Not to be missed in the ECB news fog: John Gapper’s account of an FT Davos lunch with Nouriel Roubini in which the formerly doom-saying NY Stern economist spelled out what polite and civilised society has always known but been keen to turn a blind eye to: the art market is actually a bit of a money laundering scam.
The key quotes not to be missed:
“Whether we like it or not, art is used for tax avoidance and evasion,” said Prof Roubini, himself an art collector. “It can be used for money laundering. You can buy something for half a million, not show a passport, and ship it. Plenty of people are using it for laundering.”
Prof Roubini argued that the art market had a series of characteristics that needed regulation. “While art looks as if it is all about beauty, as a business it is full of shady stuff,” he said. “We should correct it or it will be undermined over time.”
As the Bitcoin price crumbles….
… and the capital hole (economic flaw) at the heart of all cryptocurrency schemes is exposed, we thought we’d uncharacteristically look at what was actually good about the phenomenon of Bitcoin. Read more
A quick update on the scam-ridden world of Bitcoin — not to be confused, of course, with the (sacrosanct) technology of THE BLOCKCHAIN, still dubbed “promising” and “respectable” by VCs in the know — which seems to be fast descending into a blazing fireball of financial chaos, bankruptcy and despair.
On Monday, we had the suspension of Bitstamp, one of Bitcoin’s most reputable and liquid exchanges, founded and operated by two Slovenian kids in their 20s and funded to the tune of $10m by US-based hedge fund Pantera Capital (an arm of Fortress Investments) despite the youngsters’ lack of discernible financial credentials.
As of pixel time, the official line by way of CEO Nejc Kodric was still that a hack had pilfered $5m worth of Bitcoin from the company accounts but that Bitstamp would be back up and running within
24hrs, 48hrs, “soon”, and that customers should not worry because the company had more than enough reserves to cover their customer liabilities.*
*Update: Bitstamp is back up and trading as of Friday evening. No change to the official narrative and no real explanation of who is covering the loss. Read more
What did you miss while you were away eating turkey and whatnot?
Well, there was that one thing about China’s State Administration of Foreign Exchange relaxing the rules on Chinese banks’ foreign-exchange holdings, allowing them to hold fewer dollars — a pretty useful ruling during a dollar shortage issue. Read more
Arrr, you can’t keep a good pirate down. As we’ll learn below, the suppression of buccaneering in one area soon prompts piratical hot spots else where.
Indeed, one of the things the bitcoin community is quickly learning — as it goes through about 600 years worth of banking lessons at hyper speed — is that piracy, theft and fraud is a naturally occurring cost in any money system. Call it the unintended bitcoin risk premium that anyone carrying the currency must bear. (Something that doesn’t include the risk associated with the crypto currency’s volatility.)
The lesson the community is still to learn, however, is that most ordinary folk don’t like these sorts of risks and expect risk mitigation to be a demonstrable aspect of any currency system they use. In fact, one of the things people love about today’s banking system is precisely its ability to compensate or refund people if they ever do find themselves victim of fraud, theft, hacking or sub-quality service. Read more
Someone once wisely said, “if you love something, let it go. If it returns, it’s yours; if it doesn’t, it never was.”
But as Willem Buiter, chief economist at Citi, points out on Thursday, that’s not the message those with a tendency for passion investments seem to have ever received. They want to imprison the thing they love most and keep them in a dark dingy basement.
In a note on the non-virtues of gold and bitcoin investing (and the upcoming Swiss gold referendum), Buiter notes:
- Gold is a fiat commodity currency (with insignificant intrinsic value).
- Bitcoin is a fiat virtual peer-to-peer currency (without intrinsic value).
- Gold and Bitcoin are costly to produce and store.
- Gold as an asset is equivalent to shiny Bitcoin.
- Central bank fiat paper currency and fiat electronic currency are socially superior to gold and Bitcoin as currencies and assets. There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value.
- Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.
Let’s close the week off with little bit of “history is just repeating itself” education for both the champions of private cryptocurrency, unaware of the private origins of evil fiat currency, and the “take away the banks’ power to create money!” Positive Money campaign in light of the recent deluge of historically myopic press releases in our inbox.
As the BoE’s historical timeline helpfully points out, the BoE came into being when a private syndicate decided to risk all in 1688 by providing the UK government with funding when no-one else was prepared to do so. This ultimately proved to be a very good decision. It turns out lending money to government on terms you can enforce and control can be very profitable, especially if it leads to wise public investments that improve the wealth of the nation and make it easier to collect taxes as a result. Read more
Steve Randy Waldman’s latest post at Interfluidity talks about econometrics, open science and cryptocurrency. He makes the point that the real potential of “blockchain technology” is rooted in the possibility that it could one day help many different groups and movements achieve consensus for the sake of mutual discovery and progress.
There is, in his opinion, a need to create a public forum in which scientists, academics and inventors can share data and research, and in a way that allows them to shed the mal-effects of groupthink and open themselves up to public scrutiny and refutation. Read more
We can all agree that the current financial system is not perfect by any stretch. The question is, is the new system now being touted by the People’s Front of Libertaria, led by the likes of Marc Andreessen and Overstock CEO Patrick Byrne likely to be any better?
Chances are no, it’s likely to be even worse.
In fact, we propose it’s just a recasting of the old story of Animal Farm, where the animals band together to throw out their evil oppressors only to unwittingly replace them with an even greedier variety in the long run.
Hence, of course, the propaganda onslaught to convince you that what is being offered up is somehow revolutionary, when it’s actually nothing but the same old, same old. The revolution relates only to who the new overlords are. Read more
Most people know that China’s currency is classified according to trading conditions. There is, for example, CNY, which refers to onshore yuan. There’s CNH, which refers to Hong Kong (offshore) yuan. And then there’s NDF, the non-deliverable forward market.
What differentiates these currencies are the terms and conditions that apply to those particular market zones, and how easy or not it is to transfer currency in and out. As implied yields of the respective markets show (chart via BNP Paribas), the rates of return for all of these markets varies significantly — because they are, to some extent, entirely different currencies:
The latest edition of the BoE’s quarterly bulletin looks at the rise of cryptocurrencies and, as we’ve already discussed, expresses a cautiously optimistic attitude towards the technology that drives the system. Less so, however, about the potential of “bitcoin the currency” itself.
In this post, we’d like to look closer at the issue of cost and digital currencies.
You see, monitoring and supervising the global claims system is expensive business, since it takes a lot energy and resources to make sure wealth is allocated fairly to those who supposedly deserve it.
Those who are trusted to do this job tend to be compensated for that burden. Those who do that job really well, meanwhile, are usually paid a bonus by the economy to keep them involved. Historically, that job has tended to be given to a sovereign or to gold. Read more
The FT’s Ed Crooks reported this week that fears over the long-term health of America’s shale industry could be put to rest thanks to news that independent oil and gas companies have now substantially improved their financial positions.
From the story:
Cash earned from operations by 25 leading North American exploration and production companies is expected in aggregate to exceed their capital spending next year for the first time since 2008, according to an analysis by Factset for the Financial Times.
As Crooks recounts, the longstanding fear was that the industry was shaping up to be a Ponzi scheme, relying on nothing more than excitement over shale to continuously attract new investment, with every likelihood that things would cave in on themselves once the financing for more drilling ran out.
Thanks to a shift to more profitable oil extraction over less profitable gas, however, it now looks like shale companies’ finances have improved enough to make the business sustainable. Read more
Pirates. Can’t live with them. Can’t get rid of them.
And… it has always been so. Read more
The deadline for European institutions to be compliant with the Single European Payment Area (SEPA) standard came and went on August 1.
In theory, that means anyone in Europe should from now on be able to make and receive payments across the union on an entirely frictionless basis. For the euro project it’s the realisation of one of the system’s key objectives.
As the ECB noted:
It allows businesses to grow and to broaden their reach within Europe, and reduces costs by providing a standardised framework for all their payments. Businesses can now use a single system and set of accounts for all their euro trade in Europe.
Nobody has been more annoyed by Alibaba’s potential upcoming valuation of Snapchat at $10bn than the Bitcoin community, since its own “world changing” technology currently has a market value of no more than $7bn.
Here’s a flavour of the outrage on the Bitcoin subReddit: Read more
We’ve argued enthusiastically for the introduction of state e-money before.
But we overlooked the likelihood that it might first be adopted by countries like Ecuador as a means of getting out of their dollar bind (via Bloomberg):
Ecuador’s congress approved a new law today that allows the government to create its own parallel currency for use in local transactions as the government struggles to meet spending commitments.
Congress voted 91-22 to approve President Rafael Correa’s proposal to change the South American nation’s monetary and financial laws, allowing payments in “electronic money” and giving presidential appointees the power to decide who gets loans and how lenders invest their reserves.
The bill now goes to Correa for his signature or veto. As a current-account deficit drains dollars from the economy, making it harder for Correa to fund a burgeoning budget gap, a new currency could be used to meet government payments, said Jaime Carrera, a former deputy finance minister and director of the Quito-based Fiscal Policy Observatory. It could also lose its value quickly if not backed by the central bank, he said.
This how the Bitcoin regulator comes, not with a bang but with an AMA.
In accordance with the New York State Administrative Procedures Act (SAPA), the proposed DFS rules for virtual currency firms will be published in the New York State Register’s July 23, 2014 edition, which begins a 45-day public comment period. After that public comment period, the rules are subject to additional review and revision based on that public feedback before DFS finalizes them.
Additionally, DFS is today immediately publishing a copy of the regulations on the website Reddit. Earlier this year, Superintendent Lawsky hosted an “Ask Me Anything” forum on Reddit about DFS’ work on virtual currency regulation, which generated more than 1,200 public comments. Links to the proposed rules are also being tweeted out from the DFS Twitter handle (@NYDFS) and Superintendent Lawsky’s Twitter handle (@BenLawsky).
Click to enlarge, via the European Banking Authority’s response to virtual currencies. Do note E31.
Since we just spent a good while arguing against the idea of blockchain society, we thought we’d quickly follow up with a post explaining why that doesn’t necessarily mean we’re against blockchain innovation itself.
It’s very likely that the blockchain might one day be usefully incorporated into existing services to make them better and fairer. We’re just not convinced this will necessarily democratise the world the way Matthew Sparkes at the Telegraph envisions or make it cheaper to process information. If anything, it’s likely to de-risk markets (the sort that feature real goods and services) through improved information gathering, sharing and transparency — something which limits the need for currencies, not increases it. Read more
We’ve been wondering about the consequences of paradoxical markets here at FT Alphaville, especially as financial information systems run into the laws of physics. (How does an HFT trader, for example, gain an advantage when he’s already approaching the speed of light, which presumably counts as the universal circuit breaker?)
Might markets inadvertently replace the Large Hadron Collider as the world’s largest physics experiment? You know, like in Hitchhiker’s Guide to the Galaxy where the greatest computer of all time was in fact a computational matrix designed to calculate the ultimate question to life, the universe, and everything but which happened to incorporate unwitting living beings in the experiment. It was also programmed by mice and better known as the Earth. Read more
Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto).
Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that…
Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.
Meaning that a good bout of inflation could be just as good as a negative rate regime. Read more
Everyone has a linguistic signature (apparently).
Luckily for Bitcoin sleuths trying to determine the real identity of Satoshi Nakamoto the existence of *that* Bitcoin white paper provides everyone with some valuable clues. Read more
This guest post is by Tim Karpoff, a partner at Jenner & Block and formerly Director of the Treasury Department’s Office of Financial Institutions Policy and Counsel to CFTC Chairman Gary Gensler, and Israel Klein, a Principal at the Podesta Group and formerly a senior Capitol Hill staffer. The authors do not represent clients with interests related to Bitcoin.
——————- Read more
Tech billionaire and bitcoin investor Marc Andreessen says Mt Gox is to bitcoin what MF Global is to the dollar.
But before we get to that, we’d like to explore revelations that it may not have been a malleability issue, a.k.a. a transaction doppelganging problem, that brought down the world’s premier bitcoin exchange but the much more common problem of “under-capitalisation”. It’s a common problem of banks and ponzi schemes everywhere. Read more
Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.
Banks or Bitcoin operators? Click here to find out. Read more
Felix Salmon at Reuters sums up the problem with a lot of “disruptive” innovation these days.
It’s not really all that innovative — but rather focused on finding ever cleverer and more subtle ways of dodging established regulations, which, as he also points out, exist for a reason.
Should it therefore be surprising that the likes of Airbnb, Uber and even Bitcoin are more cost effective than established competitors when they’re either cutting out the taxman or costs of compliance altogether? How can regulated industry possibly hope to compete?
Which also confuses, if not exploits, the ethos of the sharing economy in and of itself. Read more
Cartels come in many shapes and sizes.
There are Colombian drug cartels. Mafia protection cartels. Oil producer cartels. Diamond cartels. Commodity cartels. Central banks. Altcoin cartels. All sorts.
All of them, however, extract value from potentially low-value things by means of organised collusion and discipline.
Columbian drug cartels organise to ensure drug markets are not oversupplied by wiping out the competition. The mafia organises to extract rents from those who would otherwise not be inclined to pay them, mostly by imposing an artificial market for protection. Oil producers organise to ensure oil markets are not oversupplied for the best possible return from oil prices. Diamond cartels do the same , but since diamonds are not an essential commodity they also create fanciful myths about diamonds being a girl’s best friend to create continuos demand. Central banks control the money supply, and thanks to that can corner and support any market they wish for as long as their underlying currency is demand. Read more
Now, more than ever, is the time for central banks to launch their own official e-money. We’ve campaigned for this before. But in light of further Bitcoin and altcoin developments, as well as secular stagnation observations by Larry Summers, it’s worth reiterating the argument for an unconventional policy of this sort.
First, it’s important to stress why this wouldn’t in any way be a panicked response to the supposedly destabilising “threat” of Bitcoin.
Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began.
What’s more, the Bitcoin asset bubble is much more likely to be doing the stagnating dollar economy a favour at the moment than a disservice. Read more
Here’s an interesting little side note from Joseph Abate at Barclays’ Global Rates team last week on the subject of rising demand for paper money:
Despite the attention the bitcoin and other electronic payments attract, the demand for old-fashioned paper money is surprisingly robust. Paper money is growing at a 7% annual rate, reflecting non-US demand and the $100 bill’s role as a store of value.
• Growth in currency demand has cooled since early 2012, yet it remains considerably faster than nominal consumption.
• Much of the demand for US currency results from its use as a stable store of value, which is reflected in high per capita holdings and its use abroad.
• Super-low rates on highly liquid assets such as money funds and checking account balances have meant that the opportunity cost of holding currency is low.
• Currency growth will determine how quickly the Fed’s balance sheet normalizes after it stops buying assets and re-investing maturing securities. We expect the precautionary demand and the higher opportunity costs to slow annual growth to 3% or less.
In a previous post we presented research by Willem Buiter, Citi chief economist and former BoE MPC member, which he conducted in the mid 2000s, into whether virtual currencies could be a useful mechanism for breaking through the zero-lower bound.
The idea in many ways represents an evolved form of QE, in which differentiable units from dollars are pumped into the economy, inducing an effective negative interest rate on dollars due to the fact that there is less of the new currency in circulation than the established one. Seen from this light, the recent rise of private virtual currencies could can be seen as amounting to the market’s own endogenous version of QE. Read more