Thursday, 28 November 2013

Bitcoin madness: I wrote to the FED and the ECB and they are playing ostrich

Judging from the current media frenzy surrounding Bitcoins, one wonders if almost four hundred years after the tulip mania in the Netherlands humanity is as gullible as ever when it comes to get-rich-quickly speculation.

What is remarkable this time is that the speculation is global and the object of speculation is not a venture or a commodity but a virtual form of private fiat money, notwithstanding the fact that the debate on the free issue of money was closed almost a century ago when central banks were given the monopoly of issuing fiat money.

Indeed, contrary to what some economists and central banks say, Bitcoins are not a form of virtual of real money and the scheme has the hallmarks of a gigantic Ponzi scheme – anonymous/dubious issuers promising returns that are too good to be true to be achieved through undisclosed (but implicitly illegal) sources.

If nothing is done to stop this scheme, the madness of crowds may reach proportions similar to the infamous Mississippi and South Sea bubbles and we might see again a situation where “puritan ladies” begin selling their jewels and virtue to buy Bitcoins.

This should not be happening now, since we are supposed to be protected by a plethora of financial regulators paid by taxpayers. So, I decided to search the site of some of them to check what advice they had for us. I limited my visits to the sites of the FED and ECB because they have the monopoly of issuing the two major currencies – the Dollar and the Euro, respectively – and play a key role in their corresponding payment systems.

In the FED’s site I could not find a single reference to Bitcoins while the ECB site had a single link to a policy paper with an academic tone and a badly disguised sympathy for private “virtual” moneys like the Bitcoins. So, I decided to email them to question the legality of private virtual moneys in the following terms:

Dear Sir/Madam,
Would you please confirm if the following operations are legal?
1) To pay and accept payment in Bitcoins
2) To trade Bitcoins against the USD/Euro
3) To issue Webcoins, a money similar to Bitcoins, except that it will be issued by mining real goods
4) To establish an electronic brokerage or exchange to trade Bitcoins and Webcoins against the Euro and other currencies.
I would appreciate an answer ASAP.
With kind regards
Marques Mendes

So far the FED has not answered (see note at the end of this post) my email of the 27th November, but the ECB replied promptly by directing me to the paper mentioned above as follows:

Dear Mr Mendes,

Thank you for your interest in the European Central Bank.

The ECB's position on virtual currencies such as Bitcoins is outlined in this report:

With kind regards,
DG Communications and Language Services
Press and Information Division

Both played ostrich by not replying directly to my specific questions on the legality of such currencies. Yet the answer should be easy.

Indeed, Bitcoins cannot even be categorized as a temporary currency substitute like the chips used by casinos, the token notes used by monopoly game players or the pieces of metal used by some farms to pay harvesters. The reason being that at the end of the day there is no issuer obliged to convert the Bitcoins into legal money like there is for chips, tokens or pieces of metal.

The sponsors of Bitcoins claim that it is not a Ponzi scheme, because like the growing of tulips in the Netherlands, there is no central organization and anyone can create Bitcoins by “virtual mining” a mathematical algorithm that generates the encrypted codes used for transfers among peer-to-peer electronic networks. This, is obviously a fallacy because someone has to hide the codes. The process of mining Bitcoins is just like the popular garden game of hide-and-seek messages in Easter eggs played by children. In fact, it is less competitive and worthy because in the end players do not even get something with value like the eggs.

Bitcoin promoters are equally fraudulent when they claim that Bitcoins can be exchanged through peer-to-peer networks anonymously like the legal notes and coins. In fact, a central organization ( is needed to support the network software and the peer-to-peer participants have to date stamp them so that a trail is inevitable.

Moreover, peer-to-peer networks do not provide any type of anti-fraud guarantee to their users. As a payment system, its security is even less than that of informal payment networks like the Hawala system used in Asia and India. Hawala is based on the performance and honour of known money brokers whose honesty users can check, not on some anonymous internet counterparty.

Any fiat money must be issued by known issuers on whose reputation rests its value. Of course its issuers may be central banks or private entities and these may be more or less creditworthy. Indeed, we can even foresee the existence of competing issuers. However, using as a medium of exchange fiat money issued by anonymous entities it is a complete stupidity that any half-witted regulator should be able to understand.

In conclusion, Bitcoins or any similar faceless Webcoins (the Web here stands for Worthless Economic Bullshit) must be considered as a fraud.

P.S. If I were in any doubt about the fraudulent nature of Bitcoins, that doubt would be over on the 6th of January 2014 when someone went through the trouble of writing an email to me pretending to reply from the FED and directing me to a bogus organization (Coindesk) based in the UK which claims that Bitcoins are legal "depending on what you’re doing with it".

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