Topic: A "Bitcoin Dollarization" Exchange? (Read 3022 times)

Overall an very interesting proposal.

But a practical question immediately springs into my mind. Let's assume I buy a share corresponding to $100. So I have somehow to "provide" ~ 9.xx BTC.  Now, lets assume the BTC/USD rate skyrockets, meaning that I effectively lost some Bitcoins. How can we enforce in practice, that I'll actually keep my promise and cover that loss?

Consequently, we'll need some kind of escrow, or, alternatively, some kind of collateral. Doesn't that effectively mean again that my BTC have to go "into" some kind of service, which I'm required to trust? A possible solution could be to require some amount of collateral (in BTC) to be placed in escrow, and to cap the possible profit and losses by that collateral amount?

Thus, my actual underlying BTC would remain on an address which I control. But I'd have to provide some additional BTC as collateral, and these (only a fraction of the sum I want to hedge) would be really "gone" into some service which I need to trust. And I'd get the possibility to control the amount of losses and gains and balance them with the amount of BTC I'm willing to put at risk.

...which would be a difference for anyone caring for the legal situation.

Besides that, while on Mt.Gox, a "small customer" is only tolerated without AML and KYC documents (which could be changed any time), your construction promises to be an airtight way for an pseudonymous entity to park some BTC temporarily in a virtual $ position.

• when I put my BTC on Mt.Gox and sell them there, they're gone
• when I put my BTC into your proposed instrument, they are just temporarily locked, but they remain mine (at least theoretically)

Kind of related:

Any interest in an offshore bank which accepts & exchanges Bitcoins?
 - https://bitcointalksearch.org/topic/any-interest-in-an-offshore-bank-which-accepts-exchanges-bitcoins-102996

The only thing you gain here is not having to trust some exchange, eg. MtGox but instead trust some "Cayman trust setup". Because I can sell my btc to MtGox and let them sit there without having to provide any AML docs or do anything at all (AFAIK, maybe I'm wrong now as these rules keep changing). And then when I want I can buy BTC again to spend via BItInstant card the same as using your ETF idea. So in essence a MtGox account is an ETF. It seems the difference is who you're going to trust. As a non-privelaged participant in your ETF I wouldn't be able to cash out USD fund shares except via BTC and that's the same as being non-AML verified on MtGox. Or not?

How a USD account can earn interest (thus participate in global investment) and not be subject to FATCA is a whole category of business I know nothing about.

 - http://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act

Or are you suggesting this would only be offered to those in jurisdictions without such restrictions?

Perhaps more desired to some Bitcoiners is a bundle of paper stored here:
 - http://dassafe.com/index.html

Thanks for your response, Stephen. Let me give this a shot:


The basic idea is to create a safe, transparent and nearly-instant way to hedge out of the risk of USD/BTC currency volatility, and lock in a fixed USD value, without actually having to have any interaction at all with the USD-based financial/banking system, and (if you will) without having to exit the "Bitcoin Universe" at all.

My hope would be that -- by allowing someone to participate in the Bitcoin Economy without actually having to basically make a (short-term or long-term) bet on which way the price of Bitcoins will move vs. the USD -- it helps facilitate faster, more widespread acceptance of Bitcoins as a method of payment.

(As a side effect: by enhancing the ability of a participant to keep his/her economic activity completely outside of the established financial system, but still to lock-in a fixed USD value of his/her profits, it might also be particularly attractive for individuals of a more libertarian ("I don't want Big Brother, in the form of either national governments or large financial institutions, nosing through my affairs") orientation.)
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So -- as an example: suppose I run a small online business, making and selling alpaca-fiber t-shirts ("They may be itchy, but they're hip!").  Today, I accept payment via credit card, and I hold my nose and pay the 3%  interchange fee to Visa, MasterCard and AmEx on every transaction.  Maybe I've heard a little bit about this "Bitcoin" thing, and it sounds kind of neat -- but at this point it sounds like more of a hassle than it would be worth: after all, all of my expenses are in US Dollars, so if I just accept Bitcoins and sit on them for any length of time, I'll have to worry that the price of Bitcoins in USD crashes (and suddenly my profit evaporates).  I could set up an account with MTGOX, so that whenever someone pays me in BTC I can immediately sell them for USD on the exchange -- but so now I've got my US Dollars sitting in an account somewhere -- I guess in Japan -- and have to trust that my money really is there, and that if and when I regularly request to withdraw my money (after complying with stringent Anti-Money Laundering/Know Your Customer requirements), that someone calling himself "Magical Tux" really will wire or ACH the money to my US Bank Account.  So I decide that, between the hassle and the red-tape and the counterparty risk and the wire fees, it just doesn't make sense at this point; so I'll stick with accepting Visa, MC and AmEx and paying the exorbitant interchange fees for now.

BUT -- now suppose this new service comes along, called, say, "Bitodex: the Bitcoin Online Dollarization Exchange."  *Now* if I accept payment in BTCs on my website, I can immediately take my BTCs, log on to Bitodex, and buy shares of the Trust at the prevailing USD/BTC exchange rate.  Those shares represent an undivided interest in the actual greenback US Dollars sitting in the Trust Account (subject to constant audit, and the legal protection of the trust structure (and the oversight of an independent third-party Caymans financial institution) to guarantee that there really is $100 of cash sitting in the count for every Trust share outstanding).  My sales proceeds are now locked in at a fixed amount of USD -- and regardless of what happens to the BTC/USD exchange rate, each share of the Trust is still going to entitle me to an undivided interest in the $100 of USD cash which is still sitting in the Account.

Now let's take it one step further -- because, someone might object "fine, I've 'dollarized' my bitcoins (as you say) and eliminated my exchange-volatility exposure, but what if actually want to hold the actual green little pieces of paper in may hand and take them to the store to buy food and beer?  So *now* do I have to sell my Trust shares on the Bitodex for actual BTC, and take those BTC over to MTGOX and sell them there to convert it to a USD credit in my MTGOX account, and aren't I back in exactly the same boat I was in before?"

And here's where I see this -- in conjunction with the forthcoming BitInstant debit card -- as possibly providing the last piece of the puzzle allowing complete independence from the USD-based finance/banking cartel.  Because, at least as I understand it at this point, when that's rolled out it will allow me to spend my BTCs to purchase things denominated in USD (with the BTC-to-USD conversion being carried out by BitInstant behind the scenes) -- but it requires me to be holding my savings (from which the card will draw) in BTC.  Which means that, on the purchaser side, I'm "long" Bitcoins and taking a risk that my wealth (in USD terms) could evaporate if the price of BTCs in USD tumbles.

But combine the two together -- the BitInstant Card and the Bitodex -- and I can completely (and relatively painlessly, transparently, and risklessly) insulate myself from BTC/USD exchange rate volatility, even as I carry out all of my transactions, both as a small-business-owner/seller as well as a purchaser/consumer, largely outside of the existing banking system, instead relying upon Bitcoin as my platform even though my income, expenses, and savings are all locked in at a fixed USD rate.
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Basically yes, but I would consider the elimination/mitigation of counterparty risk that I've tried to achieve as nontrivial, and as an important step forward in fostering further development and acceptance of the Bitcoin economy. 

This time I tried reading rather than just scanning the OP and I comprehend even less now.  One reason is that I'm not familiar with offshore investment concepts therefore I'm probably overlooking something that you are assuming is common knowledge.

So let me try asking the first basic question.  What problem are you trying to solve?

Because I can convert BTC to USD, then wire those USD to any existing brokerage account or offshore fund (either directly, or through my own account), why does a USD fund need to have any concept whatsoever of bitcoin?

Look at ARS on GLBSE -  Argentinian pesos deposited in a bank account.
 - https://glbse.com/asset/view/ARS

With that though there is external counterparty risk, wtih GLBSE, with the issuer of ARS, with the bank where those funds are deposited at even, etc.

Is that what you are describing offering for USDs, except yours wouldn't be going through a GLBSE?

Stephen: thanks for raising this point, because in fact transparency and verifiability is exactly what this structure is designed to provide: what I'm envisioning is that the Fund itself (which will hold the US Dollar cash and cash equivalents) would be structured as, say, a Caymans Trust.  The Trust documents (which would be publicly available on the website for anyone interested -- does MTGOX share its articles of incorporation and related documents, let alone its bank statements, with anyone (let alone its "customers")?) would provide that the only time the USD principal (the "corpus" of the Trust, or, if the will, the full USD "collateral" for the shares) could come out of the Fund would either (i) be when Authorized Participants were redeeming a basket of shares (10,000 shares redeemed for $100,000, using the numbers in my original example above) -- thus ensuring that there is always exactly the amount of US Dollar cash in the Fund equivalent to the USD which each share represents, or (ii) if the whole Bitcoin Experiment goes belly-up and Bitcoins cease to exist, in which case the Fund would wind up and distribute out the cash to everyone (not just Authorized Participants), again in an amount exactly equal to $100 per share.

Obviously the Fund itself would be audited by a Big 4 Accounting Firm, with the exact amount of USD cash deposits certified and reported daily (or more frequently) and posted online on the website.

MTGOX has been great (others that have fallen by the wayside, maybe not so much) in the early days -- but while "give me your cash and trust me that it'll still be here tomorrow" may work okay for a hobby or a lemonade stand, as Bitcoin grows up and puts on its big-boy pants it's time to start adopting best practices of controllership, transparency, and similar legal safeguards.  And that's exactly what I'm aiming for here.

Wow landing on the treasurydirect site I thought I'd landed on a parked domain. Something about the page style seems somehow just like one.

The snippet from wikipedia the google search shows said it allow US people to blah blah blah. What, no buying of treasury bills by aliens?

-MarkM-

Alternately the dollar assets could be held in something simple, like TreasuryDirect account.

Insofar as any dollar asset is safe that would be the safest place to keep the funds, and would be a good choice for utilitarian political reasons.

3,430 words and not one was "audit" or "verify" (well, verified was there, but verifying the investor not verifying the investment).

Actually I am not yet convinced you absolutely have to have some tail risk. Consider that baskets can be nested, and even if they are not nested the ballast asset could be an arbitrarily complicated instrument.

Possibly an instrument could be designed that cannot possibly ever be worth less than a dollar.

At the risk of being overly simplistic, suppose for example I used a two-dollars coin as the ballast?

(Merely a proof of concept.)

As to my walking off into the sunset with your bitcoins, I dunno about that, seems like a lot of facebook friends might unfriend me or something if I did something like that... And its not like the RCMP don't have my fingerprints though I don't think they ever got around to taking a retinal scan yet.

-MarkM-

Mark: that's a clever idea. It's clear that you're aware of this, but it seems like you'll necessarily always have *some* non-zero "tail risk" -- i.e., there's always *some* non-zero probability that the value of your short position goes negative and the whole thing falls apart(*).  And, at the outset you can always make that tail risk a little bit smaller by increasing the size of your "ballast," but always at the cost of increasing the inefficiency/drag.

Separately, what's my protection against the exchange (which is holding on to 2 BTC for every existing basket for so long as it remains outstanding) just closing up in the middle of the night and absconding with everybody's Bitcoins?  Maybe this is where multisignature protocol can ride to the rescue again -- there ought to some way of implementing some kind of quasi-escrow arrangement so that nobody can spend those 2 BTCs and they can only be transferred back to someone who is redeeming a "complete" basket, right?

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* But even then, it's not really "armageddon" if that happens: I suppose what would really happen in that situation is that anyone holding a short position will just walk away and abandon it as worthless -- and, presumably, at that point anyone holding a long position ought to be able to cash it in for the original cost of the undivided basket (less whatever fee the exchange would otherwise collect for redeeming completed baskets).

So it really the whole thing operates as a kind of collar, in options-ese, right? As long as the (BTC-denominated) price of the underlying stays within your predetermined reasonable range, your long will behave like a pure long play and your short will behave like a pure short play -- but once you get close to the cap or floor, the option element will begin to dominate the pricing.

I'm not convinced it is actually necessary to handle fiat at all in order to hedge it, long it, and short it. See https://bitcointalksearch.org/topic/longshort-basket-currencies-103699

-MarkM-

You should go to some writing course... Or instead of writing couple of pages the text that nobody is going to read, why not just launch the service and watch customers flooding in?

There is definitely a demand for this kind of service. If you have an idea how you could do it and you think it you should be already be implementing it, not writing boring stories on the internet...

Throwing this idea out there for consideration/dissection/comment/criticism. Do people think this would be a valuable, viable and useful alternative to the existing exchanges?

Executive Summary: I'm considering setting up a fully-secured offshore vehicle, modeled along the lines of an Exchange-Traded Fund, which would allow people to safely, instantly, and anonymously "dollarize" their bitcoins at prevailing market rates, thus locking in the US Dollar value of their bitcash and fully protecting them (in US Dollar terms) against volatility of the price of Bitcoins in USD without actually having to convert the BTC to USD (with all of the attendant Know-Your-Customer, Anti-Money-Laundering, anonymity-sacrificing implications that raises).  As the underlying vehicle would be fully and transparently backed in full by USDollar cash and cash equivalents, it would also eliminate the counterparty risk which is currently inherent in all dealings with existing exchanges.

The (much) longer version: I've been following Bitcoins with interest for the past 18 months or so, and mulling over various ideas for business propositions. For quite a while I've been thinking about the benefits of a Bitcoin "Exchange-Traded Fund" which would allow investors to invest in BTCs by purchasing shares of the ETF on a regulated exchange.  (I know others have had the same or similar ideas, as I've seen some discussion on this forum of variations of this idea.)  But, while it might be kind of "neat" if it happened, I kept coming to the same conclusion: (1) there are an awful lot of regulatory hurdles which would have to be met to accomplish this. And, while I think we may eventually see such things being traded if the Bitcoin Experiment continues to flourish, (2) I see no particular advantage (and many disadvantages) which I or any other little-guy would have in getting this thing up and running smoothly -- in other words, if and when a Bitcoin ETF were to become an economically viable thing, we will likely see the first BTC ETFs set up and run by the major players in the asset-management/ETF industry, like Barclay's Capital, State Street Bank, etc. (3) Furthermore, at least at the current USD-price of BTCs, there's really a relatively small potential profit in establishing and running such an ETF: basically, the manager/operator of an ETF covers overhead (and hopefully makes a small profit) by charging a percentage of the "assets under management;" and because your assets are BTCs which you're actually taking out of circulation for so long as people remain invested in your ETF, your theoretical maximum is capped by the total BTC money supply (i.e., the value of all BTCs in existence). Finally, (4) I don't see a BTC ETF really adding much to the long-term viability or stability of the Bitcoin Experiment.  I mean, there's no doubt people who are holding bitcoin today could see a big upside, as it could well lead to a new speculative bubble as people who have heard about this exciting new Bitcoin thing (but otherwise can't be bothered to figure out how to go exchange fiat currency for Bitcoins today) decide to plough half of their self-directed IRAs and 401(k)s into BTC ETF shares -- but other than helping drive a new bubble I don't see it as actually doing much to change the Bitcoin landscape.

So, then I started thinking about what happens if I basically took the mirror-image of my Bitcoin ETF idea, and I realized that doing so potentially allows for leveraging the unique aspects of Bitcoins and the Bitcoin system in some very interesting ways (and which also, I think, could be up and running quite quickly as the structure obviates the need (inherent in an ETF traded on a US securities exchange and subject to SEC regulation) for perhaps months of back-and-forth with the SEC, first just explaining to them what Bitcoins are and how the system works, and then trying to obtain the necessary exemptive relief to get the listing approved, etc.).

So, as the basic starting point, rather than: (x) "a real-world ETF holding a pool of bitcoins (held in air-gapped wallets which are created offline and saved onto USB thumb drives which are physically secured in a fire-proof vault, and thus (hopefully) immune from online theft), each share of which corresponds to a fixed number of bitcoins within that total pool, and the shares of which are listed on a real-world exchange in a price denominated in USD and traded among and between real-world named-and-identified legal persons," --

instead think: "an online exchange where pseudonymous netizens can freely trade ("virtual"?) shares representing [either (i) an undivided interest in the corpus of a trust or (ii) a preferred equity interest in a legal entity (in either case created in and governed by the law of, say, Bermuda, the Caymans, the BVI, or whatever other offshore jurisdiction is determined to be most well-suited), the price of which shares are denominated in BTC, and the sole asset of which trust or entity is either (i) a briefcase full of USD$100 bills stuffed under a mattress residing in a hurricane-proof vault in downtown George Town, Grand Cayman, or (ii) better yet, interest-bearing secure short-term cash-equivalents, e.g. overnight repos."

(In other words, think of it as stepping through the mirror so that our baseline/mindset shifts from (A) "real-world USD-functional-currency legal person, looking to dip his/her/its toes into the Bitcoin economy and/or hedge his/her/its BTC-USD forex risk by forking over USD to lock in the USD-equivalent value of a nominal amount of BTCs at today's BTC/USD rate, by investing in a safe USD-denominated exchange-traded vehicle linked to the price of Bitcoin" to (B) "BTC-functional-currency virtual person, looking to dip his/her/its toes into the global USD-based economy and/or hedge his/her/its USD-BTC forex risk by handing over BTC to lock in the BTC-equivalent value of a nominal amount of USD at today's USD/BTC rate.")

Other than this inversion, however, we still preserve the basic "Exchange-Traded Fund Model" for how the fund operates: i.e., the average investor can freely trade in and out of shares of the fund in exchange for BTC via an online exchange/order-matching system, but otherwise has no right to either create new shares (via a USD capital contribution) *nor* to have any shares it holds redeemed out by the fund (i.e., in exchange for the associated amount of USD cash). Just as with a real-world ETF, as to the small (and/or anonymous) investor, our Fund looks and operates like a Closed-End Mutual Fund.

BUT, just as with a real-world ETF, there will be a special class of "Authorized Participants" who have the ability to create or retire blocks of stock, contributing or withdrawing the corresponding amount of USD cash to or from the Fund's asset base -- and (as with real-world ETFs) it is this mechanism (and the theoretical arbitrage opportunity it creates) which ensures that the shares of the Fund will trade at a price tightly-tied to the spot market price, in BTC, of USD.

So, to put some numbers around it: suppose we say that one share of the Fund will correspond to USD$100 held by the Fund. (Just to simplify (although I don't think there's any reason we couldn't easily handle fractional shares) let's say that shares only trade in whole integer amounts.) So at the current price over at MTGOX of about USD$11.00 per BTC, that suggests that 1 share of the Fund should be trading at 9.0909BTC.

Further, let's say that Authorized Participants have the right to either create or redeem blocks of stock in increments of 1000 shares (in exchange for a contribution/cash-out of USD$100,000 via wire-transfer to/from the Fund's Caymans bank account).

(*As an aside, note that this is where arbitrage keeps the Fund's share price from getting out of line with the "spot rate" -- if the market price of BTC/USD over at MTGOX moves down to $10.00 (and assuming sufficiently deep liquidity) but the BTC-denominated share price of our Fund for some reason fails to immediately follow it by moving up to 10.0000BTC but instead stays at 9.0909BTC, then the quickest-acting Authorized Participant can collect risk-free profits simply by snapping up 1000 shares of the Fund (at a cost of 9,090BTC), redeeming them for USD$100,000, using $91,000 of that cash to buy and replace the 9,090 BTC it just spent to acquire the shares, and pocketing the remaining $9,000 of risk-free profits -- or, of course, if they'd prefer to take their profits in BTC, the AP could acquire a full 10,000BTC, and pocket the incremental 910BTC as profit.)

Note that, under this structure, USD only ever moves between the Fund and Authorized Participants, never to or from small (or not-so-small but nonetheless non-Authorized-Participant) investors. And I think this is potentially very important: Because, furthermore -- and unlike the small investor trading in and out of shares of the Fund solely for BTC, who is free to retain his/her/its anonymity being identified solely by a BTC Address within its control -- the small, finite number of Authorized Participants will be known to the Fund and can be vetted by the Fund to ensure compliance with applicable Know-Your-Customer/Anti-Money-Laundering rules.

So, what has our small pseudonymous every(wo)man investor achieved by buying shares of the Fund? After all, you may say, s/he hasn't actually cashed out his Bitcoins and turned them into US Dollars, right? True, but effectively, by acquiring an interest in the Fund, s/he has turned her bitcoins into a USD asset. If the price of BTC in USD suddenly plunges, she's fully hedged, and the price of the Fund shares she holds, as denominated in BTC, will go up to reflect the new exchange rate and the fact that each share really does continue to represent an undivided interest in the USD$100 of cash sitting in the Fund's bank account.

And in some sense, if/as the Bitcoin economy continues to expand and grow more vibrant, in some sense her "dollarized BTCs" are even *more* liquid than actual US Dollars (either in the form of Federal Reserve Notes, or as a digital accounting entry in a checking account with ChaseCitiUSBankofAmericaWellsFargo), because if our investor decides tomorrow she wants to buy alpaca socks, she can simply sell some of her shares to reconvert a sufficient amount of her money from "dollarized BTC ETF shares" back into actual BTCs, place her online order, and send the BTCs.

Equally importantly (and this is where the unique aspects of the bitcoin system comes into play) -- (i) the Fund itself does not need to hold, accept, or deliver ANY bitcoins at all; (ii) nor does it transact in USD at all with anyone other than Authorized Participants who will have to provide all required identifying information to comply with anti-money-laundering and related laws and regulations; and (iii) theoretically, it could be set up so that "investors" (other than, of course, Authorized Participants) don't even need to set up an "account" with the Fund in order to trade; rather, an investment in shares of the Fund could simply be tied to a particular BTC wallet address. This is important, because the couple of major "hacking incidents" involving bitcoin currency exchanges over the past 12 months or so have resulted NOT from any fundamental security issue in the bitcoin system itself, but rather (in the case of MTGOX last summer) because the exchange failed to properly secure its database of userID/password combinations, or (in the case of Bitcoinica this spring) because the exchange failed to properly secure its own BTC wallet. With the setup I'm envisioning, neither of those would be a risk here because there are no UserID/password combinations to be hacked, nor is there a BTC wallet of the Fund to be stolen.

To avoid the need for unique accounts, here's what I'm thinking: whether you already own shares in the fund or have bitcoins and are looking to buy shares, you go to the Fund's secure website and establish that you are, in fact, the person in control of a particular BTC address with a sort of "BTC micropayment handshake" -- i.e., the website tells you to send some random small amount of BTCs over the P2P Bitcoin network to a BTC address within the Fund's control, and upon receipt and confirmation in the blockchain the Fund will transfer the same amount right back to the investor's address. (So I guess I may have lied when I said the Fund didn't need to have a BTC wallet at all -- but it could literally be holding less than 1 BTC at any given moment in time).

Once an investor is verified and in a secure session (identified by the investor's now-verified BTC address), the website essentially just functions as an online exchange with a standard bid-ask order book -- if that investor (i.e., that BTC address) already holds shares in the Fund, then the investor can enter an offer(s) to sell shares in any amount up to the total # of shares they currently own.

Conversely, an investor looking to buy shares submits a bid to buy. Obviously we need to ensure that investor is good for the BTC funds if the bid gets matched, and there are a couple of different ways this could be done. Probably the simplest (but for a number of reasons, only one of which is a concern about the Fund's wallet getting hacked Bitcoinica-style, a much less favorable solution) would be to toss out the window everything I said about the Fund/Exchange not having a sizable BTC wallet of its own vulnerable to theft -- so, an investor looking to buy shares of the Fund would have to transmit BTC to the Exchange, and would then effectively have a BTC account with the Exchange which could be used to support bids to buy. The Exchange would then be in the position of a central clearinghouse: when an order gets matched, the Exchange/Fund (which already has the BTC funds in its wallet) transmits the buyer's BTC funds to the seller's BTC address, and at the same time adjusts the share register of the Fund to reflect the fact that the (say) 150 shares just transacted are no longer owned by the person who controls BTC address [XYZ123...] (i.e., the Seller) and instead are now owned by the person who controls BTC address [UVW987...] (i.e., the Buyer).

But -- to get a little bit more sophisticated -- I don't actually think the BTCs ever have to even pass through the hands of the Fund/Exchange at all: suppose instead of transmitting BTCs to the Exchange, the Buyer can establish that it has a certain # of BTC in its wallet and can reliably commit to not moving them out (i.e., to not spending them elsewhere) of that BTC address, for so long as the buyer's bid remains outstanding. If buyer cancels its bid, it will be released from this commitment and be immediately free to spend them elsewhere -- by contrast, if the bid order is filled, the BTCs will move directly to the BTC address(es) of the Seller(s), and again the share register will be modified to reflect the change in control of the transacted shares. As I understand it, this will be a fairly straightforward thing once multi-signature transactions are impleemented, enabling automated escrow- and deposit-type arrangements along these lines (where the network itself is serving as the escrow agent).

So in this setup, the Buyer would be able to commit the BTCs by effectively depositing them or placing them on escrow with the Exchange for a set period of time, and then could enter bid orders (which would in any case need to either be filled or expire before the expiration of the deposit/escrow of the supporting BTCs).  When an order is matched, the exchange could automatically monitor the blockchain -- and once it detects that the Buyer has released his funds from escrow and they've been transferred into the Seller's wallet, the transaction is fully settled and closed out as the ownership of those shares is transferred from the Seller to the Buyer in the Fund's book-entry share ownership register (which could even be made publicly available online, with share ownership tied to BTC address -- and so, likewise, could the USD assets of the Fund be constantly and instantaneously disclosed online, so that anyone can see that an any given point in time the assets of the Fund always exactly equals (or slightly exceeds) the number of shares outstanding multiplied by $100).

While this may all seem a bit complicated under the hood (but I think much/most of the complication could be largely invisible to the end-user/investor), there are reasons why I think this is a good way to go. Among others (but certainly at the top of the list), I want to steer as far as I can from what "e-gold" was doing, which resulted in the indictment and prosecution (ending in guilty pleas) of the owners on charges of money laundering and operating an unlicensed money transmitting business. I think I've largely achieved that, but would obviously want to have an expert in the money-laundering/know-your-customer rules take a good hard look at it.

Finally: How, you might ask, is this thing supposed to make money? A couple of different ways it could be set up: (i) the Exchange could collect a small transaction fee (say, 0.5%, which is less than the big exchange sites currently charge) on every filled transaction, and/or (ii) recall now that the Fund itself is now sitting on a pile of USD, which are supporting the total share float on a fixed ratio. If this cash is invested in short-term repos, it will generate a positive (admittedly quite small, in historical terms, given the current interest rate environment) return. (Now maybe a sophisticated investor will say they ought to be entitled to some or all of that interest, but if instead investors are comfortable seeing this as a pure hedge of cash -- i.e., I'm exchanging my BTC cash for an asset equivalent in value to USD cash, and wouldn't expect to earn interest on either -- then we can just keep the USD-per-share ratio fixed (at, e.g., the $100 I threw out there up above), and the interest earnings on the repos could be streamed straight to the Fund management to cover expenses and provide a profit.)

Really-truly-Finally: I need to think about it a bit more, but recall that I mentioned above that the potential value and profitability of the original BTC ETF idea is limited by the total value of the entire outstanding "monetary base" of BTCs in circulation. Here, by contrast, it occurs to me that -- analogous to the way the absolute value of derivative exposure can exceed (by orders of magnitude) the total value of the underlying -- it could be the case that, if it really took off, the USD assets-under-management of the Fund are not necessarily limited in the same way (or, rather, the theoretical upper bound limit is not the amount of BTCs in circulation, but the amount of USD in circulation).

I think it all depends on the velocity of BTCs in the "Bitcoin Economy," but (for example) let's say that Goldman Sachs (hah!) signs up to become one of our Authorized Participants, and they see profitable opportunities selling BTCs for USD at a positive spread. So, they pump in $1,000,000 today, creating 10,000 shares which they're able to sell over the course of the day on our online Exchange for ~91,000BTC; they then take those 91,000BTC and sell them to their clients (at a profit).

And suppose they do this every day for 6 months -- and assume the exchange rate is holding relatively steady during this time period -- by which point they've churned through over 16MM BTC, i.e., more than the total # of BTC currently outstanding. So, impossible, right? Well, if their clients are just sitting on the BTCs as a speculative investment, then yes.

But if, instead, their clients are recycling the BTCs, using them to buy alpaca socks and high-quality goods on (ahem) Silk Road, and make BTC-denominated loans to their own client-customers who in turn spend them: well then the BTCs haven't been removed from circulation at all, and each day they may well be a fresh demand for more shares of our Fund, so the USD assets of the Fund could grow pretty much indefinitely large. (Not saying this *would* happen, just that it could).