A chief attraction of Bitcoin is as an alternative payments system that greatly reduced transaction costs. That is to say, it is more economically than conventional payments systems and also as secure as cash (see
Bitcoin: Marc Andreessen Explains It All for You — A web visionary makes the case for virtual currency having world-changing implications by Harry McCracken). As a result, this is definitely going to happen, all the negatives notwithstanding because as long as Bitcoin is instantaneously convertible. Governments should just catch up with technological innovation. That could reduce or eliminate even the small transaction costs involved with converting Bitcoin. These transaction costs are unnecessary and unproductive economic rent. They need to go and if government won't act, then the market will.
The Financial Times | FT Alphaville (free registration required)
The time for official e-money is NOW!
Izabella Kaminska
20 comments:
The antiquated ACH and FEDWIRE system handle multiples of GDP each year in volume. The Credit card system is the peak of 1960s technology and handles what a 1/4 of GDP annually?
Bitcoin is open source, Perhaps the FED should sponsor a few projects and provide resources to investigate an adaptation of peer-to-peer payment system technology that could be used with the US Dollar instead of bitcoins.
From the outside, it doesn't appear the government is really interested in new ideas to decrease costs of transactions in the financial system. They seem more bent on helping the old guard maintain their oligopolies in payment systems. Fortunately, the economic rewards for reducing transaction costs, are large and go to those get there first.
I do not see how Bitcoin has a future since it essentially represents a fixed quantity of money. This has been and still is, a disastrous system. But then again, it might work well for those at the top.
"I do not see how Bitcoin has a future since it essentially represents a fixed quantity of money."
Mike - Bitcoin isn't a fixed quantity of money system, but I have had some exchanges with an expert on the subject who claims to have done extensive research on the subject for the past 2 years. He says the algorithms employed to mine Bitcoin from the internet are designed to mimic expansion of gold supply or about 2% per year.
Ed
the supply of bitcoins increases up to a certain amount (I think 21 million), and then it is fixed at that amount from then on.
Bitcoin has its issues but like Paypal it is a low transaction cost alternative payments system. Paypal made online settlement simple, especially for international transactions. Bitcoin is pared down from that. It's less expensive, faster, more secure and can handle unlimited amounts. Forget all the other stuff about Bitcoin and think payment system. China figured this out really fast and clamped down on it as part of its capital controls. Even though the fees are much smaller than through conventional transfers, they add up and entrepreneurs are rushing in to take advantage of it.
What the banks could do to counter perhaps is switch over to a small fixed fee for electronic transactions.... rather than charge the 2% or so that they do typically on credit card transactions. rsp,
Y yes its still natural rate of interest BS.
Y:
Exactly, the Kaminska article is garbage.
"What the banks could do to counter perhaps is switch over to a small fixed fee for electronic transactions.... rather than charge the 2% or so that they do typically on credit card transactions. rsp,"
Right, eventually they'll have to respond. Right now, alternative systems like PayPal operate through the banks via credit cards. A digital currency like Bitcoin would change that. The app is open source, companies like eBay and Amazon could just create their own currency/payment system.
We are just at the beginning of this.
The Bitcoin connection in Kaminska's piece is a total red herring. She's just trying to sell Kimaball's 100% electronic dollar proposal by making it sound something like the faddish Bitcoin.
The US already has electronic money. I have deposit balances at my bank that I can use to transact all of my everyday business without ever once withdrawing physical cash. And guess what? These electronic dollars are instantaneously convertible into dollars! Even faster than bitcoins! because they already are dollars!
So there is zero reason to conduct payment transactions in bitcoins if one is just going to convert into and out of dollars right away, unless one is seeking to hide illegal transactions: drugs, guns, trafficked humans, etc. The only other reason to acquire bitcoins is to speculate in the ongoing Ponzi market in bitcoin speculation. Kaminska bizarrely tries to present this kind of activity as some kind of virtue, since it it is directing what would otherwise be "destabilizing flows" of dollars into a Ponzi market. Has she lost her marbles? That's like saying that the Madoff scam was useful because it prevented Steven Spielberg's billions from destabilizing other markets in real goods and services!
The Kimball (and related) proposals are to move the country entirely to electronic money so that the Fed can set and maintain a sub-zero interest rate on loans and deposits. Since conventional paper currency carries a 0% interest rate, the Fed can't engineer a reduction of interest rates on deposits below the zero bound, since everybody would then just convert their deposits into cash. If all money were in the form of electronic balances, this restriction is (depending on the details) inoperative.
I think the supporters of these proposals have little understanding of what a total non-starter such a proposal is politically. They are seriously suggesting that the American people will consent to let their everyday money be turned into an adjustable rate asset, where the Fed gets to set the rate at will - even turning it negative if it so desires! Can you imagine the hell that would break loose if all of our money were trapped in the form of electronic balances, and then the Fed instituted negative interest rates and everybody started watching in horror as their money was vaporized before their eyes!? The Fed chair would be run out of Washington on a rail and thrown in the Atlantic Ocean.
It would also mean the end of the dollar, since the fact is that people will always want to save somehow, some way, and if the everyday payment medium turned into a nominal loss engine, and no longer functioned as a reliable store of value, people would rapidly convert out of it into some more stable asset. Smart foreign countries would allow US nationals to move into their currencies, offer favorable transaction fees and payment services, and pledge freedom from the monetarists' loopy negative interest shenanigans.
Finally, negative interest rates are a manifestly deflationary tool, since they would implement a continuous reduction of "Q" in the equation of exchange. Expected inflation would move into negative territory along with the interest rate, become expected deflation. The negative interest cowboys are betting that the sheer terror of disappearing money balances would result in an increase in "V" that offsets the engineered reduction in "Q". Dream on. For the reasons stated above, people will simply move out of such an incompetently and malevolently managed currency.
So there is zero reason to conduct payment transactions in bitcoins if one is just going to convert into and out of dollars right away."
Not really if you are paying credit card charges, bank fees, etc. even in the domestic economy. Businesses will accept Bitcoins if they can seamlessly convert then into USD for practically nothing. When international transactions are concerned, there is a huge advantage economically.
As I said, look at Bitcoin as an alternative payments system and you will see why it's a no brainer in an otherwise high rent environment. Business won't pay those rents if there is a safe and convenient way to avoid them, which will force down the rents on what other another. Either rents will come down to compete with Bitcoin, or Bitcoin will be come dominant or at least a major player. There's really a lot of $ involved here, which is why the entrepreneurs are getting into the game early to establish dominance.
And forget about the Kimball stuff, that's crazy. Only economists come up with that kind of thinking. Entrepreneurs follow the money.
It's less expensive, faster, more secure and can handle unlimited amounts.
Not more secure Tom. Bitcoin wallets have been hacked multiple times, and there is no legal recourse when that happens. So there is a substantial risk premium in using them. In order for the system to be truly secure, the government would have to monitor and regulate it, and have the power to identify participants in the network. And if that happens then the whole libertardian rationale for Drugcoin goes out the window.
It's just like any other money-laundering system. The system might have its benefits, but since it inherently involves mixing with criminals and shady characters who can't be trusted, it has severe drawbacks.
"Bitcoin wallets have been hacked multiple times, and there is no legal recourse when that happens. So there is a substantial risk premium in using them."
From what I can see, that's an exaggeration. If it were that prevalent, Bitcoin would gain no traction and entrepreneurs would not be flocking in.
Bitcoin is not an anonymous payment system like cash either. All transactions are on the ledger which is accessible. Read Marc Andreessen on his. Bitcoin will not replace cash in the black market.
Entrepreneurs are always flocking into something or other. They flocked into the Mississippi Bubble too.
By the way, if Bitcoin is so open source and low cost, then what exactly are these "entrpreneurs" investing in? Could it be that Bitcoin only becomes useful to ordinary non-crook folks when it has a secure private enterprise architecture of transaction services and guarantees built around it? In that case, all the fees come back in and it becomes just another PayPal.
I love how the rationales of Bitcoin continue to evolve as its enthusiasts abandon one debunked representation after another. First it was a "crypto-currency." Then it was an "investment." Now it's just a payment architecture. Let's see what comes next in the sequence of frauds.
Read the Andreessen piece in the NYT linked to in "Bitcoin: Marc Andreessen Explains It All for You — A web visionary makes the case for virtual currency having world-changing implications" by Harry McCracken (link above in my post). I don't link directly to the Times since it is behind a paywall, but they allow limited access with free registration.
"Bitcoin wallets have been hacked multiple times, and there is no legal recourse when that happens. So there is a substantial risk premium in using them."
I know two guys who each their Bitcoins wallets hacked and 2 Bitcoins stolen each at a time when Bitcoins was priced at about $15.
"the supply of bitcoins increases up to a certain amount (I think 21 million), and then it is fixed at that amount from then on."
y - Agreed, but my understanding is that Bitcoins are infinitely divisible which would seem to endow them with some degree of elasticity. Like stocks splitting.
"Bitcoins are infinitely divisible which would seem to endow them with some degree of elasticity"
In theory dollars are infinitely divisible too.
If you get to the point of having to divide basic units into smaller and smaller parts that means you're in a deflation. Bitcoin becomes completely deflationary once it reaches its maximum limit of 21M coins.
though fractional-reserve bitcoin banking could provide some elasticity in bitcoin-denominated financial assets after that point.
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