We have laws against counterfeiting for good reason. It is money for nothing. Well not exactly nothing.
Counterfeiters have to invest real money upfront to buy the paper, inks, plates and presses, and also spend on manufacturing and distribution.
Like any business, they have to do work and consume resources in order to make a profit. But who in their right mind would condone it as legitimate business?
Yet that is exactly what the producers of Bitcoin and the other Digital Currencies would have us accept.
Just like counterfeiters, Bitcoin ‘miners’ have to spend real money to buy computer resources and huge amounts of electricity to make Bitcoins. And, just like counterfeiters, they have to swap their fake money (Bitcoins) for real money and real resources to realise the fraud.
There is one difference, of course. With old fashioned counterfeiting, the person accepting the fake money is the unsuspecting loser. In this modern fraud, the person accepting the Bitcoins in payment knows what they are getting. So most smart businesses only use it like ‘reward points’, as a hook or discount.
To identify the real loser, we need to first understand: who benefits?
Certainly the miners who are continuing to mine Bitcoins benefit… but it is getting harder and more costly, so the reward is diminishing, especially with the drop in value from over $1,000 to around $300 per Bitcoin more recently.
But what about the first people in? No one knows for sure, because the pseudonymous developer of Bitcoin (Satoshi Nakamoto) has chosen to keep his real identity secret, but it is speculated that the he scored around one million coins when it was easy to mine them at the start, and his was the only game in town. On today’s price, for no more effort than writing a bit of code, he would now net $300+ million.
If they were sold at their peak, our shy counterfeiter could now be worth over a $billion.
But that’s not the end. In December 2013, Bitcoin investor Cameron Winklevoss stated that the “… bull case scenario for bitcoin is… 40,000 USD a coin”… making a return of $40 billion – if our anonymous developer has decided to hang onto most of his original haul.
In fact, that’s only the start. The idea of fixing their quantity (21 million) and making them highly divisible (each Bitcoin can be split in 100,000,000 units) and slow to issue (now 25 coins each ten minutes – halving every 4 years to 2140), means that if we are foolish enough to accept Bitcoins as currency, the value of a single coin will skyrocket – as each coin is split to facilitate day to day transactions. If we say that each unit is ultimately worth one cent, this would make each Bitcoin worth $1,000,000.
Doubtless the counterfeiter hopes and dreams we let this fraud perpetuate. If he is patient, and hangs onto most of his loot till we ‘normalise’ it as ‘currency’, we will end up handing over to him and his family $1 trillion worth of real money. I can’t imagine a better fraud!
The irony is that one of the beneficial features of Bitcoins sold to the public is that they cannot be counterfeited! What’s not said is that they are counterfeit to start.
It’s no wonder others have hopped on the bandwagon to create their own ‘Digital Currency’- with many keeping their identities secret. I suspect their shyness may have a lot to do with knowing the fraud they have committed and wanting to make sure they never get caught.
And, it’s no wonder the Bitcoiners are pushing for people to buy their coins and trade in them!
Imagine if, instead of ‘Digital Currency’… people had been selling wads of fake dollar notes.
Bitcoiners like to tell us they are ‘mining’ the currency, like mining for gold.
But gold has value as jewellery and for industrial uses. Digital currencies are just bits and bytes in a computer for sending messages.
That said; Digital Currencies do have a lot to offer. The problem is not with the digital nature of the currency. The problem is that it is issued to people who have not contributed anything to society in return for it.
This ‘unearned’ right to society’s resources goes to the heart of what money is for.
When you break it down, money is simply a token or record.
Its purpose is to tell the world that the holder has contributed value (by working or investing) equal to the amount shown on the token (eg dollar note), or recorded electronically (eg in a bank account)… and has not consumed that value.
The token or record also represents a promise by society to repay in kind, the value denoted by the money (token/record).
When a person spends money, they consume resources. Once they spend it all, they and society are once again square. The principle is: first contribute; then consume.
The idea is that, in general, we should all be able to take out of society what we put in. The exception of course is tax, which diminshes out take out.
Money is the tool that gives effect to the principle.
Ideally, money tokens should cost nothing to produce. They should also be immune from counterfeiting, theft or destruction. And, they should only be issued for ‘value’.
The problem then arises: how to introduce new money into the system to support the increase in value and volume of transactions – as the economy grows?
If we allow people to create money for their own use and ‘spend it into the economy’, it means those creating the money get a right to consume society’s resources they have not earned… as in the case of Bitcoins.
Currently, we get over the problem by issuing new money as loans that must be repaid.
This is not my contention. It is asserted by no less than the Bank of England and has been stated emphatically by Mervyn King, then Governor of the Bank of England in a speech to the South Wales Chamber of Commerce on 23 October 2012: “When banks extend loans to their customers, they create money by crediting their customers’ accounts”.
It is as simple as: Debit $100 Loan to Customer A, while at the same time entering a Credit for $100 Deposit in the name of the same Customer A. The bank stays in balance… but suddenly, out of thin air, there is new money that Customer A can draw down.
It works this way for a very good public policy reason. When new money is issued to a borrower, they’ve done nothing to earn it.
The loan contract requires them to repay it. But that is only the ‘money’ transaction.
In the real world, the advance lets the borrower spend up-front to consume society’sreal resources. In order to repay this actual debt (to society), over time, they have to contribute their talents and money to add further real value to society … equal to the amount of the loan.
When the loan is repaid, the money disappears back into the thin air from which it came. It exists only so the social contract (that you can take out only what you put in), can be quantified.
Once the loan is fully repaid, the borrower and society are again square.
In the case of Bitcoin miners, there is no such social contract. Like counterfeiters, the more Bitcoins they produce and the more people they convince to take them up, the more of society’s resources they can consume without ever having to work or invest – to pay back to society what they take out.
And this is not the only downside. As time goes on, the mining becomes exponentially more difficult… consuming huge amounts electricity. By some estimates, even if all miners use energy efficient processes, the combined electricity consumption currently would be around 1.46 terawatt-h per year – equal to the consumption of about 135,000 American homes. This cost will rise exponentially, as more people try to mine. And, as more people try to mine, the chance of success goes down. It is extremely wasteful of resources… to no benefit.
The whole purpose is to create money you have not earned… except as a counterfeiter earns: by ‘printing’ money.
It would be far easier and much less costly to simply arrange for the Reserve Bank to send an electronic message to my bank enabling it to credit a one followed by nine zeros to my deposit account. I will promise to spend the money into the economy, just like our Bitcoin developer. It’ll be quicker, it won’t needlessly use up terawatt hours of electricity and it won’t have the other downsides associated with Bitcoin (see below)
The whole idea that it frees us from the banks is nonsense.
The Bitcoin ‘nodes’ that record the Bitcoin block chains are little different to banks recording your money in a Deposit Account… except, of course, the nodes are not regulated. This means that Bitcoins are used for nefarious transactions to a far greater degree than real money. And, unlike a password to a bank deposit, if you lose the code to your Bitcoin wallet, the coins are lost irretrievably. As well, you cannot get a credit, as it is impossible to reverse a Bitcoin transaction. There are a whole host of other problems listed in Wikipedia.
Also, as soon as people start depositing Digital Currencies for on-lending, if the money is lent out unwisely, and especially fraudulently, we will still have to regulate the Bitcoin lenders, just like any other financial institution.
But why even try to regulate the counterfeiters as legitimate businesses?
The Australian Tax Office is right to treat Digital Currencies as goods and not Currencies. Treasury, the Central Bank and Federal Authorities should be treating them as illegal goods… because they are purporting to be money.
I suspect the reason why this has not yet happened is because few people understand the nature of Bitcoin or how it works, while those in the know are selling it as a wonderful new ‘financial instrument’ that will save us from those terrible banks. What they leave unsaid is how Bitcoin is enriching the anonymous developer and other early adopters – for doing no more than creating and selling an electronic message.
It is very similar to the way derivatives were sold to a naive world as a wonderful new ‘financial instrument’ to spread risk… in the lead up to the GFC. The only people who got rich in that little game were the sellers. With Bitcoin, it is the developer and to a lesser extent the later miners. And potentially the copy cats, if we allow it to proliferate.
We can’t stop individuals creating Digital Money, just like we can’t stop people counterfeiting dollar notes… but just like tradtional counterfeiting, we can make it plain that it is illegal to create it and illegal to knowingly use it. This may push it underground… but it is already used in criminal transactions. Making it illegal at least clarifies its immoral genealogy for the bulk of the population who should have no part in it.
However you look at it, Digital Currencies are a bad idea if they allow the issuer to create money for their own use. We’ve been through it before when banks issued their own currencies. This practice was stopped long ago for good reasons.
Let’s not repeat history, just because the counterfeit tokens are electronic and not paper.
Then let’s look at the positives of a Digital Currency, and design one that fulfils our social contract: so any new Digital Currency is only issued to recognise value already contributed, or as a loan that must be repaid. Just like real money.
Michael Haines is CEO and founder of VANZI (Virtual Australia and New Zealand Initiative), a stakeholder driven Initiative to develop the Digital Built Environment:
“An authorised enduring federated fully-integrated secure 3D+ computer model of the Natural and Built Environment (inside and out, above and below ground) on all scales required for decision making, together with all Legal Entitlements, for every property over time” – saving users $billions pa throughout the Property Cycle, from planning to decommission.