Bitcoin Analysts Contribute to a Post-Legal Tender Era

The year 2013 saw at least three bitcoin analyst reports from financial investment firms, an astonishing achievement for a young five-year-old digital currency. In some economic circles, bitcoin has slowly entered the 'reserve currency' lexicon.

Are we entering a post-legal tender era, where the provision of money is determined by the market and not by central bankers? Why do we see mainstream analysts reporting on price and economic impact for bitcoin when we never really saw that with other digital currencies?

The reason is simple – previous digital currencies were not decentralized with an independent floating exchange rate and they did not operate beyond confiscation.

Examples such as Digicash and e-Gold were brilliant proofs of concept, but their centralized nature also offered a single point of failure. Governments are not going to accept a challenge to their monetary authority if they don't have to.

In a paper entitled "Regulating Digital Currencies: Bringing Bitcoin Within the Reach of the IMF," Nicholas A. Plassaras suggests that the International Monetary Fund is ill-equipped to handle the widespread use of bitcoins into the foreign exchange market, highlighting the inability of the Fund to intervene in the event of a speculative attack on a country's currency by bitcoin users.

He also hints at some of the tools that the IMF may consider deploying in the face of the global bitcoin challenge.

That academic study was followed by three analyst reports from the institutional investment industry. Together, all four studies solidify bitcoin's maturity into a new and unique asset class with broad implications for both fiscal and monetary policy.

On 31st July, BBVA Research released "Bitcoin: A Chapter in Digital Currency Evolution" which concludes that bitcoin is here to stay and that the regulators and financial institutions embracing bitcoin early will likely become the leaders of the future digital monetary system.

On 1st December, Wedbush Securities released "Bitcoin: Intrinsic Value as Conduit for Disruptive Payment Network Technology" by Gil Luria and Aaron Turner.

The report observes three key sources of demand for bitcoin:

(a) as a disruptive payment network technology,





(b) an alternative uncorrelated asset class, and



(c) a safe haven currency.

Additionally, the report states that bitcoin represents another potential low-cost funding method for PayPal, leading Wedbush to predict "that with more regulatory clarity PayPal would likely embrace bitcoin."

On 5th December, BofA Merrill Lynch Global Research published "Bitcoin: A First Assessment" by David Woo, head of global FX and rates strategy. Since Woo is considered to be one of the leading currency minds on Wall Street, his 14-page report represents a massive endorsement for bitcoin.

Woo states:

"We believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, bitcoin has clear potential for growth, in our view."

Placing a $1,300 price target on bitcoin, he also identifies the three things that need to happen in order to justify the current bitcoin valuation – it will need to account for at least 10% of all global e-commerce B2C transactions, become one of the top three players in the money transfer industry, and acquire a store of value reputation close to silver.

As a contra indicator, the Bank of America Woo report can probably claim responsibility for diffusing the most recent bitcoin rally that took the cryptocurrency to an intraday high of $1,156.00 on the CoinDesk BPI.

As we gradually enter a post-legal tender era, it behooves us to examine the possible implications for fiscal and monetary policy within a bitcoin economic environment. This article focuses on fiscal policy while a future piece will focus on monetary policy.

Aside from the beneficial wave of new job creation and economic opportunity, bitcoin as a competitive and successful monetary unit influences some pretty substantial adjustments forthcoming to fiscal policy.

High on the list, of course, is the effect on true income determination and the resulting taxation policy. A growing army of bitcoin independent contractors and informal merchants selling labor and goods will operate off-the-grid, adhering to the same honor system that exists for paper cash today.

To fill State coffers, it is likely that the bulk of tax revenue from individuals will shift from taxing income to taxing consumption (or spending).

Good riddance. A progressive income tax is one of the fundamental tenets of Marxism and it holds back incentives for innovation and achievement.

Far more likely in a bitcoin environment would be heavy taxes on consumption, which are regressive in nature but also more equitable than progressive taxes. The ease of bitcoin merchant identification and point-of-sale audits makes consumption taxes nearly inevitable for a worried nation-state with diminishing revenue.

Other fiscal policy impacts revolve around how the spending beast will be starved by a lack of sufficient revenue to pursue global military adventurism and other unpopular spending programs made possible only by the ability to print prosperity.

The arrogance of control maintained through the unlimited issuance model of the world's reserve currency will be dealt a mighty blow.

For the first time in modern history, a government will actually be forced to justify why they want to increase direct taxation and to demonstrate why that particular activity should be funded. Consequently, everyday people will become more empowered in the government actions executed under their name.

However, many in society will be left behind by this monumental shift of real wealth leaking out of national fiat currencies, because people have largely underestimated the widespread, latent demand for a non-political currency.

Joerg Platzer

, founder of Crypto Economics Consulting Group, encourages individuals to start preparing for this day in advance to ensure economic survival. He also emphasizes the need for governments to be honest and to anticipate the vast swath of society that will simply be impoverished after the great wealth transfer to a cryptocurrency society.

Further economic thoughts on the cryptocurrency and free banking space will undoubtedly be filled out by other bitcoin economic thinkers, such as Peter Šurda, Konrad Graf, JP Koning, and George Selgin.

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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