Why Google’s investors may want it to issue its own cryptocurrency

Let’s say a certain individual or corporation has generated a lot of value for society.  Its quality of product, service, or information is consistent. There is increasing demand for its product. Customers are enamored with anything affiliated with the product.

Now suppose this high value individual or corporation leverages its value by issuing a digital coin of its own. In the beginning it accepts this coin only along with fiat cash. During this phase, the issuing corporation decides to accept digital coin from other high-value corporations, say Amazon accepting Google-issued coin and vice-versa.

Other producers from manufacturers to farmers to utilities rather than issue their own coin or mine other types of coin may decide to accept coin issued by high value corporations, again based on the premise that the products, services, or information produced by these corporations is consistent.

To further maintain the value of the coin, these corporations would act like mini-central banks, capping the amount of coin made available and driving up the coins price. They could also increase exclusivity of their product by prohibiting the exchange of their coin for fiat cash.

I suspect the wealth class would like a wide moat around their investments. The ability to move their transactions to cyberspace and become mini-sovereigns with favorable tax treatment will be topped off by creating their own “consumer resort.”

And the four week fall in cryptocurrency prices helps allowing them to either short cryptos or merely pick them up on the cheap.

We may be at the beginning of a different type of fork where the wealthy will enjoy cryptocurrency derived from a decentralized platform while the “information poor” are stuck with a digitized fiat currency. It is still to early to see if that scenario plays out since, at least in the United States, the federal government has made no decision to regulate cryptocurrency as anything else but a payment system and there are no plans right now to develop a “fedcoin.”

 

Decentralization like anarchy is threatened by a fear of vacuum

China is increasingly its crackdown on the production of cryptocurrency including Bitcoin. Last year China prohibited the issuance of new cryptocurrency and today is taking the attack a step further by shutting down China’s mining network, a network reportedly responsible for 80% of the mining power behind the cryptocurrency production platform. It comes to me as no surprise that a severely centralized political economy would allow a value exchange system predicated on decentralization to go on about its business unchallenged. China appears to prefer nip the decentralization concept in the bud now versus following the rest of the world down the rabbit hole and the eventual violent repercussions.

What cryptocurrency investors in other tax and customs jurisdictions will eventually find out over the next decade is that decentralization or controlled anarchy is a temporary state of societal mind. Probably from the time tribes started to trade with each other and currency, property, trade rules, and contracts were put in place, anarchy has occupied the briefest periods. It takes little time before someone pretends to be Ghengis Khan and wants to “unite” the clans in the name of order and peace. The same thing, I suspect, will also happen with cryptocurrency.

I view corporations as privateers, licensed by government to ensure that government’s tax extraction system works smoothly on a day-to-day basis. Corporations create taxable activities by extracting resources, converting resources into inputs; converting inputs into final products, and selling those final products to end users. End users are employed during the resource extraction, organization, sale process and as employees are converted into payers of an income tax. Employees are also consumers and as such see the income taxes of business firms passed on to them via a sales tax. Corporations are the tax monetizers in the government tax receipts system and as such will do the State’s bidding when the State identifies a threat and calls on the corporation to help fortify it.

One corporation that will be called on to help fortify the State against cryptocurrency attempts at usurping State power will be the utilities. The utilities are the paragon of centralization and provide great game plans for any wanna be monopolist who wants to protect its turf. More important, utilities, especially in tax and customs jurisdictions where distributed generation has not taken hold, will be at the front line of the push back on cryptocurrency. Miners should not be surprised that the State cuts off their electricity. Last time I checked, digital equipment runs on electricity.

Another consideration is how the State will employ broadband providers in their crackdown. I see the State using net neutrality principles to force internet service providers to provide as much information as possible on the encrypted cryptocurrency data flowing across their networks. Net neutrality requires that internet service providers provide consumers with network management information as it pertains to the delivery of their services. I can see the Federal Communications Commission bringing its own action to force these companies to provide them with information on network activity as well.

And what is to stop the further broadening of the Communications Assistance for Law Enforcement Act by requiring that mobile and fixed wire broadband access providers participate where technically feasible in decrypting encrypted messages that contain cryptocurrency information? Congress will have to be moved by continued strategic communications geared to persuading members that the potential use of cryptocurrency by sex traffickers and drug smugglers warrants significant amendment to the Act to cover garnering information on cryptocurrency transactions.

All States are built on centralization. Whether a communist or capitalist model is only a matter of degree.

 

When Bitcoin becomes a transmitter of valuable information

Bitcoin is not for speculation. Bitcoin is about the transmission and exchange of valuable information attached to a digital currency that measures the value of the information. The volatility we are seeing in the market for Bitcoin is based on the fear of missing out on a pop in value.

I think in the near future what will eventually drive the value of Bitcoin is the underlying value of the information that the individual sovereign either possesses or can produce. It is likely that person A holding Bitcoin may look at person B who allegedly has some information, x, and determine that the person B’s information or ability to generate useful information has no value. Think of someone in London approached by someone from Somalia who wishes to trade in Somalian currency. The Londoner wouldn’t touch it.

You may argue that scenario already occurs in the real world, that trader A is not required to transact with trader B. In a centralized world, trader B would bring a discrimination grievance against trader A for refusing to trade. In a decentralized, voluntaryist cyber world, no matter how much cryptocurrency you hold, the value of your true currency, the information that you possess or can produce, will determine your digital currency’s value.

As for the speculators, the error they make is using valuation methods created in a centralized, coercive political economy to assess the value of a currency designed for a decentralized cyber society. A speculators are enjoying the upside of Bitcoin’s market appreciation, but as the currency becomes more expensive and reaches its 21 million digital currency cap, will these speculators be able to purchase any more of the currency? Or, will they be able to ride out the inflationary characteristic the coin takes on should it become a matter of two few Bitcoin chasing too many goods? Will lower income individuals who may have made their first purchases with their credit cards be able to recover the dollar value of the coin in order to pay off increasing interest rates?

Not to mention the competing currencies that will eventually knock off Bitcoin from its perch. As technology improves such that “information rich” individuals create their own cryptocurrency, individual sovereignty will be complete. Just like western nations trade with each other based primarily on similar values and culture, the information rich will do the same. As the value of their currency increases so to will the demand from vendors who will likely prefer hold in reserve the currency of the information rich versus the “information poor.”

I believe that the information poor or “information losers” who were lucky to get a few pieces of a coin in the early days will not be able to participate on either side of a cyber trade in the future. Their focus should be on building their information gathering tools versus pursuing a quick fix, get rich path.

Cyber space will remain decentralized by the silos created by the information rich will prove daunting for the information poor.

Bitcoin doesn’t threaten U.S. position as a tax and customs jurisdiction

Back on 16 November I posted a brief post opining on whether the federal government would go after Bitcoin, the cryptocurrency that has appreciated immensely in value this year. I wrote that if anything, the Federal Reserve would consider issuing there own digital currency. Federal Reserve Bank of New York president William Dudley alluded to the central bank issuing its own digital currency back on 28 November although nothing definitive has been set.

Readers should bear in mind that the primary role of the United States government is to conduct a resource extraction and protection scheme over its physical jurisdiction. To carry out these main functions it taxes citizens and businesses. Bitcoin is property and where an investor enjoys gains from the sale of that property, the United States Treasury will be there to collect. According to a 2013 report by the General Accounting Office, right now the biggest tax problem surrounding cryptocurrency is ensuring that taxpayers either investing in or using Bitcoin for transacting commerce are aware that they may be liable for taxes.

Fortunately for taxpayers investing in or using Bitcoin, the Internal Revenue Service does not have the resources to implement a tax compliance approach specific to virtual economies and virtual or cryptocurrency. The GAO recommended that at the least the IRS use a low cost information distribution approach, its website, to make taxpayers aware that they may be liable for income taxes as a result of investing in cryptocurrency.

Whether you agree with Warren Buffet’s assessment on Bitcoin, something that isn’t real and producing no dividends hence scheduled to implode, what’s real is that the Internal Revenue Service is ready to collect.

My instincts tell me the feds won’t go after Bitcoin … for now

The financial press has been focusing on Bitcoin’s rapid appreciation in value of late. The value of a single Bitcoin eclipsed the $7,000 mark a couple weeks ago. At the time of this writing, Bitcoin.com reported the cryptocurrency is selling for around $7,171 while its “fork”, Bitcoin Cash, is selling at $1,181.

Supply and demand primarily drive the price the currency. I guess it also helps that over 100,000 merchants accept the coin. A payment system driven by blockchain provides Bitcoin owners additional certainty about who actually owns a generated coin at a particular time. Also the near instantaneous payment is an attractive feature.

In my business, I focus on political threats and I see the Federal Reserve taking a parallel approach to Bitcoin as a payment system. One possible route is issuing its own digital currency supported by an enhanced payment system. A report filed last September by CNBC described a recommendation by the Bank of International Settlements that central banks consider issuing their own digital currencies.

Also, the Federal Reserve is in the process of revamping the payments process system. Bitcoin competes with at least two prongs of the Federal Reserve’s payments system: clearinghouse services and coin distribution services. Federal Reserve governor and Fed chair nominee, Jerome Powell, currently serves as co-chair of the Federal Reserve’s payments improvement oversight committee. I expect given Bitcoin’s growing popularity, the appeal of blockchain, and the concerns about using cryptocurrency for fraudulent purposes that should Mr Powell become Fed chair, improving the payments system and increasing the Fed’s ability to compete with innovative payment systems will remain a priority.

 

Net neutrality’s transparency rules do nothing for Bitcoin

As transparent as Bitcoin’s underlying block chain process is for Bitcoin users, there is still a need for protecting the privacy of the user when moving Bitcoin from seller to purchaser. Current net neutrality rules on transparency may negatively impact the need for privacy.

Experts at Bitcoin.org warn the crypto-currency’s use to protect the IP addresses used during Bitcoin transactions. Including an IP address on a website or social network site may not be a good idea if maintaining anonymity is crucial. Once a Bitcoin address is used to receive a payment, the address becomes traceable along with all other transactions associated with the address.

Further, according to Bitcoin.org, since the currency’s users usually reveal their identity’s in order to receive goods or services (like a Klingon or Romulan starship decloaks before firing), Bitcoin addresses won’t remain fully anonymous.

Question is, as investment in Bitcoin and transactions using Bitcoin increase, why would the Federal Communications Commission pursue a net neutrality regime that includes an intrusive transparency requirement?

Current net neutrality rules require that broadband providers disclose certain details about network management including disclosures about congestion management practices and the types of traffic subject to those practices. Proponents of the transparency component of net neutrality rules argue that these rules protect consumers against misinformation about prices, services offered, and data speeds.

What isn’t discussed by net neutrality advocates is the slippery slope that transparency embarks on when it comes to Bitcoin. For example, as more consumers use broadband, and in particular mobile broadband to conduct Bitcoin transactions, should we put their anonymity at risk by requiring broadband provides disclose information about the data Bitcoin users send?

Bitcoin could become mainstream over the next ten years especially given its use of the blockchain. Should intrusive transparency rules be allowed to slow down this train?