Author: rjcesq

I’ll link this little article with little commentary. It just points to the increasing attention that Bitcoin is receiving in the mainstream monetary world. With all the VC money pouring into Bitcoin startups, I think we may have reached or be close to reaching critical mass where by outright banning of Bitcoin by the US government or even regulating it to death maybe nearly politically impossible. However, this doesn’t mean that it won’t be regulated and might not be regulated to an extent that it won’t curtail significant benefits.

I love the jump the bandwagon rash of new “Cryptocurrency” lawyers.

Rampant speculation and publicity drove up the price of BTC (in dollars) in 2013. As early adopters began cashing out, the price began falling and has been falling steadily since. See chart below courtesy of coindesk.com.

Suspicion has been recently that the dropping price is a result of the increased number of merchants accepting bitcoin (leading early bitcoin enthusiasts to begin spending their saved coins) and the lackluster adoption of new consumers. Those merchants in turn sell their bitcoin almost immediately, driving down the price, because of lowered demand.

Much of the bombastic speculation on the price of bitcoin uses faulty math to justify outlandish prices. Dividing the volume of Visa transactions by the number of available bitcoins does not tell you it’s price potential. The price is intersection of supply and demand, simply put. You have to account for the velocity that money can change hands. Fortunately, for bitcoin, there is a built in floor. Money in the bitcoin system can only change hands once every 10 minutes.

Let X be the total value of all the bitcoins in the world. Let’s say that X is held by consumers who then purchase products at merchants. 10 minutes later, the merchants sell those bitcoins back to the consumers. Repeat ad nauseum. There are 52,560 10 minutes intervals in a year. The numbers vary greatly, but lets suppose, the credit card networks process about 7 trillion dollars a year. That’s approximately 133 million dollars in transactions every ten minutes. There are currently 13 million bitcoins in circulation. Instantly, if bitcoin replaced all credit card transactions, the value of bitcoin would need to be $10 per coin. Actually, double that because the coin has to be paid the merchant and then get back to the hands of the consumer. So we’re looking at $20 per coin.

There are a couple of caveats. First, there are far less than 13 million bitcoins in actual circulation. That’s because some have been lost and many more are currently being hoarded by speculators. Secondly, bitcoins won’t only replace the credit and debit card networks but there are many other transactions, especially high value transactions. The Federal Reserve estimated that in 2013 there were $79 trillion (in the United States) in non-cash transactions. Assuming the US represents about 20 percent of worldwide transactions, that would put the entire world at approximately 400 trillion US dollars in non-cash transactions. Simple back of the napkin calculations would put the transaction volume about 7.6 billion dollars every 10 minutes. If the total money supply switch hands every 20 minutes, the value of bitcoin would be about $1170.

Now, there are some wild assumptions in that calculation
1) Bitcoin would have to replace ALL non-cash transactions. More likely Bitcoin would become one of many payment options, altcoins not withstanding.
2) Clearly the number of bitcoins in increasing but also the volume of transactions worldwide is increasing.
3) I haven’t factored in cash based transaction of which some volume bitcoin is bound to replace.
4) Not all bitcoins will change hands every 10 minutes. Just as soon as you get money, you don’t go out and spend it within 10 minutes. This will no doubt increase the relative value.
5) I’m only talking about today’s $, and not considering inflation of the US currency. In other words, purchasing power. A bitcoin could be worth a billion dollars one day, but that billion dollars may buy you a loaf of bread.

It would be foolish of me to speculate on the value in the short term, since many factors will determine the relative supply and demand of bitcoins (what % of transactions are done in bitcoin, how long bitcoins are held, etc..). In the long term though, it is clear that ultimate value of a bitcoin will probably be fairly low.

NYU Law Federalist Society hosts a conference on Digital Currency. There were two panels, included below.

 
Legal and Policy Issues

 

Business and Economic Issues

For the past few years, people have been speculating as to when Amazon might begin accepting Bitcoin for payments. There are even some nifty work-a-rounds that allow you to make purchases from Amazon using bitcoins such as zinc or eGifter. However, these require a bit of effort and don’t offer the seamlessness of paying Amazon directly. Overstock.com, whose CEO recently made big news has even said Amazon will eventually start accepting bitcoin. It seems almost inevitable.

Let’s consider some numbers. Right now Overstock.com claims to be doing $20-$30k in Bitcoin based sales everyday. To put this in perspective, Amazon makes some $200 million in sales daily (though I’m unsure how much of this is for retail versus services). Even if Amazon were to garner a respectable $1 million in sales per day, it only represents 1/2 of 1 percent of Amazon’s entire sales. It certainly doable but not a big incentive for Amazon at this point unless they think they can garner additional sales volume by accepting bitcoin. That being said, I believe it is highly likely that within the next year, unless some catastrophic event occurs in the bitcoin community (no Mt Gox was not catostrophic), that Amazon will begin accepting bitcoin. It has to be on their radar at this point.

Two things are going to happen when Amazon does this

1) The banks and card associations are going to wake up. At this point many bankers are aware of bitcoin but do not view it as a threat. When Amazon starts accepting it, they will realize that this is serious and will move to counter it. Expect competition in transaction fees to drive down merchant rates.

2) Bitcoin will no longer be able to be regulated out of existence. Don’t get me wrong. The regulators will continue to push for more and better oversight but once Amazon is on board, any call for making bitcoin illegal won’t have a snowball chance in hell of passing. It will have reached enough mainstream acceptance and integration into the economy to warrant the “too big to fail” mentality. Shutting it down will create a crushing blow to the economy and no legislator will risk that.

Let’s engage in a little Gedanken (or thought) experiment. What if by virtue of law or just increasing regulatory burden, the exchange of bitcoin to USD in the United States were completely eliminated. Would this spell the end of bitcoin? I would like to suggest not.

Certainly, there would be a precipitous drop in “value” as many of the current business eliminated its acceptance (initially) because of it non-convertibility.  But their are businesses that operate without USD and totally in bitcoin. As long as those employees of those firms and vendors of those firms continue to accept bitcoin the could continue to operate. Arguably, you would see a growth (similar to what we’re seeing now) of other companies willing to accept bitcoin as pent up demand from these employees and companies with bitcoin to spend engaged the market.

The only rub is the non-convertibility poses to the payment of taxes. How do you pay your taxes when you have no USD to pay them with? It also poses an interesting problem for authorities. They could sue for recovery but what are they going to get? bitcoin which has no convertible value? So therefore could a business continue to operate without paying taxes and with no recourse by the government?

This is clearly all wild speculation and not to be construed in any way shape or form as tax or legal advice.

Most of the regulatory discussion around “miners” (an unfortunate term not used in the Bitcoin whitepaper except as analogy) discusses their introduction of bitcoin value into the market and whether their acceptance of payment for that constitutes an exchanger (exchanging virtual currency value for fiat currency value).

FinCen recently said that “so long as the user is undertaking the transaction solely for the user’s own purposes and not as a business service performed for the benefit of another”, miners selling their newly minted bitcoin value need not register as MSBs.

However, little discussion has surround the other activity of “miners,” namely the signing of blocks of transactions thus officiating them into blockchain (the public ledger that identifies all transactions in the Bitcoin network).

§1010.100(ff)(5)B states that “Any other person engaged in the transfer of funds” is a money transmitter and therefore a money services business regulated as an MSB. Arguably, a miner who  signs a set of transactions, in effect, facilitates the transfer of funds from one person (or location) to another. Without the activity of miners, the stored value contained in one bitcoin address could not be transferred to another. This begs the question as to whether an aggressive regulator could make the argument that all miners were in essence money transmitters subject to regulation. This could spell the end of mining in the affected jurisdiction.

One saving grace is that regulators don’t generally understand bitcoin, are not technically sophisticated and make not make the connection. Specifically because of the minomered “miner” they may only consider the initial bitcoin value creation and ignore the important transaction validation function.

FinCEN recently issued a letter in which they clarified some of the requirements for Bitcoin miners. The full text of the administrative ruling is available at http://cointext.com/fincen-issues-bitcoin-friendly-ruling-for-miners/ and concerns the activity of Atlantic City Bitcoin LLC. The Twitterverse has been very active but much of the pronouncements have been of the form “FinCEN says miners don’t need to register.” This is not what they said.

To be sure the ruling is clear as mud, as these things usually are. From the letter:

“The guidance makes clear that an administrator or exchanger of convertible virtual currencies that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency in exchange for currency of legal tender or another convertible virtual currency for any reason [Emphasis added] (including when intermediating between a user and a seller of goods or services the user is purchasing on the user’s behalf) is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.”

In response to the letter, FinCEN said that it was okay to exchange convertible virtual currency (aka #bitcoin) into legal tender currency (aka USD) “so long as the user is undertaking the transaction solely for the user’s own purposes and not as a business service performed for the benefit of another.”

In other words, if you mine bitcoin and then sell it on an exchange to buy a Ferrari (because you can only buy a Lamborghini with bitcoin), then you’re golden. So, at what point are you performing a business service and not selling the bitcoin for your “own purpose?” After all, any business has expenses to pay and dividends to distribute to the owners of the business. Would selling all your bitcoin and then paying all your vendors and owners in USD mean your performing a business service or mean your doing it for your own purposes?”  I would take this to mean that if you mine bitcoin and turn around and regularly sell those bitcoin to a third party or parties for legal tender currency, you’re probably operating it as a business service. Clear right?

Again from the guidance it says “By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”

The bottom line is the hobbyist miner who spends his bitcoin for goods or services is probably in the clear, whereas a large enterprise (as most mining operations are moving towards) that is earning so much bitcoin every day that it has to sell them wholesale is probably an MSB.

Interestingly enough, FinCEN has NOT addressed the other function of miners and something that will be prevalent after 2140 when the last bitcoin is mine and that is signing transactions on the blockchain. In essence they are vouching that the transaction from address 1 to address 2 is a valid transaction and should be acknowledge in the collective bitcoin blockchain. They are (potentially) facilitating the transfer of value from one person (or location) to another. I don’t think this falls within the letter of the regulatory structure, but it is certainly something that will receive closer scrutiny and could be addressed in future changes to the laws and regulations.

Bitcoin has had a meteoric rise in the last few weeks following intensive press coverage and activity from investors and startups in the Bitcoin space. However, most of this activity is fueled by speculative actions on the value of Bitcoin. Practically none of it is by virtue of the actual use of Bitcoin as a medium of exchange. As I’ve written before, the primary beneficial use of Bitcoin is as a medium of exchange, not a store of value. The recent activity is reminiscent of the Dutch tulip mania of the early to mid 1600’s.

The easy of exchanging Bitcoin for fiat currency is the cause of this. As long as people can transfer in and out of the currency with ease, the tendency will be for people to hoard it because it’s value against other currencies will be more than it’s value as a medium of exchange. If the exchanges were shut down (voluntarily or by government action) then Bitcoin will shine and people will actually spend it and use it as it is meant to be used. Then it’s true “value” will be determined, not by some mythical exchange rate but by what people are actually willing to accept it for in exchange for the goods and services they produce.