The horizon is not so far as we can see, but as far as we can imagine

Why China Banned Banks from Bitcoin Transactions

China has ordered banks not to engage in Bitcoin transactions.  The reason is simple: bitcoin is used to bypass currency restrictions, and China doesn’t want even more money flowing out of China (it’s already contributed massively to the Australian housing bubble and affected New York’s, for that matter).  China is creating about sixteen times more money a year than the US, everyone else’s QE is meaningless in comparison.  That money is meant to boost the Chinese economy, not cause property bubbles outside of China.

Bitcoin is dubious at best.  It intentionally gives a huge first mover advantage (and has made its founders filthy rich). It is intentionally deflationary.  It is the libertarian answer to their screams about the central bank “no, we just wanted to be the central bank”.

What bitcoin is is an way of moving money without monetary authorities knowing about it.  Its first bubble peak was during the Cyprus debt crisis, when it was used to move money out of Cyprus.  Since then it has risen based on bubble psychology and on money movement and laundering.  I don’t necessarily mind, just because a government says you can’t buy something doesn’t mean the government is right, I just think it’s important to be clear what Bitcoin is.

The best way to make money from Bitcoin if you weren’t a founder is to mine Bitcoins: printing money, if you think Bitcoin is money.

Governments since the 70s have massively cracked down on movements of money: the $10,000 declaration when you travel (a lot less than it used to be given inflation), the $10,000 reporting limit at banks, huge lists of suspect individuals and corporations which must be checked during every transaction, requirements to report transactions that look like they are structured to avoid the 10K reporting limit, and so on.

This infrastructure was used, in part, to break old-style organized crime (so we could get the far worse networks we have today.)  It is used to break countries like Iran.  It used during the seizure of assets when the government decides to charge someone with a crime and take away all their money so they can’t defend themselves.  It is used to enforce legal restrictions and monopolies on what you can and can’t spend money on.

Bitcoin threatens that.  It also threatens monetary policy in countries which try to keep their money in their country, like China, which is why China was the first country to forbid it.  In the West, Bitcoin is used to move money by small people, the big guys have other ways to do it.  The Russians needed Bitcoin to get out of Cyprus because the Europeans were trying to screw them, but real Western elites, nah.

All of this might make you think I like Bitcoin: I don’t, it’s the wrong way to do something that needed to be done.  We need a peer to peer payment system, but Bitcoin, intentionally deflationary, and intentionally providing huge first mover advantages and advantages to miners which increase over time, is not it.

And if you’re not Chinese, you don’t want more Chinese money getting out.  Well, maybe you do, if you own prime real estate and want to sell in a few years.  Otherwise, no, that money isn’t going into useful production, it’s going into asset inflation.  That’s not good for you.

We’re going to have to clean up money creation and find a new measure of value to peg creation to. Bitcoin, however, is not it.


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  1. Dan H

    Do you think cryptocurrencies are here to stay? Ive been a member of a large computer hardware enthusiast forum for over a decade. Bitcoin is old hat in this end of the web. Currently theres a rush into litecoin. Techies are buying up the last generation of AMD cards in order to mine LTC as the efficiences and electricity are currently a very good value – ive read that many smallish setups are pretty easily making $1000/month. However, this is exactly what was happening with BTC a few years ago before ASIC machines were on the scene…which makes me wonder how many times this is going to repeat…

  2. Ian Welsh

    I don’t know. I think they’re a phenomenally stupid idea, honestly, but that’s just me. I think I need to write a theoretical piece on what a good monetary system looks like. It doesn’t look like the dollar, and it doesn’t look like Bitcoin, that’s for sure, but the MMT guys aren’t on point either, imo. I’ve been avoiding this for a while, because it’s heavy sledding and it’ll upset a lot of people.

  3. Jeff Wegerson

    @Ian re money systems: Since it’s heavy sledding you should get started. It should at least be a back burner project. By the time it’s ready there will either be more people upset or less. If less that’s a win and if more then it’s good you didn’t put it off longer.

    The difficulty I have with understanding money is all the various jargons surrounding financial stuff that inevitably gets dragged into any discussion. One of your abilities is that of explaining complex things reasonably simply and from the ground up. The “from the ground up” part means that when you use complex terms they are ones you have defined yourself earlier. As much as I liked reading Stirling, I often felt as if I were thrown into the middle.

    The other thing that would be fascinating for me to read would be discussions of other money writers from the point of view of the terms you explain and define. Like MMT, Michael Hudson, which is maybe the same as MMT, and Paul Krugman for instance. Dare I mention Marx? OK forget all that. But, yes, you have my vote for a money piece.

    As as for me being upset, well, that’s would just be icing on the cake.

    One concern, though, is that I also read you for the foundations of an ideology you are preparing. To the extent that money is important to that set, then fine. But I wouldn’t want you side-tracked from the larger ideology project.

  4. Ian Welsh

    Money is part of the prosperity book, it has to be. Ideology is also part of it, because ideology is a large determinant of what we do.

    One thing I’ve come to see is that a lot of people are acting from a very emotional place when it comes to theories of money. Libertarians screaming about theft, left-wingers who wonder why the government shouldn’t just print money for them since it’s doing it for the rich, anarchists who hate the idea that money is state based (is it? Not quite); people who think it’s their money (it’s not) and so on.

  5. Tomm

    I love most of your writing, but this one on bitcoin is waaaay off the mark. The media picked up on the coincidence of the Cyprus debacle with an increase in bitcoin valuation, but it was not supported by data:
    * bitcoin nodes by country (every node has an easy-to-geolocate IP address) did not show a huge uptick in usage
    * google trends by region did not show exceptional volume in the region
    * european exchanges did not see a large increase in volume
    * bitcointalk forum, still the primary forum, did not see a corresponding uptick in Turkish or Greek language postings.

    Also, the Chinese declaration explicitly allows private usage of bitcoin, which has been the dominant type of usage to date, while disallowing banks from using it directly. Though it’s unknown if Chinese banks were starting to use bitcoin, there have been no reports I’ve seen of it, and I seriously doubt it’s significant at this point.

    The fact that the Chinese are explicitly allowing private usage is very important. By contrast, American regulators have been cracking down on banks that simply allow USD-denominated accounts for bitcoin-related businesses, such as TradeHill and the Internet Credit Union.

  6. Ian Welsh

    It was Russians who were moving money out of Cyprus, far more than Cypriots.

  7. tc

    The difficulty I have with understanding money is all the various jargons surrounding financial stuff that inevitably gets dragged into any discussion.
    Money is not that complicated, few things ever are when you break them down. Anything complex is just simple things put together in complex ways, usually in order to hide shenanigans. But I too find that Sterling is almost impossible to follow. Like a lot of very smart people, he knows how to hold lots of complex ideas together in his head and make sense of things where the rest of us maybe didn’t even see a connection; but he doesn’t even seem to try to break them down to their simple components in his writing so that a layman can follow him, like Ian or Paul Krugman can (whether you agree with them or not, they both do good jobs of communicating their subject matter).

  8. Eric Finley

    Dan – I don’t think there’s any fundamental necessity that “programming cycles” should be the controlling factor behind a cryptocurrency; like the first mover issue (which left me, like Ian, totally nonplussed when I realized how heavily weighted it was in BitCoin), it’s not necessary, it’s just part of how these particular cryptocurrencies have been designed.

    As an example: it would have been equally possible to design BitCoins such that the values of all the old BCs diminished in step alongside the difficulty of “finding” new ones, thus removing the most egregious zeroth-order first mover advantage. (There are likely still subtle effects present but they’d be much less than the impact of this structural one.)

    So I’ll second the desire to see Ian’s take on a what a useful value-measure might look like. Please do!

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