The Organization for Economic Co-operation and Development, or OECD, maintains a ‘black list’ of jurisdictions it considers uncooperative in the global fight against money laundering and terrorism finance. The organization also has a stated goal of fighting tax crime. Undeclared revenues are frequently hidden offshore in these countries. The objective may be to stamp out illegal activity but also has the fringe benefit of stamping out tax competition. Governments don’t like the fact that individuals can keep assets away from the tax man. It tends to reduce their ability to “provide for the general welfare” by taking other peoples money.
Enter Bitcoin. This digital currency is exploding across the financial universe. Released a few years ago by an unknown person or group, the genius behind this concept is decentralization. There is no controlling authority. Bitcoin ‘miners’ are spread around the globe and compete to ‘mine’ Bitcoins by validating transactions and therefore providing price discovery. No government yet can be involved; ie, collect taxes, regulate, or monitor those who are using the currency to conduct commerce.
So what does this mean for global finance? Well, both side of the aisle are embracing Bitcoin. You have anarchists on the left and libertarians on the right extolling the virtues of Bitcoin. For those willing to take the risk of investing in this medium of exchange, they are provided with a completely anonymous way of buying and selling. This anonymity allows for freedom but also opens the door for financial crime. As of today, the float is too small for large transactions; however, this could change as the value of a Bitcoin unit is rising rapidly. The actual number of currency units will be capped but the value will fluctuate based on demand. After the Cypriot banking crisis, the price of a Bitcoin increased dramatically as investors saw their assets taken to fund a bailout of bad financial management.
There is no doubt that money hungry government agencies will try and regulate Bitcoin at some point to combat crime and halt the loss of tax revenue. However, this will be extremely difficult to accomplish as there is no ability to crack down on a central authority. The flip side is with no government intervention, there is no possibility of debasing the currency through reckless spending or monetary policies.
There are risks to digital currencies obviously. These include crime, hacking, coding issues and the like. There also has been and will be extreme volatility. This is not a vehicle for grandma to put her retirement savings. There is also no banking agency insuring the assets, so it’s not for the faint hearted.
One thing for sure, digital currencies are here to stay and Bitcoin won’t be the first. Let’s hope that a way can be found to enjoy the freedom and value associated with Bitcoin while guarding against the criminal aspects which are surely already involved. To thread this needle would be a good thing for human freedom and economic development.