For the information below, these are just my opinions. You should consult a lawyer for an official interpretation of Australian law.

I was double-checking the laws regarding bitcoin and the running of BitPiggy in Australia (and curious how they may affect my other business BitPiggy Platform in Hong Kong), by reading through parts of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006, and specifically the definition of e-currency (definition in section 5).  I find the definition pretty ironic, for a couple of reasons.

To begin with, one of the key requirements for a digital currency to be considered an e-currency for the purposes of the act, that currency must be backed by something. One of the ongoing arguments about bitcoin is whether or not bitcoin will fail because it is not backed by anything. The irony is this property of bitcoin means it is not classed as an e-currency by Australian law, and thus this argued weakness of bitcoin leads to bitcoin not being burdened by AML/CTF reporting requirements - which is great for the Australian bitcoin community. This definition of e-currency is even explicitly highlighted in a 2012 AUSTRAC report (top of page 17) as limiting the government’s ability to observe bitcoin. 

But beyond that, I find the definition ironic more so for another reason. There is another definition in the act, that in combination with the definition for e-currency is pretty revealing.

A key part of the AML/CTF act is the definition of money. Basically the definition for “money” is Australian dollars, other fiat currencies, and e-currencies (with the latter required to be backed by something).

But why state that e-currencies must be backed by something? If you think about why the definition is worded that way, it was likely to avoid having the AML/CTF act impose reporting requirements across whole sections of the IT industry by only targeting businesses that deal with something that is money-like. In other words, besides the explicit exceptions about fiat currencies, the act is implicitly saying AUSTRAC thinks for a money to be of interest to them, that money needs to be backed by something. To put it another way, bitcoin is not consider money because it is too little like gold and too much like fiat!

And I find that pretty ironic.

Note: Another thing of interest in the definition of e-currency is that only very specific precious metals can elevate a digital currency to official e-currency status, such as gold/silver. For instance, copper is not one of them. Hence someone could make a bitcoin-like digital currency, back it with copper, and it would not fall under the AML/CTF laws.

Or you could back it with CPU processing time. Make something called “amacoin”, where 1 amacoin entitles the owner to 1 hour of processing on an Amazon EC2 “large” instance.  

Something to think about.

Bitcoin intro

What is bitcoin?

• Bitcoin is new type of money
  • 100% digital
    • Just need to download software to use
    • Cryptography forms backbone of bitcoin

What is money?

• Lots of things have been used as money
  • Seashells, tobacco, stones, cows, salt
  • Desirable properties of money
    • Easily identifiable/hard to forge
    • Easily divisible
    • Easy to carry in your pocket
    • Doesn’t degrade
    • Non-reversible
    • Has value in its own right
      • E.g. you can eat a cow, smoke tobacco
    • Scarce
      • Expensive/impossible to produce more
    • New desirable properties that were never considered before
      • Anonymity
• Fiat currency is what all governments use through out the world
  • Fiat means ‘by decree’ or ‘by law’
  • Contrast fiat to money created by a free market
    • Has no intrinsic value (debatable- see below)
    • Is not scarce (trivial for governments to produce more, both cash and electronic balances)
    • Electronic payments are always reversible
    • Electronic payments are normally not anonymous
• Ongoing argument in bitcoin world whether bitcoin is not a good money because it doesn’t have value in its own right
  • Personal opinion is intrinsic value is not necessary
    • Fiat currencies prove money does not need intrinsic value per se
    • Criticism of fiat is mainly based on it being easily inflated rather then its lack of intrinsic value
    • Arguably the ‘usefulness’ or ‘utility’ of fiat + bitcoin give them intrinsic value

‘Normal’ money vs bitcoin

• Bitcoin same as most money you can think of
  • You only do one of 3 things with bitcoin
    • Send bitcoin to someone
    • Receive bitcoin from someone
    • Do nothing (e.g. save)

History of bitcoin

• Started by someone called Satoshi in ~2007.
• First client release start of 2009
• First blockchain mined in 2009
• Open source with open source algorithms/cryptography, so no one has to trust Satoshi

Differences of bitcoin to other money

• Decentralized
  • No central issuing authority
    • No arbitrary/centralized inflation
  • No group can freeze another groups bitcoin account
  • No one can prevent anyone else from using bitcoin
    • I.e. all you need is the software
  • Difficult to shutdown
• Tiny or zero fees
  • Fees are typically 0
  • If there is a fee, usually way less then < 0.1%
  • Compare this to credit cards/paypal that charge 1.5 ~ 4%
• Payments non-reversible
  • Contrast this to PayPal
  • Also normal bank payments + credit card payments, etc can theoretically be reversed in cases of fraud
• Transaction history is public
  • Every transaction is public record
  • Anonymity is achieved when owners of bitcoins remain anonymous
  • People call bitcoin pseudo anonymous
• New bitcoins made by ‘mining’
  • 50 bitcoins produced every ~10 minutes
  • First miner to solve a difficult maths problem gets rewards
  • Mining is the way transactions are verified
    • Prevent double spending
  • Acts as incentive for early adopters, to run mining rigs
  • Additionally miners receive ‘transaction’ fees
    • Miners can refuse to process any transaction they choose, e.g. market based
    • Assumed that in the future, when the mining reward becomes very small, transaction fees will act as the incentive
• Deflationary by design
  • Based on precious metals (e.g. gold/silver)
  • Gold/silver + bitcoin do what money is supposed to do: store wealth
    • Bitcoins will go up in value compared to e.g. fiat currency
    • Bitcoin divisible up to 8 decimal places. Protocol can easily be changed to adopt more decimal places, ad nauseam.
  • Controlled supply of money increase
  • Every ~10 minutes, 50 bitcoins added to the total pool of bitcoins
  • Rate of new bitcoins introduced decreases over time asymtotically
    • Every 4 years, rate halves, so 50 bitcoins will become 25, 25 => 12.5, and so on
  • Maximum is 21 million (~10 million have been issue already)
  • First rate reduction will occur roughly december this year!
    • Theoretically value will have increased dramatically by that time
    • Will likely increase before that in anticipation

Why should you care?

• Governments will use virtual currency in the future
  • Governments continuously encroach on areas as monitoring becomes ever cheaper
    • Communication (face-to-face conversation + postal mail + telephone + email)
    • Travel (passports didn’t exist 100 years ago)
    • Individual identification (finger printing requirements, biometric scanning)
    • Surveillance (video cameras + microphones in public places)
    • Association (jobs criteria if e.g. working with children)
    • Ownership (driving/boat/gun/property licenses)
    • Finances (tax returns + bank account tracking)
  • Governments interested in tracking anything they can about money
    • One of the main responsibilities of the Australian Federal Police is to protect the government’s revenue
    • Aside from that, AFP has power to pry into financial records to track other forms of criminal activity
    • AFP can freeze accounts as well
    • Put those together, government can justify any money tracking/freezing they want
    • Virtual currencies are trivial/cheap to track for e.g. tax avoidance
  • Hence, governments will inevitably require citizens to switch to virtual currency
    • Trivial to copy and modify bitcoin so have centralized control + monitoring
    • We already use virtual currency in a sense. Just have to get rid of cash.
    • Already have examples moving in this way
      • MintChip in Canada
      • Sweden doesn’t accept cash for public transport
      • Italy illegal to do transactions in cash if €1000+
      • All countries restrict national currency movement electronically
        • There is a pervasive myth that only a few countries like China do this
  • Thus virtual currencies will become increasingly more important in the future
    • Currency make up ~1/2 of every transaction
    • A shift to virtual currency means skills/knowledge will increase in demand
    • Businesses will need to understand and use virtual currencies
    • Bitcoin is the best virtual currency to invest time in
      • First to be decentralized
      • Has a track record
      • Active community
      • Bitcoin is still largely ignored by governments
      • Individuals and businesses (i.e. non-government entities) are very interested in privacy, and thus the bitcoin project naturally trends towards improving user privacy (though its far from perfect)
• Protect your assets
  • All fiat currencies lose value over time
    • This is intentional
    • Need understanding of economics in the field of monetary policy
  • Shares/equities are not an alternative for average joe
    • You are competing against professionals with large resources
  • Still have to pay capital gains, unless held in country that doesn’t care (e.g. Hong Kong)
• Open yourself to an emerging global market
  • 10s of millions of dollars transacted daily
  • Any merchant/customer can use bitcoin. No forms, no government approval required.
  • Avoid fraud as a merchant
  • Bitcoin fantastic for customers/merchants in corrupt/heavily regulated countries
    • Belarus -> 40% tax for online payments, server must be hosted in Belarus
    • US -> must report any asset + income held in any country to government. Many non-US banks now don’t accept US customers because of this law
    • Italy -> forbids any purchase of €1000 or greater with cash (must be electronic)
    • Every country -> very difficult for foreigners to setup local bank account

Safety

• Assume that if you lose your bitcoins, no government agency will help you
• 3rd parties
  • Be very careful
    • Bitcoinica
    • Exchanges
  • If sounds too good to be true, it often is
    • Bitcoin Savings and Trust
  • Look for strong reputation, or connection to real world arbitration
  • Technically possible for vendor to offer some services where don’t have to trust them
• Personal wallet
  • Avoid most online wallet services
    • Examples
      • MyWallet.com (closed now)
      • Coinbase.com and Easywallet.org good, but be careful!
    • Online ok if wallet encrypted before it gets to them
      • Blockchain.info
  • Mobile wallets are your friend
    • Bitcoin spinner
    • Blockchain.info (mac app cannot do payments)
  • If use desktop client
    • Make sure its encrypted
    • Better yet, encrypt whole HDD + backups
  • Backup your passwords/wallets!
    • Responsibility is for you to keep your passwords + wallet safe
    • Print out to paper
• Anonymity
  • Use a different bitcoin address for every transaction
  • Don’t publish your bitcoin addresses
  • Don’t assume you can’t be tracked if e.g. some government really wants to find out who you are

Questions

Is bitcoin a “pyramid scheme”?

• If by “pyramid scheme” its meant, “is bitcoin a ponzi scheme”, then the answer is a definite no.
  • If someone sends you bitcoins, they are in your possession and you have 100% control of what you do with them.
  • Contrast this to a ponzi scheme
    • In a ponzi scheme, someone promises to give you something, whether its bananas, dollars, gold, etc
    • In reality, the person running the ponzi scheme is handing out more IOUs then they can possibly fulfil
    • The ponzi scheme collapses when the rate of daily payouts (withdrawals) exceeds the rate of income (deposits)
  • Interestingly, fiat currency in every country is arguably run like a ponzi scheme, due to fractional reserve banking.
    • Banks loan out more money then they have in reserve
    • A bank run is thus possible for any bank that uses fractional reserves. Central banks often guarantee consumer banks against this very threat. But note: astute observes will ask the question, “where does the central bank get its’ money from?”
    • Pretty much every country around the world use fractional reserve banking
• If by “pyramid scheme” its meant, “early adopters win, late adopters lose”, then I’d say that’s a misunderstanding of investing
  • Investing is not a zero-sum game
    • Investing time/money into bitcoin is analogous to going into any new technology
    • Early adopters can potentially do better financially then late adopters, but they also take all the risk
    • Late adopters get the benefit of hindsight, reliable vendors, etc.
  • Compare this to investing in stocks
    • Early investors get potentially huge rewards, but also take the risk they get nothing in return
    • Late investors get the benefit of buying an established company with a proven record
• If by “pyramid scheme” its meant, “is bitcoin in a bubble?”, then the answer is I don’t know
  • Bitcoin prices have been rising for ~10 months, but at $10 a bitcoin that’s a third of their historic high mid-2011 of ~$32
  • Contrast this to Australian dollar
    • AUD is a few % off its all time historic high compared to the US dollar
    • AUD is still 30~40% higher then it was for decades compared to the US dollar
    • Is the AUD in a bubble? I don’t know

The next bitcoin social meetup for San Francisco will be held on Monday 23rd July, at StartupHQ (same place as last time).  Note that I recently moved the date forward one day.

For more info + to sign up, check out the bitcoin social meetup page.

~Mat