Platt Perspective on Business and Technology

Considering the nature and qualities of money 6: governmental valuation and the peer-to-peer model

Posted in macroeconomics by Timothy Platt on February 3, 2014

This is my sixth posting to a series on money and on what monetary value functionally means (see Macroeconomics and Business, postings 142 and loosely following for Parts 1-5.)

I began discussing the potential roles of outside regulatory oversight of peer-to-peer currencies such as bitcoin in Part 5, and both to validate its legitimacy and to help formally stabilize its valuation when measured against that of other, more conventional moneys so as to limit the impact of fad-driven exchange rate shifts.

I noted two possible approaches to regulatory oversight in that series installment:

• Oversight arising from formally organized and recognized governments and other outside agencies,
• And oversight arising from the marketplace itself and from the collective weight and influence of consumers and businesses, and the markets they conduct transactions in as they accept this currency in their transactions and set its working value through those transaction processes. Think of this as valuation through market-driven consensual agreement.

I focused entirely on the second of these alternatives in Part 5, and the valuation regulating impact of free markets where bitcoin consumers in effect determine what bitcoins are actually worth, and not bitcoin miners or holders, or the network of computer systems owners who bring new bitcoins into the marketplace. I turn here to consider the former of these two approaches, and begin that line of discussion by noting that the more disruptively novel and new an offering, the less of a track record individuals or organizations or agencies can have with offerings like it that could be used for baseline comparisons – limiting as a result, any possible a priori bases for making regulatory decisions. The less of a track record there is that can be turned to for historical records insight, the less of a due diligence or risk management basis can be in place for making any regulatory decisions as to value or stability.

So I begin this with what is perhaps the most basic and fundamental regulatory oversight decision that a government might make regarding valuation of an outside-sourced currency as measured against that of its own:

• Does this government even recognize the basic legitimacy of that outside-sourced currency?

And to set the stage for considering possible governmental validation of a currency such as bitcoin that arise without traditional national governmental backing, I begin addressing that question as it has historically played out between nations and for nationally minted currencies.

North Korea issues its own national currency, the North Korean won (NKW), with each won divisible into 100 chon. But North Korea’s policies and its intransigent belligerence, coupled with its unwillingness to uphold any international agreements that it does enter into, have led to strained foreign relations, at the very least. And one consequence of this, is that very few countries actively and directly enter into trade with North Korea with the People’s Republic of China serving as their primary source of foreign currency and their primary economic and political backer and patron. A great many countries disallow trade and commerce with North Korea and refuse to acknowledge the legitimacy of its currency, in keeping with that circumstance and particularly as that situation is formally backed by active ongoing trade embargos.

On one level this decision to not recognize as legitimate, the North Korean won can be viewed as being political and ideological grounded. But underlying that decision is the fact that the North Korean government and its dealings with other nations are so shaky and unreliable that it becomes unacceptably problematical to even begin to know what a fair market exchange rate valuation would even be with the won. And this lack of certainty, even if coming from a very different type of source than is faced when dealing with peer-to-peer currencies, is why I cite this example here when considering recognition of a currency such as bitcoin. Aside from its developing and growing marketplace and business place acceptance, what agencies recognize bitcoin or any peer-to-peer currencies as of now? Is it possible, for example, for individuals or businesses to pay taxes anywhere in the world yet, in bitcoin currency? That would indicate one of the most definitive possible forms of governmental recognition.

Shifting that question around, absent a clear cut standard for determining bitcoin valuation how can and should bitcoin profits and income be taxed, and certainly when all transactions involved take place entirely through exchange of bitcoins or other peer-to-peer currencies and without standard nationally backed currency participation? How would a government in effect tax bitcoin?

• At least as of this writing, I see that last little detail as the specific issue through which governments will first effectively come to recognize bitcoin or any of its peer-to-peer relatives.
• And if bitcoin-taxing governments follow anything like a free market economic model in their policies and practices,
• They would base their valuation determinations strictly on the empirical exchange rate evidence of the marketplace, and according to time stamped valuations as set at points of transaction value and profit achieved, where numbers reached are determined by how buyers and sellers come to bitcoin valuation agreement.
• Governmental and other regulatory agency recognition, like legal regulation and oversight, always lags behind marketplace practice and it almost always follows marketplace lead,
• And when not in codifying agreement with the marketplace then in repudiating it and through marketplace-limiting control.
• And for this, overt direct recognition of bitcoin or for any of its peer-to-peer counterparts will most likely follow and take the lead from marketplace acceptance, with only peer-to-peer currencies that gain real acceptance there ever gaining formal recognition from governments or from extra-governmental regulatory bodies,
• And with regulation seeking primarily to take wild-card uncertainty out of exchange rate valuations.

Germany and a few other countries have already explicitly begun taxing online bitcoin transactions that involve participation of their citizens, or of businesses located within their borders. This means that Germany as a specific case in point has begun to recognize bitcoin for regulatory purposes, even if it has only begun the process of figuring out what it needs to do in fully accomplishing that. To cite a completely separate but equally important issue from taxation that would have to be formally, legally defined and regulated legally and governmentally, if a bitcoin currency holder dies intestate and a court decision has to be made in fairly allocating estate value among claimant heirs and others who would all be recognized as holding legitimate claims under the law in place, how would bitcoin wealth be reconciled with the valuation of other estate assets so as to meet fair division of overall assets requirements?

Governmental and other, extra-governmental regulatory oversight might lag marketplace practices and their regulatory consequences, but they are at least as consequential and essential for true, full valuation of any currency form.

I am going to step back from the specifics that I have been looking into in this and preceding series installments to consider bitcoin and its fellow peer-to-peer currencies from a wider monetary economics perspective. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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