Senate hearing on Bitcoin [video]
hsgac.senate.gov
hsgac.senate.gov
There seem to be 2 'groups' of testimonies, the first coming from law enforcement and government bodies; the overwhelming consensus was that existing laws are satisfactory to prosecute bad actors using bitcoin.
The second group is still talking; again extremely positive.. analogies to bitcoin being similar to the internet in the mid nineties; its scary but overall good. The lawyer from the bitcoin foundation is really driving home the idea that the main problem right now is that bankers are too scared to give bitcoin business bank accounts.
I see overall nothing negative; and the chairman seems extremely reasonable and open to the notion of bitcoin and brought up the bitcoin-now <-> internet-in-the-nineties analogy himself.
No one is asking for stricter laws, everyone is asking for clarity. Much, much more positive than I expected; only the secret service guy seemed to be very cautious; he never said the word bitcoin and mostly spent his time saying the secret service was awesome.
Chair: "You don't think it was Al Gore [created the bitcoin], do you?"
laughers
Chair: "I like this quote from Mrs. Einstein: 'I understand the words but not the sentences.' Thanks the panel."
Side note: I thought I saw Snowden... http://imgur.com/IaAPGjx
And the hearing record is only saved for 15 days...
I actually thought he looked a lot more like Tucker Carlson (the bow-tie wearing talking head who was verbally bitch-slapped by John Stewart on Carlson's ex-show, Crossfire).
The FBI budget iirc is ~8 billion, if they get everything from silk road it could be over 10% of their budget.
[1]FBI struggles to seize 600,000 Bitcoins from alleged Silk Road founder by Alex Hern http://www.theguardian.com/technology/2013/oct/07/fbi-bitcoi...
[2]Bitcoin hits $750, up 107% in a week By: John Phillips http://www.cnbc.com/id/101205416
To make it clearer for anyone who doesn't know: The Secret Service is the primary government agency charged with investigating the counterfeiting of American currency. Protecting the President and other dignitaries is minor compared to that. That's probably why they're testifying in the Senate now to begin with.
I haven't watched a lot of these hearings, but I know that with SOPA, chaired by the infamous Lamar Smith, the witnesses were 5:1 pro-SOPA, and the NSA hearings, chaired by pro-NSA people, were also NSA circle-jerks.
So it seems the rule of thumb, more than anything, when you want something passed, is to get a chair that strongly supports your view - and then everything else will fall into place.
I've never seen decent humor in a Senate hearing haha
Few writings remain truly anonymous if the author also wrote significant amounts non-anonymously (and these days, who doesn't?).
For his sake, I hope he isn't uncovered during his lifetime, but assuming bitcoin remains relevant I greatly suspect that history books will eventually have his name.
Companies like, well, his.
To keep it simple, Banks hold reserves because they lend. Paypal, for instance, is not a bank.
If your tiny Bitcoin startup holds $1000 in bitcoin, and your obligations are $1000, I don't see the problem.
Ok, you're right, that's an oversimplified view.
Paypal is a bank in Europe. A paypal account is legally a bank account here.
And, if not, why do you need reserve capital?
Customer A deposits 2 BTC to Bank A
Bank A loans 1 BTC to Customer B
Bank A is now a fractional reserve bank, with 50% of its outstanding debts to Customer A actually on-hand.
Bitcoin would impose a 100% reserve requirement that is unheard of (as far as I can tell) in modern banking. I don't believe we can accurately predict the effects of this requirement. I also believe we can't state with any certainty that, given this requirement, a bitcoin banking system would behave at all alike to our current fractional reserve banking system.
Frankly, this appears to be another area where bitcoin doesn't seem suited to handle the economic needs of the modern world.
1. http://en.wikipedia.org/wiki/Reserve_requirement 2. http://www.federalreserve.gov/monetarypolicy/reservereq.htm
Not that I personally think there is anything wrong with a reserve currency, but they tend to significantly curtail the power of governments to wage war, so it's extremely unlikely we'll ever go back to such a system.
It is far easier to create "virtual currency" than you seem to think.
How would you fraction a bitcoin, thereby allowing 10x spending? You can't just invent new bitcoin hashes, because the creation of valid bitcoin hashes is the mining process itself, and is designed to be time-consuming.
When you transfer USD into Mt. Gox, you can then buy some "virtual" BTC. The BTC that is in your Mt. Gox account is purely virtual. Until you manually transfer it out of Mt. Gox, you don't even know if those BTC exist yet.
I'm not necessarily saying that Mt. Gox is lying to anyone (although they don't strike much confidence in me...). I'm simply stating that the job of lying to the customers is a lot easier than you might think.
Take GPL for instance. It "virtually" held BTC for its customers, and one day... they decided to disappear off the face of the internet. Unless those BTC are exactly in a private, offline wallet, you have NO guarantee that you are actually in full possession of those BTC.
That is why BTC regulation as a currency is a necessary step forward. If institutions are forced to offer guarantees on the promised value of your BTC Accounts, then life will be a lot easier for the BTC consumers.
If memory serves, this is how banking works today (beware, there are gross simplifications in here):
1. Customer A deposits $1 in Bank A
2. Customer B asks Bank A for $9
3. Bank A now needs to borrow $9. It can legally do this because it can prove to the government that its reserves ($1) are greater than 10% of its outstanding liabilities ($9). It first tries other banks, but if all else fails it can borrow from the Fed.
4. Bank A gives $9 to Customer B.
I cannot see how step 3 happens in "bitcoin banking". The whole point is that there's no "central point of trust" and hence no lender of last resort.
Or to restate, one of fractional reserve banking's key purposes is to influence the money supply. But this is clearly impossible under a "pure bitcoin" system, where the money supply is fixed by fiat.
This is very different than how banking works today. Banks (in the US) can lend up to 1000% of their current deposits. This is a core feature of the fractional reserve system, and is clearly impossible under a pure bitcoin alternative.
I guess you are saying they do accounting shenanigans with the Federal Reserve to make the deposits larger than they really are?
(I will admit, I am more interested in aggregate practice here than I am in what the more extreme banks are doing)
If I recall correctly, "demand deposits" are the subject of reserve requirements, not total deposits. The vast majority of deposits are subject to strict regulation and can't be withdrawn on demand (hence the "demand deposit" distinction). They are, in essence, another form of credit. Not a cash equivalent.
If we compare demand deposits (1.1T) to securities and net loans and leases (9.63T), we get pretty close to the 10x money multiplier.
Because demand deposits are the only things that need to be backed by cash, the rest of the money is essentially re-invested from another institution in the system. Someone didn't come in to the bank and put cash on the table for those deposits. Instead, they told their bank to exchange their credit with another bank.
In other words, it's just a change in the ledger sheet between two parties. Simplistically referred to as "created money". The Fed lets banks "create" this money as long as they meet certain rules. The most important being reserve requirements.
Getting back to comparison with bitcoin, my original statement ("1000% of deposits") was perhaps an oversimplification. But it's hard to say exactly where bitcoin fits in to a "new banking order". Would it be considered money, e.g. cash equivalent? What then is used as the medium for credit exchange e.g. the other 90% of financial activity?
Or is it the unit of account for EVERYTHING, including credit exchange? If so, then how do parties loan money? Won't 90% of bitcoin sit idle for very long periods of time? And does it really make sense to use a deflationary unit of account for an inherently inflationary activity (lending)?
Maybe try working from the assumption that what I am saying is (more in the direction of) correct. The banking system may be set up to work in favor of the establishment and bankers, but it isn't a giant fantasy.
What? I'm not ignoring those deposits, just pointing out that those deposits are "created money". They are made by banks, not issued by the Fed. The only restriction on their creation is the Fed interest rate on one side and the reserve requirements on the other.
In technical terms, they are part of M2, not M0 or M1 [1]. And banks are definitely allowed create M2, though obviously not M0 and M1.
> Maybe try working from the assumption that what I am saying is (more in the direction of) correct. The banking system may be set up to work in favor of the establishment and bankers, but it isn't a giant fantasy.
What exactly are you asserting? Nowhere did I state that the banking establishment is some kind of giant fantasy. I just made the fairly uncontroversial assertion that banks are allowed to issue more credit than they have cash on hand. In a sense, when they do so they are "creating" money (though this "created" money is technically referred to as M2).
However, when that effect is multiplied throughout the entire banking system [1], the system as a whole amplifies the base amount of money in the system. A 10% Required Reserve Ratio equates to a maximum potential money multiplier of 10, meaning the system as a whole can turn a $10 deposit into up to $100 in circulation.
[1]: http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam...
And step 4 should really read "Bank A marks Customer B as having $10". The vast majority of the money in our economy is numbers on ledger sheets. From there, Customer B uses it to pay off a debt of some kind with Customer C, who then pays Customer D, etc., until supposedly the money eventually gets back to Customer B in some way. Except Customer C deposited the money in Bank B, so Bank B can now lend out $100 to Customer E.
That's why pyramid schemes are illegal, the banks hate competition.
So yes, it especially doesn't work for bitcoins, because how do you make a blockchain for fractional bitcoins based on a mined bitcoin? The mined bitcoin is the one that has the blockchain. You can't make a bitcoin transaction without first checking the blockchain for double-spending, say nothing about 10x spending.
I haven't studied this subject in some time, so can't remember the exact mechanics. This summary sounds accurate. I would like to say that "it gets to make up the money on its own", while correct from one perspective, is another way of saying "other banks can respect its credit (how much money it says it has) if it plays by a certain set of rules".
I don't remember if this mechanically occurs via some kind of direct lending or via the Fed sanctioning "Bank A's" credit as satisfying reserve requirements for a "Bank B". The ultimate result is the same.
> That's why pyramid schemes are illegal, the banks hate competition.
I'm assuming that this is said tongue-in-cheek, but pyramid schemes are an example of perversion of credit and lending on a scale that separates them from banks. In particular, the core feature of pyramid schemes is a rate of return that is unsustainable, and thus requires rapid creation of new customers instead of gradual growth of new wealth.
If fractional reserve banking is indeed really terrible, what is the alternative? I think a massive body of research is required for someone to assert the superiority of such a system.
> So yes, it especially doesn't work for bitcoins, because how do you make a blockchain for fractional bitcoins based on a mined bitcoin? The mined bitcoin is the one that has the blockchain. You can't make a bitcoin transaction without first checking the blockchain for double-spending, say nothing about 10x spending.
This was ultimately my point. The principles behind fractional reserve banking and bitcoin seem fundamentally incompatible. Given that fractional reserve banking has worked for many centuries, any alternatives that are radically different should be approached with caution.
The amount of money a bank can lend out is a multiple of the bank's capital, because when a loan defaults, the corresponding amount is subtracted from the bank's capital, i.e. from the net value of the bank (assets minus non-capital liabilities).
We as society want to limit the amount of loans that a bank can make to such an extent that its bank capital won't go negative. Because if bank capital were to go negative, the bank would be in default and would effectively have given money out "for free".
And banks are limited exactly in this way: Loans are limited in terms of the amount of capital that banks owe their owners. You may argue that the capital requirements are too low (and they are...), but qualitatively, the system makes sense.
It actually makes much more sense than this foggy picture of reserve banking that most people have in their heads.
http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam...
No. There were experiments with trying to influence the money supply in the past, but it doesn't work. Today, the money supply develops endogenously, that is, it is determined by potential borrowers' willingness to borrow and by banks' determination of the credit-worthiness of said potential borrowers.
The central bank is tasked with making sure that the interbank clearing system works smoothly and with setting the short-term interest rate.
Also, your story about how banking works today is a bit muddled. Whether Bank A can borrow those 9$ has nothing to do with how many reserves they have, but with quality of the bank's assets relative to its capital.
The volume of reserves really does not have a noticeable effect on the behaviour of the banking system, mostly because, as I wrote above, it is endogenous anyway.
In theory, we can design a banking system that accepts deposits in bitcoins and gives out loans in the fiat currency.
Also, such a system mutes a key feature of current "money multiplier" based systems, which is recursion. Under the current system, when you deposit $100 in a bank, that bank can then lend $10 to nine other people. Who can then each take that $10 and deposit it nine other banks, which can each lend $1 to nine other people...
Without this effect, the money multiplier would probably need to be tweaked pretty drastically.
There's a school of thought that the expansionary fractional reserve system we've had for the last 100+ years has worked OK because more and more fossil fuel energy was available over that time. It's possible we're in a new era where total energy usage will be essentially static, and the current monetary and banking system won't work.
I'm not necessarily saying I buy the argument.
For one, a few billion people are currently moving from an annual income of less than $10,000 to closer to $30,000. That's a huge, unprecedented global shift that will lead to a big increase in worldwide energy demand.
Second, I think ingenuity will solve our future energy supply issues. A geologist once said "oil is found in the minds of men" and I think that claim holds true for all sources of energy. Look at shale gas: this is a huge energy source that wasn't even in anyone's radar thirty years ago. Moreover, effeciency increases over the next two decades, both in MPG standards, industry and electronics, could yield a savings equivalent to 13 million barrels of oil per day. That's like adding a new Norway and Russia to world energy supplies.
Daniel Yergin's book The Quest coveres these future challenges quite well, I highly recommend it.
Slightly tangential to the main topic, but this is a common misunderstanding and incorrect. Bank lending is not constrained by the amount of reserves a bank has, because banks can and do lend each other reserves (or sell each other reserves in exchange for other assets).
So banks just make loans regardless of how many reserves they have. Afterwards, a separate department checks whether they satisfy the reserve requirements. If they do and they have too many reserves, they will try to lend those reserves to other banks. If they don't, they will try to borrow reserves from other banks or from the central bank.
Note that banks still cannot make loans willy-nilly. It's just that they're constrained by capital requirements instead, as opposed to what people commonly believe.
Edit: If you are interested in the low-level workings of the system, I recommend reading the corresponding writeups of Modern Monetary Theory economists. A good starting point (though somewhat lengthy) is here: http://neweconomicperspectives.org/p/modern-monetary-theory-...
Marketwatch: More than one hour into the hearing, and Sen. Carper is the sole lawmaker to ask questions. It appears no others are there.
Embarassing.
But hollow disruption porn and worse-is-better are still fucking tragedies.
What do you mean?
Why would law enforcement be eager to support a technology which, on the face of it, seems to reduce the power of law enforcement?
You could argue that the increase in law enforcement power would offset the decrease in power from not being able to issue fiat currency, but that would mostly be a silly line of argument to pursue.
Force mostly has to be individually applied, and you can only take it so far before you have massive pushback in the form of civil unrest.
Printing money, to pick a simple example, is much more effective and can be done across the economy as a whole.
Could you imagine police forces breaking into everyone's home and taking half their cash in a matter of days? It's unthinkable that that would happen for logistical reasons alone.
But that's what we've effectively seen some modern western governments do just recently by rapidly deflating their currencies.
Abolishing fiat currency would take away that power, and make no mistake it is an immense power. It's the power to shape entire economies at the stroke of a pen.
Why would law enforcement be eager to support a technology which...
Also, if they can freeze (stall) certain wallets indefinitely, that's pretty much as good as asset seizure.
Others getting 'pissed'? What are they going to do? The very limited consequences of Snowden-leaks pretty much show that they can do such things and ignore protests, if the government leaders are okay with that.
It makes the job of law enforcement _different_. Their existing skills/procedures/relationships/precedents for dealing with cash and banking-industry-mediated finances don't work for Bitcoin - presumably that makes it scary for any change-averse members of the LEO community.
This gives them an off-switch for The Terrorists. And, side effect, a way to blockade groups they don't like.
A registry may happen because businesses have an incentive to have creditworthy customers. Sometimes you want to prove you have collateral, that you have cash flow, that you've paid people in the past. Bitcoin does that nicely.
So, you've got your public wallet to prove you have money available, for making credit decisions, for deciding whether to sell you a house, etc. And your private wallet because "fuck the police". There's not even a good way to know if a wallet is located in the US or somewhere else.
And, if there are people willing to take coins from people's private wallets, there will likely be a solid economy outside the government's control; as there already is; there's a massive barter and cash economy. Bitcoin makes it slightly technically challenging (like, how do you get and spend bitcoins to and from your private wallet if you can't accept your paycheck there and can't order goods shipped to your house with it).
source: a part of the government
https://www.cia.gov/library/publications/the-world-factbook/...
EDIT: Or not... [1]
A deflationary currency isn't much different from owning stock. Imagine you own $1000 in stock and want a TV. Would you ever sell to buy? Of course.
I'm really out of my depth economically here, but couldn't this inadvertently lead to a sharp drop in general investment in publicly traded companies?
It can't.
This isn't a bubble IMO, it's just that USD won't hold it's value compared to available currency that has at least has some value.
:-D
http://www.aarongreenspan.com/writing/20131118.hsgacstatemen...
Jerry Brito's testimony was quite good.
[1] http://www.dailyfinance.com/2013/11/17/bitcoin-bubble-or-val...
I'm genuinely curious. I can understand an argument from principle like RMS might use, but I am unsure what the difference is between agreeing on a VM and agreeing not-on-a-VM.
I'm really trying to see an edge case where doing it on a VM that you destroy later is in any way worse (or even different) than doing it on a laptop that you buy, use, and then later incinerate.
[1] The download page states "By clicking the "Download now" button, you acknowledge that you have read and agree to the Adobe Software Licensing Agreement.". That statement is hundreds of pixels away from the actual download button.
English is on page 87: http://wwwimages.adobe.com/www.adobe.com/content/dam/Adobe/e...
Heh, it might be forbidden to spin it up in cloud VMs, though local VMs are okay as long as you don't run nginx on your laptop? "3.2 Server Use. This agreement does not permit you to install or Use the Software on a computer file server." "4.1 Adobe Runtime Restrictions. You will not Use any Adobe Runtime on any non-PC device or with any embedded or device version of any operating system" ...
This provision is really broad: "9.5 Indemnity. You agree to hold Adobe and any applicable Certification Authority (except as expressly provided in its terms and conditions) harmless from any and all liabilities, losses, actions, damages, or claims (including all reasonable expenses, costs, and attorneys fees) arising out of or relating to any use of, or reliance on, by you or any third party that receives a document from you with a digital certificate, any service of such authority ..."
If you are acting on behalf of a business, you might not want to authorize Adobe to occupy your business's time telling them your business secrets: "15. Compliance with Licenses. If you are a business or organization, you agree that upon request from Adobe or Adobe’s authorized representative, you will, within thirty (30) days, fully document and certify that use of any and all Software at the time of the request is in conformity with your valid licenses from Adobe."
I'm not sure whether this persists: "4.5 No Modification or Reverse Engineering. You shall not modify, adapt, translate, or create derivative works based upon the Software. You shall not reverse engineer, decompile, disassemble, or otherwise attempt to discover the source code of the Software.", where "“Software” means (a) all of the contents of the files (delivered electronically or on physical media), or disk(s) or other media with which this agreement is provided". I'm not sure whether "Software" includes bit-for-bit identical copies of the software obtained by other means at other times (see http://ansuz.sooke.bc.ca/entry/23 ).
...how have I never heard of that? That seems like a really easy thing to get thrown out in court. Wikipedia gives me something that sounds more reasonable:
> The file format specification document is offered only to developers who agree to a license agreement that permits them to use the specifications only to develop programs that can export to the Flash file format. The license forbids the use of the specifications to create programs that can be used for playback of Flash files.
Which is not an issue of accepting the EULA and running Flash, but of getting specs for Flash and, well, developing a competing product. Asinine, but less insane. That's more in the realm of "IP law, and attitude towards IP, sucks" than "accepting Flash EULA is wrongbad".
The intent of 3.2 sounds like it's to prevent stuff like internal company file servers from keeping a copy of Flash around. I could see it being bent to make the VM spin-up illegal, but that's it.
I could see 4.1 being an issue, since it seems to be a deliberate way to keep Flash from being run on VMs, but I've run Flash on development VMs for the purposes of debugging embeds before and it never came up. My instinct, despite IANAL, is that I'm interpreting it wrong and it has nothing to do with VMs and so is inapplicable.
9.5 isn't relevant unless watching a Livestream over Flash on a VM causes you harm...
15 isn't relevant unless you're a "business or organization", and I strongly doubt that a court would allow that to extend to an individual proprietor of any kind.
4.5 would be a good reason not to do it if you had any intention of ever reverse-engineering Flash. I can see that persisting, but I also have my doubts as to whether that's sneak's reasoning.
So, in short... I am guessing that there's no established precedence to prevent you from accepting a EULA on a VM that disallows running said software on said VM. That would be a fun court case to watch. Thus, the main legal hurdle is the possibility of reverse-engineering Flash.
(And yeah, I'm too lazy to read the T&C myself. Sorry.)