Platt Perspective on Business and Technology

Considering the nature and qualities of money 10: considering recent FINRA and US IRS decisions and their consequences

Posted in macroeconomics by Timothy Platt on June 2, 2014

This is my tenth posting to a series on money and on what monetary value functionally means (see Macroeconomics and Business, postings 142 and loosely following for Parts 1-9.)

Up to now in this series, I have discussed a range of issues as to what money is, and what bitcoin and other peer-to-peer currencies are. In a fundamental sense much of what I have been writing about in this as been leading up to this series installment. So to set the stage for its discussion, I begin with the fundamentals, going back to what money actually is and does.

• Money is an abstraction that is used to establish fair market value, and ideally for the full range of possible value exchange transactions that can take place in a marketplace.
• And that can only work if this valuation standard – and that is what a monetary system is, is consistent and reliable. This does not mean that every monetary transaction is fair and equitable and for all parties involved. It means that fair and equitable can have consistently and reliably understood meaning, there and in that marketplace context.
• Money as such serves to stabilize marketplaces. But more than just that it offers social and political stability too, as societies cannot achieve or maintain sociopolitical stability if their markets and the economy that rests on them is not stable and reliable.
• And this brings me to bitcoin and its peer-to-peer currency alternatives. And it also brings me to the central question that they raise: can a true peer-to-peer currency be developed and maintained in ways that lead to valuation stability and constancy, and to marketplace stability insofar as they are used as bases for valuation exchange in them?
• If these currencies are fad-driven, it becomes impossible to establish a true, reliable “fair and equitable” through them as cited in my second bullet point, above. And these peer-to-peer currencies cease to act like money, or at least as reliable, stable forms of money.

I began raising the specter of regulatory oversight and regulation systems early in this series and have at least briefly touched upon that complex of issues in a number of contexts since then. This is a point in my overall discussion where regulatory oversight as third party validation enters this narrative again. I keep reading opinion pieces that seek to argue that a true peer-to-peer currency is a “people’s money” and that ultimately any money, any currency of any sort or source requires public trust if it is to function and succeed. These opinion pieces keep proposing that regulatory oversight is unneeded and perhaps even unwarranted here.

The point raised in those discussions that monetary value and stability depend on public trust is valid. But adding in systematic due diligence approval from third party sources that are respected and trusted can only support claims that a financial instrument, or a monetary system should realistically be perceived as reliable by the public.

And this brings me to the title of this posting where I cited recent Financial Industry Regulatory Authority (FINRA) and US Internal Revenue Service (IRS) rulings and announcements.

To set the stage for a discussion of those events I note the obvious, and certainly for anyone who has even just casually tracked the reported bitcoin-to-national currency exchange rate valuations that have been reported in the news. Bitcoin valuations and I add peer-to-peer currency valuations in general present themselves as being fad driven, as they have fallen from lack of interest and use, or as in the case of bitcoin itself have skyrocketed along a trajectory that prudent investors and purchasers would see as indicative of a financial bubble.

• FINRA, a private corporation that offers valuation insight for the financial industry, has raised red flags and offered cautionary warnings about investment in or use of bitcoin because of this (see for example, the March 11, 2014 FINRA report: Bitcoin: more than a bit risky.)
• The US IRS has gone so far as to officially rule that bitcoin and its peer-to-peer currency alternatives cannot be considered to be money at all; a bitcoin, according to the IRS is simply a form of property. As such, exchange transactions that employ them as a medium of monetizable value exchange are legally considered to constitute barter and not monetary transactions at all according to the US government. And tax liability resulting from bitcoin use is set by the profit or loss achieved when selling bitcoin property as its exchange rate-based property value changes (see Bitcoins are Property, Not Currency, IRS Says Regarding Taxes.)

It is argued by some, as cited above, that a peer-to-peer currency like bitcoin does not need the types of regulatory oversight or support that a nationally offered and supported currency would. But third party regulatory organization red flags and warnings, and non-currency rulings as to what peer-to-peer currencies are, cannot be argued to help them. And it would be difficult to argue convincingly that these rulings would not have negative impact on the stability and reliability of these currency alternatives too. Such rulings could only be expected to erode public trust, and certainly for businesses as they do their due diligence analyses in deciding if and how to accept these currencies in their business practices.

• Bitcoin and its contemporaneous peer-to-peer currency alternatives are a first generation test run at making a valid trans-national or supra-national currency system that would have a global reach and not be tied to any government or group of them for its identity and support. It and its same generation peers could even perhaps be seen as beta test early release versions of a still forming peer-to-peer currency form, to use a term of art from software development which might be particularly appropriate considering how bitcoin is entirely software based.
• So what happens to bitcoin and its first generation peers should not be seen as a final word on the peer-to-peer currency approach. Even if they ultimately fail, next generation attempts that incorporate lessons learned from them would be that much more likely to succeed.

I am going to finish this series, at least for now with one more installment, in which I will discuss some possible lessons that could be learned from bitcoin and its first generation peer, peer-to-peer currencies and both for their own evolutionary development and for any second generation successors to them. Meanwhile, you can find this and related postings at Macroeconomics and Business.


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