Skip to main content

I have some interest in monetary economics and I have been curious about what impact bitcoin is going to have on the global monetary system.

Janet Yellen: Federal Reserve has no authority to regulate Bitcoin Federal Reserve chair told banking committee regulators confident US law is ‘adequate to meet enforcement needs’

The Federal Reserve has no authority to supervise or regulate Bitcoin, chair Janet Yellen told Congress on Thursday.

Testifying before the Senate Banking Committee in the week that the controversial digital currency’s largest exchange collapsed, Yellen was asked about Bitcoin’s potential impact by senator Joe Manchin.

On Wednesday, Manchin wrote to the Fed, Treasury and other regulators warning that the currency was “disruptive to our economy” and calling for its regulation.

“Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway,” said Yellen.

Yellen said there were concerns about the currency being used for for money laundering but that regulators were confident that US law was “adequate to meet enforcement needs”.

“The Fed doesn’t have authority with respect to Bitcoin,” said Yellen. “But certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies.”

“It’s not so easy to regulate Bitcoin because there’s no central issuer or network operator. This is a decentralized, global [entity]... We’re looking at this,” she concluded.

I read that to mean that she thinks that existing law is adequate to regulate money laundering, but that she is open to exploring how to deal with a decentralized digital currency.

The world's banking systems are already using forms of digital currencies for the most part. Actual physical currency and coin make up only a small part of the total money supply. However, those systems operate under the control of government agencies such as the Federal Reserve and the US Treasury. Bitcoin is the most well known of new digital exchange mechanisms that are not controlled by governments. It uses the bittorrent protocol that provides peer to peer transactions without the need for a central server. There are several other similar pieces of technology.

The world of money is complex and mysterious. Most of the time it operates behind the curtain and we don't think about it as long as we have enough to get by on. At times like the major crashes of 1929 and 2008 the curtain falls down because it ceases to work smoothly and people begin to ask questions about it.

There has been a trend since WW II to create centralized international financial institutions like the IMF and World Bank. That raises all sorts of important questions about global control and who is calling the shots in that. Monetary systems that are able to operate outside of that network of institutions could pose a potential threat to their control. Depending on ones perspective that could be good or bad. It does seem like the time has come for some serious discussion about it. The topic has moved beyond the level of tech blogs/

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

  •  Her Remarks Are Limited to the Fed (10+ / 0-)

    I think she is correct.

    However, she does note that Congress might look into what the proper regulatory structure might be for trading in digital "currencies." I personally don't think that a bitcoin is a currency, but rather a different sort of investment instrument.

    Anyway, people who want to invest in bitcoins should welcome a stronger regulatory framework for this market. Take a look at Mt. Gox. Bitcoin investers might have lost $300 million in that fiasco.

    "I'll believe that corporations are people when I see Rick Perry execute one."

    by bink on Thu Feb 27, 2014 at 05:15:19 PM PST

  •  Congress? Congress? (4+ / 0-)

    Even if it wasn't so dysfunctional and polarized it would be completely clueless.

    Last night I got a class on bitcoin by a good friend that is getting "credits" in his own hardware already.

    Bitcoin will survive the collapse of the Tokyo based exchange.

    It is perhaps the most visible, global and useful of many alternate currencies

    When Wall Street collapses again (even Hank Paulson says it may happen again soon), bitcoin may look great.

    Then again, the other feds, the TSA is already showing symptoms of cluelessness and authoritarianism.

    Daily Kos an oasis of truth. Truth that leads to action.

    by Shockwave on Thu Feb 27, 2014 at 05:22:19 PM PST

  •  The issue isn't really Bitcoin proper... (6+ / 0-)

    If people accept Bitcoins and never try to convert them to other currencies.

    The problems are with the exchanges.  And it seems to me that they are no different from dealing with game currencies in virtual games.  Or currencies of shaky foreign countries.

    When the exchange engages in fraud or other illegal acts, there are sufficient laws to cover that--if they are enforced.  Unfortunately, as the dot-com collapse and the unwinding of mortgage derivatives show, enforcement is lax.

    It is interesting that Manchin's concern is that this is not about banks.  If banks were doing Bitcoin, I bet it would be hunky-dory with Manchin even if a bank exchange behaved like the exchange whose collapse has brought this attention.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Thu Feb 27, 2014 at 05:22:22 PM PST

    •  We certainly saw lots of evidence (5+ / 0-)

      in 2008-2009 of what dodgy activities the banks were engaged in. The real difference between them and something like Bitcoin is that they got bailed out.  

    •  baseball cards (0+ / 0-)

      bitcoin is just another scam.

      The cold passion for truth hunts in no pack. -Robinson Jeffers

      by Laurence Lewis on Thu Feb 27, 2014 at 06:11:31 PM PST

      [ Parent ]

      •  Bitcoin is a triple-entry accounting standard (0+ / 0-)

        ...implementable through a distributed network of agents on the internet.

        It's the exchanges that are potential scams.  That's what takes the real money.

        But then what are the gaming pieces that one buys in online games?

        50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

        by TarheelDem on Thu Feb 27, 2014 at 07:40:38 PM PST

        [ Parent ]

        •  and baseball cards (0+ / 0-)

          only so many are produced each year, and they're supposed to be sold at a given price per pack, but the secondary markets can jack them.

          The cold passion for truth hunts in no pack. -Robinson Jeffers

          by Laurence Lewis on Thu Feb 27, 2014 at 08:13:00 PM PST

          [ Parent ]

          •  Comic books. (1+ / 0-)
            Recommended by:
            Laurence Lewis

            What makes Batman #16 (for example) worth more than #15 or 18? Same goes for all the other superheroes.

            Sometimes the answer is, a better writer or artist. But sometimes it's just...everyone liked that one better, so it's worth more.

            Comic books and baseball cards seem like they're both alike in that way: popularity determines value.

            I don't know about bitcoin.

            English usage is sometimes more than mere taste, judgment and education - sometimes it's sheer luck, like getting across the street. E. B. White

            by Youffraita on Fri Feb 28, 2014 at 12:34:03 AM PST

            [ Parent ]

          •  What seems to be emerging... (0+ / 0-)

            is that Mt. Gox got a  $75 million bill for server services that they could not pay.  So they liquidated their customer's bitcoins at the going rate and declared bankruptcy.  In the process they invented a story about a stolen key.  Not sure that this is the full story, but it is the way that the techie discussion is moving.

            Bitcoin currency movements are public and transparent.  It should be obvious where the Mt. Gox bitcoins went even if it isn't obvious where any dollars or other currency went.

            50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

            by TarheelDem on Fri Feb 28, 2014 at 05:56:52 PM PST

            [ Parent ]

  •  This bitcoin phenomena baffles me. A few days ago (5+ / 0-)

    when the major bitcoin exchange closed down, the article mentioned some enormous number of dollars of bitcoins may be missing.

    How are these issued? What mechanisms of confidence to people have? Especially, after the founder was arrested?

    Even printing "The Full Faith and Credit of The USA" seems a bit sketchy.  But, what stands behind bitcoin.

    What prevents counterfeiting? What prevents people from just making up new ones?  

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Thu Feb 27, 2014 at 05:26:07 PM PST

    •  All of this raises questions about the nature (4+ / 0-)
      Recommended by:
      enhydra lutris, AoT, HoundDog, blueoasis

      of money. The most interesting stuff that I have read on the topic is the work on modern monetary theory.

      This is what is known as heterodox economics in that it tends to make the Wall St crowd break out in a sweat. It is actually derived from Keynes work on monetary theory. What it really comes down to is that money works when people agree on a mechanism. That mechanism can be changed if people agree on it.

      MMT questions the notion about money having to be backed by government reserves in things like gold. The new technological realities are going to force a reexamination of the financial system.  

      •  money is a medium of exchange agreed upon by (4+ / 0-)

        convention, once it is such it can be whatever your want, from cocoa beans to computer bites (= bitcoin)

        but I'm old fashioned in these matters..

        We're shocked by a naked nipple, but not by naked aggression.

        by Lepanto on Thu Feb 27, 2014 at 05:40:28 PM PST

        [ Parent ]

      •  This is especially the case when the so called (3+ / 0-)
        Recommended by:
        HoundDog, Youffraita, blueoasis

        real economy is utterly bullshit. The rampant speculation in such things as mortgage backed securities and the like is, in the end, based solely upon the agreement to set a baseline value for one examplar of a hypothetical item in a hypothetical market at a hypothetical time.  It doesn't matter if the derivation of the value is totally spurious, if the agreement exists, then we can speculate on futures in that item, be it used wine corks, kewpie dolls, etc.

        That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

        by enhydra lutris on Thu Feb 27, 2014 at 06:44:44 PM PST

        [ Parent ]

    •  Just making up new ones (4+ / 0-)

      is not really a problem - there is a mechanism for "minting" new bitcoins but it is designed to require substantial  and increasing computing resources and the "supply" is thus limited. No one has yet found a way to circumvent this and obtain unlimited bitcoins for free.

      However, bitcoins can be stolen. Obtain the private key associated with a bitcoin address and you are effectively the new owner of it. And ownership is largely anonymous so the thief can be hard to catch.

      And indeed there is a potential problem when to get your funds into a usable form you need to rely on exchanges, which are private and practically unregulated entities, often in foreign jurisdictions.

    •  All money currently in the world, including (0+ / 0-)

      bitcoin, is based on people trust that it has value.
      Traditional currencies, as backed by government, at least have a guarantee that you can "purchase" services from government with currency backed by that government (in short, say for US Government, you're guaranteed that if you have US dollars, they'll accept that US dollar to perform services for you).
      Bitcoin doesn't have anything standing behind it, but it technically doesn't need to as long as everyone using it agree to offer their service at a consistent price.

      There's a good, interesting video behind how Bitcoin work. Whether you view Bitcoin as a valid alternative currency or not, it's an interesting video on how the protocol work to prevent counterfeits.
      https://www.youtube.com/...

  •  Treasury has jurisdiction, not Fed? (0+ / 0-)
    I read that to mean that she thinks that existing law is adequate to regulate money laundering, but that she is open to exploring how to deal with a decentralized digital currency.
    Or that money laundering is outside of the Fed's jurisdiction unless it's through banks, but is the responsibility of Treasury?
  •  I think I'll stick with Liberty Head double eagles (1+ / 0-)
    Recommended by:
    Richard Lyon

    and Queen Victoria sovereigns (preferably Young Head with Heraldic Shield and not Pistrucci's St George on the reverse, they're worth a little more).

    We're shocked by a naked nipple, but not by naked aggression.

    by Lepanto on Thu Feb 27, 2014 at 05:37:30 PM PST

  •  The Fed is not your friend. Neither are the (1+ / 0-)
    Recommended by:
    blueoasis

    banks and banksters. They have helped to see to it that we have shifted to a predominantly FIRRE economy, one that produces nothing whatsoever and speculates on damn near everything. Something beyond their ambit and control is not magikly bad because useless losers like Summers cannot tip off their cronies as to what tomorrow will bring.

    That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

    by enhydra lutris on Thu Feb 27, 2014 at 06:38:13 PM PST

    •  Ummm.... (2+ / 0-)
      Recommended by:
      wu ming, Youffraita

      ...if you think Summers is bad (and he is), you ain't seen nothing with Bitcoin.  Why?  There's no central bank at all.  It's a gold standard without the gold.  And despite its Rand Paul policy bias, there's nothing that stops someone from setting up a Bitcoin non-bank bank in an appropriate jurisdiction and doing things that would make JPMC freak out.

      Oh, yes.  The Bitcoin base is small and any large player could make a speculative attack on it.  (This doesn't work against the dollar or any other major currency because the appropriate central bank ultimately controls the money supply.  That's why the deficit scolds are so full of shit.)

      •  And Rand Paul is totally opposed (1+ / 0-)
        Recommended by:
        Kvetchnrelease

        to any kind of regulation whatsoever...that's his Ayn Randism, is it not?

        But thousands of years of banking experience have proved that Bankers. Need. To. Be. Regulated. To. Save. Their. Banks. From. Their. Own. Damn. Selves.

        As for Bitcoin? No sane person should go there. It's a scam for the kind of person who thinks betting on the lottery is good odds.

        English usage is sometimes more than mere taste, judgment and education - sometimes it's sheer luck, like getting across the street. E. B. White

        by Youffraita on Fri Feb 28, 2014 at 12:42:08 AM PST

        [ Parent ]

        •  Rand Paul != Bitcoin. Stay away from (1+ / 0-)
          Recommended by:
          Youffraita

          underdeveloped countries and underdeveloped areas of the US, there's a lot of barter and unofficial non-bank currencies floating about in those areas, so you're guaranteed to be bankrupted within minutes.

          That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

          by enhydra lutris on Fri Feb 28, 2014 at 10:31:29 AM PST

          [ Parent ]

      •  I stopped reading at Rand Paul, because I'm (0+ / 0-)

        talking about bitcoin and not Rand Paul. If you feel like discussing facts, let me know.

        That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

        by enhydra lutris on Fri Feb 28, 2014 at 10:28:54 AM PST

        [ Parent ]

  •  Digital currencies offer an escape hatch (1+ / 0-)
    Recommended by:
    blueoasis

    from the corrupt monetary system we have now, which is based on banks creating money out of thin air for the private profit of banks (this is how the current system, called "fractional reserve banking" actually works).

    Although I don't believe bitcoin, per se, is the solution, I do think that the creation of alternative forms of money could enable people to break out of the banker-ruled economic structure and create something new, possibly something better. I hope the government will continue to take a hands-off approach and allow people to experiment with alternative forms of money.

    The most serious problem in American politics today is that people with wrong ideas are uncompromising, and people with good ideas are submissive and unwilling to fight. Change that, and we might have a real democracy again.

    by Eric Stetson on Thu Feb 27, 2014 at 07:40:37 PM PST

    •  We still need a way to control money supplies (1+ / 0-)
      Recommended by:
      Eric Stetson

      and, more specifically, a way to add to the money supply.

      The major issue with Bitcoin is that the supply is fixed. There's no way to add additional bitcoin to offset loses due to losing a wallet's private key or to offset growth in economy (which will send you currency into a deflationary spin, which is about as bad as hyper-inflation). This is where Feds come in. Fed purpose is to control money supplies to prevent money from entering a deflationary spin (money starts to gain value, incentivize people to "hoard" it, further increase value money due to reduce amount of money in circulation, incentivize more people to "hoard" it).
      A health currency system has a very small inflation to it (high enough that small fluctuation don't send it into a deflationary spiral, low enough that it's stable).

      Bitcoin protocol is very interesting in that with a small tweak to protocol, a government can "control" the amount of virtual currency released precisely while still bypassing the banks.

      Just put in a bit of note before continuing. Unlike what most people claim, bitcoin mining does NOT waste.
      https://www.youtube.com/...
      Bitcoin mining is basically a work problem designed to secure bitcoin (to prevent double spending attack). In essence, bitcoin mining is the cost to prevent counterfeits, similar to how we pay taxes to government (which, in turn, pays treasury employee and such) to prevent counterfeits.

      Continuing on. In short, the amount of money awarded per block is arbitrarily defined (in bitcoin, it's defined at a certain value that gets halved every certain number of blocks), the bitcoin protocol could be modified such that the authority to set the block reward rest with the government (or whichever section of government that handles economy). In essence, the government has some control over how much money supply there are and can tweak it by declaring the block chain from X ~ X+n is worth however many coins.

      •  Interesting thoughts... (0+ / 0-)
        Bitcoin protocol is very interesting in that with a small tweak to protocol, a government can "control" the amount of virtual currency released precisely while still bypassing the banks.
        True. Or a nonprofit could do the same. In fact, any entity -- a government, an NGO, a corporation, whatever -- could run an alternative currency based on tweaked bitcoin code.

        As for the fixed supply, yeah, that's certainly a drawback to bitcoin. But I suppose the code could be tweaked to make it possible to keep generating new coins indefinitely.

        The most serious problem in American politics today is that people with wrong ideas are uncompromising, and people with good ideas are submissive and unwilling to fight. Change that, and we might have a real democracy again.

        by Eric Stetson on Fri Feb 28, 2014 at 07:07:53 PM PST

        [ Parent ]

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site