Why Bitcoin should remain unregulated

Tomas is the founder of Coin of Sale, a Bitcoin POS system. He blogs at freecitystate.com.

Aidil Zulkifli on e27.co tried to criticize the free market approach to Bitcoin (un)regulation and he based his argument on two points – that Bitcoin is the perfect tool for money laundering, and that unregulated markets caused crises such as the one in 2008.

First of all, it’s nice that Zulfikli has forgiven David Moskowitz (the author he was responding to) for overlooking the prosecution of two men for money laundering through Bitcoin, an incident which happened after David wrote his article.

What is more difficult to forgive is the fact that Zulfikli, who is a lawyer, has ignored the “innocent until proven guilty” principle. Not a single person has been found guilty of money laundering with Bitcoin, so using these examples to prove his point is blatant ignorance of the basic principles of justice.

Also, as a lawyer, Zulfikli should know that just because the Singapore dollar is the only legal tender currency in Singapore does not make alternative currencies illegal. Legal tender simply allows a currency to be used as a means of paying taxes and meeting obligations, but that doesn’t stop you from trading in other currencies. Anyone is free to open a USD account in Singapore and receive payments from its partners in that currency.

Under-regulation didn’t kill economy – over-regulation did

But my criticism is aimed mostly at the economics part of Zulfikli’s argument. He claims that financial markets were “unregulated” before the ‘08 subprime mortgage crisis.

Let’s analyze how that “unregulated” market looked like and compare it with how Bitcoin would have handled such issues. To do this, we cannot do it the populist way and just look at the derivatives which drove the subprime mortgages and the credit default swap instruments which were insuring them. We need to look at the whole process from the decision to issue a subprime mortgage, through to the setting of its parameters, to selling it on the secondary market.

As Bitcoin is a medium of exchange (not money – yet), we need to compare it with the medium of exchange which was issued against those mortgages – US dollars. The Federal Reserve – the US central bank with a board appointed by the President and confirmed by the Senate – targets the interbank lending rates, thus setting interest rates for the whole economy and effectively centrally planning the price of money for loans.

This is why both US and Singaporean interest rates are virtually zero (Singapore pegs its rate to US). This would be impossible with Bitcoin where there is no such authority with the ability to issue new currency at will and push rates below their market value.

New loans are taken from deposits of other clients who believe that their money is safely “stored” in a bank and available to them 24/7 when in fact, most of it (in the case of US, this is up to 90 percent) is lent to someone else. The amount that banks has to store without lending out is defined by financial regulations. International agreements are also in place for banks to set aside money to cover losses.

By defining these limits in a regulation, it was implied and later explicitly stated and executed that as long as banks stick to these rules, the central bank as a lender of last resort will provide liquidity in case clients initiate a bank run, an event where many customers make withdrawals at the same time but to the extent that the bank risks bankruptcy. Meanwhile, the Treasury will  provide capital in case bank’s loans go sour.

Since the damage suffered from bank runs and losses are subsidized by the government, there’s nothing stopping banks from growing the money supply and triggering credit bubbles like the one preceding the 2008 crisis or the one we’re facing now.

Deposits are further insured through the Federal government’s deposit insurance scheme, which took away the consumer’s responsibility to do basic due diligence and allowed banks to take larger risks because nobody who have money at stake was watching the banks.

Bitcoin has no cushion for negligence

The boom caused the bust