Monthly Archives: February 2014

Mt. Gox halted trading in Bitcoin on its exchange late yesterday (February 24), after suspending payments to customers on February 7. This morning (February 25 Eastern Time) their website is down except for the silly message

 Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on Mt Gox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

Best regards,
MtGox Team

Why is this silly? Coindesk (a bitcoin news source) reports on a document suggesting that Mt. Gox has large losses, on the order of 750,000 bitcoins. This is about $370 million U.S. dollars at a price of $500. If the losses are anywhere near this big, Mt. Gox is gone. It would do well to be working out its insolvency and making the insolvency clear to customers with accounts. Instead, the document, which supposedly is a plan for resurrection, is wildly unrealistic about the options at an insolvent financial firm.

Bitstamp – the largest exchange by number of trades recently – recovered from the software issue in days and began trading again. The long suspension of payments indicates that the problem is serious.

Mt. Gox suspended payments almost three weeks ago and has been issuing nothing but rare, cryptic messages since. There is no evidence the losses aren’t very substantial and all efforts should be devoted to winding down the operation, not supposedly protecting “the site and our users.”

Fraud by Mt. Gox is not necessary to get to this sad end for the exchange. Instead, naiveté is sufficient to explain it. Some of it was on display in Wired in November when they used the prescient title “The Rise and Fall of the World’s Largest Bitcoin Exchange.”

The bankruptcy rules in Japan will have a big effect on the resolution for Mt. Gox’s customers. I know nothing about whether Japan even has “bankruptcy” laws as the U.S. does. Arrangements for insolvent firms and people are very different even in the United States and European countries. Japan may not be so different if General McArthur’s staff wrote the first version at the end of World War II but even that is not necessarily what is in force now.

The history of non-governmental currency indicates that the hit on bitcoin’s reputation is likely to be substantial. Some people have lost quite a bit of money. The Coindesk article says that one person had 550 bitcoins at Mt. Gox, which is a rather startling amount: $275,000 at $500 U.S. dollars per bitcoin. I would think twice before having that much deposited at my credit union, let alone at a startup operation in Japan. This person says that he has no one to blame but himself, which is admirable.

Unfortunately, many others are likely to want the government to protect them in the future and politicians will be happy to oblige. New York State already was floating the notion of BitLicenses.

Currency union and Scottish independence

Scotland is having a referendum on leaving the United Kingdom. For someone whose ancestors include mostly Irish people, this seems unexceptional. I can see points pro and con.

The odd thing was an article in the Wall Street Journal on currency union between the rest of the United Kingdom and Scotland if Scotland left the United Kingdom. There was an article by the BBC as well. Why would the United Kingdom – with about 59 million people – form a currency union with Scotland which has about 5 million people? What does the rest of the United Kingdom stand to gain from a currency union with Scotland?

It is similar in some ways to a petition by Puerto Rico to form a currency union with the United States if it became independent. Puerto Rico uses U.S. dollars and the U.S. government would have no problems with that continuing. The U.S. has no obvious incentive to share any seigniorage from money held by Puerto Ricans any more than it shares seigniorage with Panama, which uses U.S. dollars. The U.S. government also treats Panamanian banks the same as other foreign banks, at least as far as I know. Scotland would be in the same position.

Bottom line: The United Kingdom has no incentive to form a currency union with an independent Scotland. If Scotland leaves the United Kingdom, the Scottish government can attempt to choose a currency but I would be surprised if U.K. pounds did not prevail unless there were serious legal penalties. Apparently this is evident to Scottish politicians as well. They’d just rather have some of the seigniorage and probably don’t like the image of using foreign currency after becoming independent.

Discretionary Monetary Policy and the Stability of a Money’s Value

George Selgin has a very nice blog about an FT op-ed on Bitcoin. He didn’t say all that might be said though.

The conclusion of the FT article is:

“Governments should be wary of allowing any virtual currency, unless they first find a way of putting central bankers back in charge.”

I couldn’t help but smile reading this.

So ends a profoundly uninformative piece on Bitcoin in the Financial Times no less.

The author of the article is Mark Williams “a former Federal Reserve risk examiner….” I guess this affiliation is supposed to suggest some sort of expertise concerning monetary policy. Unfortunately for the FT and we poor readers, the article is more a rant than a thoughtful piece.

The premise of the article is: “Keeping money stable and trustworthy has traditionally been a function of national governments.”

This premise assumes a great deal. It is fair to say that governments typically, although certainly not always, have been involved in defining the unit of account and money used by most people in the government’s area. Whether that money typically has been stable or trustworthy is quite another question. Probably the best answer is: “Sometimes yes, sometimes no.”

In the main part of the article, the loss of discretionary monetary policy determined by central banks is the big loss if private currency is allowed to exist. According to the author, central banks do a good job of executing the “enormous job” of adjusting monetary policy to the current state of the economy.

Williams assumes that Bitcoin and similar currencies will become sufficiently popular that they will make discretionary monetary policy less effective. A new currency faces a lot of hurdles to being adopted in place of an incumbent currency that is legal tender. If private currencies become widely held, it is hard to see how this can happen unless private currencies become a more reliable store of value than government currencies.

For private digital currencies to become a more reliable store of value and popular, there must be a trade-off of discretionary monetary policy and instability of money as a store of value. The desirable discretionary policy must make the money’s value less stable, or else digital currency is very unlikely to be widely adopted.

This whole line of argument seems more like an argument against discretionary monetary policy than an argument for it.


Mt. Gox’s suspension and software problems

On Monday, Mt. Gox announced that the suspension of payments would continue because of a software problem. This will not inspire confidence by Bitcoin newbies. The dollar price of a bitcoin at Mt. Gox fell below $600 on February 11. Long term though, such difficulties and responses are inevitable. Protocols in other contexts have these problems, including theft of information on millions of credit cards.

Smart regulation of bitcoins?

Mt. Gox has suspended payments, at least until Monday, February 10. A suspension of payments means that it is not possible to withdraw funds from Mt. Gox. This is not a problem at a small outfit. Mt. Gox was the by far largest exchange for bitcoins at least until the last few months. Mt. Gox seems to have had difficulties redeeming accounts for some time. The problems started about the same time that the Financial Crimes Enforcement Network in the United States started treating Bitcoin firms as money transmitters and reportedly seized accounts in the United States related to Mt. Gox.

It is odd to read a spokesman for the Bitcoin Foundation — Jinyoung Lee Englund — say that the United States has a “smart regulation approach” at the same time this problem occurs.

But then again, maybe creating substantial difficulties for firms dealing in bitcoins is smarter than trying to ban them? The Russian government has announced that bitoins are banned in Russia.

Trying to ban bitcoins is not particularly bright. It shows a lack of knowledge, imagination or both. Bitcoins can be transferred around the world trivially by parties who completely trust each other. Anyone who has bitcoins in Russia can transfer funds abroad if they have someone they trust outside the country. It is equally easy to make the reverse transaction, bringing bitcoins into the country. Maybe bitcoins would be brought into Russia to sell? An institution such as Mt. Gox is not necessary.



Bitcoin and other digital currencies

Bitcoin has been much in the news lately. I have written a draft of a paper on “The Economics of Private Digital Currencies”. The paper uses Bitcoin to concretely summarize how private digital currencies work.

There are two major innovations associated with recent private digital currencies such as Bitcoin. The first is the settling of transactions by a peer-to-peer network. Instead of settling transactions on the books of a single institution such as the Federal Reserve in the United States, transactions are settled on a network in which no link inherently has more standing than any other link. More concretely, transactions are settled by agreement among participants in the network, for example Bitcoin’s network. The paper goes somewhat into the details without, I hope, becoming tedious for non-programmers.

The second innovation is the creation of exchanges in which buyers and sellers of Bitcoins are “end users” – people how hold bitcoins or want to buy bitcoins instead of agents such as brokers – and the trading is computerized without human intervention. This has resulted in 24/7 trading, which is quite different than trading on organized exchanges. It is more similar to Ebay than the New York Stock Exchange.

Whether Bitcoin or any other digital currency will exist in a couple of years is an open question. A close examination of Bitcoin reveals no inherent design flaws indicating that it will ultimately fail. The question is whether it will be useful. As with many other innovations, this is hard to tell.

The paper is available at