Pecunia olet... a bit

Trouble in paradise?  Unless you’ve sat in cave for six months, Bitcoin’s all the rage.  Anonymous currency, cleverly designed, but not yet perfect, attracted a throng of fanboys and almost $100M in venture capital investment.  The idea that I can buy stuff in an untraceable, safe, and 100% electronic way, without governments or payment-fee nickel and dimers makes my libertarian heart sing.  But, there’s a problem… and the problem is simple:  governments should not allow this thing to exist.

As the Mt. Gox disaster yesterday showed, the techno-pure, white world of Bitcoin isn’t without it’s technical disasters, crime, and negligence (or, as some parties with motives of their own would call “growing pains. But I’m not going to talk about that.

And I’m not going to talk about the currency’s use to buy drugs, launder money, or evade taxes — I don’t buy drugs, have never laundered money, and my IRS conscience is clean.  And I can’t talk about the myriad ways in which this new medium of exchange is going to revolutionize the e-commerce of mobile payments because, unlike some of my colleagues, I like to talk about things where I have some clue and keep my mouth shut about the rest.  And I don’t know much about e-commerce or  mobile.  The thought experiment I want to run is based on the business I somewhat understand — running a VC firm.

As most of you know, VCs get their money from parties interested in making investments in early-stage companies — parties known as “limited partners” or “LPs.”  The LPs give the VC money to manage and the VC finds companies where that money can be put to good use.  The day to day operations of a VC fund, however, are paid by something called a “management fee,” usually based on a percentage of the total amount of money the LP wants you to manage.  Usually it’s about 2.5% per year.  So, if the LP wants me to invest $100M, that’s great, but I take $2.5M per year to keep the lights on, pay myself and the rest of the staff, cover travel costs, conferences, whatever.  Just like startups, we have budgets, cost controls, expense reports.  I do waterfall charts, cash forecasts, etc. just like a normal operating business.

So, the experiment:

Imagine I go to my LPs and propose:

  1. Why don’t I fly or drive down to your office with a briefcase handcuffed to my wrist, you put $2.5M in cash into that briefcase.  You’ll know it’s me coming to pick up the cash, because, hey, it’s me.  I will take it back home, hide it some place (but where?  What if someone robs me or gets a search warrant… I’ll figure it out.  “X” marks the spot).  Then, I will pay myself and my employees with a little envelope of cash every month.


OR, wait, it’s 2014 so…

  1. Hey, why don’t you send me this annual $2.5M in Bitcoin.  I know Bitcoin isn’t 100% untraceable, but I’ll use a VPN, an anonymous proxy, etc. to make sure that it’s very private.  But you’ll still now it’s me and not some hacker from Vegas because I’ll have all the right keys and stamps.  The bitcoin-walleted fund will then take that money and pay myself the same way — anonymously, let’s say 50% of my salary so it still looks like I’m employed and getting more than minimum wage.  And I can use this Bitcoin money to pay for apartments or buy goodies from hip, avant-garde merchants.

Pretty cool idea, eh?  BUT DO YOU SEE A PROBLEM HERE?

The problem is that even the libertarian in me cedes some rights to the government in whose jurisdiction I choose to live.  As an “Ayn Rand” libertarian, I feel the government’s only job is to protect my property.  I give them money (called taxes) and they prevent the bad guys from taking my money at gunpoint or from spitting on the contracts they sign.  I give cops the right to have guns and use them, so I don’t have to.  I pay them for that.

What if I stopped paying them?  I would love to get paid using either of the above scenarios, but what  if enough people liberated themselves this way — I think the shit would be deep.

Wait, but the whole cyber-currency thing is young.  There are ways in which it will mature and perhaps some regulation could be introduced to make the whole thing cool again.  OK, so how about this:


The LP wires the money into my firm’s account.  Every month, electronically, I send salary payments to the funds’ employees with the money going straight into their bank account.  Electronic, instant, and cool.  They can, then, using these little plastic things called “ATM cards” or even “ATM cards with new-fangled payment chips” immediately pay for goods and services using “legal tender for all debts public and private.”  They can take this money and convert it into something people from my planet call “cash” and use it to buy crack cocaine on the corner.  The value of what I paid them would be more or less stable and backed by the full faith and credit of the U.S. Government.  And anyone takes these payments.  Crack dealers, Whole Foods, prostitutes, the Metropolitan Opera… anyone.

Neat idea, huh?  But doesn’t that destroy the whole anonymity thing (well, at least up until the cash thing) and makes the government control stuff and lets the banks charge those pesky transaction fees?  Exactly.

Governments have just two levers to make the economy budge:  fiscal and monetary policy.  Fiscal policy means how much they tax and how much they spend.  Monetary policy involves controlling the money supply, printing more money or less, setting interest rates, etc.  If you take either or both away, there isn’t much point for having a government.  And even the libertarian in me believes that a government should exist, just be very constrained in what it gets to do.

Dude, I’m grasping at straws here. Why don’t you pay me with World of Warcraft gold.  It even has an exchange rate:  Looks pretty stable.  No dice, once again…

If I’m in the government, my response would, unquestionably be:  “I DON’T THINK SO.”  Using Daniel Webster’s 1798 line from McCulloch v. Maryland, “The power to tax is the power to destroy.”  Indeed it is.  NEXT….!