MY PROBLEM WITH BITCOIN – THE SEQUEL

 

I was delighted to see that the original posting of two weeks ago, “My Problem with Bitcoins,” generated a lot of online and offline interest.

Because I wanted to know more, I showed up at last week’s “Inside Bitcoins” conference, in New York. A well attended MediaBistro event — with something like 300-350 Bitcoiners — I roamed the room asking questions.

It’s rare these days that I get to revert to my roots and play boy reporter.

Much of what I heard came as no surprise. Ever since I started asking questions about bitcoins, I’ve grown used to ad hominem attacks emotionally driven, nonsensical and illogical answers.

“You’re a currency denier.”

I don’t even know what that means.

And, “You don’t understand anything about Austrian economics.”

I understand it’s widely discredited.

And, “It’s math. That’s the algorithm’s setup. Like asking why believe “1/x” has dual asymptotes?”

Huh?

I asked several people, if you cross a US border with more than $10,000 worth of bitcoins in your wallet, do you declare your “negotiable instrument” as required by US Customs?

Far too many of them looked baffled and shrugged, “No, why should we?”

I suggested, “Because that’s the law.”

That was waved off with, “Doesn’t apply to bitcoins.”

However, one man gave the game away by explaining, “There are different kinds of wallets, on purpose. Yes, if you are carrying your bitcoins in a wallet on your laptop or on your phone, then you have to declare them. But if the bitcoins are on another server, and you merely have electronic access to them on your laptop, then it is like an online bank account. In that case, you are not transporting negotiable instruments, you are transporting electronic access. That’s not declarable.”

Another thing I heard was, “Bitcoin exchanges are more regulated and more compliant than Western Union.”

While many of these exchanges — independent small businesses — try very hard to stay in bounds, it is not true that the industry is more regulated, or that they are more compliant, than Western Union. Yet, as more people say it, more followers repeat it.

Admittedly, I came to the conference suspicious of the “mining” aspect of bitcoins, which I’d previously compared it to a computer game.

The only reasonable explanation I got was from a fellow in the mining hardware business. He explained that every 10 minutes a new block of coins appeared. That “miners” were nothing more than a collection of people who linked their computers together to create hyper-computing power so that new bitcoins could be verified and, for their effort, one of the miners would win the bitcoins.

“A computer game,” I repeated.

“No,” he said, “more like the lottery. You buy a ticket, ie, the mining equipment, and the more you buy, the better your chances of winning a prize.”

So I stand corrected.

It’s Super Mario meets Powerball.
*****

I’d expected to find a roomful of spotty 14 year olds. Instead, I found a roomful of former-spotty 14 year olds — now in their 20s — surrounded by the same enormous enthusiasm of true believers at a revivalist church.

The most fervent among them was the anarchist crowd. Not present in big numbers, they had the volume turned way up, especially during a panel discussion where they compared the right to purchase whatever they want with the First Amendment protected right of free speech.

Intellectually, it’s an interesting question.

The major credit card companies have stopped taking contributions to the WikiLeaks leader, Julian Assange, who remains holed-up in the Embassy of Ecuador in London. These people insist, supporting his cause by sending him bitcoins, is protected free speech.

Their argument then extended to sending bitcoins to various people in Iran — usually poets, dissidents and musicians — which is nonetheless a sanction’s violation. From there, free speech became using bitcoins to purchase otherwise illegal drugs for personal use on the website Silk Road.

Again, it’s an interesting intellectual exercise.

Where they lost me was in saying that they had a First Amendment right to pay for something described by the state as criminal — ie, drugs or pornography — as long as it was a victimless crime. I had to get off that train because none of them wanted to hear my opinion, that there is no such thing as a victimless crime.

Next, a refugee from Iran who’d sought safety in the US, received a round of applause for saying that people in Iran had more freedom of speech than anyone in the United States.

After that, another round of applause for a woman panelist who announced that she didn’t care about the Constitution, because the government was using it to deny us our rights and therefore, the Constitution didn’t matter.

The distinct tone of “them against us” united these people in their quest for world currency domination. The government can’t be trusted. Banks can’t be trusted. The NSA is listening in to all our phone calls and reading all our emails. “Fiat” currencies are doomed. We are the only answer.

My discomfort with that was shared by a man I’d describe as one of the few “adults” in the room. He worked in the financial industry and was, admittedly intrigued with the idea of digital currencies.

His response, “No one will take bitcoins seriously until this crowd marginalizes the anarchist fringe and starts acting like serious people.”
*****

The single most interesting thing I discovered at the conference was the concept of the “two B’s.”

One speaker made it quite plain that when you talk about bitcoins, you have to differentiate between “capital B” Bitcoin, and “small b” bitcoin.

Small b is the currency.

Apparently, or at least according to the bitcoin crowd, small b is now accepted by more than 10,000 merchants around the world. None of them, however, seem to be on my block. And I live on a very big block. That should matter. Because none of the people I do business with accepts bitcoins, even if I could figure out how to mine them, what would I do with them?

Hearing that, one bitcoin stalwart Tweeted me, “You don’t have an Arby’s or Baskin Robbins or Burger King or McDonalds near you? They take #Bitcoin. You didn’t do your home work.”

In fact, he couldn’t be more wrong. I did my homework very well; there’s no Arby’s, B&R, BK or McDo anywhere near me; and NO! they do not accept bitcoins. In an effort to be deliberately misleading, this fellow was referring to a value added card product from a website called gyft.com, which can be bought for bitcoins which, in turn, can be used at Burger King. (But not the other three.) So, yes, through an intermediary, and by paying middleman costs, you can indirectly buy a Double Whopper with bitcoins, even though, at the cash register, you will still be charged in dollars. Which is not the same as saying that any of those four fast food places accept bitcoins. He is dead wrong. They do not.

More interestingly, one fellow at Inside Bitcoins told a lovely story about how he’d received a panic email from a school group in Nigeria who’d crossed the border into another country and needed money to bribe officials in order to get home. Luckily he had bitcoins to send them, and thanks to his bitcoins they made it back safely.

I was glad that he was able to help them. But for the time being, I don’t expect to bribe any African officials, so I’m still at a loss.

Another disturbing aspect of the small b — at least for consumers — is that once a transaction has been made, it is irreversible.

No charge backs is one of their big selling points to merchants. But that’s not a big selling point for consumers. Pay for your widget with bitcoins, and you’re stuck with that widget. Doesn’t matter if it’s blue instead of yellow, arrives or doesn’t arrive, works or doesn’t work. The payment is final.

At least with credit cards, you can object to faulty goods or non-delivery and the credit card company will protect you by reversing the payment. What’s more, under many State laws, sales are not final until both parties agree that they are, or a lapse of time, such as 30 days. Which means irreversible bitcoin payments are not only anti-consumer, the no charge back factor may be a violation of specific consumer protection laws.

Once upon a time, cash was shells. And Manhattan was sold for $24 worth of junk jewelry. These days, most of us use less and less cash. So the concept of digital payments is one whose time has come. But then, at least for the foreseeable future, dollar bills and “Loonies” and euros and pound coins are universally recognized and accepted payment methods for goods and services.

What’s the selling point for bitcoins? The ability to move them anonymously, any time, to anyone, with as little as zero fees and no dependence on financial intermediaries? My question is, how many consumers really need that?

I suggest, most don’t.
*****

Then there is the capital proper noun B.

That’s the technology behind the small b, and there is no doubt that it is fascinating.

Whether or not most people need this, the fact that you can move a currency around the world at almost no cost, and do it anonymously, has all sorts of applications that predict the future. But it strikes me that the future is the technology. And that the success of this technology merely assures the success of some form of digital currency, not necessarily bitcoins.

Here’s why.

Right now, there are as many as 50 digital and virtual currencies competing for the same minute market. And it is minute. One estimate bandied about at the conference was that there are about $1 billion worth of bitcoins in circulation around the world, as against $16 Trillion US Dollars.

Using that weight, bitcoin the currency doesn’t even have the same punch for punch as the non-convertible Cuban peso.

Many bitcoiners argue that this is only the beginning of the game for the small b. That it is the top half of the first inning. That acceptance will take time. What they don’t want to understand is that, the moment bitcoin gathers genuine momentum, the big kids on the block will move in and take over.

It may be a better mousetrap. But only until the mouse finds out.

The big kids will kill off small b bitcoins, not with regulations, but with capital B Bitcoin technology.

That technology is open code. It’s not protected. And if it works so well for bitcoins, it can be adapted and upgraded to work even better for anything. How about digital Facebook dollars? Or digital Google Sterling? Or digital Apple Euros? Or digital PayPal Every-Currency? The platforms are already there. Converting the technology to suit them will happen when it is economically feasible for the big kids to own it.

And they will.

Never going to happen, the bitcoiners insist.

But that’s only because most of them are too young to remember semi-automatic transmissions, floppy disks, 8-Track and Betamax.

*****

© Jeffrey Robinson 2013