How Bitcoin Plays Into the Hands of Central Bankers and Will Facilitate the Use of Negative Interest Rates

Bitcoin enthusiasts like to present it as a “power to the people” form of money, stressing its apparent lack of ownership (the “Napster for finance“). They stress the lack of need for a “trusted party” like a bank or broker to verify that a payment has been made. And many clearly relish the idea of launching a currency outside the control of central banks (plus this beats Cryptonomicon in geekery).

If you believe the hype, you’ve been had. As Izabella Kaminska of the Financial Times tells us, you all are really just doing free/underpaid R&D for central banks, since you are debugging and building legitimacy for one of their fond projects, making currencies digital and getting rid of cash altogether.

I had wondered about the complacency of Fed and SEC officials in Senate Banking Committee hearings on Bitcoin last year. Press reports at the time attributed it to successful lobbying. But there’s no need to fight when you understand how to become the alpha quant per Tom Lehrer:

Let no one else’s work evade your eyes,
Remember why the good lord made your eyes,
So don’t shade your eyes,
But plagiarize, plagiarize, plagiarize –
Only be sure always to call it please ‘research’.

As Kaminska explains (boldface mine):

Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began…

Bitcoin has helped to de-stigmatise the concept of a cashless society by generating the perception that digital cash can be as private and anonymous as good old fashioned banknotes. It’s also provided a useful test-run of a digital system that can now be adopted universally by almost any pre-existing value system.

This is important because, in the current economic climate, the introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.

Consequently, anyone who believes Bitcoin is a threat to fiat currency misunderstands the economic context. Above all, they fail to understand that had central banks had the means to deploy e-money earlier on, the crisis could have been much more successfully dealt with.

Among the key factors that prevented them from doing so were very probable public hostility to any attempt to ban outright cash, the difficulty of implementing and explaining such a transition to the public, the inability to test-run the system before it was deployed.

Last and not least, they would have been concerned about displacing conventional banks from their traditional deposit-taking role, and in so doing inadvertently worsening the liquidity crisis and financial panic before improving it…

Almost of all of these prohibitive factors have, however, by now been overcome:

1) Digital currency now follows in the footsteps of a “disruptive” anti-establishment digital movement perceived to be highly accommodating to the black market and all those who would ordinarily have feared an outright cash ban. This makes it exponentially easier to roll out. Bitcoin has done the bulk of the educating.

2) What was once viewed as a potentially oppressive government conspiracy to rid the public of its privacy can be communicated as being progressive and innovative as a result.

3) Banks have been given more than five years to prove their economic worth and have failed to do so. If they haven’t done so by now, they probably never will, meaning there’s unlikely to be a huge economic penalty associated with undermining them on the deposit front or in transforming them slowly into fully-funded fund managers.

4) The open-ledger system which solves the digital double-spending problem has been robustly tested. Flaws, weaknesses and bugs have been understood, accounted for, and resolved.

The balance of the article describes how the central bank digital currency would be launched, and Kazmina finds a plan developed by Miles Kimball of the University of Michigan to be thorough and viable.

Oh, and why would Bitcoin, um, central bank digital currency make it viable to implement negative interest rates? Kaminska tells us:

…the greater the negative interest rate, the greater the incentive to hold alternative coins. The greater the incentive to hold alternative coins ,the greater the incentive to produce them. The greater the incentive to produce them, the greater the chances of oversupply and collapse. The more sizeable the collapse, the more desirable the managed official e-money system ultimately becomes in comparison.

Either way, the key point with official e-money is that the hoarding incentives which would be generated by a negative interest rate policy can in this way be directed to private asset markets (which are not state guaranteed, and thus not safe for investors) rather than to state-guaranteed banknotes, which are guaranteed and preferable to anything negative yielding or risky (in a way that undermines the stimulative effects of negative interest rate policy).

So all these tales by Silicon Valley promoters (and remember, Marc Andressen mentioned all the money chasing Bitcoin-related ventures) of how liberating and democratic Bitcoin will be are almost certain to prove to be precisely the reverse. Hang onto your real world wallet.

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  1. jojomojo

    From the convenience perspective, I used to think the cashless society was a good idea, now I see it as another grave threat to civil liberty ….no thank you.
    An attempt to go cashless would spur the adoption of gold and other precious commodities as alternative currency in the black economy.

    1. digi_owl

      Or household goods. Didn’t a detergent end up as a kind of black market currency some years back? To the point that stores were broken into just for said product?

      1. Tiercelet

        You’re thinking of Tide, which is frequently stolen, but not as a currency–more because there’s high demand (so it’s pretty easy to fence), it’s pretty high-value for the weight.

        However, you do see canned mackerel as a commodity-currency in many prisons. This is largely because it sells in the commissary for about a dollar a can, so the conversion is easy, and it’s so unpalatable that nobody actually wants to eat it.

        1. Alonzo

          I suppose if BitCoin was renamed UnsrcrupulousOppurtunistsReelInMoneyHandOverFistAtTheExpenseOfStarryEyedTechnophilesCoin it might not be so popular.

  2. fadez

    There seems to me to be a fundamental misunderstanding here. Bitcoin and the blockchain protocol are irrelevant here and completely useless for the application you describe ie emoney issued by a central bank. Putting aside the pros and cons of such emoney, Bitcoin is an entirely different beast – it’s a global network (cf the central bank’s jurisdiction), the supply is capped (cf central bank emoney which can be added to at will) and it is not open to manipulation or whim (cf central bank control over its emoney).

    1. Yves Smith Post author

      No, you misrepresent the argument. Bitcoin will legitimate digital currencies, which is great for central banks. It has nothing to do with the technology, this is a marketing/consumer acceptance issue.

      And if you think the officials can’t box Bitcoin in if/when they choose, you are smoking something very strong. Bitcoin miners are power hogs. Shut off or tax their power consumption heavily and mining becomes too costly. Bitcoin miners also use the Internet. What happens if ISPs were prosecuted for serving Bitcoin miners, or carrying their traffic? I think you are sorely wanting in imagination if you thing Bitcoin can escape the reach of TPTB. It might not be possible to eliminate it completely but governments can easily throw enough obstacles in the way to damp it way down.

      1. fadez

        The article goes beyond the legitimate digital currency argument in my mind. It is littered with comments like this:
        “(4) The open-ledger system which solves the digital double-spending problem has been robustly tested. Flaws, weaknesses and bugs have been understood, accounted for, and resolved.” The “open-ledger system” and “double-spending problem” are completely irrelevant to a digital currency issued by a central authority, so why even mention it?

        In any event, Bitcoin is, currently, tiny and insignificant. Most people don’t know anything about Bitcoin – or if they have heard of Bitcoin, they certainly don’t understand or trust it enough to legitimate digital currency. Those that do understand and trust Bitcoin simply won’t buy that central bank issued emoney is a bona fide alternative. Or are we talking about some distant future where Bitcoin is universal, globally accepted and trusted and a genuine threat to central banks and monetary policy? Surely not – that’s far too bullish for Bitcoin.

        As for governments, central banks and TBTF banks fighting Bitcoin, well, I am inclinded to agree they will. Of course it would have to happen globally to be effective, which might be asking a bit much, but certainly the powers that be could make operating Bitcoin mining operations or businesses in the US, for example, or getting USD in and out of Bitcoin even more difficult than it already is.

      2. petrocrat

        “governments can easily throw enough obstacles in the way to damp it way down.”

        Which governments? The bitcoin network can be anywhere in the world. I’ve never seen that many governments cooperate.

        1. Yves Smith Post author

          You need to be able to translate Bitcoin into real world goods for it to have any value. You seem to miss that point.

          1. Peter

            And this is becoming easier every day. BitPay and Coinbase both convert bitcoin to USD for merchants such as, eliminating part or all of volatility risk (depending on what % of bitcoin the merchant wants converted).

            During the Senate Hearings on Virtual Currencies in November, it was made very clear that bitcoin is legal. And why wouldn’t it be? So to prevent converting bitcoin to “real world goods” as you say, Congress would need to pass a law to partially or fully outlaw bitcoin. Would this get paper-clipped to some harmless farm bill? Would there be a coordinated effort to turn public opinion against bitcoin and pass the bill out in the open?

            I believe we are still free people and that many in government are not corrupt. We would not let this happen.

            1. Yves Smith Post author

              No, it was not “made clear that Bitcoin is legal”. The officials made preliminary noises. No official determination have been made. The SEC “made clear” it hadn’t made up its mind what Bitcoin was, but thought it most likely was a security. If that’s what they decide, it means anyone trading in Bitcoin would need to register as a broker dealer, which includes meeting SEC standards to head a broker dealer, including qualification of principals and having sufficient capital, making required compliance reports, submitting to inspections as required, and having any customer-facing employees become registered representatives.

              1. OpenThePodBayDoorsHAL

                This entire thread reminds me of the parable of the blind fakirs and the elephant.They grab different parts of the beast, the one who grabs the trunk insists “it’s like a snake!”, the one who grabs the leg cries “no it’s like a tree!”, etc. They are individually correct but collectively are all wrong.
                Bitcoin is an elephant. It’s a protocol that can serve as the transport layer for finance, the same way TCP/IP (packet switching) is the transport layer for the internet. The first “app” is a currency and that what’s getting the most attention. The real advancement is that it enables “decentralized trust”. This turns the entire world of money and finance on its head. “Trustable” financial counterparties, whether they are commercial banks you’re hoping do not debauch their balance sheets or central banks you are hoping do not debauch their currencies, are few and far between in a world where risk is an opaque ephemera of rehypothecated rubbish. Assets and liabilities always match in Bitcoin because the system automatically rejects any transaction where they don’t. It’s the cleanest CLEAN shirt there is.

                1. Skippy

                  “It’s the cleanest CLEAN shirt there is.”

                  Politics will always assert its self, so, the techno gimmickry will in the end be captured by it – to serve it.

                  Skippy… cracks me up to see some try to go – around the problem – rather than addressing it.

      3. inhibitor

        This article goes nowhere, really. It (1) suggests that BitCoin will somehow remain king even when myriads of other e-currencies exist. BitCoin also establishes a set number of block chains so ‘mining’ becomes increasingly unprofitable over time. Also, the article suggest that (2) BitCoins are ‘R&D’ for large banks since apparently, people who use BitCoins are ‘debugging’ and ‘building legitimacy’. Now, I’m not quite sure what the author means by ‘debugging’ in this context; The BC system is set in stone, and it cannot be directly tampered with by central banks. They could, lets say, hold vast amounts of BC’s, but since BC’s are essentially priced due to an odd mixture of hype and utility, such a tactic could easily fall flat since, as stated above, other e-currencies exist. Its like having a bunch of little, independent currencies all priced off one another.

        And having negative interest rates does not FORCE everybody to switch to e-currency, especially since there are still a lot of fees associated with converting low amounts of usd to BC, and most services do not take BC’s but rather dollars. There would have to be large paradigm shifts for e-currency to replace fiat currency. A cashless society would not necessarily be in the interest of banks, not only due to security reasons, but having money off the grid allows for a lot more ‘behind closed doors’ deals.

      4. Globe99

        And if you think the officials can’t box Bitcoin in if/when they choose, you are smoking something very strong.

        This is easier said than done. The government would basically have to shut down the entire internet to stop bitcoin. Sure it’s possible. It’s also possible that they’ll decide to nuke Chicago tomorrow. But how likely, really? We’re already starting to see merchant adoption by big players like Overstock, and general adoption is increasing. And all this without bitcoin being declared illegal in any capacity, unlike P2P file sharing, which continues to thrive despite being 100% illegal. At this point the government has to do a major 180 to start to “clamp down” in any meaningful capacity, and by the time they do that it’ll be too late.

          1. ScottA

            Lambert – There are no servers.

            There are servers (and client) only in client-server systems.

            Bitcoin (like Bittorrent, which it is based on), is not client-server – it’s peer-to-peer.

            I know this is hard to wrap your mind around, but in a peer-to-peer topology, there is no server. (Well, actually, every machine is both a client and a server: hence the generic terminology “peer”).

            The entertainment industry – and the US goverment, would love to be able to take down Bittorrent. And they’ve been trying for years.

            Oh, all the usual three-letter agencies (and some newer ones you might not expect, which I won’t dare or deign to name here) have gotten into the act of trying to shut down Bittorrent.

            End result: It’s stronger than ever, now accounting for 35% of total internet traffic.

            Reason: you can’t uproot crabgrass. It’s rhizomatic.





            1. Yves Smith Post author

              This is not exactly correct.

              It’s already well reported that Bitcoin mining has moved rapidly into the hand of players that are throwing highly specialized, very high computation processing volume computers at it, built just to mine Bitcoin. The boxes cost $20K a pop and consume so much power that some players have gone to lengths to locate them in places like Iceland, where energy is cheap and plentiful.

              So this isn’t “peer to peer” like any Joe Schmoe is mining. This is a capital intensive exercise, due to become more so over time. That means increasingly concentrated.

              And the high energy consumption levels will make them easy to find, just like the marijuana growers who used UV lights.

              1. fadez

                Also not exactly correct.

                Mining pools mean people can mine at home with a reletively small investment and relatively low electricity costs. Dedicated ASICs are still a new thing, of course, but with more and more ASICs in development, all targeting lower costs and greater efficiency, we will reach a point on the curve where ROI is predictable at any scale. The dust will settle and whilst it’s true there will be tens or possibly hundreds of very big miners, there will also be thousands or tens of thousands of smaller miners and hobbyists.

                We’re taking this further off-topic but at the moment you’re talking about a game a whack-a-mole, played globally, to take down the biggest miners. It would do very little to disrupt the Bitcoin network. You could cut total network hashing power in half tomorrow (which would be a truly incredible feat, by the way – taking out virtually all of the biggest mining operations in the US, China, Iceland and just about everywhere else overnight!) and there would still be thousands of miners across the globe processing transactions and securing the network. A 51% attack might be a better option, but that has its own issues.

                Maybe one day, Intel or Samsung will have a $500m mining farm which might make for a nice target, but today isn’t that day. (Let’s face it, $20k for a machine that provides ROI in a matter of months has no shortage of buyers!)

      5. cg

        The central banks and the government would love to require and control a digital currency, Transaction charges! Take points on every transaction and run it all through a chipped card that doubles as one’s required ID. A good part of the populace would revert to barter and coin (though I expect pms would be confiscated as part of the digital introduction).

      6. Nathanael

        Bitcoin is deflationary and will therefore die on its own, quite catastrophically. How does its dramatic collapse help “legitimate” digital currency?

    2. pebird

      Let’s not forget that currently it takes a while (up to a minute) to confirm a transaction and the blockchain keeps growing. The answer? Dedicated high-speed hardware, vast storage and 24×7 data centers. Who can afford such a infrastructure? – well funded ventures that are creating what looks very similar to banks.

      Also the blockchain is the ultimate for BIG data: every transaction available for crowd sourced as well as private analysis. Well, of course we can’t obviously identify YOU as a transaction participant. But with all the metadata, not really a problem.

        1. fadez

          You think?

          I agree with the big data point. The blockchain is a gold mine of information. It’s also completely public, however, which means anyone can make use of the data.

          Regarding confirmation times, for anything other than big transactions where you need extra certainty, and assuming a nominal transaction fee is paid, zero confirmations is absolutely fine (transactions being almost instant i.e. as soon as they are broadcast). Double-spending is very difficult.

          “well funded ventures that are creating what looks very similar to banks” – are you talking about miners or payment processors or both? In any event, the person sending bitcoins is in complete control of his or her bitcoin balance at all times – they can send their bitcoins to anyone, anywhere at any time. Similarly, the person receiving bitcoins knows exactly when they are sent and received and that the transaction is irreversible. Miners and payment processors facilitate transactions but that’s about it – they otherwise have no say, unlike banks.

          As an aside, I think it’s worth considering the other truly remarkable uses for the blockchain protocol (which, by mining, miners will facilitate and secure). Colored Coins for example, where a seperate value for specific bitcoins can be based on real world assets. No need for any third party to maintain a register of ownership – if you hold one or part of the designated bitcoins, you have an interest in the underlying. Smart property is another example. The possibilities – all essentially “apps” built on top of the Bitcoin platform – are endless.

    3. digi_owl

      “not open to manipulation”

      The amount of pump and dump going on begs to differ.

      Basically what you are saying is that bitcoin is the equivalent of digital gold, as the same arguments have pretty much been used to favor gold. As such, i find myself pondering the label bit-bugs…

  3. Ben Johannson

    Above all, they fail to understand that had central banks had the means to deploy e-money earlier on, the crisis could have been much more successfully dealt with.

    This is what I have the biggest problem with. We’re still playing that the economy needs to hit the correct Wicksellian interest rate and then all is jolly? Keynes identified eighty years ago that businesses are largely insensitive to interest rate changes when considering whether to invest in productivity, so Kaminska is really saying that e-money will give CBs the power to create instantaneous inflation for consumers, forcing them to spend what little savings they have.

    For those wondering what a negative interest rate is, it simply means you’ll have less money each day as you are literally charged a rate for holding onto a cash deposit in a bank.

    1. susan the other

      Makes sense to me. Not to mention how convenient e-money will become at the next level, at the global trade level. It is a short step to go from domestic e-money to global e-money and in the process undermine the last vestiges of national sovereignty. Far more efficiently than the clumsy TPP. That should give us pause. But I actually like the negative interest ploy. It’s like they finally found a tool to deal with irrational exuberance. Wheaeas bitcoin is a virtual commodity, a central bank e-dollar will be a pure currency; pure fiat. And being backed by the state will drive down interest rates because there is no value there at all that needs to be kept “strong.” Clever. Pegging velocity to escape the vigilantes. More on this please.

      1. Susan the other

        And as if on cue, Philip Pilkington has chimed in today with a logical essay on Victorian moralizing as a control mechanism to prevent utility minimizing economies. Gotta ask, so what if we do just go out and minimize our market utility? Why not just go ahead and do it? Take it to the limit. Let’s legalize the derivatives market for everyone. Write all the tickets you want. Also gotta ask whose utility we are talking about today – the same old fat cats that controlled the Victorian era? What happens to their protected market if the currency is not volatile? Will they hoard their money and their expensive real estate? Hoarding itself is a form of irrational exuberance. Whatever.

      2. Susan the other

        So the trade-off at the global e-money level is the one the EU is facing. No sovereign money to mitigate domestic slow downs – unless e-money retains sovereignty. But convenient commerce for the rich. And the danger is the junk market of crappy useless goods and the exploitation of the planet. Same old.

      3. Ben Johannson

        I’m actually more disturbed by the possibility this simply masks a greater incompetence. That central banks would seek the ability to generate negative interest rates because they actually think this would work as a response to recession rather than as a naked power grab.

        I think morons with power are, as a general rule, more dangerous than the malevolent.

  4. R Foreman

    If bankers think they can break strong encryption then more power to them. The NSA can’t do it. The reason they embraced it last year (or at least didn’t try to fight it) is because they can’t control it, and most of the people using it are outside the US Justice system. They could try to get TAO to break into a lot of online wallet and exchange servers and steal a shit-ton of btc, but that’s about the most damage they could do… and I think they may have already tried to do this. The cat’s already out of the bag kids. Can’t put it back in, so might as well go with the flow and make people think this was all part of the bankers’ evil plan, right?

    1. b4real


      I am not the brightest bulb on the Christmas tree.

      My primary concern with bitcoin is that one of its perceived strengths is also its greatest weakness. Anonymity. What is to prevent (The FED, JPMorgan,) a 1% er, from creating multiple wallets (to mask holdings) and buying a majority of the bitcoins with fiat? I suspect they have already positioned themselves so they can crash it anytime they choose.

      I would really appreciate thoughts on this from more educated people.

      The NSA has no need to break the encryption. There are programs already mass deployed that can can get all the info necessary to access your wallet. (Remote access software, keyloggers, screen grabs, etc.)

      I will admit, I like shiny metals that I can hold in my hand. Worst case scenario, I can put them in a slingshot and knock someone the hell out. :)

      I’ll appreciate any response.


      1. Oren Baldinger

        Currently, nothing. The only thing that could prevent that is the size of the market growing to the point of it being too big to manipulate, but I’m not sure if that’s even possible. Bitcoin right now is very manipulated, and very prone to flights up and down. I think what you described is already happening- quant types who know how to trade/manipulate forex are grinding down/out all the speculators and early adopters who saw bitcoin as a grand new paradigm.

  5. Dan Kervick

    I think Kaminska has lost it. The article is a string of non sequitors.

    First of all, we already have a near-cashless society. It is entirely possible for a person to live a perfectly normal life using only only the electronic dollars in their bank account and a check card. And banks hold most of their reserves in electronic form as deposits in a Fed account. It didn’t take Bitcoin to get there. So I haven’t any idea what Kaminska means when she says central banks have an interest in “introducing official e-money”. We already have official e-money. What century is she living in? Also, Kaminska says:

    This is important because, in the current economic climate, the introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.

    But she is running together two entirely different issues. Moving to a cashless society would happen if the Fed simply ceased issuing paper currency and Congress dis-established the paper currency in circulation as legal tender. They need only ordain a brief transition period during which everyone is allowed to trade in their paper currency for electronic balances, and there you go … a cashless society. The whole existing structure of central bank + private banks would remain intact and function just as before. There is no reason at all why moving to a cashless society would have to be accompanied by a move to turn the central bank into a public bank that holds the deposits of ordinary people and either competes with or eliminates private banks.

    On the other hand, if the US Government wanted the central bank to go in that direction, it could easily make it happen without going to a cashless society. Paper currency is already issued by the Fed and is an obligation of the US Government. All Congress would have to do is pass a law saying that the Fed is open for business as a provider of ordinary consumer banking services for ordinary people, and there you go. The public banking issue and the electronic money issue are logically and practically distinct.

    1. H. Alexander Ivey

      Close but still not there. Try this simple experiment: live for 1 week using only your debt or credit card. No cash. No dollar bills. No coins. And no fudging by having someone else cough up the dollar. No can do. Cash exists because it is the most convenient form of money for small transactions – don’t believe me?, you aren’t a business person, ask them about the costs and expenses of handling debt and credit cards. And we aren’t even talking about the transactions where the parties involved wish for complete anonymity.

      And really, bitcoin, any E-coin, is anonymous? You really must be smoking. Nothing on the web is anonymous.

      1. Dan Kervick

        I’m not talking about anonymity. I’m talking about electronic money and electronic payment systems. We already have them, and they are already “official”. And this was the case before anyone ever heard of Bitcoin.

        I’m also talking about the fact that a 100% electronic money system could be implemented in many different ways, with many different banking system architectures, so that Kaminska’s suggestion that electronic money is somehow inherently connected with a total central bank absorption of the private banking system is off the mark.

        Third party electronic payment technology continues to evolve and has grown increasingly low cost. I expect that even in what is left of my own lifetime we will see the full transition to digital money and payments. We’ll probably just wear little gadgets on our wrists that we can use in everyday transactions to move money from one person’s or business’s account to another, and grubby old paper money will go the way of pieces of eight and buffalo nickels.

        1. Yves Smith Post author


          You have not thought hard enough about the negative interest rate scenario to see how having a physical currency available plays into that. You think it’s such bad policy that you reject that scenario.

          And I do know people who live underground, on cash only. It can be done. And drug dealers clearly deal in large amounts using only cash. I’m told by tax experts that a bigger percentage of small retail (like cheap jewelry stores and pizza joints) survive only by virtue of money laundering.

          1. Dan Kervick

            Yves, I know how the existence of physical currency plays into zero bound, and the difficulty central banks would have under the current monetary system in engineering negative interest rates because of the existence of physical currency. Because people have the option of cashing out interest-bearing electronic deposit balances into zero-interest cash, any attempt by the Fed to set deposit rates in subzero territory would just result in people withdrawing their deposits and holding their money in cash form.

            This is well-worn territory. People have been talking about the challenging mechanics of negative interest rates off and on for five years now, and have been proposing a cash-free money system as a way out of the impasse for as long as they have been discussing the issue. Kimball’s recent writings are only the latest foray into the subject. New life was breathed into the discussion when Summers gave his now-famous IMF talk in which he suggested that the natural rate of interest is possibly negative, and so implied that finding ways to overcome the zero bound and move real interest rates into negative territory might be called for.

            I’m just pointing out that Kaminska is running together several logically and practically distinct issues in her piece. If the powers that be want to experiment with a cash free economy that permits negative interest rates, the first step is just to eliminate cash. There is no need to institute some additional “official e-currency”, because we already have an official e-currency. It’s called the dollar, and everyone who is paying attention knows that most dollars already exist in electronic form. Operationally, removing physical currency from circulation and leaving only the electronic currency in play would not be much different than removing dimes, nickels and pennies from circulation and leaving only the other denominations behind.

            Another issue Kaminska confuses with the cash-free monetary system proposal, and the negative interest rate proposal, is the entirely separate issue of whether ordinary people should be able to open up accounts at the central bank so that the central bank is then competing with the other banks in the Federal Reserve system to provide ordinary banking services for consumers. That is certainly an interesting proposal, but it has nothing inherently to do with the cash-free monetary system proposal. The simplest way to go to a cash free system would just be to take the cash out of circulation and leave all of the other banking system architecture just the way it is. People still bank at their existing banks, hold their deposits at those banks, have their paychecks deposited at those banks, take loans from those banks, etc. The only difference is that there is no more physical cash – it’s all electronic.

            By the same token, one could also move to a system in which the Fed began to accept consumer and business deposits, made consumer and business loans etc. without getting rid of physical currency.

            So the cash-free monetary system proposal (with the possibility it creates for negative interest rates), and the Fed-as-commercial-bank proposal are two completely different animals and really have nothing to do with one another.

            1. Nathanael

              Eliminating cash will not happen. If the US tries to eliminate US cash… other forms of cash will take over. The early US actually didn’t have its own money — people just used foreign money. This happens *all the time*.

      2. Charles LeSeau

        Try this simple experiment: live for 1 week using only your debt or credit card. No cash. No dollar bills. No coins. And no fudging by having someone else cough up the dollar. No can do.

        I regularly do this, month after month, check card only, with the exception of paying rent by check. Not sure what the issue is. Perhaps we live differently though. I don’t go to bars or restaurants, for instance.

          1. Charles LeSeau

            I don’t use freeway exits. I live car-free, and do all my commuting, shopping, traveling, etc, with a lovely custom-built Mercian touring bicycle. For travel in foreign lands I use a folding bicycle from a company called Bike Friday, which can be stored in a Samsonite suitcase that in turn can trail behind the assembled bike on its own wheels and multitask as a luggage container in addition to my panniers.

            And no, not a young pup, no I don’t live in the city, and no I don’t live in perfect year-round weather. I’m in the snowbelt of Western NY. Sometimes in winter I have to hike it for groceries, a 5.5-mile distance. Constant modern convenience can kiss my bottom. :)

            1. MyLessThanPrimeBeef

              I like that.

              Biking is good. Walking is good too. Train rides are good. I hope to try cruising on a freighter one day.

              1. Charles LeSeau

                It’s fun if one can swing it and embrace a pleasant attitude about it – walking through snow in particular, where layers and a balaclava come in handy, as well as an mp3 player. A big caveat for me is that I do work from home, so I don’t have the inevitable work commute that most do, and definitely don’t try to advance the idea that it’s for everybody. Certainly, it makes me pretty much relationship-ineligible in a place like rural America, so I’ve learned to embrace my inner studious hermit too.

                I met a chap from Brazil many years ago who used his Bike Friday in a very unique way: He had a collapsible kayak that he would store in the suitcase (or maybe on top of? I don’t recall), and he would leap frog between rivers and roadways, doing one or the other – bicycling, folding bicycle and placing in suitcase, assembling kayak and rowing along, then packing kayak and bicycling again. Versatility++. I’m from a sailing family, so I’ve done cruises myself, trips to Toronto on my dad’s Erickson 32, etc, but I’d like to try it his way sometime.

          2. Mike

            I live in Canada, I can can tell you we certainly are far more ahead than the US with digital currency. I can live the rest of my life with my bank card (debit is what we call it). Practically every store in Canada has debit machines. When I get on the toll highway either a gadget on my dash goes ding and I get billed or a picture gets taken of my license plate on my car and I get a e-bill in my online banking. Everything can be done electronically in Canada now. I suspect this country was used as a test bed for this technology. To tell you the truth, I think its great.

            1. Yves Smith Post author

              You absolutely do not want to use or carry a debit card in the US.

              The overwhelming majority are not PIN protected.

              So if someone steals your wallet, they can use your debit card to drain your bank account. And you have no recourse.

        1. lambert strether

          Well, Charles is the edge case. I am car free, but I need coins or bills to take the bus. (I don’t ride a bike because I’ve fallen twice, in neither case breaking a hand. Too much rusk.) And all the local stores prefer cash because of the cut the card rentiers take.

          1. Charles LeSeau

            If you would like to bike but are afraid of falls, perhaps consider a trike? There are some excellent recumbent tricycles out there that don’t tip over and are in fact more aerodynamic than the classic safety bicycle.

            That isn’t to say there is no risk, however. Wherever there are cars and tri/bicycles on the same road, there are risks involved. Then again, an ex-girlfriend’s mother was fatally hit by a car just walking on the sidewalk, so walking isn’t always safe either.

        2. H. Alexander Ivey

          Got me. I forgot about cheques – I live where personal cheques are not popular, we mostly use a debt card. But my point is that physical money – pennies, dimes, quarters, fifty cent pieces, Susan B’s, and all the demos of dollar bills, are a bedrock to any economy. Not in the sense of the MMTs that the amount of physical money drives the economy growth’s but in the human to human sense of social interaction and in the real, practical economic sense of being the cheapest (not the least hassle free) form of doing business.

          And while I’m here, “negative interest rates”? Really? Call it a tax on deposits and be done with it. This “natural interest rate” idea is another pipe dream from main stream economists trying to shoehorn social class structures into business and economic relationships.

          1. Charles LeSeau

            Right. And I do use physical money from time to time, but months will go by where I don’t, and it’s the exception for me rather than the norm. For one thing, person-to-person transactions are often best served by cash exchange.

            And as Lambert correctly said, I’m an edge case, and in so many different ways. We have coin-operated laundry machines in my apartment building, for instance, but I use a 1940s laundry device in my bathtub that looks like a big plunger instead. I also don’t make too many purchases under $5, where lots of vendors will not allow one to use a card. If I’m going out to buy something, I live remotely enough where it is more economical time-wise to buy in relative bulk.

  6. Amin

    Kaminska doesn’t understand the point of Bitcoin’s public blockchain. There would be absolutely no need for a public record of transactions if there was a trusted third party (the central bank) holding the ledger. A privately held ledger, as opposed to a Bitcoin-style public ledger, would greatly improve the privacy and therefore the utility of a digital currency, but would have the disadvantage of being reliant on a single trusted party, which Kaminska is not trying to avoid, thus nullifying the need to have this feature and bear its problem.

    All of Bitcoin’s innovations, including the public blockchain, are necessary only for the purpose of creating a decentralized means of managing payments. Centralized digital currencies, which have existed ever since banks started recording their clients’ account balances digitally, do not need any of them.

    Also missing from the article is an understanding of where Bitcoin’s advantage comes from. It’s not the fact that it’s digital that makes it so useful, it’s that it democratizes payments. No one can censor people making payments in the Bitcoin network, meaning there are no gatekeepers in a position to charge a premium. This is what leads to Bitcoin payments costing zero or near-zero.

    1. Yves Smith Post author

      I am a merchant and I have absolutely no interest in Bitcoin. Yet one of the big assumptions is that merchants are desperate for Bitcoin.

      I value the accounting and the ability to reverse transactions.

      And as a consumer I ALSO have no interest in Bitcoin. I don’t use a debit card and never will. I use cash and a credit card. Again, on the credit card, I value the accounting, the float, and the ability to reverse transactions. None are operative with Bitcoin.

      And the volatility is a much bigger “tax” than 3%. I have absolutely no interest in being paid in a volatile medium. Even if I had interest, that’s a deal-killer.

      And merchants who deal with overseas customers won’t find this useful. Why would anyone pay in an irrevocable form when you haven’t received the goods? The one use I can see it having is for money transfers to overseas family members.

      I’ve done a lot of tech deals. You promoters keep selling the tech aspects. I’ve seen that again and again, and those deals tend to fail (as in not find a market or find only a limited market) Those are utterly irrelevant. What matters is the advantages to the consumer v. the cost of adoption. I don’t see them.

      1. ScottA

        Yves is correct to say that things like reversibility (chargebacks) and float are not available in Bitcoin – yet.

        I am however fairly confident that such things will be available in the near future.

        You have to understand how this sort of tech gets rolled out.

        First you roll out the primitive operation:

        person A sends X bitcoins to person B

        That operation is (obviously) up and running already on the Bitcoin network.

        Then, you can “compose” a few such primitive operations to build composite operations. Reversability (chargebacks) seems rather straightforward, and I’m sure one of the many companies springing up in the Bitcoin ecosystem will begin offering that soon.

        The ability to enjoy “float” while using Bitcoin (rather than using it merely as a straightforward debit card, which is what it’s currently limited to) might be a bit trickier – I suspect mainly because the designers of Bitcoin intentionally put a lot of effort into limiting the number available, so I imagine the only way that “Bitcoin credit” could be extended would be by a party who actually HAD some extra bitcoins on-hand to extend as credit – ie, not the way we seem to be seeing now, where banks can simply issue new money as debt out of thin air.

        But still, I imagine that there could be a demand for “Bitcoin credit” – and if so, some enterprising individual will in all probability come up with a way to issue it (say, in a year or two).

        The point being (and I don’t mean to sound like a whiny apologist): This Bitcoin technology is in its early days. How many of you were using the web in the early 90s? And if you were, did you have any idea what you’d be able to do with it today?

        Bitcoin is in a similar situation. The “bare-bones” early 90s web was (under the hood) basically exactly the same as the “fancy” web we use today – in the sense that the whole contraption ran and still runs on top of TCP/IP, which hasn’t been changed a whit since then.

        What HAS changed have been the “value-added” services built on top of TCP/IP – things like blogging systems, comment systems, EBay/Paypal, Facebook, Twitter, Instagram. These things were unimaginable about 20 years ago – but they all came into existence as innovations built on top of boring ole TCP/IP.

        This is the magic of protocols. If you manage to define a solid protocol which includes the “right” primitive operation(s), it’s almost a given that a bunch of companies will end up building some really cool, fancy stuff on top of your solid protocol.

        And there is a growing consensus out there that the Bitcoin protocol, which basically consists of the ability to say:

        person A sends X bitcoins to person B

        is not only solid (after all, it’s been humming along nicely for 5 years now) but also nailed the “right” primitive operations for internet-based financial transactions.

        This is why I’m optimistic that we will soon see features such as the ones Yves mentioned here (chargebacks, credit). Because all the ingredients are there:

        (a) People (such as Yves) want these features

        (b) The Bitcoin protocol can support programs that provide these features.

        So… it seems very likely that we will get these features.

      2. ScottA

        Also, re: Accounting

        I’m not sure where Yves is getting this idea from, that Bitcoin somehow lacks accounting.

        After all, at its heart, Bitcoin is really nothing more than a global accounting ledger. (The innovation being, that it doesn’t require any central person or server to run it.)

        This is truly a ground-breaking achievement – one of the most important economic achievements in human history.

        But if you want accounting, Bitcoin gives you that already. The Bitcoin ledger already contains a record of every historical transaction, and every user’s (actually, more precisely: every “account’s”, or every “address’s”) current balance.

        So, the nitty-gritty accounting details are actually all there – currently in pseudonymous form, involving a really long, ugly public address (eg: 1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqX). This is because the hackers who developed it liked it that way. That’s what you’d expect from them, after all. They’re not Name-Address-Birthday-SocialSecurityNumber types… they realized that each account just needed any ole kinda (ugly, unique) number – so that’s all they gave us. In this initial iteration of the system.

        But there’s no reason to believe that we’ll be stuck using these really long, ugly public addresses forever.

        Let’s step back and look at a similar example, from the world of IP. Does anyone know what the “raw” (numeric) IP address refers to? (Hint: you can actually copy and paste it directly into the address bar of your browser, to find out!)

        Well, back in the day, when TCP/IP was just starting to get adopted, THAT was how you accessed a website: by typing in its IP address.

        Of course, later, for convenience, we got this wonderful thing called DNS – which meant that instead of memorizing a bunch of meaningless numbers and typing them in to surf the web, you could memorize a meaningful name (like “”) and type that in instead – and let DNS automatically do the translating for you.

        So, nowadays, in these early days of Bitcoin, we’re currenlty stuck with these clunky alphanumeric “public addresses” (eg, 1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqX) which we have to use when we want to sent bitcoins to somebody, or when we want to look up the transactions involving that address.

        Actually that address that I mentioned above is a pretty famous one – it’s the address of the Silk Road bitcoins, seized by the FBI. And funny thing is, people have been sending tiny transactions (involving microbitcoins, or less) to that address – while also taking advantage of an advanced feature (already available in certain Bitcoin applications) allowing you to attach a public note to your “spend” transaction.

        So, if you go here:

        You can see:

        (a) How many bitcoins are in the account which the FBI seized from Silk Road, and

        (b) All the transactions (with date and time) sent to that address by pranksters or spammers or activists – many of whom who also attached a public note to the transaction.

        So Bitcoin already gives us a (rudimentary) form of accounting – complete with a global, public ledger of all historical transactions and all current balance – plus some Bitcoin client programs also add the ability to attach a public notes to your “spend” transaction.

        Now, it doesn’t take a big leap of faith or imagination to believe that, given this sort of infrastructure already in place, in a year or two we’ll probably get a whole lot more accounting details with Bitcoin (eg, maybe the name of the sender, the name of the recipient, the item purchased, etc. – assuming of course that people want this stuff to be published out there in the open, which is another issue altogether!)

        But the main point is: the basic accounting ingredients are all in place, we’ve had a global accounting ledger up and running, under our noses, with no central maintainer, for over five years now. (But because we are so accustomed to most “cool” things on the web coming from a central authority – whether it be Facebook or Twitter – we’ve had a hard time wrapping our minds over the truly momentous significance of this groundbreaking new invention: a peer-to-peer global accounting ledger.)

        Again, you have to understand the mindset of the developers. They (quite correctly) focused exclusively on developing a PROTOCOL. And they nailed that part perfectly. They provided us with a global ledger of historical transactions and current balances, consisting mainly of statements of the form:

        account A sent account B amount C on date/time D

        Now, I hope everyone understands that this constitutes the groundwork par excellence for a full-fledged accounting system.

        Also, remember, there is no company behind Bitcoin. No marketing department. No public relations staff. Just a bunch of nobodies like me on the net (I’m an amateur mathematician and erstwhile programmer), who are trying to explain to everyone else, what a truly amazing thing this is: an accounting ledger run by “nobody”.

        And as far as “accounting” is concerned: I’m quite confident that we will be seeing applications giving us various types of accounting data, built by enterprising individuals and companies, running on top of the Bitcoin blockchain, in the next year or so.

        1. flora

          I say this with respect because you are obviously a technically talented guy.

          From your 2 above posts:
          “[1]How many of you were using the web in the early 90s? [2]And if you were, did you have any idea what you’d be able to do with it today?”
          “This is truly a ground-breaking achievement – one of the most important economic achievements in human history.”

          To which I can honestly reply:
          [1] Yes. And earlier. Remember BITNET over MIDnet?
          [2] Yes. I have been in on the creation of some of this.
          I have no doubt that your technical faith is justified and – I don’t mean this negatively, I once shared the same outlook – your utopian faith in the technology in and of itself is sincere. I don’t question your technical remarks.
          But I have seen over and over again the amazing work and achievements by many in the digital world be, when the technology becomes mature enough, subordinated to the market and/or govt forces for their own ends. Remember the start of instant messaging with Quantum CS Inc and all the people who gave massive individual hours of time to perfect it? And then Quantum became AOL, went public, sold at a high price which the volunteers saw no part of ? Remember that the internet is supposed to be open and free and amazing only now not so much with the striking of net neutrality rule ? And, uh, that NSA thing? The point here is not that you are mistaken about the technology. The point is that I think the article is correct to assume that TPTB will use this technology for its own ends, after you and many others perfect it to a certain mature point. And neither you nor I may like those ends. So work, but with eyes open.

          1. ScottA

            Hi Flora,

            Thank for these thought-provoking ideas.

            It’s refreshing to be concretely reminded that there indeed are some people on this site who were involved in the early days of the internet, and with its eventual enhancements.

            Being aware of the phenomenal progress made – specifically by means of building applications on top of a stable underlying protocol, be it TCP/IP, or the Bitcoin network – can justify our expectations, or hopes, for bigger and better things to come.

            I wasn’t aware of the Quantum CS -> AOL history – but it sounds to me like this was a corporate entity (rather than an open-source protocol with no owner, like TCP/IP or the Bitcoin network) – and as we know, corporates often tend to sell out, whereas protocols really can’t.

            Regarding the NSA and the recent, serious attacks on net neutrality: These have been, to me, two of the most disappointing developments over the past few years (along with Citizens United) – in other words, these have seemed to me like the final nails in the coffin (although I do believe that the solutions to the spying stuff is fairly simple – the encryption tech has been lying around for years, we just neglected to build it in as the default option on our internet – plus there is a lot of stuff in development to try to address this stuff – such as mesh nets, Twister, BitMessage, and Open Transactions, which may make it possible to have decentralized exchanges for things like Bitcoins and national currencies).

            Then, sometimes, I have gotten really depressed, thinking that this wonderful thing we know as the “Internet” – and all the freedom and bounty it has provided – will turn out to be a mere brief “thaw” when we look back a few decades from now.

            I am fully aware of the seriousness of the forces arrayed against innovations which empower the people at the expense of TPTB. And I think the main vulnerabilities to things like Bitcoin are precisely those – not technological (as the tech works fairly well) but rather political (as it will unseat some very powerful people).

            In the end, it seems rather sad to me that so many of the arguments against Bitcoin – even from Yves – have boiled down to: “TPTB won’t let this stand.”

            Anyways, be assured that there are lots of geeks and nerds who are well aware that good tech can be taken down by bad players in the political sphere – and there is even a coherent school of thought about this, which advocates solutions where the technology is specifically designed to withstand (or simply sidestep) the politics. From what I understand, Bitcoin itself was a volley from this very school of thought – and it was launched with the full awareness that it would probably be just the first of a series of progressively enhanced volleys launched in this area. (For example, you can often hear Andreas Antonopoulos, one of the leading proponents of Bitcoin, talk about how Bitcoin could easily crash – either through a technical flaw, or under an takedown from the authorities – but within days or hours, a new cryptocurrency would arise to take its place, while also attempting to address whatever vulnerabilities had led to its crash or takedown).

            So I’m actually quite pessimistic about Bitcoin in the political sense – ie, if its money-creation aspect really does threaten to tip the balance of power in the current world order, you can be quite sure TPTB will do their best to take it down. And the current architecture does have a few weak points where they could attack. Many of the developers involved are aware of these weak points, as they get discussed plenty on the forums, and work is underway to address them – either within the current incarnation, or in some later, completely separate implementation.

            It seems that we are discussing several distinct points here all at once:

            (1) Does Bitcoin offer features which make it attractive enough for various classes of users to want to adopt? (Investors, merchants, consumers, unbanked, people using money remittance services – or even big firms needing things like letters of credit, smart contracts, etc.) There is already plenty of debate on this topic.

            (2) If such adoption does take place, would it be a Good Thing for our economy and our society – or would there be undesirable or unforeseen ramifications (deflation/hoarding? concentration of wealth? etc.)

            (3) Even if Bitcoin gets adopted – and even if it turns out to be overall a Good Thing for most of us – there seems to be an unstated gloomy consensus, at this late stage in our “civilization”, that anything that is good for most of us will be bitterly fought tooth-and-nail and eventually destroyed by the genocidal / ecocidal Powers That Be.

            So, some of us might be saying, “Yeah, the tech actually seems to work fine, and it looks like it could even help improve many people’s lives” while others are saying, “Yeah, but what’s the point? Whenever we finally get something that actually works and makes our lives better – like the internet or net neutrality – the assholes from the NSA / the telcos / the banks just want to come along and destroy the whole thing.”

            That’s where we’re at these days – and that, folks, is why, whenever I use the word “civilization”, I use it in quotes – because I think if any extraterrestrials have happened to point their telescopes at this sorry planet, they’re shaking their heads, saying, “So much potential. So close to achieving sustainability. Pity they burned fossil fuels instead of thorium – and adopted domination rather than cooperation as their official state religion.”

            1. Lambert Strether

              Protocols can’t sell out, but protocols can be sold out. Ever done any international standards work? And that’s before we get to the NSA’s helpful work on encryption.

          1. ScottA

            It’s just an address at Yeah it shows the funds held by SilkRoad… but it’s part of the regular website, which actually shows the funds at all Bitcoin addresses.

        2. Yves Smith Post author

          And who is going to convert this ledger into a form that someone like me would find sufficiently friendly?

          And what would they charge? Now we have more middlemen and the need to layer in costs.

          This is like stone soup. You pretend you are making soup from a stone but what is needed to make it palatable is throwing in a whole bunch of other stuff. And that has costs.

          And you have chosen to ignore the deal killer, which is INHERENT to Bitcoin the price volatility.

          And we’ve had Bitcoin exchanges go tits up leaving the account holders with 100% losses.

      3. Dan Kervick

        I think some merchants are interested in Bitcoin right now mainly because it is a fad, and it’s a way of signaling to that portion of their customer base that cares about Bitcoin.

  7. JGordon

    There is something like 30 times more electronic USD currency floating around in circulation as is today than there exists corporeal paper currency. So it seems kind of redundant to have this thing running as a beta test. But that’s not really important.

    Anyway, what I was really thinking about when reading that: believing in top-down “solutions” to our various existential crises is a guaranteed way to go extinct. People should not be worrying about what the sinking governments/central banks are doing in these remaining twilight years of industrial civilization. Instead, we should be worrying about getting the best equipment possible (that will fit) into the lifeboats and then pushing off as far as we can before we’re dragged under too. It’s good that NC is starting to nibble around the edges by running cross posts from Nicole Foss and Gail the Actuary, but you all could go even further; please consider linking to or even cross-posting articles from James Howard Kunstler and Charles Hugh Smith–that would be great!

  8. Cesira

    Bitcoin is one of the many distractions littering the press. The power implications of the current distribution of income attract little comment; some moan about the equity implication; others note implications for middle class youth. What matters is the 1% have the ability to buy the democratic franchise and have succeeded in doing so in states like Wisconsin. The only countervailing power is the power to tax their ill-gotten wealth until their share is a fair share.
    Lets put tax back in the headlines; lets march for higher taxes on the 1%–the same tax rate as under Eisenhower and Johnson. Bitcoin is a bit of nonsense given airtime by people who have not a clue what modern modern is and even less of a clue about the politics of this type of money.

  9. Mel

    “All of Bitcoin’s innovations, including the public blockchain, are necessary only for the purpose of creating a decentralized means of managing payments. Centralized digital currencies, which have existed ever since banks started recording their clients’ account balances digitally, do not need any of them.”

    There’s a use for Bitcoin there. In 2007-2008 all the major banks contrived to lose both sides of all the bets they had made with each other. They rolled over and like to have died if the various governments hadn’t revived them by pouring floods of money over them.

    Global trade stopped. Nobody could ship since there was nobody who could be trusted to guarantee payment on arrival. So with a payment system that didn’t depend on one fallible guarantor … ?

    (Is this really going to link to Amin’s post? Eh. We’ll see.)

    1. Yves Smith Post author

      Global trade relies on letters of credit, most often documentary letters of credit but some are financial letters of credit.

      Bitcoin is no solution for either.

      You can forget financial letters of credit, Bitcoin is a payment, not a financing mechanism.

      For documentary letters of credit, there is more than payment involved. The buyer specifies that certain documentary requirements be met, such as for oil, that the quantity shipped has been verified, that the goods have cleared customs, etc.

      Bitcoin does not have the infrastructure to do that. It just sends money. It can’t validate that the goods have arrived and have the documents verifying that they are what you paid for.

      No one is going to send cash to some party overseas and rely on them to be really good guys and send what they promised. And the guy overseas is not gonna ship unless he has confidence he will be paid. This is why a credit card (and letters of credit) are valuable: the shipper does NOT get paid if the goods (in the case of credit card) or the documents saying the goods are what they are supposed to be don’t meet the standard.

      You really don’t grok the problem and why banks and payment networks add value. Hint: in many cases, they do more than just send money.

      1. ScottA

        Actually there has been some discussion regarding advanced, heretofore little-known features already available in Bitcoin blockchain – which make it possible to do things like implement “smart contracts”.

        I think we may have a detrimental situation of overspecialization here:

        – People like Yves know the real-world details of how letters of credit work – but don’t necessarily know all the tech details about how Bitcoin works (in particular, the little-known advanced features, like embedding smart contracts directly into the Bitcoin blockchain).

        – On the other hand, some advanced Bitcoin enthusiasts may actually know how to embed a smart contract in the Bitcoin blockchain – but might not be well-versed enough in the details of letters of credit in order to actually be able to put this to practical use yet.

        So… as someone know knows a bit about Bitcoin, and almost nothing about letters of credit, I’m not qualified to say whether a letter of credit (either documentary or financial) could indeed be implemented in the Bitcoin blockchain.

        But I sure would love to find out!

        1. lambert strether

          “Smart contracts” is the phrase that leaped out at me in iirc the andreessen piece.

          Technically, very appealing. Then again, one thinks of MERS. And fraud.

      2. ScottA

        When Satoshi Nakamoto created the Bitcoin protocol he envisioned the system not only as a way of moving money from one owner to another, but also as a broader mechanism to manage agreements and instructions.

        The way he implemented this was by creating a space within Bitcoin transfers where users could enter scripts stating conditions for their transactions.

        This functionality opens a whole new game where service providers and startups can build on top of the Bitcoin network to create new products and services with innovative business models.

        1. ScottA

          There’s a video clip at the above link (with Mike Hearn, a brilliant mathematician and one of the Bitcoin core developers, who also works at Google), where he talks about smart contracts using Bitcoin.

          While he doesn’t specifically mention letters of credit per se, he mentions adding instructions and conditions to transactions in order to create various types of agreements and contracts pertaining to events and property in the real world, using a scripting language which is already part of the Bitcoin system (although it’s still relatively unknown).

          This gives the distinct impression that it would indeed be possible to use Bitcoin to implement things such as (documentary or financial) letters of credit – although we of course not know for sure until someone weighs in who knows about (a) letters of credit and (b) advanced Bitcoin technology, in particular, the scripting language and smart contracts using the blockchain.

          1. Michael Fiorillo

            I implicitly grant the brillaince of the people who developed this process but please clear something up for me: Satoshi and Bitcoin have heretofore been described in the mythic language of absolute anonymity and privacy, yet now I’m hearing that someone from Google, one of Mammon’s and the NSA’s primary data feedstock providers, is involved with it.

            Or is it that Mr. Hearn is involved in projects piggybacking on the already-existing architecture? Please clarify.

            1. Anonymous

              Hi Michael –

              Normally, as we know, programmers who write open-source code release it to the public, and then other programmers come along and enhance it, releasing upgrades (or sometimes veering off in new direction, “forking” the original code).

              In this case, the computer program being released could potentially up-end the current world order because it had the ability to print money – something which up until now only our Dear Leaders have been able to do up (to finance their endless little wars, or to buy their charming little million-dollar carriage houses on the Upper East Side, or whatever).

              In this case, the programmer(s) wisely adopted a pseudonym, and went incognito after releasing the code – simply as a precaution to avoid providing an easy target for the-powers-that-be to “take out” once they got pissed-off about losing their monopoly on their lucrative money-printing gig.

              (Side Note: Because this new open-source money-printing program was also designed in such a way as to use a peer-to-peer or decentralized network topology – meaning that no central server would be needed in order for it to run – the programmer(s) had a pretty good hunch that it would indeed succeed – given that a previous program which also used such a topology – the famous Bittorrent program for downloading big files such as movies – had also been a wild success, now accounting for about 35% of total internet traffic – despite the poignant, Sisyphean attempts of governments and industries to take it down.)

              Now, as with any open-source programming project, other programmers are coming along and providing the usual enhancements and upgrades. Although any programmer is free to do this, the more important and active ones are sometimes referred to as the “core Bitcoin developers” – and there is actually a foundation which some of them are involved in, called the Bitcoin Foundation.

              But still, they’re just the usual rag-tag bunch of (mostly volunteer, unpaid) programmers providing upgrades – in this case, to the original magic money-printing program released by the mysterious S.N.

              Mike Hearn is one of these programmers – a rather good one, who also happens to have a day job to pay the bills – which happens to be at Google. But this does not imply any official affiliation between Google and Bitcoin of course!

              So, you were right when you surmised that Mike Hearn is working on projects piggybacking on the original project.

              1. flora

                Torrent downloaders are a poor example. Several have known security holes/backdoors that activate without your knowledge and allow other Torrent users to store data (illegal data?) on your computer when you use Torrent. You’re downloading, and so are they, to your computer.
                Bitcoin has been hacked more than once. Bitcoin mining bots run on infected computers. etc.
                But of course Bitcoin isn’t the issue in the article. Govt e-currency and how it could be used to manipulate the economy is the issue. I’ll keep my paper bills, thanks.

                1. ScottA

                  Bitcoin has never been hacked – but Bitcoin exchanges (where people trade bitcoins for national currencies) have.

                  The fact that one can install a Bitcoin mining bot on an infected computer… is about as relevant as the fact that one can install an email spambot on a computer. In fact, it is merely proof of a working technology.

                  Torrent downloader programs may or may not have backdoors in them (particularly the closed source ones).

                  What Bitcoin borrowed from Bittorrent was merely the protocol (which is not the same thing as borrowing the implementation of a particular program). The Bitcoin client program itself is open-source, and has been subjected to withering scrutiny from friendly (and unfriendly) hackers and programmers for five years – and a tiny flaw was found and fixed a few years ago.

                  Hey, we actually should be glad that the tech behind Bitcoin is beyond the ability of many of the readers (and apparently both of the proprietors) of this blog to grasp.

                  This gives us some hope that it will continue to spread, under the radar of TPTB, and even the people who should know better (the top econ-bloggers), so that when they finally do figure out what it’s really all about – it’ll be too late to do anything about it (just like the govt and Hollywood – no matter how much they’ve tried – have been unable to do anything about Bittorrent.)

                  The reason, I will state again, is: peer-to-peer (or decentralized) topology. People who don’t understand what this term means in the context of computer networking, will not understand how Bitcoin works under-the-hood, and why it is probably impossible to take down.
                  (Intuitively, a peer-to-peer system is difficult or impossible to take down, because there is no single or central point of control – eg a server. In a peer-to-peer system, every machine is both client and server simultaneously – which makes it kinda hard for the goons from the 3-letter agencies to know where to send their jackbooted thugs when they want to take down the “server”. Because: there is no server.)

                  (Yes, TPTB could take down the exchanges where people trade their bitcoins for national currencies. These exchanges are notc urrently decentralized – but the Bitcoin community is working on that too.)

              2. Michael Fiorillo

                Well, I have my doubts whether anyone just has “… a day job… at Google.”

                As Barbara Ehrenreich has written, the new corporate order not only requires the requisite skills, but more importantly, the requisite buy-in to the company’s “mission,” i.e. ideology. Failure to display sufficient enthusiasm for it can quickly result in a visit from a stern-looking security guard offering to accompany you out of the building.

                Since we have a pretty good sense of what Google’s ideology is – the Panopticon is good for you! – I take that seemingly casual comment about a “day job” with a grain of salt.

                Again, I grant the intelligence of all concerned, as well as the possibility/likelihood of digital currency expanding greatly, but I have strong doubts whether that will be to the benefit of The Rest of Us.

      3. slothrop

        “For documentary letters of credit, there is more than payment involved. The buyer specifies that certain documentary requirements be met, such as for oil, that the quantity shipped has been verified, that the goods have cleared customs, etc. Bitcoin does not have the infrastructure to do that. It just sends money. It can’t validate that the goods have arrived and have the documents verifying that they are what you paid for.”

        Jesus Yves you really need to do your due diligence. Precisely what you describe can be achieved by the blockchain, which essentially a global ledger of title. It’s not just money. Repeat: It’s not just money.

        The bitcoin network has the potential to be a a triple-entry accounting system where the transactions are validated WITHIN the transaction. No more Enrons.

  10. slothrop

    Good lord Yves. You’ve been so wrong on bitcoin up to this point you’d think you’d have learned a lesson by now. People are smart enough to distinguish between a decentralized currency and a centralized one for crying out loud.

    1. Yves Smith Post author

      Oh really? Tell me how I’ve “been so wrong”. The onus is on you to provide examples.

      “Digital currency” does not = Bitcoin. Bitcoin is a subset within that category. So your immediate beef demonstrates a failure to read carefully or worse, a failure to understand terminology.

  11. bob smith

    you are missing the biggest use of bitcoin. It’s a store of value.
    In Argentina, the currency is a scary thing to hold. If Argentineans were to purchase gold, stocks, or commodities, the government could ban all of them, or tax everything at exorbitant rates.

    Bitcoin might be the safest way for the average Argentina to hedge. And what if you lived in Greece, with euros in your pocket? would bitcoin have a place for poorer Greeks as well?

    1. Yves Smith Post author

      Bitcoin is more volatile than established currencies or gold and more difficult to convert to actual currencies. That makes it inferior even to gold, which is more stable on a day-to-day basis.

      And Bitcoin exchanges have failed, leaving customers with 100% losses.

      I’d take Euros or gold or dollars any day over that.

      1. Skippy

        Ha!… your both wrong –

        Bitcoin and beers

        Forget about bitcoin. The latest go-to cryptocurrency is called dogecoin, a digital denomination that began life less than two months ago as a jokey tweet made by 26-year-old Australian Jackson Palmer.

        That’s true virality. [Dogecoin] grew a mind of its own

        But his joke has now taken on a life of its own. The total value of the market for dogecoin (pronounced dough-je coin) has just topped $US60 million ($68 million) and it has spawned a community comprising thousands of buyers, sellers, merchants, beggars, speculators and “miners”, the people who mint the money.

        Read more:

        Skippy…. lmmao twitter…

  12. Paul Tioxon

    Sorry Yves, but this explanation has been rolled out before for so many fiendishly diabolical plots. Science fiction stories and movies about aliens was a government program to socialize the public to get ready for the real alien revelations that would destroy religion and faith, the last institution holding back the chaos in the face of an empty meaningless universe posited by science. We already have a cashless society with the fed handing out emoney: it’s called social security, disability, welfare, food stamps, unemployment, IRS refunds, all electronic direct deposit that also includes direct deposit of paychecks from the entire private sector. Almost no one uses printed or minted money. Electronic bill pay has taken over kiting checks. Check 21 is the e-money, bit coin is playing a bit part.



    “Why do banks create substitute checks?

    Some banks find that exchanging electronic images of checks with other banks is faster and more efficient than physically transporting paper checks. In certain circumstances, however, banks may need to use a paper check. To address this need, Check 21 allows a bank to create and send a substitute check that is made from an electronic image of the original check.
    Can I require my bank to return my original check?

    No. In general, the law does not require your bank to return your original check. Many banks destroy original paper checks. Other banks may store original checks for some period of time and then destroy them. Check 21 ensures that you have the same legal protections when you receive a substitute check from your bank as you do when you receive an original check.”

    Cash may never go away, but e-money is already quite common and most comforting, especially to the smart phone generation who live with paypal digital shopping and debit cards. Honestly, bitcoin just seems more like another scam or mystifying crap from Wall St that no one who already used a Visa or Master Card for debit payment ever put their trust in. Try explaining it to the average person and the response is why, when I already have paypal and a debit card do I need to get involved with more non-sense? Intellectuals may love it, but that’s about it. I say bitcoin on the Eric Snowden web site today during his on-line chat. That I can understand, when Visa and Mastercard will shut down donations for a guy the NSA wants to assassinate, but other than a handful of people like that, where is the demand?
    I am not supply side believer in bitcoin, if you mine it they will come? Extremely doubtful.

  13. The Dork of Cork

    I have to say I live a very simple life.
    Without cash I am goosed and can be taken out of economic life or just plain life in a relative instant.

  14. ScottA

    I have the greatest intellectual respect for both of you, Yves and Lambert… over the many years of reading you both here (and also at Corrente)… I’ve learned a lot about economics from Yves, and I have always appreciated Lambert’s reductio ad extremum approach to confronting the most pressing problems of our times.

    But this whole lack of intellectual curiosity I am seeing from you both, when it comes to of Bitcoin, is a bit perplexing – and I’m really just using that as a euphemism for “disappointing” – which is really just a euphemism for je ne sais pas what other word – because I want to be gentle enough here to not piss you off so bad that you stop reading this rant right here.

    Here you have a blog where you have been railing for years about how untrustworthy the “leaders” running our money-creating system are… and suddenly some smart programmers come along, and offer a possible technological solution which claims to neatly sidestep / obviate many of these political and economic problems, precisely because it is a “leaderless” (ie, peer-to-peer, or decentralized) tech solution…and five years after it successfully launches, having shrugged off probably countless attacks (which we will never even know about, it’s just so damn impregnable), you both apparently still have major gaps in your understanding of how it works – and you’ve just been offering canned responses about “not sure, sounds like high-tech, probably can’t be trusted!” – or totally incorrect critiques.

    Yves’ complaints- “can’t do chargebacks” – “can’t do float” – “can’t do letters of credit” – are largely irrelevant because (a) everyone who understands protocols and programming knows that these features are straightforward to add-on later – just like the many, many features that have been added on to TCP/IP over the years and (b) there are other more urgently needed features (such as wealth preservation for people in countries with hyperinflation) which Bitcoin clearly already does provide.

    Today, Venezuela devalued the Bolivar by 32% (or 46% – depends what source you read).

    And the Argentine peso plunged over 12% in the last two days.

    Bitcoin was invented primarily to deal with this dysfunctional incompetence on the part of our sovereign currency issuers. Other things (such as chargebacks, and float, and nicely formatted accounting statements) will assuredly come also, for us lucky people in the first world – but just because the add-ons aren’t here yet today, is no reason to dismiss Bitcoin out-of-hand (as Yves appears to do in this comment thread).

    1. Yves Smith Post author


      The fact is that Bitcoin mining has migrated to players who buy highly specialized, high crunching power computers that eat lots of power. One even located in Iceland to assure access to sufficient cheap power. So this isn’t some wonderful decentralized “any guy with a box can mine Bitcoin” scenario. It’s already becoming capital intensive (the last quote I saw on the Bitcoin mining computers was $20K for one box). That means relatively few nodes. The “peer to peer” makes it sound more democratic than it really is. And mining will become more concentrated over time.

      You can analogize this to growing marijuana before it was legal: cops could often find them via the grow lights. Here you can find the miners via their power usage.

      1. ScottA

        Yes, but it doesn’t really matter if TPTB take down even say 90% of all the miners worldwide. (Which doesn’t even seem within the realm of possibility – if one understands the nature of peer-to-peer or decentralized network topology.)

        The remaining 10% would have enough mining power to both (a) continue mining the coins and (b) continue processing the transactions.

        What we need to bear in mind here is that – due perhaps to greed – this bitcoin mining )(and transaction-processing) network has, in the last five years, grown to the point to where it now has 200x times the computing power of all the supercomputers on the planet combined.

        Also, we should bear in mind that the “difficulty” of mining itself is an automatically adjustable parameter – which the network bumps upward or downward, in order to keep the whole thing running at the same rate (in order to generate the predetermined number of bitcoins as scheduled by the original Bitcoin spec itself – currently set at 25 bitcoins every ten minutes for this phase of its history).

        What this means is, now that ridiculously large amounts of hardware have been thrown at mining (a) there as crazy redundancy built into the system, and (b) the mining difficulty has automatically been adjusted way upwards to be sky-high – simply because that’s what the spec says: no matter how much computing power the overall network has, it shall generate, as a whole, 25 bitcoins every 10 minutes.

        Conversely, what this means, is that even if TPDB were somehow able to find, and destroy 90% of the bitcoin nodes currently chugging along out there – nothing serious would happen to the network. The mining difficulty would drop – to maintain the steady-state where 25 bitcoins were being generated every 10 minutes.

        (Ok, after such a massive drop in capacity, the network’s transaction processing power would indeed take a major hit. But nobody would lose any of their coins as recorded in the ledger – which is a very important point, and which would probably end up contributing to the kind of effect Nassim Taleb calls “anti-fragility” – the darn network would just continue to rear its head(s), hydra-like, again and again.)

        And of course it would be highly impractical, from a logistical / manpower / political standpoint, to even take out 10% of the nodes on the network – so my use of silly numbers like 90% was just that: really silly.

        Remember, they’ve been trying to do the same thing to the Bittorrrent network for years – big industry players, and big three-letter US agencies whose names I don’t even feel comfortable typing online… and what have they got to show for it? Nuthin’. The Bittorrent network currently accounts for 35% of total internet traffic.

        The reason this is so hard for many non-tech types to understand, is you may not really understand what the real ramifications of “peer-to-peer” or “decentralized” topology are in the context of computer networking.

        When there is no there there, where do you send the cops?

    2. Dan Kervick

      But while the ingenuity in devising the payment mechanisms is admirable, the monetary theories on which the coding was based seem, frankly, goofy. The designers seem to have swallowed a large dose of the thinking of some of the more poorly informed members of libertarian/Ron Paul school, and do not seem to have understood the fundamental fact that a dynamically evolving economy requires an elastic currency. Indeed, they seem to go along with Paul in thinking that the chief virtue of modern monetary systems is actually its worst original sin. They built in an absurd artificial cap on the quantity of bitcoins which means that bitcoin, given its current architecture, would be destined for a future of extreme deflationary pressure if this so-called “crypto-currency” ever caught on. (Which it won’t of course.)

      People in this obsessively anti-inflation libertarian camp come here and elsewhere frequently, ranting and raving about the loss of purchasing power of a single dollar over a century, and seem oblivious of the need to evaluate this phenomenon in connection with the dollar rate of pay for an hour of labor. They give the impression of believing that if the dollar had experienced zero net inflation over the century, we would all be rich now – rather than drawing the much more plausible conclusion that we would all be paid vastly fewer dollars for our work. They are good candidates for the silly bitcoin bug.

      The extreme volatility of the market for bitcoins is as good an experiment demonstrating “failure of concept” as one could ask for, since the number one quality that must be possessed by a viable medium of exchange is relative stability. For bitcoiners to to sneer at sovereign currency issuers over monetary volatility, when almost all of these currencies are far more stable than their wildly gyrating bitcoins, is somewhat ridiculous.

      I have been very intellectually curious about bitcoin. I have read quite a bit about it, but the more I learn about it, the less it impresses me. I honestly can’t see why any sensible person would want to conduct business in bitcoins other than to buy drugs. On the other hand, I don’t get too worked up about it since I regard it as just fad like ham radio that will enjoy a bit of a craze before dwindling into obscurity.

      Ultimately, we have a conflict of views on the foundation of economic health and financial stability. On the one side we have the Greenspans, the Pauls, the Randians and the bitcoiners who believe private enterprise is self-regulating, governments are evil and individual liberty is the key to prosperity and stability.

      On the other side there are people like me whose reading of history tells them that financial crises and economic failures have all been associated with a deficiency in government regulation and an excess of unregulated private enterprise. The most recent financial debacle is the result of government taking the restraints off the private sector in the 80’s and 90’s, which let all hell break loose in financial markets; let hucksters and cheats off their leashes; allowed a proliferating jungle of financial “innovations” to clog and choke the workings of the healthy and well-run parts parts of the economy; and permitted the growth of outrageous inequality and an out-of-control plutocracy.

      And yet the bitcoiners, and their fellow-travelers, want to move us even further down the road of unregulated personal license and ungoverned market anarchy.

      1. fadez

        “The extreme volatility of the market for bitcoins is as good an experiment demonstrating “failure of concept” as one could ask for, since the number one quality that must be possessed by a viable medium of exchange is relative stability. ”

        It is stupidly difficult to exchange bitcoins for fiat and vice versa right now in any meaningful way. It is every bit as difficult to e.g. short bitcoin or hedge bitcoin positions. In a global capital markets context, that means unavoidable, extreme volitility.

        Much will depend on regulatory developments in each jurisdiction, of course, but as more exchanges open and sophisticated trading options appear, bitcoin price volitility will greatly diminish.

        1. Dan Kervick

          If the viability of Bitcoin depends on the ease with which it can be exchanged for other fiat currencies then isn’t that a recognition of the failure of the whole alternative currency ideology that animated Bitcoin in the first place, and a recognition that its entire utility consists only in its use for hiding black market transactions, not as an alternative medium of exchange for the legit economy.

          1. fadez

            Personally, I don’t subscribe to the “Bitcoin will replace fiat” ideology, rather I see it as a global reserve currency operating alongside fiat. Its price will ultimately be measured against goods and services as well as other currencies. It’s a chicken and egg scenario, of course.

            To suggest its entire utility consists only in its use for hiding black market transactions is absurd – Bitcoin is in its infancy and that statement is already wrong. BitPay alone provides payment processing for over 20,000 merchants in some 200 countries – it has processed over $100m in transactions, none of them “black market”. Or perhaps you are referring to eg Snowden or wikileaks, who get the bulk of their donations nowadays in bitcoins (because, you know, it’s impossible to make such “black market” transactions using your bank or credit card).

  15. ScottA

    In other words, protocols provide primitives (retrieve this web page; send amount X from person A to person B)… and over the years apps provide add-ons that leverage those primitives to do other stuff (crop my photo on Facebook, post this comment on this blog, send this amount via PayPal, transfer X dollars from my bank to your bank – or, with Bitcoin: do a chargeback, extend me credit, execute a letter of credit agreement)

    If you had done your due diligence on Bitcoin at all, you would know that all these features – and more – are said to be in the pipeline – so you wouldn’t need to be disingenuously or embarrassingly complaining about the lack of such bells and whistles at this stage of the game.

    You should also realize that you’re actually not so special anymore for being distrustful – of tech, or of people. Everyone who knows what’s going on these days is just as distrustful as you – which is why the current “big thing” in searching for solutions to our problems is to find “trustless” solutions – ie, solutions where you don’t need to trust the developers, or the tech, or the other users, or TPTB. You bake the solutions – and the trust – into the tech (or the topology) itself.

    I know – this sounds vague – but here’s a simple classic example: double-entry bookkeeping. Or perhaps you’ve been in a country where, in most shops, you have to pay one person, and then another person is responsible for giving you your purchased item – this would be a “topological” solution, to prevent the employees from giving out free stuff to their friends. The point being – it’s often best to bake the solution into the tech, or into the topology – rather than trusting anyone. So you’re familiar with this approach. And it does work.

    So that’s the thing that you should be aware of, regarding trust, and your lack thereof: You’re not special in this way anymore. One of the main features of Bitcoin (or any other cryptocurrency with a chance at success), which is constantly talked about by the developers and users, is that it should – nay, it must – be built so that it works without the need to trust anything – not the code, not the developers, not the other users, not TPTB. (Well, you do trust the code – ie, you trust, but verify – because when it’s open source, and as the inventor of Linux said, “given enough eyeballs, all bugs are shallow”.)

    So that’s the ballgame these days. It’s being fought on the playing field of tech. Yes there is still a place for hand-wringing and sighing and observations and aperçus and cris de coeur and snark – but at the end of they day, either we tame TPTB, or we don’t – and we all know that mere talk ain’t gonna cut it – and as Chris Hedges has pointed out, in his comments on Black Bloc – violence won’t cut it either – so pretty much the only weapon we have is tech – so you better get up to speed in this area, to the best of your abilities.

    So when you sit there saying, “Haven’t looked at it much – but in general, I don’t trust tech!” (a) you are not being terribly original anymore, since distrust has become everyone’s default state and (b) you are not aware of the plethora of tech solutions being developed specifically with a view towards addressing precisely this now-universal concern about trust – all the good stuff stuff is deliberately and consciously and openly being developed in such a way that there is no need to trust anything or anybody in order for the damn thing to still Just Work.

  16. bob smith

    if you were Argentinian- would you rather own the peso, or bitcoin?
    Local gold might be sold out, or the government might impose stiff tariffs on gold imports.

    A local may be unable to purchase large cap multinational stocks- due to restrictions on brokerage accounts.

    is the rupee, the peso, or even greek euros easier to own, or a better store of value than bitcoin?

  17. Wilmotron

    “…the greater the negative interest rate, the greater the incentive to hold alternative coins. The greater the incentive to hold alternative coins ,the greater the incentive to produce them. The greater the incentive to produce them, the greater the chances of oversupply and collapse.”

    Claiming that there can be an “oversupply” of Bitcoin due to production is patently false. The algorithms adjust every two weeks to ensure that one block of Bitcoins is found every 10 minutes. If they’re being found faster than that, the difficulty adjusts to compensate. Currently, 25 Bitcoins is the reward for finding a block, which means 150 Bitcoins enter circulation every hour. The reward halves every four years, and it’s already halved once from 50. Again, this is all done algorithmically and without a central authority.

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