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I've read your article on Forbes about Bitcoin: http://blogs.forbes.com/petercohan/2011/06/28/can-bitcoin-survive-is-it-legal/
I think the article could be better, and I'll outline the reasons below. Corrections
dropped from $17.50 to “pennies”
One exchange (out of several) experienced technical difficulties (related to being hacked) and suspended trading for a week. Other exchanges kept trading and held the exchange value between 14$-17$. It currently trades at 16.8$.
used to buy Alpaca wool socks and illegal drugs
There is a wide variety of goods&services that's growing daily that you can pay for with Bitcoins. Among them are PC-hardware, Coffee in NYC, IT Consulting, Programming, Webdesign, Web-Hosting and many more. Comparision to other "e-currencies" not thought trough
have been many attempts at creating online currencies — including Digicash, Flooz, and Beenz.
It isn't exactly relevant to compare Bitcoin to these currencies.
Beenz and Flooz were value substitutes entirely controlled by a single party. They could only be exchanged by involving that party. Inevitably these parties fell on hard times at some point or another, and had to cease operating, at which point exchange became impossible. That makes them a bad comparision to Bitcoin which is guaranteed not to fall prey to central control and floundering businesses that'd make their exchange impossible.
Digicash may have been somewhat similar to Bitcoin, but there are two key differences. Digicash may have been anonymous and somewhat decentralized in exchange, yet the minting of new coins and the client software itself were in the control of a single party. Inevitably when Digicash failed (to run a sound business) Digicash (the currency) became impossible to trade.
Therefore the comparision of Bitcoin with these failed "e-currencies" is only insofar of interest as it provides ample evidence of what exactly Bitcoin did better, namely two things:
Small change is irrelevant to the discussion of Bitcoin
- There is no central mint (central bank or what have you), new coins are minted by a collective effort
- There is no central control that would make it infeasible to exchange bitcoins, therefore there is no central attack (like the one by CC companies) that could "kill" it just like that.
A historical look at currencies over the last 500 years reveals an interesting insight — a key limiting factor to adopting currencies has been the ability to make small change.
The smallest unit of bitcoins is 0.00000001 btc. (https://en.bitcoin.it/wiki/FAQ#How_divisible_are_Bitcoins?
). At currently traded (16.8$/btc) that would be 0.000000168$. Bitcoin payments can be specified down to that smallest unit, and there does not have to be any "change". Therefore both the numeration and the precision of payment argument is not relevant. Marginal costs and benefits misconception
But they never caught on because their marginal costs to consumers and merchants exceeded their marginal benefits.
In order to understand the motivation behind bitcoin, it's important to understand the limitations (or costs) of CC and Paypal payment processors. The Paypal issues
The CC in general issues
- Paypal payments in sum incur about 7.5% in transaction cost.
- Paypal payments (especially to merchants) are often delayed, withheld or entirely nulled by Paypal. Merchants have no recourse in this.
- The Paypal payment processor API is quite convoluted and integrating it is far from easy. Merchants are at the whim of Paypal, and Paypal often decides not to carry a merchant without any reason specified.
- If Paypals system go down, or are unavailble, e-commerce built on top of Paypal stops.
- CC payments are subject to fees ranging between 2-10% Merchant protection with CCs is better, but by no means flawless. The CC payment processors offered are not technically simple to integrate
- CC Merchant fees can be substantial Lower fees are offered by third parties, but again (like Paypal) a Merchant is at the whim of these third-parties.
*What Bitcoin does better
- Bitcoin does not have forced transaction fees. There is an optional transaction fee, whose sole purpose is to incentivize the faster processing of the transaction by the network. However payments involving no txfees are equally possible (and practised widely).
- The Bitcoin API is supremely easy to talk to, and it is a pleasure to implement. It can be acomplished by any programmer in a couple of minutes. And you do not need to sign neither any contract nor ask any permission to do it.
- Since bitcoins are not centrally controlled, a merchant is not at the whim of any second or third party.
Repeated misleading allusions as to questionable legality
- Bitcoins have no cost (marginal or otherwise) but substantial benefits
- CC/Paypal have substantial cost and substantial drawbacks
Is It Legal? as a way to pay anonymously for illegal drugs sold on Silk Road – is the one that has been referred to the U.S. Attorney General as a violation of money laundering statutes. Mann notes that Bitcoin’s ultimate ambition well might be illegal After all, he points out, there are federal statutes that make it illegal to produce a separate currency.
Two main thrusts are presented by you as to the legality of Bitcoins. First you question businesses that use them of being in violation of money laundering laws. Second you allude to the legality of alternative currencies. Both of these things are not issues for the following reasons:
Consumers and Merchants pickup
- Businesses that accept Bitcoins can easily be required to conform to existing money-laundering laws. The medium of exchange does not change the rules that businesses must play by.
- Bitcoins are actually less anonymous then the USD. That is because every transaction of bitcoins is publicly accessible. That means that it is a whole lot easier to follow a money trail in Bitcoins then it is to follow it in USD.
- Alternative currencies are not illegal under EU and US laws. After all the exchange of foreign currencies certainly is not. What is certainly illegal is to establish a currency pegged to the national currency such as to represent a stand-in. This would give rise to issues with the central mint of the national currency. The Bitcoin value is not in any way pegged or related to the USD (or any other national currency). It is determined by the exchanges that trade Bitcoins.
- Even if by some heavy-handed lawmaking Bitcoins would be deemed illegal, it would prove hard indeed to stamp them out. They are a truly decentralized and international system. They cannot be centrally attacked, so there is no "mint to shutdown" or business to bankrupt etc.
Unless consumers and merchants can be persuaded that adopting it will make them better off, it’s likely to go the way of other online currencies.
This is an astute observation and I applaud it for that.
However as a system Bitcoins do not depend (financially) on that pickup, and the speculative part of the Bitcoin economy will be able to live quite a while entirely without it. That being said, there is some pickup of bitcoin in genuine e-commerce and other fields. Closing
Bitcoin has many desirable qualities, from an organizational, economic and technical point of view. Your article is not a very good representation of Bitcoin as it is, nor of what it can be, or what it's core issues really are.
I'd invite you to write a retraction and correction in your next article and consult a Bitcoin specialist for review and input. If against all "odds" Bitcoin should prove to be more successful then you thought, think of it as collateral for your journalistic integrity.
You can read comments about this open letter on the reddit post about it: http://www.reddit.com/Bitcoin/comments/ic92x/open_letter_to_forbes_peter_cohan/
Kind Regards, Florian Bösch
TL;DR Peter Cohan has a poor grasp of bitcoins and presents a number of fallacious arguments that are not relevant.
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