Bitcoin and offworld banking

by George Hatjoullis

Bitcoin software running under Windows 7

Bitcoin software running under Windows 7 (Photo credit: Wikipedia)

Offshore banking is not new. It offers corporate and banking facilities outside of national jurisdictions. It also offers anonymity. It is not difficult to imagine why nationals of a particular jurisdiction might wish to operate anonymously outside of their jurisdiction. It is less easy to grasp why national jurisdictions allow them to do so. However, this seems to be changing and pressure on offshore banking to move to full transparency is growing. Moreover, coming onshore is now subject to great scrutiny and increasing financial penalties. In the UK, for example, property owned by offshore entities is taxed at a higher rate (or at least will be). If national authorities in co-operation decide to negate the effectiveness of offshore activities they will succeed. Increased transparency alone will seriously damage this parallel corporate and banking structure.

The question was put to me whether Bitcoin could replace some aspects of the offshore system. The answer depends largely on how anonymous and secure is Bitcoin. It also depends on how much liquidity Bitcoin can generate. Indeed, Bitcoin is at a stage analogous to the transition from barter economies to money economies.

During the development of the money economy farmers and manufacturers increasingly accepted some precious metal in exchange for goods. Precious metals supplies however at times grew more slowly than the capacity to produce so the goods value of the metal rose. In modern parlance there was goods price deflation. Banking emerged to fill the demand for money. Banks held precious metals (for safe keeping if nothing else) and issued promissory notes, backed by their precious metal holdings, which became the new form of money. Finally, authorities intervened to regulate the supply of such promissory notes and eliminated the convertibility to precious metals. The result was the present fiat money system.

The important point here is that farmers and manufacturers acquired money in exchange for goods and services and precious metal balances grew. Money producers (or miners) were rewarded for their efforts with claims on goods and services. One way to acquire Bitcoin is to sell goods and services and accept Bitcoin as payment. There is no need to actually buy Bitcoin by making payments through the onshore banking system. Another way is to buy anonymously using offshore funds before transparency is imposed.

The Bitcoin system thus has the potential to grow organically and substitute for the money element of offshore banking. As the authorities neuter the offshore banking sector a new offshore money system may grow in cyber-space with many of the same characteristics as the geographically located offshore banking sector. The users will most likely have the same motivations.

In a previous blog, Bitcoin and the law, I noted that anonymity in financial transactions runs counter to the anti-money laundering efforts of national and international authorities. Bitcoin can thus only succeed if it loses anonymity or develops as a parallel offworld system. It may be able to succeed as an offworld system. It is a cyber-cash system that offers potential anonymity. There is no central organisation or geographic location. Bitcoin activity is widely dispersed across individual computers. This is a difficult structure to control.

This potential cannot be lost on the authorities and they cannot allow it to undermine their efforts to combat the laundering of the proceeds of crime and the financing of terrorism. Bitcoin is a fascinating historical phenomenon worth monitoring from a distance.