be MULTIPLE digital currencies, with fixed exchange rates (since the ledgers are public and open, and since the total units of currency also fixed and known, there will never be a fluctuation in digital exchange rates).

Where the swings will be wild is in the fiat dollar exchanges vs digital currencies. If the Chinese demand you purchase in yuan, and their presses go white hot with all the printing, the firm peg represented by the digital currency will mitigate the inflation factor. Less bitcoin will buy way, way more yuan on the world exchange.

The scary thing here for governments is that with bitcoin the days of monetizing your debt will be over. Keep on printing if you will, but per unit bitcoin it will just take more dollars to balance it.

Today, when we print more dollars, foreign governments have to print more of their currency in response in order for their currencies to not to be so strong against the dollar, and disadvantage their countries exports.

Bitcoin represents a truly independent reserve bank that, for now, appears beyond political manipulation.

We’ll see.

[Yo-Yo]

Question for the Bitcoin experts:

Theoretically, the advantage of Bitcoins is the anonymity of the transactions.

Bitcoin miners provide electronic ledgers to store/backup/crosscheck individual bitcoin wallets.

What's to prevent the NSA from becoming a Bitcoin miner and have a copy of all transactions anyway?

[Errant]

Bitcoin is a Nobel-worthy breakthrough, in that it is the antidote to the 100 percent failure rate of fiat currencies throughout history.

Very well put! And perhaps a Nobel prize will flush out the inventor(s)? :)

"The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly."

Inflation Vs Deflation – The Ultimate Chartbook Of 'Monetary Tectonics'

[Errant]

Theoretically, the advantage of Bitcoins is the anonymity of the transactions.

That is the least or nonexistent advantage of Bitcoin. All transactions are viewable by anyone with a computer. The only thing semi-hidden, is who the transaction ID belongs to. If you know that (the NSA and other alphabets probably do in many instances), then you can find any and all transactions to/from that entity.

You can view live Bitcoin transactions, the amounts, and their IDs here: http://blockchain.info/

[moovova]

In other news...Monopoly Money has increased 1200% in value over the last six months, and has become THE money to guard. Old Monopoly games are becoming almost impossible to find at yard sales. Parents are rummaging through their attics and children's closets hoping to find tattered Monopoly boxes containing this newly discovered wealth. Rumor has it that even China is buying tons of paper waste in hopes of finding scattered remnants of the once-popular game's phony currency.

"

[Errant]

Why not use "real" money of the time, like children have in the past?

[TsonicTsunami08]

Although Monopoly money has been around a long time I’m pretty sure Overstock.com is not accepting it as payment.

Today Overstock.com has gone live for Bitcoin payment ahead of schedule.

I think you folks really have to get past the “ Is Bitcoin for real” syndrome.
Every major retailer in the world will accept Bitcoin for payment before the end of 2014 or their business will go the way of the Do Do Bird.

This S&#t is as real as it gets!

http://www.coindesk.com/overstock-opens-bitcoin-sales/?preview_id=35116

[TsonicTsunami08]

[Vermont Lt]

If I take $100,000 of bitcoin on a USB drive to the Cayman Islands, no one will know. Do that with hard currency.

[Vermont Lt]

Your assumption is incorrect. The beauty of bitcoin is the public ledger.

They cannot be forged, spent twice, or counterfeited.

But they are not anonymous.

[moovova]

There’s one sure way for bitcoin to go belly up...if I bought some.

I have personally been responsible for several stock market nose dives in the past. It happens every time I buy stock.

I’ll stay away from bitcoin...and hope it succeeds for others.

[Ouderkirk]

I didn’t know that bitcoin was...I don’t even know how to describe what you’re talking about. Convertable to....

I assumed that you had to transact bitcoin via computer without ever taking possession of it as a bearer instrument.

[GeronL]

They were probably feel threatened by beanie babies at one point

[M Kehoe]

Isn't competition grand?

To those reading this post, and disagree, be very careful...

5.56mm

[Errant]

Isn't competition grand?

Indeed it is. The freedom to compete is a huge deal. It's the canary in the coal mine, and what made America the greatest nation on the planet. Unfortunately, we're seeing a lot of our freedoms being curtailed of late. Once it reaches a certain level, the entire society will suffer, including those who depend upon America's industrious for their monthly subsistence payment.

[Vermont Lt]

The transportable thing is that you can carry it electronically in a file, or transmit it. If you were trying to escape nazi Germany, for example, you could take your bitcoin “wallet” and email it, copy it, or print it out. Then when you get to your destination you could convert it to local currency.

It’s ability to cross international borders easily is one of the reasons central banks hate it.

[Ouderkirk]

So essentially you are saying that Bitcoin can be converted into a bearer instrument that as a bunch of encrypted 1’s and 0’s, I can take virtual possession of and virtually transport without detection.