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Friday, November 10, 2017

Why Haven't Central Banks Gone After Bitcion?

Why haven't the world's central banks gone after bitcoin? They can't. They've tried, but a sovereign nation can't dictate to bitcoin -- bitcoin is a post-nation state asset and comes with its own monetary system. That said, central banks can try to work with bitcoin.

"Central banks could simply step in and offer their own digital currency, to pre-empt a Bitcoin takeover," said a writer at the Financial Times. She goes on to say:
There is such a thing already, of course. It’s what happens whenever central banks buy assets by creating bank reserves. It’s all just digital entries on a spreadsheet. Creating central bank “digital currency” simply means offering existing digital account services to a wider group of entities.
There is one big difference, reserves retain value based on the value of paper and monetary/fiscal policy; bitcoin retains value based on energy prices and demand. The more bitcoin are made, the harder they are to make and mining operations are popping up everywhere.

So, if central banks can't beat bitcoin, can it work with it? This is the Fed's only real option. Here's a quote from a recent speech by Fed Chairman Governor Jerome H. Powell in which he lays out three objectives of the Federal Reserve regarding bitcoin:
Today, I will lay out those objectives as we see them at the Federal Reserve, and focus in particular on their application in three specific areas where technological innovation is driving change: creating a real-time retail payments system, using distributed ledger technology to develop new clearing and settlement services, and the issuance of digital currencies by central banks.
Note that distributed ledger technology (DLT) refers to cyrptocurrencies like bitcoin. Powell goes on to describe bitcoin in the following way:
Using blockchain technology--which employs a form of DLT--and an open architecture, Bitcoin allows for the transfer of value (bitcoins) between participants connected to its ecosystem without reliance on banks or other trusted intermediaries. This feature has led some to predict that DLT will in the long run render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary.
Two points: 1) the fed is aware of the potential threat, but 2) only to the extent that it may provide an alternative payment system. In truth, bitcoin is more than a system of payments, it is a system of value storage. Until we reach 21 million bitcoin, it is also a source of value creation. In this way, it will render more than parts of the banking system obsolete. We may see a complete collapse.

Bitcoin & The Law

The Fed also seems to understand that the most challenging aspect of bitcoin is that it can't be controlled or tracked. Users have complete anonymity for all transactions. Indeed, similar blockchain technologies are being used to develop digital content platforms that offer the same kind of anonymity as bitcoin. How do you develop laws around something that was developed to be anonymous?  Chairman Powell contemplates this question below:
Which bodies of law apply to the particular firms, assets, and activities will determine the associated rights and responsibilities when transfers are made, cleared, and settled. For example, whether and how banking, payments, securities, or commodities laws apply in a given context are likely to be important in designing systems and services and understanding their properties. 

We will need a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations. A robust legal basis that provides certainty across relevant jurisdictions is essential for building strong governance, risk management, and operations. 
Good luck with that.
He goes on to say that,  
A digital currency would also be a prime target as a potential vehicle for global criminal activities, including money laundering. Central banks could face difficult trade-offs between strengthening security and enabling illegal activity. Advanced cryptography could reduce vulnerability to cyber attacks but make it easier to hide illegal activity. To the extent we relax strong cryptography to make it easier for authorities to monitor illegal activity, we could simultaneously weaken security.
Still, this is the Fed's security. This is the Fed's privacy. The Fed's needs aren't always aligned with the needs of the people. Perhaps the reason bitcoin is so popular is because it is naturally aligned with the people.

Final Thoughts On The Digital Currency Revolution

This is the world's first real artificial intelligence challenge. Bitcoin can take over the nation state without battle or loss of life. It offers itself to humanity as a system of payments and storage with no central authority. It has only two demands (for now) -- more computer hardware and energy. Bitcoin allows users to access the gods of money without going through the dollar's Vatican, also known as the Federal Reserve.

Over the next 10 years we will bear witness to a remarkable digital revolution; it will be a war between the nation-state and technology. They are fighting for control over humanity. It's hard to say what the Fed's next move against bitcoin will be, but one thing is certain, if the Fed could do anything about the rise of bitcoin, it would have done so already.