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Jun 10, 2011



Is this anything more than an electronic version of a LETS scheme?

Apart, that is, for the temporary bootstrapping of mining, and even that isn't much different from the starter-pack of credits some LETS schemes offer new entrants.


When local alternative currencies form (like Ithaca Hours in Ithaca, NY or Valley Dollars in W. Massachusetts) they typically have some kind of disbursement mechanism (which BitCoin does) and also some anchor institutions -- people, companies, or banks that agree to exchange these currencies for something of value (labor, goods, or US dollars).

The US Dollar has a big anchor institution in the US Government itself, and also in a set of laws that requires the dollar be accepted as a legal payment. Basically, the value of the US dollar is anchored by your faith in the US Government and its laws. If the government of the United States collapses (or defaults), so goes its currency. (Same for other countries.)

How often do countries collapse? It happens. The smaller they are, and the less politically stable, the more likely the collapse. Compared to other countries, the US is a decent bet, as is the Euro.

With the Linden dollar, the currency is anchored by Second Life, where it can be traded for virtual goods and services, by the Lindex, Virwox and other currency exchanges that let you convert this currency to US dollars. However, everything is based on Second Life -- if the company shuts down, the exchanges will immediately close up shop (they're not idiots). How likely is it that Second Life will shut its doors? Reasonably likely. Several other virtual worlds have closed shop, most recently There.com. Or it might be acquired, and the buyer can convert everyone's Linden dollar holdings to their own virtual currency at any exchange rate they choose.

What are BitCoin's anchor institutions? What companies groups or individuals HAVE to accept BitCoins and can't change their minds on a whim? Right now, it's shaping up that these anchors are likely to be sellers of illegal goods which can't be purchased with other kinds of electronic payment mechanisms. Is this enough to sustain a virtual currency? It might be.

For example, while I, myself, would never ever consider buying drugs or child porn or doing illegal gambling online (really, I'm not just saying that) I'm pretty positive that there are plenty of people out there who do just that, and I can always unload my excess BitCoins on them.

Other companies, governments, exchanges, and people can choose to accept other payment mechanism. Even if they promise to accept BitCoins, there's no guarantee that they'll do so tomorrow if something happens to those anchor tenants.

It's highly unlikely that the authorities can stamp out porn and gambling and drugs -- but they might be tempted to go after BitCoins as a way to get at the bad guys, to shut off their funding.

So there are definite risks to holding BitCoins which may or may not be compensated for by their rise in value.

The usual advice applies: don't gamble any money that you can afford to lose, and keep the majority of your investments in a diversified portfolio. (After all, if all the major governments collapse, the fact that you lose your retirement savings will probably be the least of your worries.)


I do not understand what BitCoin does that regular money does not... unless you don't want to use regular money because either: a) you have access to the kind of machines that can generate BitCoins without additional effort on your part; b) you want to do illegal things and not have the regular money traced. If find it kind of silly and, if at all something to watch, interesting only because of its danger.

What worries me is that we're calling certain things "currency" that aren't, and that may bring regulators down on the heads of gamers for doing game-y stuff (rather than Real World-y Stuff) that shouldn't be regulated the same way economies and finances are (and should be).

I wish Second Life had had the sense to not call Linden Dollars "Linden Dollars," but something like "Second Life Points," or "SLoot," or something fun/funny. Even calling the currency in WoW "gold" is troublesome, because that's a real world thing that is often used as money. I know it's also a staple of fantasy economics (as is the ubiquitous "credit" in SciFi games), but you run the risk of non-gamers (most politicians falling into that group) pricking up their ears for a nice media-friendly fight over something that isn't really a serious issue, won't be solved by regulation, might ruin perfectly good gaming features, and isn't really (really...) related to money in the sense of the word as we've used it.

Gold, for example, in WoW can't buy you anything outside of WoW. It is a kind of point. It is redeemable for other kinds of in-game points. I can keep a bag of 10,000 gold and say, "Hey, lookit my character! He's rich!" or I can trade it for a Purple Hat of Glorious Nonsense and say, "Lookit my character! He's stylin'!" Both states are equivalent expressions of how well (or long) I've played the game.

I won't get into RMT here (I hate it, but I've done that rant here before), except to say that RMT would exist (where technically possible) regardless of what you called the in-game system of point exchange. Heck, you can use real money to buy a character that's been leveled up... but which has *no* in game gold.

I don't mind paying taxes on the money I make in the real world. If I did a significant amount of barter, I'd be amenable to paying taxes on the net-value of what I took in. I believe in the system of government that requires taxes.

BUT... If I paid income tax on the $50 I earned to pay for the WoW disk, and I paid for the sales tax, AND I paid tax on the monthly fee... that's it. I shouldn't have to pay tax on the time I spend in WoW because the word we use to describe "points" is a synonym for "money" in the real world, just because some people (cheaters, imho) exchange real money for those points. It is the equivalent, in my opinion, of me being asked to pay tax on the sex I have with my wife because somewhere people are illegally paying for sex with prostitutes.

By that logic, everyone else should pay money for reading books for pleasure, because some people (reviewers, editors, teachers, librarians) do so as part of their jobs.



For me, the thing that BitCoin does that regular money does not is have a fairly straightforward way of regulating its supply without the need for some Fed that manipulates the amount of currency and interest rates. Especially for political ends. See: Greenspan and Clinton.


Linden Dollars are different from many other in-game currencies because there are a number of third-party exchanges, encouraged by Linden Lab (it provides a convenient API) that exchange Linden Dollars for hard currencies such as the US dollar and the Euro. In addition, Linden Lab actively promotes the use of Linden Dollars for in-world business where the business owners take that money out of Second Life and convert it into real-world income (on which they do pay taxes). Until last fall, Linden Lab used to publish regular data about how many people pulled how much money out of Second Life.

The general rule of thumb right now for tax authorities is to tax such income only AFTER it's converted to real money.

But this creates a number of accounting problems if the currency can be used to buy non-game goods. Say, for example, I pay my housekeeper with Linden Dollars. At the end of the year, the total amount I withdraw from my Second Life account is now that much lower - so I pay less taxes. In effect, my housekeeper becomes a tax-deductible expense, as is anything else I buy with Linden Dollars.

Now, if my business operates inside Second Life, then its reasonable to assume that all the stuff I buy in there (or a sizeable chunk of it) is related to work in some way or other and I can deduct it. (Just as a guy who makes his living selling trading cards can deduct the expense of subscribing to collector magazines.)

But if the Linden Dollars become used for anything outside of Second Life, it becomes a potential problem.

So, as long as virtual currencies are not convertible to hard currencies AND they can only be used for in-game purchases, they're not a significant problem for tax authorities.

If the virtual currencies spread out beyond their virtual walls, then how different, are they, really, from PayPal accounts, just with a different label on the balance? And PayPal is regulated -- depending on the jurisdiction, either as a bank, or as a money sending service.


I think the decentralized bit is what really makes BitCoin different - there's no central entity that BitCoin relies on for its validity, so there's no one for the government (any government!) to target and be able to cripple or kill the BitCoin economy by taking down. So a BitCoin economy will survive for as long as people want it to.


A significant point to make about BitCoin specifically, which I discovered today, is that right now it is the currency used for the (apparently) burgeoning TOR-based CL-like/EBay-like anonymized illegal narcotics website, "The Silk Road".

If this isn't driving law enforcement attention to BitCoin now, it will be, shortly.


Actually, BitCoin *1s* a fiat currency because it's value is not pegged to any specific commodity. The words that come to my mind are "pyramid scheme", though.

Andrew Tepper over at A Tale in the Desert is a big fan of BitCoins. You can pay for your game subscription with them. I suppose he wants them to use in his on-line casino.


kmellis > A significant point to make about BitCoin..."The Silk Road"

That would be why I made that point in the post.


CherryBombSim > Actually, BitCoin *1s* a fiat currency because it's value is not pegged to any specific commodity.

No. Fiat currency refers to one that exists by order of a state.

> The words that come to my mind are "pyramid scheme", though.

Part of the BitCoin FAQ explains why they are not a pyramid scheme. You might think that they are scam, but that are not that type of scam.

> Andrew Tepper over at A Tale in the Desert is a big fan of BitCoins. You can pay for your game subscription with them.


>I suppose he wants them to use in his on-line casino.

I was not aware he ran a gambling site, is that what you are suggesting / alleging? Given inter-state gambling laws in the US that’s a quite a suggestion.



I don't mess with Bitcoins, so I haven't looked into it too deeply.

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