Bitcoin

Digital Wallets Will Destroy Central Bank Power by Enabling Seamless Currency Arbitrage

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Bitcoin
dailytech

One of the prerogatives of central banks is the ability to inflate government-issued currencies as a way to impose a hidden tax on the citizenry. (OK, neo-Keynesians call it "stimulating demand," i.e. people rushing to buy goods before the value of their money declines further.) But central banks may not be able to do this for very much longer.

Over at the New York Times, a fascinating op-ed, "The Digital Wallet Revolution," by Indiana University media professor Edward Castronova and Washington and Lee University law professor Joshua Fairfield, argues that the advent of digital wallets like the recently announced Apple Pay will dramatically reduce the power of governments to manipulate their currencies. How? By implementing seamless currency trading and arbitrage as an app.

The professors explain:

Apple's digital wallet, if widely adopted, could usher in a new era of ease and convenience. But the really exciting part is the fast-emerging future that it points toward, in which virtual assets of all sorts — traditional currencies, but also Bitcoin, airline miles, cellphone minutes — are interchangeable, opening up enormous purchasing power for consumers and creating tough challenges for governments around the world. …

Frictionless exchange is a killer app. Some companies might lose value in their loyalty programs, but others will find enormous value in issuing their own currencies for advertising or data-tracking purposes, or even just because the creation of a successful virtual currency or digital wallet lets companies make money by making money. That's certainly Apple's bet.

The revolution is what comes next: an exchange that connects and trades these different stores of value to find the most cost-efficient one to use, both within your wallet and between wallet users, worldwide. Let's say you want to buy an audiobook from Best Buy. It costs $16, or 1,000 My Best Buy points, or M.B.B.P.s. Your wallet contains several hundred dollars and 200 Best Buy points. The wallet software automatically determines that, at the current exchange rate between M.B.B.P.s and dollars, it is better to buy using the points. …

But then let's say you only have 50 M.B.B.P.s. The wallet system searches its clients and finds someone — call her Hannah — with enough M.B.B.P.s for the transaction. It buys the audiobook with her points and sends it to you, and sends Hannah dollars from your account.

Following Bitcoin's protocol, the wallet software broadcasts these transactions to the network, and every wallet in the world updates the M.B.B.P.-to-dollar exchange rate.

The idea is that you can buy anything, with anything. The wallet will find the best deal and execute it. In so doing, it will ignore the historical and cultural differences between dollars, points, coins and virtual property. It's all bits anyway…

This sort of digital wallet raises difficult problems for regulators, who rely on institutional intermediaries like banks as the point for monitoring transactions. But a digital wallet can be a phone app; just like the cash in your pocket, it doesn't require accounts with any intermediary. A wallet app can be written by anyone, downloaded by anyone and secured and maintained by everyone. In this huge river of money, there is no narrow channel from which the state can divert flow into its own fields.

Of course, governments will fight hard to stop this currency revolution as my colleague Brian Doherty points out in his article, "New York Tries to Regulate Bitcoin Right Out of the State."

The whole op-ed is worth your attention.

For more background, see also Reason TV's "Tech Visionary George Gilder: "Bitcoin is the Libertarian Solution to the Money Enigma" below:

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  1. opening up enormous purchasing power for consumers and creating tough challenges for governments around the world. …

    I sense a ban coming in the near future.

  2. But a digital wallet can be a phone app; just like the cash in your pocket…

    As long as law enforcement can still seize digital wallet assets during traffic stops in southern states if they feel that the contents of said wallet might someday be used for drugs.

    1. California and New York are the two states with the highest value of seizures.

      http://www.washingtonpost.com/…..and-seize/

    2. by Indiana University media professor Edward Castronova and Washington and Lee University law professor Joshua Fairfield

      Yeah, reading the excerpts of their article it’s clear these aren’t technical people, i.e. the computer scientists who are building all these new digital currencies. They simply don’t know what they’re talking about. Common, Ron, how about reading some better sources?

      1. “media” usually means “internet” in today’s academic jargon. Not saying you’re wrong in this case, just warning you that “media” doesn’t mean what it used to and the article writer or editor could have dumbed-down a lot of information to the point of uselessness.

  3. I see the IRS issuing a regulation requiring all such transactions be recorded in dollar equivalents and the ‘obligatory’ taxes automatically deducted.

    Reference this previous Reason article:
    “IRS Sets Sights on Frequent Flyer Miles, Hotel Points”
    https://reason.com/archives/201…..lyer-miles

    1. I was going to point out the same thing. There’s shitloads of regulation on loyalty programs. Pass a law saying these things are non-transferable (and most of them already non-transferable by the company’s rule anyway) and the example falls to shit.

  4. as a way to impose a hidden tax on the citizenry.

    Yet the US Dollar continues to gain strength since the Fed started buying bonds and gold is lurking near a 3-year low.

    No one is entitled to high savings rates. This entitlement mentality pissed me off.

    1. This is sort of like hailing a stock buyback program as a sign of strong stock performance.

      Of course if the fed buys US dollars, the US dollar is going to go up.
      But think about WHY they are buying US dollars.

      1. A US Dollar is a Federal Reserve liability. They are in high demand all over the globe.

    2. Yet the US Dollar continues to gain strength since the Fed started buying bonds and gold is lurking near a 3-year low.

      Yet the dollar has lost 98% of its value since the Fed was created.

      No one is entitled to high savings rates.

      Witness the mind of a central banker: not being robbed is an entitlement.

      1. Wealth is up from a few billion to $80 trillion since then. Real wealth, real assets, real income and structures, companies, trade value, and earnings.

        The US Dollar of 1913 was primitive.

        1. Prove that the Federal Reserve is responsible for any of that.

          1. Here are the goals of the Fed, all of which have been dismal failures:

            Fewer boom and bust cycles
            Price stability
            Maximum employment

          2. If we had the money supply of 1913 that growth could not have occurred. Even increased by amount of gold production it could not.

            You have the option. You can accumulate wealth in gold, dollars, or other real assets. The winners are the ones that choose the latter. The first two classes never do well.

            1. If we had the money supply of 1913 that growth could not have occurred.

              Citation needed.

            2. You have the option.

              I have the option of where to park my already devalued dollars. Lovely.

    3. But they are entitled to the market savings rate. And that is the problem.

      1. But Mr. Number One Capitalist doesn’t trust markets!

        1. Is Soros short the US Dollar? He is the best currency speculator in the world.

          1. Non-sequitur.

    4. “Yet the US Dollar continues to gain strength since the Fed started buying bonds ”

      Our three biggest trading partners our Canada, China and Mexico

      The dollar has lost 34% of it’s value vs the Yuan in the last 10 years.

      The dollar has lost 25% of it’s value vs the Canadian dollar in the last 10 years.

      The dollar has lost 12% of it’s value vs the Mexican Peso in the last 10 years.

      https://www.google.com/finance?q=USDCNY

      https://www.google.com/finance?q=USDCAD

      https://www.google.com/finance?q=MXN

      You’re statement is completely at odds with reality.

      1. I picked the day the Fed initiated QE (buying bonds/assets) in early 2008.

        You went back 10 years and the USD was in decline 2004-2008.

        1. LOL, ok let’s use 2008 as the starting point.

          The dollar has gained 16% vs the Yuan.

          But,

          The dollar has lost 9% of it’s value vs the Canadian dollar.

          The dollar has lost 21% of it’s value vs the Mexican Peso.

          So, no your statement is still not true.

          http://tinyurl.com/pgu9rcj

          1. Euro, Yen, Pound Sterling, etc, don’t count?

            1. You really are a glutten for punishment aren’t you. You’re wrong and you keeping doubling down.

              I listed our 3 biggest trading partners, that account which account for over twice as much trade as we do with the EU, Japan and GB combined.

              And anyway the USD is down against the Yen, since 2008.

  5. This makes sense except for one thing; computer networks has enabled seamless arbitrage amongst currency traders for a long time now. If that didn’t destroy the central banks, how will this?

    1. Because those were arbitrages between central banks.

      However, this wont destroy them either, as long as taxes are required to be paid in FedBux.

      However, however, I see this pressuring radical tax change. Of course, I have the obvious solution, but the Gmen wont find it.

  6. I was just looking at the Google Wallet tab on Google.
    I’ve never actually used one of these apps, but I have used PayPal, which seems kind of similar. Can you set up paypal to link together all your credit card rewards points and spend them like cash?

    1. I don’t know the exact answer to your question HM, but I just recently started using my phone to pay for gas at MAPCO via PayPal. They hooked me in with an additional discount of $0.02 per gallon.

      So, I’m using PayPal and being paid to do so.

      (I should note that the discount is on top of the MAPCO loyalty program, ie I’m getting a $0.05 per gallon discount).

      1. And Paypal sucks on charges to the retailer.

        1. I can’t say as I care much. It’s the MAPCO app that let’s me use Paypal, so it apparently doesn’t bother them.

  7. J: The idea is that arbitraging transactions must currently go through banking institutions which are regulated. Digital wallets may escape such choke points. We shall see.

    1. “Digital wallets may escape such choke points. ”

      Escape the IRS? That doesn’t seem particularly likely. If anything, I expect the opposite effect. That this digitalization will make it easier for the IRS to collect it’s pound of flesh. And since the amounts for any given individual are small, I expect most people will just shrug and except the slight raise in taxes.

  8. The professors(and you) don’t consider that the government can and will simply forbid these companies from having those kind of wallets or accepting bitcoins.

    Bitcoin will be banned. When it is banned it will be of little value, what will you be able to buy with it? The “libertarians” who promote bitcoin consider the possibility of the government engineering hyperininflation but don’t consider the possibility of the government banning bitcoin.

    1. the government

      There is more than one government.

    2. The value of bitcoin does not depend on whether governments allow it or not.

      If people wish to exchange them, they will continue to do so. BTC has less value if its only being exchanged in gray/black markets, but it will still have value. And not just “little” value.

      Right now, most of its value comes from remittance, not from literally buying stuff with it. Its a cheaper and easier way for foreign workers to send money back home.

      1. Most of it’s value comes from people buying and hoarding. Will it be cheaper and easier to send bitcoins out of the country when they are made illegal?

        1. The ease of transferring btc doesnt depend on legislation at all.

  9. Following Bitcoin’s protocol, the wallet software broadcasts these transactions to the network, and every wallet in the world updates the M.B.B.P.-to-dollar exchange rate.

    Sounds cool… but this doesn’t work without intermediaries (at least not yet).

    Dollars, as they are outside the Bitcoin protocol (as well as every other virtual currency protocol), have counter-party risk: you can’t make the above exchange truly peer-to-peer unless your faceless peer on the network can send you digital dollar scrip you can redeem for services and products at some later time (at the scrip’s face value).

    Why would anybody accept digital dollar scrip represented on your phone issued by Joe Blow who may be on another continent if those dollars are not verified to exist for use on the wallet network by, say, a bank?

  10. I don’t understand any of this so ban it!

    Seriously though the idea of millions of people having access to my “wallet” makes me nervous and I’m not anti-tech. How do you protect from hackers if your wallet is open for conversions?

    1. Trusted intermediaries? :)…

      Seriously, though, this article was full of wishful thinking and does not really understand how these new virtual currency protocols work.

      1. b: Interesting observations. I think the professors envision a kind of universal blockchain for currencies. With regard to third party risk – won’t the process of arbitraging will provide at least some information about whom you can trust?

        1. Universal blockchain for virtual currencies would be possible.

          But I dont see how physical ones get included without the trusted intermediary. And physical currencies have the issue of seizure, meaning no intermediary can be completely trusted.

          1. What about the size limitations of block-chains? Isn’t the theoretical maximum relatively small?

            1. “Block chain” wasnt literal. It was shorthand for whatever tech is used going forward. Something without the block chain limitation will replace it.

              1. Okay. Fair enough. But the physical scarcity and increasing calculation cost are both key elements of the value. If we remove the first part, the second needs to increase for this to be valuable.

          2. And physical currencies have the issue of seizure, meaning no intermediary can be completely trusted.

            Many are trusted enough for everyday commerce to function. But only because they’re in note form or are held by institutions the merchants’ payment network trusts.

        2. Well, yes, but then people will naturally drift towards institutions that have the highest level of trust (will you trust somebody who has done 10 transactions without a hitch in the past month or 1,000,000?)… and these institutions will simply become intermediary choke points on the network.

  11. Can you set up paypal to link together all your credit card rewards points and spend them like cash?

    Only if you’re crazy.

    FUCK PAYPAL.

    1. FUCK PAYPAL.

      What’s wrong with paypal?

      1. For a merchant, it sucks, as most costs for using PayPal — as well as Visa, MC, etc. — are hidden to the consumer (though the consumer of course indirectly pays).

  12. As much as I appreciate the concept behind Bitcoin, I wonder if it would be feasible to have a highly automated digital currency that works more like trade between nations; each participant could exchange their own “currency” for goods, and others could purchase goods and services from them in that currency, and complex automated arbitrage systems would work it out and pay for themselves by retaining part of the profit from doing so.

    Of course, it would make sense for such a system to start off with businesses being the original currency creators, and there might not be much reason for it to go much beyond that.

    It’s a little more advanced of a notion than simple store loyalty programs, of course. It’s more like if Best Buy points entered circulation as a tradeable payment to suppliers and workers (initially, perhaps, as a bonus payment in addition to dollars)

  13. For those of you wondering how this can happen, look at Ethereum.org. They are making this world possible, probably within a year. The first app people will know about will probably be the Ether lotto — a true distributed peer-to-peer lottery with almost no ‘house cut’, to compete with state-run lotteries and their 50% cut. It will be impossible to shut down (although winners could be arrested if they don’t pay taxes, and theoretically states could outlaw playing it — with no practical means of enforcement).

    From there, the world of tradeable micro-currencies (i.e., “loyalty programs”, “frequent flyer points”, etc) is a tiny step. The possibilities are endless, and will sweep the world much more quickly than most people are prepared for. Ethereum may not be the ultimate answer, but they are the first step.

  14. We are moving more and more away from annonymous Everything.
    Especially annonymous Transactions.

    At the end of the day, governments do have the ultimate control of infrastructure and backbones and can monitor anything and everything.

    When the NSA info came out that they were “spying on us”, I didn’t bat an eyelash. It’s exactly what I expected that our government was and is still doing.

    Annonymous currency won’t make it. Currency Will be Cyber-ish. Don’t get me wrong. It may even be called Bitcoin. However, the accounts will not be annonymous. The Gobmint won’t have it.

    1. This.

  15. Or you could just use specie for all your transactions. Then there won’t be any digital paper trail.

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