Although the Mt. Gox debacle tripped up Bitcoin for a time, the alternative currency won a victory in the state of California, which has amended its law to allow the use of currencies besides the U.S. (i.e., Federal Reserve) dollar. The newly passed legislation should increase awareness of alternative currencies and increase the movement’s momentum, particularly in light of dubious monetary policy at the federal level.
A Victory for Bitcoin?
Despite the predictions of naysayers, Bitcoin has maintained much of the value it gained in 2013. In 2012, the cryptocurrency hovered at around $5, but in the spring of the following year, its price took off, peaking at over $200 before settling around $100 for several months. Late in the year, it exploded again, this time exceeding $1,000. Today, the price is around $600 (about $650 as of July 1, 2014).
Bitcoin may or may not be a good investment, but a comparison of a Bitcoin chart and a Dow Jones chart show few fundamental differences, except perhaps in timespan. Perhaps the greatest advantage of Bitcoin and similar digital currencies is that they provide a choice for businesses and consumers in the medium of exchange for goods and services. The recent development in California expands that choice by providing some legal backing.
According to CNet’s Steven Musil, California’s legalization of Bitcoin and other non-official currencies “should help smooth the sometimes rocky relationship Bitcoin has had with the state.” And since California is often a model for other states, the victory for the currency there may lead to similar legislation throughout the country. “In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives,” said California Assemblyman Roger Dickinson. These alternatives include local currencies, company-based currencies (like Amazon Coins) and other digital currencies, such as Maxcoin and Dogecoin.
The 800-Pound Gorilla
The status of Bitcoin at the federal level, however, remains uncertain. For tax purposes, the IRS treats Bitcoin as property rather than currency—an extremely tenuous distinction given that both Bitcoin and U.S. dollars are backed by absolutely nothing. Effectively, this ruling by the tax-collection agency means that Bitcoins must be assessed in terms of their dollar values to, for instance, determine capital gains, which are taxable. This policy can make dealing in Bitcoins troublesome for businesses that conduct numerous transactions. “Purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop,” says Bloomberg.
Furthermore, the matter of federal law could stand in the way of Bitcoin—at least in terms of its legal status. The case of Bernard von NotHaus’s “Liberty Dollar” creates some precedent against official currencies. In this case, however, the similarities to Federal Reserve–issued currency (the U.S. dollar) may have been the Liberty Dollar’s downfall. Bitcoin and similar cryptocurrencies have little resemblance on the surface, potentially bypassing such legal landmines.
Bitcoin as Protest
Bitcoin and other alternative currencies are gaining traction and attention in part because they (in some cases and in certain ways) provide a means of bypassing the U.S. dollar and other national currencies. One of the chief complaints against fiat (unbacked) currencies like the dollar is that a central bank—the Federal Reserve in the U.S.—is indistinguishable from a counterfeiter. For some reason, governments find intolerable the notion of citizens printing bills on the order of thousands or millions or even billions of units, but it wholeheartedly encourages central banks to print bills on the order of trillions. Naturally, if there is something fraudulent about a citizen watering down currency by printing his own, then there is something fraudulent about a nation watering down the currency—the only difference is a highly questionable “official” seal of approval on the latter.
Bitcoin, by having a fixed theoretical maximum number of units, aims to avoid the problem of currency manipulation through fiat printing. By giving consumers and businesses an alternative to these national currencies, alternatives like Bitcoin create market competition. The problem, however, is that governments don’t treat their unbacked currencies in any sort of free-market manner. In the words of Keynesian economist Paul Krugman, “Fiat money, if you like, is backed by men with guns.” In other words, governments will ultimately rely on bully tactics in place of appealing to consumers/citizens regarding the value of their currencies.
Is California Crazy?
California is hardly among states interested in expanding freedom (if any such states even exist), so its reasoning behind legalizing Bitcoin and similar currencies appears suspicious. It may simply be attempting to stick with the times, but more likely, it is attempting to bring alternative currencies into the legal domain for tax and regulation purposes. California, like most states, is struggling with debt, so any pickings ripe for further revenue are probably welcome. As in most situations, understanding the state’s actions likely comes down to following the money.
Nevertheless, the state’s greed may still prove to be an overall boon to alternative currencies, particularly if more states follow suit. The question will then be whether the federal government chooses to recognize, ignore or fight Bitcoin and similar currencies. But given the international and digital character of Bitcoin, restricting its use would likely be much more difficult than simply attempting to steal a slice of the pie, as governments are wont to do.
Conclusions
California’s legalization of Bitcoin and other alternative currencies is a mixed bag. Although on the surface, the new legislation seems to expand freedom, the motivations are probably focused on taxation and regulation. The main question, however, is whether other states will follow California’s lead, as they often do in other policy matters. For Bitcoin, this recognition should expand the user base, making future negative policy actions by governments increasingly difficult. In the meantime, however, the small scope of alternative currencies means that central banks like the Federal Reserve probably won’t be deterred in their officially sanctioned counterfeiting schemes. But that mood may change in time if competing currencies gain enough traction.
Image courtesy of zcopley
July 01, 2014 at 09:57AM
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