Bitcoin, crypto-currencies, state power strategies

bitcoin

This report was initially published in the GEAB 111 / January 2017

Crypto-currencies, of which Bitcoin is the most popular, are “virtual” currencies devoid of any physical reality, possessing an electronic form and functioning by using cryptographic methods. They are used specially as a means of payment in an innovative decentralised peer-to-peer system. With the Bitcoin and the other crypto-currencies, one can buy everything from food products, company shares, to false driving licenses and even Kalashnikovs.

fig0001Figure 1 – Source: Journal du Geek. The most purchased items in Bitcoins

It all goes back to the subprime crisis in 2008/2009, when the monetary, financial, banking and stock market system broke out in a crisis that threatened to upset the world system as we have known it since 1945 and which our GEAB team has reported on since 2006. A systemic global crisis that would drag the economic and financial world into abyssal depths never before reached, sweep away many of its players and de facto force institutional powers (states, central banks, European or international institutions such as the IMF …) to strengthen the control of this parallel universe(s) and financial repression in order to save what could remain of the sovereignty of their currencies, to face the foreign exchange war, to ensure the control of the movement of capital , to bail out debts and balance sheets, mainly on the back of taxpayers and with austerity policies imposed on the people.

It is clear that, just ten years later, the world has indeed woven its web of conventions and regulations on transparency, chasing tax havens, combating fraud, withholding taxes, imposing financial sanctions, tightening the rules governing the movement of capital and money, exerting greater control over financial activities, etc., without, however, fundamentally reforming the intermediaries (banks, financial institutions, etc.) all resting on the games of the central banks, which create the fiat currency, and hence the processes and costs associated with it.

All this is reason enough to the pioneers of “virtual money” who have, above all, sought to create alternatives to this disruptive system, at a lower cost and rapidly, without intermediaries, respecting anonymity by dealing only on the Internet and peer-to-peer.

Created in 2008, the Bitcoin was introduced in January 2009[1]. Other virtual currencies, or crypto-currencies, such as ‘alternatives’, ‘social’, ‘solidarity’, ‘shopping’ and ‘local’ (see below) will emerge, with new tools of exchange, applying the same technology (or similar) allowing them to offer services without intermediation and equally out of control[2],

Emancipation of the real economy – the transformation of the financial sector – the end of the monopoly of banks?

Initially, the idea was to emerge from a corrupt system that had triggered a devastating domino effect on all sectors – economic, financial, political and social – to allow for the stabilisation of the world financial system and create an alternative system that could not be usurped by speculative and corporatist interests: exchanging currency without going through a bank, making the banks obsolete[3], just as the internet has made the newspaper obsolete. But the idea was also to offer a new generation of money transfer services, new payment or transaction systems, global (such as Bitcoin) or local (such as local virtual currencies), sectoral currencies (such as “social”[4], simple (favouring peer-to-peer), accessible (Internet), competitive (without intermediaries), reliable and anonymous (using sophisticated cryptographic technology, blockchain[5] to “decentralise” and “democratise” the financial system, respond to the deficiencies or obsolescence of traditional banking services, particularly in certain regions of the world. For example: In African countries, where 75% of the population does not have a bank account[6] or, another example, the Philippines, the third country in terms of home remittances[7].  All that is needed is an Internet connection, and even the most remote villages are now interconnected, to access a complete and competitive online system, to make transfers for free and instantly, or payments (even if the crypto-currency itself has no fiduciary value).

Serious competitors to banks and financial institutions, crypto-currencies have nonetheless inspired the latter in the development of new products and services of financial globalisation. Even if Bitcoin alone holds a market capitalisation equivalent to 80% of the other crypto-currencies in the market[8], the financialisation of Bitcoin start-ups alone by institutions in the global banking and financial sector would amount to billions of dollars since 2012/2013[9]. Moreover, many players diversify their own portfolios and that of their customers with Bitcoins or crypto-currencies[10].

When the world adopts the blockchain…

The information storage and transmission technology used by Bitcoin, which is transparent, secure and operates without central control, creates a real revolution in all business sectors and well beyond the banking and financial sectors that have already embarked with frenzy in the race [11] under the relatively benevolent gaze of public authorities[12], including all the states in the world. Improving the fluidity, speed and flexibility of administrative services, the power to curb bureaucracy and paperwork are highly valued advantages in a globalised and interconnected world. Even if these developments are recent, examples of states embarking on this transactional system, not only for fiduciary purposes, abound, as the Russian government, which has studied its use for paying wages [13], Sweden which launched its land register[14], Kenya to combat the falsification of diplomas[15] , or Tunisia, which will be the first African state to launch its digital currency[16]. With these new elements, we are entering the era of crypto-finance, which is also accompanied by new products, such as “crypto-bonds”[17].

“If you cannot defeat them, join them. “

The “darknet”, cyber-criminality and “shadow-finance” love Bitcoin and the crypto-currencies

What we see of the Bitcoin is only a part of the submerged part of the iceberg of anonymous encrypted “monetary” networks[18]. The so-called darknet loves Bitcoin and crypto-currencies. The network serves as a cover for many illegal transactions, all in anonymity, and as an exchange communication tool to the vast world of cyber-crime and mafia. Like many other products, drugs and weapons circulate freely via Bitcoin transactions and other crypto-currencies. The ‘Silk Road’ is cited as an example of the Amazon or E-Bay of drugs and weapons[19]. But other virtual markets are regularly created to offer all sorts of illegal products, transaction laundering, pirated data, and so on[20]. The creation of Monero, which develops an even more sophisticated technology than Bitcoin, offering zero traceability, perfectly illustrates the stakes[21]. There is therefore a need for intervention by the judiciary to prosecute, sanction and dismantle these structures and tools.

But it is not only receivers, pedophiles and arms suppliers who use crypto-finance. Bitcoin and crypto-currencies offer platforms and heavenly niches: flight of capital and tax evasion, finance hunted in the real world escapes through the gates of the virtual. Crypto-currencies offer the loophole to circumvent customs duties, exchange controls, taxation[22]… The Chinese government recently paid the price for the announcement of new measures on the control of capital movements, causing a rush on the Bitcoin and a uncoupling between it (which will reach a record level) and the yuan[23].

fig0002Figure 2 – Source : ZeroHedge.

The Bitcoin and the crypto-currencies, instruments of a new monetary war?

The currency war is not exclusive to the fiat currency. The entry into the competition of a virtual currency, uncontrollable by the State, is a definite danger which could serve to destabilise the currency and cause the bankruptcy not only of the economic and financial system but of a state, starting from the moment when it no longer controls its monetary sovereignty or any flow of transactions, that the portfolios of its taxpayers are emptied out as well as its coffers at the same time. It is enough to study the recent events, in Venezuela but also in India to convince oneself of the reality of these stakes[24].

Fragile by monetary policy, price control, quotas and a drastic fixed exchange[25], it is a whole parallel economy that has developed in Venezuela in the recent years: a black market using the dollar and since the last one to two years, a virtual market in Bitcoin[26], which went from 1 to 7 in 2016.

fig0003Figure 3 – Source: Coin Dance

Nothing could foul-up the currency and the national economy worse than the development of these parallel markets. Indeed, the consequence is not only an exit from the country’s capital and reserves, but with the explosion of online sales, half-masting of entire sectors of economic and commercial sectors and national companies that cannot compete with competitive prices of foreign markets that circumvent regulations, duties and taxes.

The monetary policy of Modi, which we described in the last GEAB[27], also tackled the black market. The consequence was first of all a gold rush, very tangibly also attacked by the policy of the Indian government, and consequently a pseudo-rush on the Bitcoin (and other virtual currencies). Indeed, a peak in the variation of the volumes of transactions is certainly observed, but it remains temporary and  moderate. Indeed, contrary to what is prevalent, money laundering is not possible with Bitcoin[28].

fig0004Figure 4 – Source Coin Dance

As we have emphasised regularly in our newsletter, we have witnessed a real “currency war” since the financial crisis of 2008/2009, especially for the dollar’s survival against the euro and emerging currencies like the yuan. Each large indebted power wants to maintain its currency at the lowest and pay the least interest on its sovereign loans. The fiat currencies such as the dollar, the yuan, or the euro are the weapons of this war, to which it is now necessary to add the Bitcoin and other crypto-currencies.

Finally, in the last bulletin, we discussed the issue of the South African franc- CFA and how it prevented the African States from freeing themselves from the monetary, and therefore economic-financial, control of France and Europe. To avoid colliding head-on with France and Europe[29], West Africa has just launched its own virtual currency, the eCFA, this time issued by the Regional Market Bank “according to the regulation on currency issued by the Central Bank of the States of West Africa (BCEAO) “[30]. Tested in Senegal, the digital currency will extend as common currency to all the member countries of the WAEMU zone.

State power strategies

States are confronted with a plethora of stakes involved in the development of these virtual currencies, legal and fiscal of course, but also political and monetary. Given the recent realisation of the implications of the very sovereignty of states and their monetary systems, the answers are still somewhat imprecise and it seems that we expect a lot from the positioning of the central banks to know how to accommodate the Bitcoin and crypto-currencies in the system. Anyway, bitcoinists and other aficionados of crypto-currencies must not fantasise, the trend is to regulate and attempt to take control of the systems.

In practice, such a tendency proves to be very complex to analyze: we do not control the development of technology on the Internet and the Internet itself (especially in this field, they rely on open source networks and collaboration of the internet community, if not hackers). But the societal evolution in a world presented to us “of all dangers” and “of all fears” (even if only by focusing on the risks of terrorism in the West), tends today towards hyper-security, and therefore to an acceptance of a very strong state intervention by the imposition of increasingly restrictive measures on all areas, including of course, the Internet, (filing, data transmission, control of all kinds …)[31].

Whether they are addressed to operators, intermediaries or social networks, governments and public authorities have been forced to provide a lot of information about their users. Legislation on data transmission is becoming increasingly drastic[32]. In this matter and on internet control, it is safe to bet that this will not work out. Especially since taking control of the regulation also involves back-door operations, if we can afford to apply this term.

Bitcoin operators now have a rear window, whether it is mining start-ups that run computers, or exchange platforms. As we saw above, their financial independence is more than questionable when the same operators in the financial and banking sector worldwide invest heavily in them. Moreover, these platforms are legally installed and therefore also subject to national laws and regulations. 80% of operations in Bitcoin are handled by Chinese operators. The two main foreign exchange platforms, BTCC and OKCoin, said they would allow better cooperation between them and the government, or even the Chinese central bank[33].Many other governments are considering similar solutions.

The era of large regulation: central banks are not yet closed

Around the world, the Bitcoin revolution worries states. Will crypto-currencies take precedence over fiduciary currencies?

The status afforded to Bitcoin and crypto-currencies depends on a set of legal and institutional rules that diverge according to whether one places oneself on the plane of money or a commodity that can be exchanged. Thus, in a country like the United States, there is no consensus between states and jurisdictions on the very nature of Bitcoin and virtual currencies more generally[34].Although to date, the majority of governments have not yet legislated on the status and framework of crypto-currencies, one can nevertheless consider, on the basis of what already exists, that Bitcoin and the other virtual currencies will be subject to increasingly stringent regulations. This is especially true for those governing markets and financial and monetary institutions, and controls and measures that serve, in particular, to protect sovereign currencies and the sovereignty of states and their central bank over the money supply[35]. At the top of this reinforced policy is China which has just launched a series of surveys on possible manipulations by the exchange platforms of Bitcoin volumes and exchange rates[36] and provides for the establishment of “customer services”[37]; but also, the European Union as we see below.

In Europe, the ECB, which fears losing control of the money supply, calls for a firm intervention by the European Commission on the supervision of virtual currencies and their operators[38]. But, in doing so, one could also believe that the ECB also wants to prevent Eurozone Member States from substituting the euro for another competing virtual currency (Bitcoin, for example, is well established in Greece)[39] that would bring them out of the common monetary system, or that states outside the Eurozone and even the EU would come to offer competing exchange currencies (if the UK were to offer such a currency). As we have already mentioned, crypto-currencies are also weapons of monetary wars, whether initiated by powers or by “hostile” political or economic interests. Hence the great mistrust of governments and central banks.

Expect a wave of regulation and control of crypto-currencies, their operations and operators. And if the Bitcoin, like the other crypto-currencies must comply with the demands of regulation, they will then become currencies like any another, serving only to diversify your portfolio. After all, it is still easier to track down an electronic currency than a banknote…

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[1] For more information of the creation of Bitcoins, consult the site Wikipedia
[2] The Crypto-Currency Market Capitalisations website quotes some 700 of them.
[3] Read: BNP Paribas recognises that Bitcoin can make the whole banking system obsolete, source: RT,07/07/2015
[4] Crypto-currencies like CureCoin to help medical research, SolarCoin, to support solar energy… for more details see: “A classification of decentralised currencies”. Source: Bitcoin.fr, 10/02/2015
[5] See Wikipedia
[6] Source: How we made it in Africa, 20/12/2016 or Banque mondiale 2014
[7] Source: Bitcoin Magazine, 11/05/2015
[8] Source: The Conversation, 11/01/2017
[9] Source: Vox, 21/11/2016 and Bitcoin Venture Investments on CoinDesk
[10] Bank of America Diversifies Their Portfolio With Bitcoin. Source: Live Bitcoin News, 09/01/2017
[11] There are many sources, including Fortune 17/12/2015
[12] As in the United States, for example, when it comes to the use of the blockchain as a share ownership register, financial transaction register. Source: Wired, 15/12/2015
[13] Source: The Coin Telegraph, 04/01/2017
[14] Source: Coin Desk, 10/02/2017
[15] Source: All Africa, 20/12/2016
[16] Source: DCE Brief, 28/12/2015
[17] Introduced after the hack of the Bitfinex platform in the form of tokens or distributed shares to eventually reimburse the holders of the hacked accounts – Sources: Coin Desk, 11/08/2016 and Money and State, 11/08/2016
[18] See the compilation of more than 87 English-speaking sites in the dark-market 2011-2015 on: Gwern, 29/11/2016
[19] See Wikipedia on the creation of the network: Yahoo, 02/06/2011; on the closing of the site and the suites: Le Monde, 23/09/2014
[20] As Alpha Bay, one of the largest markets to date accused of misappropriating Uber accounts (on sale at £ 1 on the black market). Source: Digital Trends, 28/03/2015
[21] Meet Monero, the Currency Dark Net Dealers Hope Is More Anonymous Than Bitcoin – Source: MotherBoard, 23/08/2016
[22] It is interesting to note that countries that have or still are part of real tax havens are the first to want to create “tax oases” for crypto-currencies: Kanton Zug will von Steueroase zu Crypto Valley werden. Source: Futurezone, 08/09/2016
[23] Source: ZeroHedge, 02/01/2017
[24] Bitcoin Investors Should Send A Thank You Note To India’s Modi And Venezuela’s Maduro. Source: Forbes, 25/12/2016
[25] Recently, the government has limited the withdrawal ceiling to 10,000 bolivars ($ 5) per day. Source: CryptoCoinsNews, 22/11/2016. The suppression of the 100 bolivar banknote was also announced. Source: The Guradian, 16/12/2016
[26] Source: PanAm Post, 09/06/2015
[27] Cf GEAB 110
[28] Why Is It Almost Impossible in India to Hoard “Black Money” in Bitcoin?  Source: News BTC, 08/01/2017 and Warum man sein Schwarzgeld in Indien nicht in Bitcoin horten kann: Bargeldverbot. Source: BTC Echo, 09/01/2017
[29] See the GEAB 110
[30] Source: RFI, 12/01/2017 or: Quartz Africa, 27/12/2016
[31] For example, on the pretext of the fight against terrorism, the European Commission advocates the lifting of Bitcoin anonymity. Source: Futurezone, 04/07/2016
[32] For example, in the US: the IRS has filed a legal application against one of the bitcoins exchange platforms for the transmission of data of several million users suspected of tax evasion. Source: Numerama, 28/11/2016
[33] Source: Coin Desk, 10/01/2017
[34] The court in Florida ruled this summer that the Bitcoin could not be considered a currency, neither issued by a government nor a central bank, nor was it a tangible asset (which could be hidden under mattresses like cash and even gold). The accused was not prosecuted for illegal money-laundering. Source: Miami Herald, 25/07/2016. However, the federal judge in Manhattan considered that the Bitcoin was a real currency. The accused was convicted of illegal activity as a foreign exchange operator. Source: Fortune, 20/09/2016 The State of Illinois published a guide on crypto-currencies, stating that they did not require a special license since it was not strictly speaking a fiat currency. Source: CryptoCoinsNews, 05/12/2016. While the State of North Carolina subjects the activities related to these same crypto-currencies to the legislation applicable to the activities of bureaux de change and money-transfer companies. Source: Coin Desk, 06/07/2016. Trump has surrounded himself with the most ardent defenders of Bitcoin. Source: Bitcoinist, 20/12/2016
[35] See for Africa, Uganda, Kenya, South Africa… Iweb Africa, 27/12/2016. For India: CryptoCoinsNews, 10/01/2017, for Russia: Russia changes its mind on bitcoin ban. Source: Business Insider, 08/09/2016 or for Canada: Motherboard
[36] Source: Xinhua, 12/01/2017
[37] In fact, it is an anachronism with the crypto-currencies system. Source: SCMP, 10/01/2017
[38] Source: Reuters, 18/10/2016
[39] Source: l’Usine digitale, 29/06/2015