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I don't dispute any of that, but in an ideal Bitcoin economy people wouldn't need to convert to USD. Obviously the Bitcoin economy isn't at that point yet and

by acabal 14y ago

I don't dispute any of that, but in an ideal Bitcoin economy people wouldn't need to convert to USD. Obviously the Bitcoin economy isn't at that point yet and people need the USD to peg "value" to what a Bitcoin is. But eventually, if Bitcoin becomes more widely accepted, shouldn't the economy settle on to what 1BTC is "worth" regardless of what other currencies are doing?

thinkcomp 14y ago
Sure, but frankly I don't think the United States Department of the Treasury or any federal judge cares about the ideal Bitcoin economy. This letter addresses the real economy we live in today and for the foreseeable future, and it gives enforcement agencies a very bright green light to seize assets and put people in jail.
betterunix 14y ago
"in an ideal Bitcoin economy people wouldn't need to convert to USD" So how do you think they will pay their taxes? How do you think businesses will repay their loans? Do you really think the US government will accept Bitcoin tax payments, or that banks would be stupid enough to issue loans in a deflationary currency that conveys no legal protections? Bitcoin's only real value in its ability to ultimately be sold for a fiat currency.
- freefrancisco 14y ago
  "Bitcoin's only real value in its ability to ultimately be sold for a fiat currency" You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want, for things of actual value. So if bitcoin is not directly exchangeable for dollars but it is exchangeable for other things, it doesn't ultimately matter. The no arbitrage conditions of financial markets guarantees that even if bitcoin is not tradeable for dollars directly, it will preserve its value if it is easily tradeable for something of actual value.
  - betterunix 14y ago
    "You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want" The value of fiat currencies lies in their ability to pay taxes, and in general the legal structure that surrounds them. The USD would be worthless if you could not at least use it to pay your taxes in the United States. Your entire theory is predicated on the idea that currencies are valuable simply because they exist. Supply is not sufficient to create value; demand must exist also, and your theory does not make it clear why anyone would demand any particular currency. Why is CAN not used in the United States? Why are Euros not used in Japan? Why would the citizens of the United States almost all use USD, when so many other currencies exist? Why don't people just use monopoly money? Take the exchanges away, and you take away the demand for Bitcoin. With the exception of a few cryptoanarchists, the demand for Bitcoin is really the demand for secure and anonymous electronic payments. Claiming that Bitcoin can exist in a vacuum is like claiming that Paypal can exist in a vacuum -- in other words, it is delusional, because people are engaging in electronic transactions for the purpose of spending and receiving their nation's currency.
    - dyno12345 14y ago
      Not necessarily taxes, it's "legal tender" to settle all debts, public (taxes) or private (any private contract). You can pay any debt in the equivalent amount of USD. If I owe you bitcoins I can choose to pay you in USD and you have to accept it.
      - Gormo 14y ago
        > If I owe you bitcoins I can choose to pay you in USD and you have to accept it. That's not true at all. Legal tender laws mean that an offer of US dollars is legally recognized as an offer to fulfill a debt obligation; i.e. if the issue ended up in litigation, the court would treat your offer of dollars as a settlement of the debt. But that doesn't mean that anyone is actually obligated to accept your offer of dollars, or that the agreement that generated the debt wouldn't give you a strong incentive to pay in BTC as opposed to USD.
- steve19 14y ago
  Its real value is being a medium of exchange. For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN. There are many, many ways people who wish to deal in bitcoins can find a way to convert them into USD. Even if that means buying prooducts from overseas using bitcoin, importing them, then selling the products on ebay for USD.
  - betterunix 14y ago
    "Its real value is being a medium of exchange" Value is the result of supply and demand. What is the demand for a medium of exchange? Why not just use monopoly money, or acorns, or lumps of clay? For that matter, why do US citizens not use CAN instead of USD? What drives the citizens of a country to use the currency issued or authorized by that country's government? "For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN." Yeah, and what do you think the VPN provider is paying its bills with? When the government says, "Pay us the tax on your energy use," what does the VPN provider reply with? "Here are some Bitcoins?" Unless the government is accepting Bitcoin for tax payments -- which would effectively turn Bitcoin into a fiat currency -- your service provider is either going to need a way to convert their Bitcoin currency into some other currency, or they will require that you pay them with something other than Bitcoin.
    - retrogradeorbit 14y ago
      I think bitcoins real value to people is it's a P2P solution to the double spend problem. "monopoly money, or acorns, or lumps of clay" can be created almost indefinitely. Of course BTC can too, but must be done by forming consensus amongst the majority of the P2P systems. Lumps of clay you don't need consensus. Just more clay. "What drives the citizens of a country to use the currency issued or authorized by that country's government?" Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law.
      - betterunix 14y ago
        ""monopoly money, or acorns, or lumps of clay" can be created almost indefinitely" Make an acorn for yourself in that case. Acorns are pretty similar to Bitcoin in that regard: you need Oak trees to produce acorns, just like you need CPU time to produce Bitcoin. "Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law." Not all countries have such laws. There is, however, another important category of law that gives fiat currencies their value: taxes. The fact that law-abiding citizens must pay their government periodically creates a large demand for whatever the government accepts as a tax payment. Typically, governments accept a currency they issue, or else they authorize the use of some other currency.
- aneth4 14y ago
  Given that it's not a currency according to the government, you probably don't need to pay taxes when you earn a profit in it. When you receive goods and services in exchange for it, you may need to take those as income (since you didn't pay for them) and pay real taxes on the dollar value of that. There are probably ways bitcoin could survive without being convertible, but there would be major inefficiencies. In general, currencies must be convertible to other currencies to be widely accepted. You can't deposit foreign currencies that are not convertible because there is no value to a bank.
  - betterunix 14y ago
    "In general, currencies must be convertible to other currencies to be widely accepted" That is not really true. The Soviet Ruble was very hard to convert to other currencies, yet it was widely accepted within the USSR.
    - aneth4 14y ago
      Yes, within the USSR. That's equivalent to Bitcoin being "widely accepted" among merchants who accept Bitcoin.
  - illuminate 14y ago
    "Given that it's not a currency according to the government, you probably don't need to pay taxes when you earn a profit in it" What? No. http://www.irs.gov/taxtopics/tc420.html http://www.irs.gov/taxtopics/tc420.html
    - aneth4 14y ago
      Unclear whether the virtual currency itself would be considered of value by the government. If not, the person paying in bitcoin would probably have to pay income tax on the fair value of the goods or services.
kaonashi 14y ago
You will ALWAYS have to convert your Bitcoins to dollars if make any income in Bitcoins, as you cannot pay your taxes with Bitcoins (nor should you, but that's another matter entirely).
- hippich 14y ago
  But you also do not owe any taxes if you whole income is in bitcoins and there is no way to tie bitcoin value to usd.. :)
  - kaonashi 14y ago
    That's an amazing recipe for being convicted of tax evasion.
    - hippich 14y ago
      That's wrong impression I gave, I am sorry. My point was - if US government will make hard or impossible converting bitcoin into usd, they can't claim you owe them any taxes if sole income you get is in bitcoins. Or they have to accept it in bitcoins. As an analogy - let's say you made business where whole income is produced via bartering and in goods, not currencies. Let's imagine that us government made some law which prevents you from exchanging these goods to USD which is the only tax payment option. How you can pay taxes and from what amount?
      - eurleif 14y ago
        They can make you pay because they're the government. They would make you pay taxes on the fair market value of the goods. http://www.irs.gov/taxtopics/tc420.html http://www.irs.gov/taxtopics/tc420.html The prohibition of exchange most likely would not enter into it, because that would be a completely separate law from the tax code..
        randomdata 14y ago
        Wouldn't the fair market value be zero, given that there is no possible way to give the item value under the given scenario?
Pitarou 14y ago
> in an ideal Bitcoin economy people wouldn't need to convert to USD You're describing a situation in which the economy is split into two parts: a dollar economy and a Bitcoin economy. (I will assume that the Feds will come down hard on any "hacks" that make it easy to convert between the two without a license, like they did on offshore gambling sites and AllofMp3.) Experience proves that kind of situation just isn't tenable. Cuba and North Korea just about manage it, but only because there are lots of other barriers separating the two economies. And anyway, we're talking about the here and now. Do you think the Bitcoin speculators and Silk Road traders are in it for the lols? Dream on.
- nwzpaperman 14y ago
  What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world. For time eternal, government has risen among traders to enforce commercial rules. Currency is like electrical current. It flows and the total currency system--all users--seeks equilibrium on it's own. When you've got currency you have to fend against spouses, family, friends, external competitors, the state, lawyers and nature itself to maintain your position.
  - Pitarou 14y ago
    > What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world. No one anticipates it because it makes no sense. Nobody _wants_ hundreds of thousands of cryptocurrencies: Metcalfe's law and the inherent costs of currency fluctuation risk tell us that the number of cryptocurrencies will remain small. I can't make sense of the rest of what you wrote.
marcamillion 14y ago
The value of all currencies is relative to some other currency or value store. The USD's value is relative to the Euro, the Yen, the Pound, etc.
rubyrescue 14y ago
It's the ability to move between USD that allows us to discover the true value of a bitcoin. Quick example - in Argentina currently, the government is desperate to keep foreign currency reserves in USD, so they've banned most means of converting ARS to USD. This has created a dual exchange rate where the official value is 5:1 USD, but the "alternative" rate is 8:1 USD. The difficulty of conversion is causing the value of pesos to fall by nearly 40%. The "true" value of the peso is probably somewhere between those two numbers but the market's ability to discover its true price is being distorted. If a currency as "big" as a member of the G20 ($450 billion GDB) can get massive distortions from closing just some of the easy conversion points, it could destroy bitcoin if the US Government made it difficult to convert into and out of USD. Further, it seems to indicate that BTC would need to be incredibly liquid before converting to USD wouldn't matter that much.
- Retric 14y ago
  While I agree with your point, Bitcoin's are not limited to the US which changes things.

by acabal 14y ago

thinkcomp 14y ago

Sure, but frankly I don't think the United States Department of the Treasury or any federal judge cares about the ideal Bitcoin economy. This letter addresses the real economy we live in today and for the foreseeable future, and it gives enforcement agencies a very bright green light to seize assets and put people in jail.

betterunix 14y ago

"in an ideal Bitcoin economy people wouldn't need to convert to USD" So how do you think they will pay their taxes? How do you think businesses will repay their loans? Do you really think the US government will accept Bitcoin tax payments, or that banks would be stupid enough to issue loans in a deflationary currency that conveys no legal protections? Bitcoin's only real value in its ability to ultimately be sold for a fiat currency.

freefrancisco 14y ago
"Bitcoin's only real value in its ability to ultimately be sold for a fiat currency" You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want, for things of actual value. So if bitcoin is not directly exchangeable for dollars but it is exchangeable for other things, it doesn't ultimately matter. The no arbitrage conditions of financial markets guarantees that even if bitcoin is not tradeable for dollars directly, it will preserve its value if it is easily tradeable for something of actual value.
- betterunix 14y ago
  "You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want" The value of fiat currencies lies in their ability to pay taxes, and in general the legal structure that surrounds them. The USD would be worthless if you could not at least use it to pay your taxes in the United States. Your entire theory is predicated on the idea that currencies are valuable simply because they exist. Supply is not sufficient to create value; demand must exist also, and your theory does not make it clear why anyone would demand any particular currency. Why is CAN not used in the United States? Why are Euros not used in Japan? Why would the citizens of the United States almost all use USD, when so many other currencies exist? Why don't people just use monopoly money? Take the exchanges away, and you take away the demand for Bitcoin. With the exception of a few cryptoanarchists, the demand for Bitcoin is really the demand for secure and anonymous electronic payments. Claiming that Bitcoin can exist in a vacuum is like claiming that Paypal can exist in a vacuum -- in other words, it is delusional, because people are engaging in electronic transactions for the purpose of spending and receiving their nation's currency.
  - dyno12345 14y ago
    Not necessarily taxes, it's "legal tender" to settle all debts, public (taxes) or private (any private contract). You can pay any debt in the equivalent amount of USD. If I owe you bitcoins I can choose to pay you in USD and you have to accept it.
    - Gormo 14y ago
      > If I owe you bitcoins I can choose to pay you in USD and you have to accept it. That's not true at all. Legal tender laws mean that an offer of US dollars is legally recognized as an offer to fulfill a debt obligation; i.e. if the issue ended up in litigation, the court would treat your offer of dollars as a settlement of the debt. But that doesn't mean that anyone is actually obligated to accept your offer of dollars, or that the agreement that generated the debt wouldn't give you a strong incentive to pay in BTC as opposed to USD.
steve19 14y ago
Its real value is being a medium of exchange. For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN. There are many, many ways people who wish to deal in bitcoins can find a way to convert them into USD. Even if that means buying prooducts from overseas using bitcoin, importing them, then selling the products on ebay for USD.
- betterunix 14y ago
  "Its real value is being a medium of exchange" Value is the result of supply and demand. What is the demand for a medium of exchange? Why not just use monopoly money, or acorns, or lumps of clay? For that matter, why do US citizens not use CAN instead of USD? What drives the citizens of a country to use the currency issued or authorized by that country's government? "For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN." Yeah, and what do you think the VPN provider is paying its bills with? When the government says, "Pay us the tax on your energy use," what does the VPN provider reply with? "Here are some Bitcoins?" Unless the government is accepting Bitcoin for tax payments -- which would effectively turn Bitcoin into a fiat currency -- your service provider is either going to need a way to convert their Bitcoin currency into some other currency, or they will require that you pay them with something other than Bitcoin.
  - retrogradeorbit 14y ago
    I think bitcoins real value to people is it's a P2P solution to the double spend problem. "monopoly money, or acorns, or lumps of clay" can be created almost indefinitely. Of course BTC can too, but must be done by forming consensus amongst the majority of the P2P systems. Lumps of clay you don't need consensus. Just more clay. "What drives the citizens of a country to use the currency issued or authorized by that country's government?" Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law.
    - betterunix 14y ago
      ""monopoly money, or acorns, or lumps of clay" can be created almost indefinitely" Make an acorn for yourself in that case. Acorns are pretty similar to Bitcoin in that regard: you need Oak trees to produce acorns, just like you need CPU time to produce Bitcoin. "Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law." Not all countries have such laws. There is, however, another important category of law that gives fiat currencies their value: taxes. The fact that law-abiding citizens must pay their government periodically creates a large demand for whatever the government accepts as a tax payment. Typically, governments accept a currency they issue, or else they authorize the use of some other currency.
aneth4 14y ago
Given that it's not a currency according to the government, you probably don't need to pay taxes when you earn a profit in it. When you receive goods and services in exchange for it, you may need to take those as income (since you didn't pay for them) and pay real taxes on the dollar value of that. There are probably ways bitcoin could survive without being convertible, but there would be major inefficiencies. In general, currencies must be convertible to other currencies to be widely accepted. You can't deposit foreign currencies that are not convertible because there is no value to a bank.
- betterunix 14y ago
  "In general, currencies must be convertible to other currencies to be widely accepted" That is not really true. The Soviet Ruble was very hard to convert to other currencies, yet it was widely accepted within the USSR.
  - aneth4 14y ago
    Yes, within the USSR. That's equivalent to Bitcoin being "widely accepted" among merchants who accept Bitcoin.
- illuminate 14y ago
  "Given that it's not a currency according to the government, you probably don't need to pay taxes when you earn a profit in it" What? No. http://www.irs.gov/taxtopics/tc420.html http://www.irs.gov/taxtopics/tc420.html
  - aneth4 14y ago
    Unclear whether the virtual currency itself would be considered of value by the government. If not, the person paying in bitcoin would probably have to pay income tax on the fair value of the goods or services.

kaonashi 14y ago

You will ALWAYS have to convert your Bitcoins to dollars if make any income in Bitcoins, as you cannot pay your taxes with Bitcoins (nor should you, but that's another matter entirely).

hippich 14y ago
But you also do not owe any taxes if you whole income is in bitcoins and there is no way to tie bitcoin value to usd.. :)
- kaonashi 14y ago
  That's an amazing recipe for being convicted of tax evasion.
  - hippich 14y ago
    That's wrong impression I gave, I am sorry. My point was - if US government will make hard or impossible converting bitcoin into usd, they can't claim you owe them any taxes if sole income you get is in bitcoins. Or they have to accept it in bitcoins. As an analogy - let's say you made business where whole income is produced via bartering and in goods, not currencies. Let's imagine that us government made some law which prevents you from exchanging these goods to USD which is the only tax payment option. How you can pay taxes and from what amount?
    - eurleif 14y ago
      They can make you pay because they're the government. They would make you pay taxes on the fair market value of the goods. http://www.irs.gov/taxtopics/tc420.html http://www.irs.gov/taxtopics/tc420.html The prohibition of exchange most likely would not enter into it, because that would be a completely separate law from the tax code..
      - randomdata 14y ago
        Wouldn't the fair market value be zero, given that there is no possible way to give the item value under the given scenario?

Pitarou 14y ago

> in an ideal Bitcoin economy people wouldn't need to convert to USD You're describing a situation in which the economy is split into two parts: a dollar economy and a Bitcoin economy. (I will assume that the Feds will come down hard on any "hacks" that make it easy to convert between the two without a license, like they did on offshore gambling sites and AllofMp3.) Experience proves that kind of situation just isn't tenable. Cuba and North Korea just about manage it, but only because there are lots of other barriers separating the two economies. And anyway, we're talking about the here and now. Do you think the Bitcoin speculators and Silk Road traders are in it for the lols? Dream on.

nwzpaperman 14y ago
What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world. For time eternal, government has risen among traders to enforce commercial rules. Currency is like electrical current. It flows and the total currency system--all users--seeks equilibrium on it's own. When you've got currency you have to fend against spouses, family, friends, external competitors, the state, lawyers and nature itself to maintain your position.
- Pitarou 14y ago
  > What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world. No one anticipates it because it makes no sense. Nobody _wants_ hundreds of thousands of cryptocurrencies: Metcalfe's law and the inherent costs of currency fluctuation risk tell us that the number of cryptocurrencies will remain small. I can't make sense of the rest of what you wrote.

marcamillion 14y ago

The value of all currencies is relative to some other currency or value store. The USD's value is relative to the Euro, the Yen, the Pound, etc.

rubyrescue 14y ago

It's the ability to move between USD that allows us to discover the true value of a bitcoin. Quick example - in Argentina currently, the government is desperate to keep foreign currency reserves in USD, so they've banned most means of converting ARS to USD. This has created a dual exchange rate where the official value is 5:1 USD, but the "alternative" rate is 8:1 USD. The difficulty of conversion is causing the value of pesos to fall by nearly 40%. The "true" value of the peso is probably somewhere between those two numbers but the market's ability to discover its true price is being distorted. If a currency as "big" as a member of the G20 ($450 billion GDB) can get massive distortions from closing just some of the easy conversion points, it could destroy bitcoin if the US Government made it difficult to convert into and out of USD. Further, it seems to indicate that BTC would need to be incredibly liquid before converting to USD wouldn't matter that much.

Retric 14y ago
While I agree with your point, Bitcoin's are not limited to the US which changes things.