Bitcoin

Government Fears Bitcoin Will be As Awesome as Bitcoin Fans Hope It Will Be

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For a half-decade or so, crypto-anarchists, libertarians, and freaks of all varieties of anticipated that bitcoin will upend all the powers and principalities of banking both government and private, credit, and perhaps even the legal system, IP system, rideshare system, and stock market via innovative use of the blockchain technology underlying it.

This week a bunch of federal sources decided to tell Newsweek that they agree, though they are nervous as hell about it, not excited.

The story, by reporter Leah McGrath Goodman, begins with a bizarre and pointless lede about a southern African portmanteau currency made by white nationalists exclusively for whites, that is irrelevant to anything about the story and I'm not sure why it was mentioned at all.

From there, she reports via voices such as Juan Zarate, a senior adviser at Washington think tank Center for Strategic and International Studies; Joshua Baron of the Rand Corporation; Yaya Fanusie, a former counterterrorism analyst for the CIA; Bala Venkataraman, global chief technology officer of banking and capital markets for Computer Sciences Corp; and sources unnamed that:

hundreds of experts inside the nation's defense and intelligence agencies, as well as private-sector researchers in finance, technology and various think tanks across the country—some of them under contract with the U.S. government—are now investigating how virtual currencies could undermine America's long-standing ability to disrupt the financial networks of its foes and even permanently upend parts of the global financial system.

"Feature not bug" the cryptoanarchist edge of the bitcoin community—who are clearly becoming a smaller percentage of that relevant community since it's beginnings—might say. But Zarate lets us know federal law enforcement never wants to lose the ability to cut off its enemies via cutting them off from the legitimate banking system.

The creation of an all-computerized, potentially anonymous, electronic banking system via blockchain makes this harder, and makes the feds upset and nervous.

Rand's Baron told Newsweek that:

America's enemies appear to have far more access in recent years to the kinds of advanced technology and encryption tools that would allow them to potentially design a virtual currency that could circumnavigate the global financial system. "We are seeing a trend toward increasingly sophisticated cyberservices being put into the hands of unsophisticated players," he says. And while this may be handy for privacy-savvy Americans, it can make it much harder for the government and law enforcement to fight terrorists and criminals, he says.

Baron does not seem to believe bitcoin as it exists will be that all-criminal virtual currency, as "the currency's publicly visible ledger of transactions is too transparent to attract terrorists, criminals or enemies of the state" in the reporter's summation. Though Goodman does report that, unsurprisingly, at least one terror propaganda organization, The Ibn Taymiyyah Media Center, accepted bitcoin to fund its efforts.

Venkataraman of "Computer Sciences Corp., a digital information-technology company whose sister firm, CSRA Inc., runs the IT backbone of the National Security Agency (NSA)," told Goodman that "with the introduction of Blockchain, a disruption of the global banking system is inevitable" and "in a cryptocurrency world, you know who becomes the bank?…You and I. You become not just the bank, but the central bank. And that can have enormous ramifications for things like sovereign authority. By 2040, I think we may be fully transitioned over to cryptocurrency. I don't think anyone can stop it from happening."

My reporting from when bitcoin's dollar price first broke $500, in November 2013, with some background on its startlingly quick rise. It leapt above $1,000 for a bit, then dipped considerably but lately has been hovering between $700-800.

Bloomberg reports today that bitcoin was your best currency speculation deal for 2016. It "surged 79 percent since the start of 2016 to $778, its highest level since early 2014, data compiled by Bloomberg shows. That's four times the gains posted by Russia's ruble and Brazil's real, the world's top two hard currencies."

But its value as a speculative investment vehicle, while potentially lifechanging to the smart and well-timed, ought to pale before its value as a world-changer, and forces in the federal government seem to agree.

I reported the other day on the IRS's attempt to force large bitcoin exchange Coinbase to give up all sorts of customer identification.

Jim Epstein reported from Venezuela in a detailed feature in our January 2017 issue about how bitcoin's properties give people suffering under stifling socialism at least a hope of a way out.

NEXT: Judge Sykes, possible confirmation hearings, and sexual-orientation discrimination

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  1. “The story, by reporter Leah McGrath Goodman, begins with a bizarre and pointless lede about a southern African portmanteau currency made by white nationalists exclusively for whites, that is irrelevant to anything about the story and I’m not sure why it was mentioned at all.”

    I know! Call me, teacher!
    C’mon; it’s a way to demonize by innuendo.

    1. Ha, I had that copy pasted already and was ready to post when I saw your comment. Feigning ignorance is so adorable when done properly.

    2. Well, you’re right, of course … but seeking out associations with white supremacy, in particular, are also all the rage in journalism today.

  2. Russia’s ruble and Brazil’s real, the world’s top two hard currencies

    Could someone explain to me how the ruble and the real are hard currencies?

    1. I don’t remember the exact ratios. Simply put though. The USD is like 10:1. By that there is 10 USD in circulation for 1 USD equivalent dollar worth of gold(in weight). Where as the Ruble and Real, are closer to 3:1. Again, I don’t remember the exact numbers. Making the Ruble and Real stronger as a hard currency.

      1. I appreciate the effort you put into the explanation, I’m just not convinced that this is the case. None of the mentioned currencies are convertible to gold (at a fixed rate), so I don’t think that the gold holdings of the issuing banks make any difference.

        But thanks anyway.

      2. “Hard currency, safe-haven currency or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency’s hard status might include the long-term stability of its purchasing power, the associated country’s political and fiscal condition and outlook, and the policy posture of the issuing central bank.”

        https://en.wikipedia.org/wiki/Hard_currency

        I’m not sure where Doherty is getting his info from that puts the Ruble and Real above the Pound or the Dollar or even the Riyal or Won.

      3. The USD is like 10:1.

        I think the ratio is a lot higher than that. I’m not down with the technicalities, but USDs are technically issued by the Federal Reserve Bank, not the US government. The dollar is backed by assets owned by the FRB, mainly Treasuries, and may not even be backed by gold at all.

        Even if you throw in the gold owned by the US government, I’m not sure what the ratio would be – its not jumping out of Google – but I think its way higher than 10:1.

        1. From the Federal Reserve’s FAQ website:

          Does the Federal Reserve own or hold gold?

          The Federal Reserve does not own gold.

        2. The US Treasury claims to own 261,498,926 troy ounces of gold.

          At $1200/oz, that’s would be worth around $310 billion.

          The Federal Reserve reports the M1 money stock at $3.1 trillion.

          So, it’s about 10:1 … if the Treasury actually owns unencumbered gold in these quantities and M1 is used for evaluation.

          However, M2 is about $13 trillion, which suggests a ratio of 42:1.

          Gold holdings of $310 billion really aren’t particularly impressive when the government is $20 trillion in debt.

          1. I thought the ratio for M1 would be higher, but the math is the math.

            Because we have fractional reserve banking, though, I suspect that backing only M0 or M1 would be pointless, as it would leave the rest of the actually used money supply (M2, etc.) unbacked and you’d get the same collapse if we were forced to a hard money financial system.

            Anyone who thinks the Treasury’s gold is unencumbered needs to have their head examined, IMO. There are persistent questions about how the amount of physical gold actually showing up in the markets can outrun the gold coming out of the ground for decades on end, unless it is coming from the central bank “reserves”. But the whole point of gold is that it is anonymous and untraceable, so its really hard to figure out where the disconnect really comes from.

      4. I think that “top two hard currencies” means the two currencies that appreciated most vis-a-vis the USD in 2016.

        I think the writer thinks that “hard currency” means that it is legal to use the currency in foreign exchange outside of state-controlled banking systems. There are a bunch of countries where you can’t take even take currency out of the country or exchange with an unauthorized dealer at a negotiated rate.

        1. Hard currency used to mean a currency that was redeemable in gold or silver specie.

          There are no longer any hard currencies on the planet.

          So, the definition of “hard currency” has been diluted just like the currency itself.

          1. the definition of “hard currency” has been diluted just like the currency itself

            Nicely said.

          2. Technically hard currency is any currency that is is backed by any commodity good, not just gold or silver. Really the idea is “is the currency governed by the free market or not?” I know it’s pedantic but this is econ so it’s OK to be pedantic.

  3. pointless lede about a southern African portmanteau currency made by white nationalists exclusively for whites, that is irrelevant to anything about the story and I’m not sure why it was mentioned at all

    Because Newsweek consists of a pack of goddamned bootlickers who feel compelled to hint that anything the government doesn’t like is evil.

    -jcr

  4. the legitimate banking system.

    Or as it’s known to those who value their privacy, “the 100% surveilled legacy banking system”.

    -jcr

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