EC Why Marc Andreessen Is All Wrong About Bitcoin...

Andreessen subtly admits this fault, referring to scenarios where that real-time exchange happens behind the scenes (emphasis mine):

"You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click 'Confirm' on your phone and the transaction is done (including converting dollars from your account into Bitcoin, if you did not own any Bitcoin)."

However, that step almost always requires fees. Mt. Gox, for instance, the largest bitcoin exchange, charges as much as 1.2% to facilitate that transaction on both ends—far more than most ACH or debit vendors. Also, according to many user complaints, it takes Mt. Gox weeks or months to deliver the dollars they take in trade to the final vendor—a stark contrast to the next-day availability most credit card processors offer.

The delay is fixable, of course—but only with cooperation from the government that oversees each currency. That's not cooperation they're likely to provide without imposing serious costs on those vendors to comply with the many laws that govern international transfer of money.

Why do they impose these burdens? Well, for example, with something like Bitcoin in the mix, what's to stop a drug dealer in the US from trading his piles of cash for a USB stick full of bitcoins? He could then walk those bitcoins across the border, carrying anything from $10,000 to $100,000,000 out of the country with zero chance of being caught, and exchange it back for euros, yen, or yuan on the other side of the border. Money successfully laundered. He likely wouldn't even have to leave his home. Those bitcoins could simply be sold on Mt. Gox and the results deposited overseas for a rainy day. Yes, the bitcoins will carry a trace of the transaction, but because bitcoin is peer to peer, the deal doesn't have to pass through any system with a regulatory responsibility to look out for that.

(Which also raises the question about seized property, too. If that criminal is caught and, as Andreessen shares, "every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin blockchain, or permanent record, available for all to see," then what's to stop the government from attempting to seize all those ill-gotten coins, even multiple stages down the line? Cash and gold have no ledger, and that provides each holder some assurance that it cannot be appropriated by others. Add a paper trail and that dynamic changes.

It introduces the "nemo dat" rule, a legal precedent that going back thousands of years through multiple legal systems, which holds that someone cannot ever own stolen property, even if he had no idea it was stolen when it was purchased. Through this rule, art, antiques, and much more has been returned to its original owners, sometimes after generations have passed. Imagine the effect of that on your bank account.)

A criminal or a tax dodger could walk gold and paper currency across the border as well, with one difference. The more of these physical things you try to carry across a border, the harder it is to go unnoticed. These things take up space, and that small difference makes the job of criminal investigators worlds easier.

You can be 100% certain that, no matter how persuasive Andreessen is, regulators will eventually put the same requirements on Bitcoin's exchange agents that it does on those who oversee gold purchases and cash deposits—to report large transfers and purchases for scrutiny. Failure to do so would effectively roll out the red carpet to criminal activity.

Even if law enforcement manages to get its hands around the traceability of bitcoins—a feature that Andreessen relies on heavily in his argument but which is trivially defeated using a simple piece of code called a "tumbler"—there's still a much bigger concern to be dealt with:

Every country insists on maintaining control of its money supply and exchange rate, a process that happens through currency controls.

Most Americans know less about this process than the rest of the world, as in our lifetimes the US dollar has been the world's reserve currency and the yardstick against which all others are measured. It has lost value over time through slow, steady, engineered inflation, but never have we experienced quite the shock most other currencies have, with double-digit devaluations virtually overnight—wherein you wake up one morning to find that the last bank crisis didn't just sink the stock market, it made the price of food double overnight.

Never has our country had to impose strict exchange measures, though anyone who's traveled internationally knows you must declare leaving or returning with more than $10,000 so it can be monitored, and that gold purchases above $10,000 must be reported to the government if purchased with cash or cash equivalents. Similar such rules in other countries limit such activity, instead of just monitor it, to prevent massive selling of local currency or moving large amounts of cash out of the country to avoid taxes.

When people lose faith in a currency—as has happened in dozens of countries in the past few decades, including well-known examples like Argentina in 2002—its value on the market can drop dramatically. That inflation or devaluation causes import prices to rise dramatically, and can be devastating to a local populace. The controls on currency movement and exchange is part of how countries encourage a stable economy, but also how they can borrow cheaply, by assuring investors they are taking the steps to maintain a healthy currency.

Bitcoin today circumvents these controls by providing a non-currency intermediary—like a physical good, i.e., a gold coin or barrel of oil—that can be traded electronically and outside any regulated exchange. With an unregulated, mass-market bitcoin, all the world's currencies immediately become truly floating rate, and anyone can easily circumvent currency controls with a few clicks. Some would argue that this is a step forward for global economics—but it would take away many of the very tools central banks use to manage the world's economies during the most extreme circumstances.

Neither currency controls nor financial monitoring for tax and criminal statute compliance are powers any government would readily surrender.

Speaking of criminal activity, the modern-day payment systems Andreessen decries serve a critical role in that detection and prevention as well. He bemoans that role, saying that transaction processors err too far to the side of security.

"In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers.

Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.

Credit card fraud is such a big deal for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent."

Anyone who's seen a few '70s or '80s action movies should be well aware of the comparison to bearer instruments, or as they are more commonly known, "bearer bonds." For instance, in Die Hard, the criminals break into the building to steal $640 million in these bearer bonds, cash-like securities that are payable to whoever has them at the time they're transferred—which is one of the reasons you rarely see them in use any longer. No record is kept of who owns what, and so when those instruments transfer hands, that's it. Possession is ownership.

View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
Lennie 4 years ago Member's comment

There is one thing you did not understand about Bitcoin and cryptocurrencies, which is that they are protocols which can be used to build other things on and much more flexible than the current systems. Bitcoin is like the Internet without the Web, still in it's infancy. It will take at least a couple of years for it to reach that next step.