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Bitcoin: When the End Began
No Stopping Innovation...
Commodities Futures Trading Commission?
No doubt, many of you have perused the latest headlines about and Crypto-Currencies, in general. During the latter part of 2015 and now into 2016, two really interesting pieces of news came out. Bitcoin
One piece was about how major banks are now 'publicly' admitting that they are attempting to use the '' technology.1 This was not a revelation. The ability of the technology to reduce costs associated with currency transfer is well documented. blockchain
Another piece of major news came from the Commodities Futures Trading Commission (CFTC).2 The CFTC now firmly asserts that Bitcoins and all other virtual currencies, are in fact, commodities. This news was also expected. But is Bitcoin and are all other virtual currencies really commodities? Has the CFTC has taken liberties with their own regulatory playbook.
The Phases of Bitcoin Regulation in the U.S.
Investigations by government bureaucracies leading to calls for regulation (SEC, IRS)
Banking Industry begins to use blockchain tech for higher profits
Commodities Bureaus begin to over-regulate existing 'private' virtual currencies
What do you think?
Is Bitcoin any type of "Commodity"?
Phase I: The Apparatchik Investigations
FinCEN and the IRS, step in.
We noted, when FinCEN (Financial Crimes Enforcement Network) Director Jennifer Shasky Calvery decided that [private] virtual currencies must comply with U.S. money transmission laws. Laws which are supposed to protect us from criminals. Laws which allow the assigned bureaucrat to investigate all of our financial dealings.
Bitcoin thwarted FinCEN's ability to see and verify all monetary transactions. This could not stand...according the FinCEN 'Calvery'.
We moved on, when Chief Criminal Investigator Richard Weber, of the glorious and exceedingly efficient Internal Revenue Service (IRS), referred to the "wild west" environment of virtual currencies and how the current financial system could be eroded by criminals. As if criminals would not erode a system of fiat currencies.
The Securities and Exchange Commission (SEC) also chimed in with, guess what? Bitcoin is a "security," like a stock.
We hoped that the regulators were done. But they are never done. Not until they have as much 'regulation' as possible. They do this, allegedly, to protect the public. After all, why would anyone want a private currency, one which is theoretically immune to devaluation. Why would any citizen want control over his own finances?
(See more about Phase I in this bitcoin hub if you want more background.)
The FED Eagle
Phase II: Bank - Government Assimilation
We scoffed, when the 'Big Nine' Banks joined to create a 'blockchain' partnership, knowing that they would not open their books to us, like the Bitcoin network allows us to view every transaction - allows us to see how much currency actually exists.
Goldman Sachs? Barclays? Why should we care? Will they actually allow us to download our currency like you can with Bitcoin? Will they keep our currency in a decentralized ledger, allowing 'the people' to control their own funds? Allow everyone on earth to verify each others transactions?
When Bitcoin was created, Satoshi Nakamoto, the programmer(s) of the system, specifically referenced the lack of government responsibility when, in the Genesis Block, a reference was made to government bailouts.3 This was a deliberate message and a lesson. Government Bailouts (the message) will collapse the economy (the lesson). Maybe 'Satoshi' was sitting home, tapping on his keyboard and reading 'The Times'. (See photo above.) The words in the Genesis Block seem to fly off of this news sheet.
When Bitcoin met big banking, the 'regulated' financiers joked about it. It was a minor player. Not enough currency flowed via the networks.
Former FED Chief Alan Greenspan called Bitcoin a "bubble." Then they, most certainly sicced their apparatchiks upon the whole idea of private currency. They, the banks, cited the numerous regulations regarding 'money transmission' and in short order, Bitcoin was labeled 'money'.
Meanwhile, back at the ranch...banks reached out to FinTech as the current Crypto players, such as Coinbase, were saddled with seemingly inexplicable regulations. Regulations which all banks were already well versed. This head-start should have enabled the banks to outpace the Tech wave, but it did not. Banks pushed ahead anyway. They are still attempting to harness the engine, so to speak.
Their investigation of the blockchain technologies led U.S. banks to understand that should the Bitcoin Ecosystem grow unchecked, even having been saddled with 'money transmission' laws, they might just lose the battle of the finances and what was more, if they lost, so would the U.S. Dollar.
It was a bitter pill. The future, as it often comes, was upon them. How could banks turn it around, if they could not hold the line? Join them - then beat them? Perhaps. But was it not like the Bitcoin Mouse versus the Big Bank Elephant? Who had the advantage?
One such attempt to join them began with companies like Western Union. Already failing by degrees, Western Union made forays into the high tech world of digital finance, maybe out of desperation or even from some semblance of foresight. It warmed to the idea of crypto-currencies and Ripple Labs.4 Unfortunately, but the jig is not yet up, the fledgling company of Ripple Labs was fraught with internal struggles and later, legal scrapes with former founders.
Jed McCaleb actually created the Ripple Currency (XRP's), but then he left to found Stellar, a near clone of Ripple5. Why Western Union moved in Ripple Lab's direction was debated, but all appearances seemed to indicate that the centralized structure of the monetary units (XRP's) certainly helped.
This was always an issue with the Bitcoin 'Purists'. The fact that XRP's were no better than fiat dollars, with regard to their lack of privacy and inability to thwart fiscal controls as applied by government agencies. Bitcoin, by contrast was light years ahead, but also, at heart, just another fiat currency.
While some software programmers, turned financiers, plied their new found freedom as 'money transmitters' in the U.S., the banks watched. Things were not working out as planned, however. Some of the biggest Bitcoin/Crytpo Exchanges, including many foreign ones, such as BTC-e, just keep right on transmitting crytpo-currencies.
In the U.S., anyone still brave enough to buy or sell Bitcoins or any Crypto, from any 'exchange', not only had to worry about taxation, the ever present drain, but if the 'exchange' was in compliance with their Federal Guidelines regarding the transmission of money. Things became so ludicrous that even a guy in France wishing to sell a Crypto, was required to comply with U.S. mandates, should his customer be in America. Fortunately, many foreigners who lived in much harsher financial climates knew how to deal with oppressive regimes. They ignored the U.S. Regulators with technologies always a step ahead of the inefficient Goliaths of government.
But, behold, there were entities already positioned to utilize the 'money transmission' laws in this land we once called America. Our banks, who are not our monetary oppressors, but merely extensions of the fiscal apparatchiks at the FED, were uniquely qualified and ready to take the reigns of the future. They assured themselves, after telling us repeatedly that Bitcoin was a 'bubble', that Bitcoin would fail, that Crypto was dead - that they could utilize this new and wondrous technology for the benefit of the bottom line...er...the people of this great nation.
The banks then gathered together at the New Jekyll Island or to most of us, the R3 Detente, to render the blockchain onto Caesar.6 The FinTech waves were to be damned. What a bitter moment for Bitcoin.
Did the R3 Detente save the day or simply prolong the crumbling American fiat currency system? Time will work out the details. But what do we know right now? Who are these R3 people? Well, they are New York based FinTech firm backing big banking. R3 CEO David Rutter is apparently looking into the 'blockchain' system for the 'Old Guard'.
What tech will the banks use, according to R3? Ethereum7 was one such idea. Maybe banks could issue Commercial Paper therein. But how will they guarantee that a blockchain, created by private programmers, will keep the 'paper' safe? How will they trust a 'public' ledger? Would not such a ledger enable anyone, including other banks to 'see' how much 'paper' was issued? Knowing this, could other banks, not so keen on FinTech, use this information to their advantage?
And if Ethereum is used, how will banks comply with new commodity rules regarding 'Ether', an alleged crytpo-fuel...not a crypto-currency? Who is Vitalik Buterin, Ethereum's founder and Guru in situ, trying to fool? Even the Federales know it's money or is it a commodity...er...whatever.
In any case, aside from Barclays and Goldman Sachs, JP Morgan, State Street, UBS, the Royal Bank of Scotland, Credit Suisse, BBVA, the Commonwealth Bank of Australia, and The Bank of England are reportedly investigating blockchain technologies. Go figure.
But do the banks need a little more time to integrate the blockchain tech?
Enter: (Stage Leftist) the Commodities Regulators.
Phase III: Commodities Regulation
Next, in the long line of ubiquitous government apparatchiks? The Commodities Futures Trading Commission (CFTC). Welcome, comrades.
But is Bitcoin, an electronic code, a commodity or money or both or neither? If it's a code, then all such electronic codes, including the ones sent to your cell phone are also money/commodities. Every satellite signal and every digital radio broadcast? Money. Commodity. You say no? Why not? Because they do not function as money or commodities where as Bitcoin does. Ah, there's the proverbial rub. Form follows function. Didn't Frank Lloyd Wright say that too?
Bitcoins are scarce digital commodities, according to New York Law School Professor Houman B. Shadab.8 Shadab's paper can be found on the cftc.gov. It outlines facts surrounding the growth of Bitcoin, how it should not just be considered a software application, and how, if regulated, the price of Bitcoin could stabilize.
I guess it's like 'Shadab' magic. After all, 'real' commodities are so very 'price' stable. Seriously. What is stable about any commodity in the U.S. Derivatives and Futures do help to an extent, but they can not stabilize prices long term. They can spread risk. They can guarantee a future price, but stabilize it? Did Shadab take economics in Saint Petersburg...Russia? This is not about stabilization. Don't take your eye off the ball: Bitcoin. This is about "strangulation". Not "stabilization."
Particularly, Shadab focuses on the futures and derivatives trading, which is already available, unregulated, within the Bitcoin Ecosystem. The idea is to reduce fraud and market manipulation...by total control? But part way into his diatribe, Professor Shadab indicates that the CFTC is not itself certain if Bitcoin is a commodity. If so, why is CFTC regulating it?
Shadab gets around this conundrum by playing the middle. He indicates, citing CFTC guidelines under the intangible commodities section, that Bitcoins can be owned, even if they are digital in nature and what is more, they can be "consumed" sort of. In other words, Bitcoins can be spent and that is kinda like consumption. Remember that, next time you drop your quarters in the soda machine, they were "consumed".
Just to make clear, according to Wikipedia, an Intangible Good can be something like downloadable music, software and mobile applications. Perhaps we require a different classification for digital goods. Don't worry Tinker Bell, the CFTC won't try to regulate your "fairy dust".
He who controls the money supply of a nation controls the nation.
- James A. Garfield
(2oth President of the United States)
Conclusion: "The Double Whammy"
The U.S. Government and its various organs, have failed to regulate Bitcoin, thus far, with any measure of success. Digitized music and movies, software applications produced by Bill Gates and Club, currently exist in the fiat world. They, the producers of these "intangible goods" must be remunerated, if they are to survive - if they want to sell their soft-goods.
But Bitcoin and the rest of the decentralized applications, harnessing the power of secret codes, trusted by using shared ledgers, downloadable by anyone, eliminates the risk of manipulation and interference by the apparatchik. They do not like this.
And so they needed a new tool. If the first tool failed, try the next. If you call it money and require conformity with all U.S. money transmission laws and it fails to work, try, try again. How about that other thing. You remember: the "commodity" hammer. "Sounds good Jethro, let's do some pounding." It's the "Double Whammy".
Remember how they work. The time honored playbook. They "investigate" the growing, "wild west criminal problem", using "spin" as much as possible to fan the flames of dissent. Seeing that the problem is actually a blessing in disguise, they adopt the system, naturally and miraculously, eliminating the threat of criminality.
Next, having created a playing field where the new system (the blockchain) can thrive, with our fine collection of low payed brokers, only molested and controlled to the 'Nth' degree, they begin to uproot the "criminals" who dare to use the same system, absent their spying eyes.
Next in line? Watch for the raids on the Bitcoin Exchanges in America...the ones which are still thumbing their noses at Uncle Sam. After that? Wait for the warnings. Warnings about buying or selling Bitcoins, without a broker. Warnings about downloading Bitcoin software, logging onto foreign websites, using TOR and wearing your sunglasses while surfing the net. (The NSA needs to get a clear facial shot and hear stuff. They are here to protect and serve.)
The follow-up? Select individuals, such as Bitcoin Millionaires, questioned by "officials" seeking information about where they bought their Bitcoins. But this is only a guess... Any Bitcoin rich care to chime in?
For those of you who think regulation is a Godsend to Bitcoin, welcome Comrades, you deserve what you get.
Bitcoin - as in the group of individuals - the world over, does not give a crap about American regulations. It will "move on". Mark my words, Alan Greenspan...and the tech of it will evolve.
Could crypto-currencies be a bridge from centralized monetary systems, to decentralized ones...then a way back to sound money?
Sources / Photos
1 Kelly, Jemima, 'Nine of the world's biggest banks join to form blockchain partnership', REUTERS, September 15, 2015
2 Kawa, Luke, 'Bitcoin Officially a Commodity, according to U.S. Regulator' Bloomberg Business, September 17, 2015
3 Bitcoinwiki, 'Genesis Block', Accessed September 18, 2015 (with photo of 'The Times')
6 Bagwell, Tyler E., 'The Jekyll Island duck hunt that created the Federal Reserve', Jekyll Island History, (Accessed September 18, 2015)
7 Ethereum.org (Accessed September 18, 2015)
8 Shadab, Houman B., 'Regulating Blockchain and Bitcoin Derivatives', U.S. Commodity Futures Trading Commission, October 9, 2014
- Bitcoin Logo: By Web-dev-chris (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons
- Department of Treasury Logo: By United States Internal Revenue Service (United States Internal Revenue Service) [Public domain], via Wikimedia Commons
- FED Eagle: By dbking (originally posted to Flickr as IMG_2923) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
- Ethereum Logo: By Poridge123 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons
- Uncle Sam: By James Montgomery Flagg. (Cartoon by James Montgomery Flagg, via ) [Public domain], via Wikimedia Commons
© 2015 Jack Shorebird