The Private Equity for Families Blog

The Fed Gets Into The Bitcoin Business?

The Wall Street Journal reported on December 10, 2015 that the founder of Bitcoin may have been discovered in Australia. Satashi Nakamoto may actually be Craig Steven Wright. Mr. Wright’s home was raided on a tax matter relating to his business. Mr. Wright’s company, DeMorgan Ltd. describes itself as “focused on alternative currency, next generation banking and reputational and educational products with a focus on security.”

What was more interesting to me was the article just above it that was much more prominently displayed: “A Digital Currency for Central Bankers” by Ryan Tracy. Mr. Tracy suggests that central banks around the world are studying the use of virtual currency backed by the full faith and credit of the issuing government. Normally, I would not even think twice about this development because central banks cannot ignore a payment system that circumvents their control. If they can’t beat Bitcoin, why not join cryptocurrencies for all the reasons I suggested in my blogs Shaking Up the Savers and Shaking Up the Savers: Part Two. What made me pause was a concurrent setback for my experimental Bitcoin. I was preparing to transfer a small amount of Bitcoin to my paper wallet (complete anonymity) this week when I noticed for the first time that my repository of Bitcoin, Circle.com, had imposed a weekly limit on the amount of Bitcoin that I was allowed to transfer. This is supposedly done to protect me.  If its circulation is being limited by one of the leading web transfer sites, powerful forces must be exerting influence? Circle’s website suggested that I could raise my limit if I provided additional information so I called them.

I was right. Circle has joined the Federal Reserve System by signing a “Bit License”. When I called Circle to ask about the limitation I was told that there is no restriction on converting Bitcoin to cash – in essence moving it back into the banking system. I was also surprised that, as I was talking to the Circle employee about my disappointment in the transfer restriction, my account went from a $400 restriction on Bitcoin transfer to an allowance for $500,000. The employee also told me not to worry that my Bitcoin were now FDIC insured so why would I want to transfer out.

I did a little research about Circle’s change in policy. Evidently they are the first of their kind to get a Bit License which allows them to hold dollars and Bitcoin and give FDIC insurance for the account up to $250,000. I suppose Circle is opting in to some portion of the Federal Reserve regulatory scheme, like PayPal, for money holders and transferors?  Circle’s founders sent a blog explaining their change in status:

“As part of this release, we’re also announcing full compliance with New York’s money transmitter and Bit License regulations, which continues our ongoing compliance as a money services business across all US states.

We’ve been fairly vocal about our concerns with the Bit License, especially in its initial incarnation. Many of those issues were resolved, and though still not perfect, the Bit License and its requirements became clear and irrefutable prerequisites for serving and supporting everyone in New York. We are the first company to be granted a Bit License, and we also hold a Money Transfer License for US dollar transactions in the state of New York. We want to help people everywhere around the globe, and that includes New Yorkers.”

It is not just Bitcoin that may be under attack. Mr. Tracy’s article suggests that there is a problem with cash. In a low interest environment as the banks begin to charge depositors to hold and administer cash (what they call “negative interest”), the normal response is for people to withdraw full faith and credit cash that should always trade at face value and hold it in safekeeping under the mattress. Central Banks lose an important behavior modification tool if they cannot punish savers by depleting their deposits with “negative interest”. As long as savers can withdraw their cash or switch to a cryptocurrency like Bitcoin, they can escape the controlled banking system. This idea of “breaking the buck” came up recently in the administration of money market mutual funds. Fidelity was the first to split its money market funds into government funds (guaranteed not to have a NAV below $1.00) and non-governmental funds (where the NAV can float below $1.00).

I like the option of withdrawing cash. I also like the option of using a digital currency that is not controlled by a central government. But I fear that this central bank intervention will lead to non-governmental digital currencies eventually becoming either illegal or impractical. If, in fact, central governments can “mint” (rhymes with print) their own digital currencies, then there will be no scarcity value (no predetermined upper limit on Bitcoin that can be produced).

I am not surprised by the result. It just happened much quicker than I had expected. Control of digital currencies is important so that governments can see asset classes to tax them properly. The only hole in the dike will be cash and there are already restrictions on the amount of cash you can withdraw.

It was also ironic that on the day this article on central bank intervention ran, the founder of Bitcoin gets his house raided by taxing authorities!!! They probably have him in a flimsy shark tank off the Great Barrier Reef. He may be coughing up bitcoins from his paper wallet before the feds are finished with him. Rule #1 of investing, Don’t fight the fed. Rule #2 Always pay your taxes.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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