Monthly Archives: September 2017

The Bitcoin Bonanza

At the beginning of 2017, I could not have told you what Bitcoin or any other cryptocurrency are. While I now know of the many cryptocurrencies out there, the only one I have my eye on is Bitcoin. What I am going to summarize can be found in a very detailed and informative documentary on NetFlix called Banking on Bitcoin. If you want to learn more, I highly recommended the hour and a half to watch the movie.

Origins of Cryptocurrencies
In the 1990’s there was a group of super nerds (cypherpunks) that decided the central banking system as we knew it had too many flaws, and they were unhappy with governments role as the trusted third party. These individuals were concerned about privacy and individual liberties being threatened by the control of money.

If you boil it down, money is a basic accounting system of who owns what. For centuries now, governments have been the trusted third party as the issuer of currencies around the globe. What the issue had become for this group was whether or not the government should remain that trusted third party or should there be a peer to peer system where people can send money for goods and services without government regulation, fees, and the potential for corruption. The basis for the current cryptocurrencies in the market were being formed.

DigiCash came the closest to launching an e-commerce platform for money in the 90’s, but simply could not gain traction. Its founder realized the need for government and banks to get behind it to make it work and that abandoned the principles for which the idea was based upon.

A Collapse that Opens A Door
The financial collapse of 2008-2009 revived the interest in a new form of digital currency, due to governments complete and total inability to protect the public from corruption within the established financial system. Out of the group of original cypherpunks and all of the various ideas that came about, one name in particular rose to the top with an idea that we now call Bitcoin – Satoshi Nakamoto.

Nakamoto published a white paper on a digital currency on a peer to peer system, based on the ideas of others such as Nick Szabo, Hal Finney, and others and produced a viable working system that we now call Bitcoin. Cryptocurrency is effective making currency transactions using cryptography as a secure means. The backing of the peer to peer system is the blockchain, which is having the ledger transactions verified by the network of multiple computers operated by a consensus of individuals committed to an honest and verifiable system. The people are now called “miners” because they get rewarded for their work through the issuance of bitcoin. The miners and blockchain have no government oversite or regulation and the trust of those using cryptocurrencies are based upon this simple foundation.

The Blockchain
The ledgers are distributed worldwide and each Bitcoin transaction is verified, logged, and open to the public. The owner of the transaction is protected through encryption. The computers are independent and done without the oversight of a central bank and its network, thus the system is impossible to hack.

The miners that keep the blockchain going are the backbone. While the reward is Bitcoin for their work, without the miners keeping the system honest, it would collapse. Now, someone might think “I’ll just jump into Bitcoin mining!” Before you do, understand what the blockchain effectively does is super computing and the code that is read for the transactions is very complex. The miners invest in top line computers and bear heavy cooling and utility costs to maintain the blockchain. Those that maintain the blockchain are in it for the change to global currency and not necessarily as a business model.

Why the Government System is in jeopardy and why it scares the hell out of people
What Bitcoin offers is the first truly unregulated form of money the world has seen in centuries. All of the government currency systems and all of the traditional financial markets cannot control it. When you look at the areas Bitcoin serves – Africa, S America, large parts of Asia (including China), and the Middle East; these areas all have one thing in common: local currencies that suck, a lack of access to banks, and a large user base that wants the freedom Bitcoin offers. It is estimated that over 2.5 billion adults do not have bank accounts and hail from these regions. Bitcoin provides an opportunity for this sector to come into the financial world. Additionally, these areas usually cannot get or have a short supply of US Dollars, British Pounds, or Euros and Bitcoin offers the first available alternative and they love it. You could say that by ignoring this sector, governments and the established financial community have created their own nightmare. While it’s not big in the US or EU now, don’t count on it staying that way. As of this writing, a single Bitcoin is valued at $4865 to one US Dollar. That has the current Bitcoin market cap over 179 billion USD value and growing.

So why the concern from the established financial sector? They cannot control it or benefit from it. They cannot make fees or bastardize cryptocurrency. Governments cannot control how it is used. That is a basic rub that will not go away until they can control it.

So why did New York State begin the regulation burden? Well, like all new frontiers, some of the pioneers that come in are bad actors. Bitcoin was not exempt from this. The Silk Road, a site for buying illegal drugs online and anonymously was founded by Ross Ulbrecht, had Bitcoin as its main form of currency for transactions. Thus, the currency gets a black eye. The government finally cracked the code and arrested and hammered Ulbrecht.  Even though his servers were outside of the US and he was personally nabbed in San Francisco, the case was tried in New York – the epicenter for global financial regulation. That was done for a reason – to send a message. It was about the use of Bitcoin and having a purely unregulated market with no oversight was a threat to the establishment and would not be tolerated. I don’t advocate committing criminal activity, but why was this not done to the asswipes that killed the economy in 2008?

Then came Charlie Schrem and Bit Instant, which became a quick Bitcoin exchange. Where Bit Instant ran into issues was that it was US based, in New York, and thus came under the Patriot Act and the terms of knowing clients to avoid money laundering. If you want an idea of what true cronyism looks like, review the Patriot Act and what defines money laundering and what has to be done to avoid non-compliance. It is impossible. When one of Bit Instants (BTCKING) clients was found to be using the Bitcoin from the exchange to provide to its clients to buy products from the Silk Road. Schrem was communicating with BTCKING and found to have knowledge of its business. Schrem was arrested and tried and convicted for money laundering under the Patriot Act. Again, I don’t support the criminal act, but ATM’s have cash withdrawn every day that ends up being used to illegal purposes. Have yet to see one banker go to jail over an ATM cash related drug deal. Have you? The next day there was the first hearing in New York by NY Financial Superintendent Ben Lawsky on the regulation of Bitcoin…… Here is the question – how can the US issue regulation on a currency they don’t even recognize?

Then the MT Gox fiasco came along. Mt Gox had been formed to be an exchange and was originally formed in the US. However, the original founder did not want the US oversite and sold it to Mark Karpeles, a Frenchman living in Japan. It was the global leader in exchanging Bitcoin. About 2 weeks after the New York hearings, Mt Gox announces that over 750 million Bitcoin have been stolen or lost and that they are claiming bankruptcy. Mt Gox had over 6% of the estimated Bitcoin value in its care when this was announced. To this day, no one knows how this happened.

So, Bitcoin had some public mistakes that opened the door for government regulators to come into the arena and put their sticky fingers all over it.

Whoops, Here we go Again!
Within a year of the initial hearings, Lawsky’s department hands out the first outline for Bitcoin licensing in the spring of 2015. The application and process is enormous. Most Bitcoin companies left New York. Amazingly, due to the complexity of the application and its process, Lawsky left the New York Department of Financial Services to form his own consulting firm in May 2015. The firm specializes in helping companies navigate the process he helped make into law. Within a year of the new regulation, most of the other people that helped to draft the regulation had left NYDFS for consulting gigs in the private sector specializing on Bitcoin exchange licensing.  When will this crap end…..

Oh, and now you have Bitcoin licenses for almost every state to regulators can get fees. However, not all states are the same. Here is a list of the most friendly and most onerous to have a Bitcoin exchange in the US as of today: http://news.dinbits.com/2017/01/state-of-regulation-2017-bitcoin-and.html. My home state of Texas is the best place to do business.

Feds Still Ready To Hammer
On August 24, 2017, the SEC announced temporary suspension of publicly traded First Bitcoin Capital. First Bitcoin is classified as a “penny stock” due to its value. The SEC suspended this Canadian company (hmmm?) because the value went up over 7000 percent…. https://www.coindesk.com/sec-suspends-trading-publicly-listed-bitcoin-firm/.  Its not the first company with Bitcoin growth ambitions that the SEC has suspended and will doubtful be the last. Question is why? Hopefully I have provided you with the basis for rational debate on that.

The Future of Bitcoin
Is Bitcoin here to stay? I think digital currencies are here to stay and at the moment Bitcoin is king. Could another cryptocurrency knock off Bitcoin? If the government ties it down too much, then the answer is yes. The road map has already been plotted and the knowledge is there to make another one just as viable. Bitcoin is about freedom and once you have a taste of it, you don’t want to give it up.

Nor should you have to.

 

 

 

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