Topic: Do you think shorting of Bitcoins should be allowed? (Read 2810 times)

Great minds think alike! 

TonyT

Should we regulate Bitcoin?

by Tyler Cowen on April 11, 2014 at 9:16 am in Economics, Law, Web/Tech | Permalink

There is a new paper by Jerry Brito, Houman Shadab, and Andrea Castillo, the abstract is here:

    The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

    In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

    Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Along related lines, you might consider Adam Thierer’s excellent new book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.
- See more at: http://marginalrevolution.com/#sthash.g3xPJrde.dpuf

It is simple:  the IRS is wrong.  I stand by my statement above and yes, it may be an issue for Bitcoin (and all other crypto). 

How much of an issue remains to be seen.

Of course you say it is a BIG issue.  We shall see.

uh oh...bitcoins are not fungible after all... and taxable as capital gains says the IRS.

Trouble in paradise.

TonyT

The IRS ruled that Bitcoin and other virtual currencies are property, not currency.  This means that they are subject to capital gains taxation.  And that means that Bitcoins are not fungible.  The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent.  If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. (Poor Satoshi–he’s got a lot more capital gains than most…)  This means Bitcoins are not fungible, and that makes it unworkable as a currency.  If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.  Bitcoin still works as a speculative medium, but Bitcoin’s claim has always been to being more than the latest iteration of the trading sardines–it aspired to be a commercial medium.  I don’t see that happening now.

- See more at: http://marginalrevolution.com/#sthash.G16rvTlQ.dpuf

And what about this statement by the member BurtW here?  In view of the above?  Clearly it's panic time for bitcoin lovers!:

"Bitcoin must have unqualified fungibility to survive as a form of money.  We must support all efforts that protect and improve the fungible nature of Bitcoin and stand firmly against anyone or anything which threatens this essential property."

Same old bullshit we have been hearing for years.  Bitcoin is still here. 

Oh yes it is! Read the below on the death of Bitcoin--if it does not elect a monarchy to govern it ("governance structure").

There's trouble in paradise...

TonyT

http://www.technologyreview.com/news/525676/academics-spy-weaknesses-in-bitcoins-foundations/

Yet signs are emerging of more subtle flaws in the vision of Satoshi Nakamoto (which may or may not be a pseudonym), with analysis suggesting the rules governing how Bitcoin operates as a currency may be far from perfect. Some researchers claim that these rules leave room for cheats to destabilize Bitcoin. Others have concluded that major changes to the currency’s rules will be needed as the number of bitcoins in circulation increases.

The only solution Kroll sees is to rewrite the rules of the currency. “It would need some kind of governance structure that agreed to have a kind of tax on transactions or not to limit the number of bitcoins created,” he says. “We expect both mechanisms to come into play.”

"Allowed" by whom? Bitcoin is not a monarchy.

The Empire (governments, collectively) strikes back!

One is attempting to tax bitcoin (Japan), while the other to regulate it (with an eye towards tax or 100% transparency).

TonyT

http://www.bbc.com/news/technology-26538378

 11 March 2014 Last updated at 21:39

New York regulator plans 'regulated' Bitcoin exchanges



http://www.bbc.com/news/business-26478059

 7 March 2014 Last updated at 02:15

Bitcoin not a currency says Japan government

Japan's government said Bitcoin is not a currency but that some transactions using the virtual unit should be taxed.

You wish comes true.  Bitcoin will be regulated, and captured by authorities.  That may even make it more stable and likely to be adopted by the masses...or it may kill it.

TonyT


http://dealbook.nytimes.com/2014/02/26/japan-studies-regulation-of-bitcoin-after-mt-gox-goes-dark/?_php=true&_type=blogs&_r=0

February 26, 2014, 8:40 am
Now, Nations Mull the Ways to Regulate Bitcoin

Of course shorting should be allowed. People should be able to bet on prices going down, not just up.

And we should trust the opinion of this known criminal why?

 More evidence that Bitcoin is at a cross-roads:  if it is not regulated it will not prosper.  But if it is regulated, it will become like any other payment service, like for example PayPal, and have costs that will make it less competitive.

This is one theme in this thread and it's recognized below by Jamie Dimon.

TonyT

Bitcoin “will eventually be made as a payment system, I think, to follow the same standards as the other payment systems, and that will probably be the end of them,” Dimon said Jan. 23 in an interview on CNBC.

http://www.bloomberg.com/news/2014-01-27/new-york-duels-california-to-write-bitcoin-rules.html

Hurting?  Nope.  News from India is all good for Bitcoin.

 http://news.ph.msn.com/regional/top-india-bitcoin-operator-halts-trade-after-bank-warning-2

More on how the lack of law is hurting Bitcoin.

TonyT

 Just as I said in this thread: a contract to short Bitcoins cannot be legally enforced, even outside of China.  So until regulation comes along, you invest in Bitcoin at your own risk.  

Having said that, it is theoretically possible to enforce Bitcoins (except in China where they are banned) if you get the counterparty to sign an agreement.  But it has to be a signed document, possibly notarized with a lawyer (in certain countries) and in practice nobody goes through the trouble of doing this.  So bitcoins are effectively "illegal" (or rather, outside the law) in most jurisdictions.

So the original question was right on point and topical too, in view of the events of the last few days in China.

TT

PS--for those of you that might argue that an exchange will make you whole if something bad happens, I urge you to read their "fine print" that you agree to when you sign up.  All of these exchanges have "fine print" that promise NOT to make you whole if something bad happens.  That's standard business practice.

http://www.theregister.co.uk/2013/12/18/buying_virtual_currencies_risky_warns_european_banking_authority/

By OUT-LAW.COM, 18th December 2013

Buying virtual currencies, such as Bitcoin, presents a number of risks that consumers should be aware of before purchasing such assets, the European Banking Authority (EBA) has warned.

The regulator said that because virtual currency is not regulated, consumers risk losing their money by "buying, holding or trading" them.

"Currently, no specific regulatory protections exist in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business," the EBA said in a statement.

Consumers do not have refund rights when they use virtual currencies in transactions, and they may also have to pay tax on the assets, the EBA said

You regulate it like in the NYSE in the USA.  All BTC exchanges need to go through the SEC.

I don't know if TF had it planned, but the way I described it in this thread, it's the perfect non-crime.  It's not pointless at all: he makes money, probably half the 1.5M being 750k USD, and it's fool-proof:  nobody can sue you, nobody can go to the police, and in the end TF even gets sympathy for being ripped off, and then gets more sympathy a year from now when he pays back everybody with lower valued bitcoins  supposedly 'out of his own pocket'.  TF however becomes a villain if the price of BTC continues to go up from the date of the theft, and, today I see that the price of BTC has recovered to near all-time highs, which, if my hypothetical is correct, is probably giving TF heartburn and spoiling his plans to be a Good Samaritan and refund everybody's money.

TonyT

Same regulations as at a bank or exchange.  Shorting allowed but not naked shorting, so you must show you borrowed bitcoins before you can short.   Online wallet vendors have to post a bond with US regulators if they are based in the USA.  One reason I'm going with Kraken for my trading and thin client wallet is that they are based in the USA so more regulation than say Australia.  Regulation for banking type institutions is good.  Who needs a 'wildcatter' in this day and age?  In cyberspace anybody can pretend to be a banker.  I'm also not in favor of anonymity, but at the same time I realize the only people not hoarding BTC and actually using BTC in transactions, which keeps the price stable, are probably drug dealers, who require anonymity.  So I'm somewhat leary of making BTC less anonymous, though if you check out the Youtube video below you'll see that with a bit of effort the authorities can figure out who traded what.

TonyT

Must see Finextra Youtube video interview with Richard G. Brown, a CompSci expert who works for IBM, who is bullish on bitcoin but around 3:30 states it is not anonymous, and eventually Big Brother is going to use it to tax people under an 'asset register' scheme.

But Brown's bullish on bitcoin, even though bitcoin is not anonymous.  At 9:00 he discusses how machines can trade bitcoin amongst themselves! @10:20 "On the blockchain, nobody knows that you're a fridge"!  

@10:45 bitcoin will not be the only cryptocurrency.  Litecoin is a 'psychological' play, and others.  

TonyT

https://www.youtube.com/watch?v=gERNbqUNMm4

Finextra interview with IBM architect Richard G Brown about Bitcoin and Litecoin

If someone want's to short sell, it's his problem, let him do it. It's not like someone can conjure large sums of BTC out of thin air. And even if - how would you regulate that?

While I would act in a manner akin to described in OP. 'Lose money' when it's at it's highest and 'find it' later when it's at it's lowest I doubt that TF had this planned, because his reputation suffers even if he repays everything, and it's kinda pointless.

If you read the fine print of any internet bailee, they'll have language that makes them not liable for anything.  This is standard practice on internet.  In fact, no online wallet that will say they guarantee your money.  As for theft, while it's true if TradeFortress admitted to his theft, he would be prosecuted, but keep in mind what he's doing is not really 'theft' in the classic sense but misappropriation--he intends to return the coins after he's made money shorting.  In fact, I bet he sold all the coins a few days after the theft (since Mt. Gox had a big sale of exactly the amount 'stolen' at Inputs.io), and now is, as the price of BTC drops, buying these coins back with the sale proceeds, and again he intends to make money off the short sale price as explained before.  Eventually most, if not all, of his customers will get their bitcoins back, but at a lower price.  If he did this with dollar bills, as you say, it would be a different story since dollars and traditional banks are highly regulated.  You cannot just take depositors money for a while and return it a year later...you'd have government agents swarming your bank.

TonyT

But you are exceptional anth0ny.  Most people would be pissed, and on top of that claim they did not read the fine print or anything before they signed up.


The TF post does not rely on the premise that bitcoin contracts are illegal.  To the contrary, it relies on the premise that the contract between TradeFortress and his customers is the ONLY thing that matters, and if you read such online "bailor/bailee" (that's the legal term) contracts, they always say that the bailor (TradeFortress) has no legal obligations whatsoever (unlike in the real world).  Anything goes.  So if TF shorts your bitcoins, makes money, and a year later gives you back your coins that he "stole", he's not liable to you, even for the lost interest, and certainly not for the profits he made shorting, in any court, based on what the contract says.  Of course you are free to flame TF online, and seek another online wallet company for your bitcoins.

That's the downside of bitcoins not being regulated.  That lack of regulation is the genesis for my headline, which I admit is a bit confusing, "Do you think shorting of Bitcoins should be allowed?".  What spurred me to write this post was the realization that what TradeFortress did was not only not against the law, but actually it's completely defensible, even heroic, under the academic theory of greater "price discovery" by shorting (Google this).  Now whether or not you believe in better price discovery being a worthy goal or not, that is, whether volatility or not is a good thing for bitcoin, regardless it remains that the unregulated nature of bitcoin means what TradeFortress did could become, unless bitcoin is regulated, the "norm" in the future.  Only the threat of losing future business would prevent people like TradeFortress from doing the same thing as TF did, in the future.  And as for future business, if you make a huge profit from a 1M short of bitcoin, using other people's money, who cares about future business?  You can always open another online wallet company under a different assumed name, and you're way ahead financially from the unethical (but not technically illegal) short.  And if you believe shorting helps the bitcoin community, what TF did is not even unethical--he's in fact a hero.

TonyT

Thanks for the reply.  We're talking about pretty much any court in the world.  That which has no precedent is hard to decide, and will be decided badly.  It all depends on the judge.  That's why religious disputes taken to court are usually thrown out by a judge in the USA, and elsewhere.  It's not so much the First Amendment as it is the courts don't want to get into something that really has no precedent--how do you decide if plaintiff 'sinned' against defendant and deserved to be thrown out of the temple, or not?  See also my "TradeFortress" post, just after you posted, where I try and make things more clear.  What I am saying is this:  if somebody took your bitcoins for a year, sold them, bought them back a year later at a lower price, gave you back your coins but kept the profits from this short sale, and the fine print says he is not liable if he does that, then you're OK with this?  Because that's the state of bitcoins now, with online or even offline storage.  No regulations means anything goes, including what most people consider unethical behavior (but again, see my TF post--actually TF is doing the community a favor by 'screwing over' his customers, so you could say that for the greater good what TF did in my hypothetical is net good, not net bad).