Yesterday the US Senate held hearings on "virtual currencies [14]" (meaning Bitcoin). Meanwhile the "virtual currency" ran up above $800/USD and it was reported it got above $900 [15]. It pulled back but as of now, is hovering above $700.
It was interesting at the hearing, the so called Bitcoin 'experts' included FinCen and the Secret Service [16]. The focus seemed to be on potential criminal activities in the digital currency (not other benefits such as a replacement currency in the event of a US Dollar collapse, etc.).
Using phrases such as "money laundering" and "criminal activity" and "child pornography" certainly did not paint a good picture of Bitcoin, for those watching with less knowledge about Finance and Bitcoin, and especially for those who had the hearings on in various bars, restaurants, airports, and other places where viewers were not focused on the hearings but could pickup the occasional keyword such as "drug trafficking." Silk Road [17] and a newly discovered Assassination Market [18] have been over reported in the news and used by anti-Bitcoin antagonists as a justification to shut down the use of Bitcoin as much as possible (or at least to make it look dirty, as if users of Bitcoin are all drug dealers and child smut peddlers). To put things in perspective, it's been reported that the largest holders of US Dollars next to central banks are drug cartels [19]. Oh, and banks such as HSBC and others have been involved in the laundering of their US Dollars [20], some knowingly.
It’s being described as the largest cartel money-laundering scheme in history, and today, HSBC Bank headquartered in London, with offices in the U.S. will forfeit $1.256 billion and enter into a deferred prosecution agreement with the Department of Justice (DOJ [21]). HSBC Bank USA violated the BSA by failing to maintain an effective anti-money laundering [22] program and failed to conduct appropriate due diligence on its foreign correspondent account holders, DOJ said.
But the DOJ is not suggesting we stop using the US Dollar because of it's use in the drug trade, nor are they suggesting HSBC is shut down because it was laundering money for criminals. They get fined, and we all move on.
Virtual Currency?
What is exactly a "virtual currency" ? Merriam-Webster defines "virtual" as [23]:
very close to being something without actually being it
Ok so Bitcoin is not a virtual currency. It could be a digital currency [24], as it's purely electronic and not in physical form. But of the Trillions created by the Fed during the QE program [25], still only $1.3 Trillion of M0 (physical cash & coin), as of July 2013, according to the New York Fed [26].
Note the green line, M2. (M3 no longer being reported. [27]) But this chart will suffice to show the discrepancies between M0 and M3. M0 is less than M1 (red line) by about $700 Billion. The different between M2 and M1 is still about $8 Trillion. That means at least $8 Trillion USD exist in digital form, electronically. So does that imply the US Dollar is also a 'digital' or 'virtual' currency? Or are the only 'real' US Dollars M0, physical notes?
Money does not exist
Mike Maloney has an excellent series about the differences between "money" and "currency." [28] But let's take things a step further, to divide our economy into 2 simple logical components, things that exist (real economy), and things that don't (virtual economy).
Things that DO exist:
- Tools
- Machines / Factories
- Gold, Silver
- People!
- Buildings
- Transportation systems
Things that DO NOT exist, except in our minds, as concepts:
- Money or currency (it's electronic entry in your bank account)
- The markets (again, the markets themselves are virtual, although with commodity markets a virtual contract will result in the delivery of physical goods)
- Derivatives
- Law
- Knowledge
- Value, i.e. 'asset prices'
- Theories, concepts
- Belief
Paper money exists, yes, but as they say it's just paper. If I write a $100 on a napkin even if I'm Ben Bernanke, it will not be accepted by anyone unless they believe they can take said napkin and use it for whatever they need to obtain in the real economy. What makes physical notes accepted is the belief the US Dollar system, and the Fed, not the paper it's printed on.
The fact is the US Dollar is not backed by the Fed, although the Fed is the primary emission, the "Prime Mover." The US Dollar is backed only by a belief system (as are all other currencies today). The belief system is backed by the US military (stop believing in USD and bombs will fall shortly after, yes the villagers were right). So money doesn't exist, it's all an illusion. That is not to cast aspersions on illusions, as a matter of fact, the higher up you go on the Maslow pyramid the more 'virtual' things become. Intelligence is non-tangible, as are many of the ideas we hold dear, philosophy, morality, etc. Our financial system is virtual, it's all a big video game (to use analogy) with money being the method of accounting (not the store of wealth!). Money is a means of exchange, not a store of value.
Many lose sight of the fact that money doesn't exist, they say they 'need' money or they 'have' money - how can you have something that doesn't exist? It must be a boomer concept, too much experimentation in the 60's. For those of you who have trouble grasping this, checkout Eric Fromm, "To Have or to Be." [29] He explains that when you own things, or have things, they end up owning you! We won't get into the legal reality that when you have money in a bank account it's actually their asset (deposits are not bailment [30]). Also, anyone who bothered to read the new account opening contracts when they open a forex account [31] would have seen the clauses that state you are basically handing your money over to the broker and should consider yourself lucky if you get any back.
Bitcoin has emerged [32] at an interesting time, at a time when the Fed has declared there's 'no limit' to the amount of USD he will create. At a time when few other currencies offer stable alternatives. It gives us good perspective to stand back, objectively, and examine the financial system for what it is; a construct, based on concepts, backed by 'the real economy' which is dying [33].
Maybe the conclusion is that the system is just outdated, and we are in a long generational transformation process to a new system, based on technology, not on fiat decree of our central banking lords.