Welcome to the CoinDesk Weekly Review 26th July 2013 — a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law
Too good to be true – and those are just the names
The marvellously named Trendon T. Shavers from Texas has had his collar felt by the American authorities. They accuse him of running a Ponzi scheme under the guise of Bitcoin Savings and Trust, which turned millions of dollars’ worth of bitcoin into fun for him and misery for his investors.
Ponzi schemes are simple: you promise huge returns on investment but use new investors to pay off old ones at your promised rate. It works wonderfully as long as new money keeps coming in fast enough, and nobody tries to take their investments out – but the longer you run it, the bigger the financial hole. This is, of course, massively illegal (unless you’re a national government, in which case it’s called prudent financial engineering).
Such schemes are very old – Dickens wrote about them – but the classic of the art was one concocted by the even more marvellously named Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi. An Italian immigrant to the US at the start of the 20th century, he went through various petty frauds and thievery before discovering that you could buy international postage coupons in Europe and redeem them in the US for many times their original value. That wasn’t illegal – but you couldn’t do it in bulk. That detail escaped Ponzi’s attention, at least until he’d got hundreds of investors in on the scheme and promised them huge returns – so he paid them from the new investors who flocked in as the old ones were paid. Eventually, it all came thundering down amid huge publicity and Carlo’s fame was assured. Albeit not perhaps as he may have wished.
There have been plenty of other Ponzi schemes since then, based on the principle that there’s a sucker born every minute. So why the connection to bitcoin? The only reason bitcoin is chosen for such activities is that it’s new and has recently undergone a dramatic increase in value, and has thus attracted a lot of credulous punters. As with gambling, anyone with a basic grasp of integer mathematics and basic statistics will be able to spot and avoid the worst excesses of the rip-off merchants with ease. Another sign that something needs a little extra scrutiny is if the underlying mechanism is kept secret – as it was with Bitcoin Savings And Trust.
Shavers refused to divulge this for the reason that if he did, it would stop working. In that, at least, he told nothing but the truth.
Gains without frontiers as BTC becomes the world wide wonga
An Israeli, an Afghani and an Iranian walk into a bar.. and security services on three continents immediately get tremendously nervous. Perhaps not – but even in the absence of bars, all three territories saw BTC activity this week. The first recorded transaction in Afghanistan joined Iran’s first native online bitcoin service and Israel’s new-found ability to buy BTC in currency exchanges to underline two important facts: The will to trade overcomes most cultural barriers, and cybercurrencies possess a unique ability to move into new territories, almost as easily as plants colonise new islands by hitching a ride on birds.
There have always been global currencies. For most of the last hundred years, the US dollar has been the de facto dosh accepted anywhere in exchange for goods and services’ real value, and it’s not really under threat, even though the euro has made some inroads. But dollars have downsides. They are frequently counterfeited and in the strangest of places such as North Korea and, well, Dartmoor – where the young John Law worked for a chap who rented out fruit machines and arcade games. Said cross between a Wurzel and Arthur Daley was subsequently nabbed when the local plod found $100 printing plates and security paper under the floorboards of matey’s barn.
The other downside is that dollars are physical and open to being stolen, confiscated, mislaid or destroyed – all risks for anyone who habitually moves across borders, makes the acquaintance of people with guns and no sense of humour, or generally has an adventurous attitude to life.
Bitcoin, however, can live safely on the Internet, stashed quietly away in this or that online storage system – even in an email account – only to be summoned at will by its owner when required. Provided the details of where it’s stored are simple enough to be memorised, and that’s easy to arrange, the adventurous traveller doesn’t even need to carry technology with them. As long as a computer or smartphone can be borrowed at the time of transaction the money can be spirited out of nowhere and transferred.
Until customs, gangsters, robbers or governments learn to look inside our heads, this is going to be one of the safest ways to globetrot with transactable currency for the foreseeable future.
Good luck finding that bar in the ‘Stan, mind.
A wizard wheeze for hungry programmers
Fans of Terry Pratchett’s Discworld series will know it has sold many millions of copies in many languages, and is enjoyed by hordes of normal people who wouldn’t normally consider fantasy – let alone comedy fantasy – as wholesome faire. But as Pratchett himself has noted, whenever the series breaks into a new market around the world, it follows the same pattern. It’s picked up first by the hardcore fantasy mob, the sort with yards of bookshelf deoted to dragons and wizards, and in particular by the more techy geeks among them.
Bitcoin may be following the same path. Foodler, an online ordering system for restaurants, decided to add bitcoin to its system: not because of complex economic analysis and business model cogitation, but because Foodler was built by programmers. Programmers eat a lot of delivery Thai. And programmers think bitcoin is cool. Now, although the actual figures are low, the rate of growth in bitcoin transactions within the company is 30 percent a month – which is anything but low. And that’s not just programmers.
In retrospect, Foodler is an obvious candidate for bitcoin exploration. It can shield the restaurants from any need to handle BTC – instead, Foodler converts customer payments into credit and handles all of the bitcoin to dollar conversion. It’s an online service, bitcoin’s natural environment. And it has a huge customer base – some 11 million hungry clients – which is big enough for even a very minority interest to make sense.
So far, only around 270 bitcoins are spent in the system every month. And it’s far too facile to imagine that the 30 percent per month growth rate will continue indefinitely, but even in the short term, that means an increase of thirteen times per year. For something that didn’t take very long to implement, it’s been worth it in publicity terms alone – and yet another sign of cryptocurrency slipping into the mainstream.
And it didn’t even need a wizard with a big wand.
John Law is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.