The Legal Tender Blog: Crypto

Faux Money (September 21, 2023)

That would have been a better title. 

Bitcoin distribution (August 25, 2023)

Perfectly normal monetary behavior. Not.

What do genius programmers know? (July 16, 2023) 

Econ 101: Specialization is efficient. 

Example #1: 

How do I upset both MMT and bitcoin maximalists?  (June 25, 2023) 

I observe two empirical regularities: 

1. Today what functions as money depends mostly on government (I think because legal tender for taxes). 

2. Money affects prices. 

Cryptoasset, not cryptocurrency (June 23, 2023) 

How bitcoin succeeds but fails (June 10, 2023) 

"A.I., please design an asset that cleverly fails in all the 4 functions of money." 

A.I.: OK, here goes:

1. On most years: Too valuable to spend so can't be a general medium of exchange. 

2. On other years: The worst store of value. 

3. Volatility prevents use as unit of account. 

4. Tax authorities reject it. 

Introducing "super exorbitant privilege" (May 26, 2023)

The dollar's dominance in international trade, a.k.a. "exorbitant privilege," is voluntary, based on custom and network.

It's nothing compared with its legal-tender-for-taxes privilege at home, based on the IRS and prison.

Sorry, bitcoin. 

Bad news on Tax Day (May 26, 2023)

This can happen to any bitcoiner who doesn't own dollars on Tax Day: 

Bitcoin's Tax Day problem (April 18, 2023)

From the diary of a bitcoin maximalist:

April 17: The dollar is a scam! Let's never use it! Long live bitcoin! We are finally freeeeee!

April 18: Oh no, it's Tax Day, and the IRS won't accept my bitcoin... can someone please please please sell me dollars? 

Lessons from the money changers in the Temple: An Easter special (April 9, 2023)

A special Easter thread on the complicated relation between money and taxes, as exemplified by the money changers in the Temple.

According to the state theory of money / chartalism / cartalism / tax-foundation theory, a government can make an object circulate as money by accepting it for its own taxes.

The Jewish Temple in Jerusalem showed the limitations of this mechanism. 

Jewish law required high-quality silver coins for the Temple tax. Coins of the Roman occupation didn't qualify. Only shekels from Tyre were. 

Contrary to theory, shekels were not currency in Judea, so money changers in the Temple converted taxpayers' Roman coins to shekels just before the tax was paid. 

Theory failed because: 

A. The Temple tax was too small and infrequent. 

B. Perhaps shekel supply was too low.

C. The economy was dominated by Roman taxes that required Roman coins ("render to Caesar" etc. was said in this exact context).

The lessons:

1. An object is NOT legal tender for the main taxes in a territory? It faces a huge obstacle to becoming a currency. Sorry crypto. 

2. The welfare state's huge taxes greatly weaken crypto's potential.

Finite money supply: A lesson for bitcoin (February 24, 2023)

Three countries recently stopped increasing the quantity of their currencies: Yemen, Afghanistan, Croatia.

Two currencies are doing great, but the third is dead.

Why the difference? 

The governments' legal tender laws. 

Compare my article in the Chicago Tribune on Croatia with this blog post on the other two.

Croatia and bitcoin (January 10-12, 2023)

1. My opinion piece in the Chicago Tribune:  

What can we learn about bitcoin from Croatia's current transition from kuna to euro?

That finite quantity and network are far less important for currency than legal tender status. 

2. [A later tweet proved far more "popular" and invoked lots of hatemail from bitcoiners:]

Attention all bitcoiners!

I found something better than bitcoin: A currency whose production just stopped FOREVER, and already has a network of 4 million people. 

It's called kuna and you can find it only in Croatia, only for a few more days. Go and get it!

3. Correction: My original article accused bitcoinism of "misunderstanding of basic economics (not every asset is money)." The Tribune ommitted the part in the parentheses.  

Legal tender money is evil - and impossible to resist (December 27, 2022)

I agree with this bitcoiner below: Bitcoin makes you aware of how evil the "fiat" system is. 

Especially on April 15 when you MUST exchange bitcoin for dollars to pay taxes. 

Darth Vadar put it well .

The future of Binance (December 19, 2022)

When the cops come they will want both hands. 

The bitcoin religion in the long-run (December 18, 2022)

Zeus is just as powerful in 2022 as he was in 1000BC. 

"Circulation" (December 13, 2022)

Great sense of humor: The graph says "circulating" about an asset (in red), although most of its units haven't moved for months.

Icebergs circulate more than bitcoin. 

Luftgeschaft (December 11, 2022)

Just like his business, CZ likes "air business" in his free time as well. The term, in German and Yiddish, means a questionable business that has really nothing in it.

A non-current "currency" (December 6, 2022)

This "currency" is as current as a dry river:

The FTX party (December 5, 2022)

An Irish historian accidentally found a secret picture of Sam Bankman-Fried enjoying crypto investors' wealth at a Bahamas FTX board meeting:

The bitcoin religion (December 4, 2022)

"All Bitcoin holders are brothers," was the entire tweet of a bitcoin professional.

This is yet another indication that bitcoin crossed the line from a wannabe money to a religion.

Money has never had anything to do with brotherhood. Real brothers don't need money between them. They do gift-giving. 

But I understand that all Christians are "brothers in Christ." 

Bitcoin and the power of government (December 1-2, 2022)

For once I agree with Michael Saylor. Wars indeed kill money.

Some Bitcoiners say that bitcoin is "unstoppable" by governments. 

 But... (see below)

The grid (November 28, 2022)

Bitcoin mining is good for the greed, not the grid. 

A state that had some people freezing to death for lack of energy two years ago, better handle its grid differently.

Evolution of money (November 27, 2022)

Bitcoiners are almost right.

Physical cash will be replaced by digital cash; but it would be CBDC rather than bitcoin.

The light bulb and the car are not privatized candle and horse; they are only technologically better. 

The same will happen with state-issued cash and CBDC.

Not that I'm happy with a CBDC future, but that's my prediction. 

Crypto in ... Albania (November 26, 2022)

Crypto boss knows where to market his fantasy merchandise: In the only country that had such wide-ranging pyramid schemes that they affected the macroeconomy, politics and society. In the ensuing anarchy and near civil war, 2000 people died, according to this IMF report.

A lost cause (November 22, 2022) 

"Who else is still bullish on bitcoin?" as it continues to fall, reminds me of this Animal House scene. 

Dumb and Dumber - and Dumbest (November 16, 2022)

FTX listing its own FTT crypto "currency" as an asset reminded me of this scene from Dumb and Dumber.

Dumb and Dumber were prudent relative to cryptos as their IOUs were denominated in dollars. 

Maybe the brilliant writers thought that having Dumb & Dumber invent their own currency would be way too silly, even for this movie. 

When one man tries to save a financial market (November 14, 2022)

1907: JP Morgan.

2022: CZ Binance. 

FTX and its "currency" (November 14, 2022)

The fate of FTT - the crypto "currency" issued by FTX - was foretold.

FTX customers only had to google it and see what the acronym means (see below).

In retrospect, it's an exact description of FTT's performance.

According to a Twitter search, only one self-described pharmacist-speculator noticed it in advance.

On the FTX collapse (Saturday, November 12, 2022)

Sabbath thoughts on FTX.

From tulipmania to cryptomania, King Solomon nailed it:

"The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun." 

- Ecclesiastes 1:9.   

מַה-שֶּׁהָיָה, הוּא שֶׁיִּהְיֶה, וּמַה-שֶּׁנַּעֲשָׂה, הוּא שֶׁיֵּעָשֶׂה; וְאֵין כָּל-חָדָשׁ, תַּחַת הַשָּׁמֶשׁ. 

- קהלת א:ט

Bitcoin volatility (November 10, 2022)

Binance-FTX war (November 9, 2022)

On this day, the largest crypto exchange Binance launched a "bank run" on the assets of the second largest crypto exchange FTX, caused its collapse, and agreed to buy it.   

The earliest precedent I know is from 1697 England. Old goldsmith-bankers ganged up on the new kid in town - the Bank of England - and presented many of its notes for redemption in coin, in order to bring it down. See below. 

More famous example come from "banknote wars" in Scotland for a few decades beginning in the 1720s, and there were also cases in Canada and Sweden in the 19th century. A useful source for these later cases is here.

The bitcoin bubble (November 3, 2022)

This is totally normal, I'm sure every great currency of the past went through such a phase. Not. 

Musk and crypto (October 31, 2022)

Following the Twitter purchase, can Musk make crypto a real currency?

Maybe if he commits not just to accept it from Tesla buyers or Twitter advertisers, but legally commits to do it at a fixed price: X amount of bitcoin buys a model Y from Tesla.

Like paper money was convertible into an exact quantity of gold.

But he can do better than promoting bitcoin or dogecoin. He can cheaply issue his own crypto instead of paying with cars to those who made or mined other cryptos.

That's the problem of all cryptos that got no intrinsic value or legal support: See the entry below at September 27-29, 2022. 

Bitcoin illiquidity again (October 21, 2022)

Bitcoiners celebrating the non-trading of 2/3 of bitcoins for a year, including at Tesla, don't distinguish currency from an asset. But some of the greatest monetary economists made an identical error. 

It happened on the enchanted Pacific island of Yap, where economists go to become gullible. 

Friedman, Keynes, Tobin and Mankiw read an anthropologist describing an extremely illiquid asset as money. Blinded by their desire to find "pure" money, that is, unburdened by intrinsic value or legal support (i.e., a bitcoin predecessor), they said amen.

I showed the fallacy of their argument in this myth-busting 2005 article. Here is the relevant part:

Bitcoin illiquidity (October 18, 2022)

Bitcoin dictionary:

"currency": a group of assets, most of which don't change ownership for at least a year. 

Is bitcoin the new Esperanto? (October 17, 2022)

Money is the language of trade, so money-language analogies can be useful, according to renowned sociologist George Herbert Mead.

Esperanto is an utopian decentralized attempt to unify humanity, but has made little progress since its inception in 1887. Maybe because governments didn't help. 

Sounds familiar? 

The new religion of bitcoin (October 14, 2022)

21st century bitcoiner: It's not just digits, it's digitized gold.

Be like:

1st century apostle: He's not just human, he's a humanized god.

Bitcoin has become the latest religion.

Its prophet is Laser-eye the Saylor Man:

Bitcoin for robots (October 11, 2022)

Renowned AI scientist Lex Fridman of MIT thinks the Nobel Prize in economics should have gone to bitcoin's inventor.

50,000 laser-eyed Tweeter users cheered.

Lex, you may program your AI creatures to use bitcoin as currency. With us humans it's not going to be that easy:

• In theory - see below under September 27-29.

• In practice - see below under October 5.

Life without crypto in the world's leader in digital quality of life (October 5, 2022)

In 2008 I moved back to Israel, which is now the Digital Quality of Life world leader.

Bitcoin was launched a few months later.

All this time I never encountered bitcoin in person here at the retail level:

• No employer offered to me a payment in bitcoin.

• I never saw a "bitcoin accepted" sign in a store.

• I never saw a price tag denominated in bitcoin in a store.

In 13 years I bought here many items, from a pacifier to an apartment, and many services, from a haircut to an airline ticket. Online and offline.

Nobody I know here in person told me of a different experience.

I don't know in person anyone here who owns bitcoin.

The only one here who told me he owned bictoin was the boss of a fintech company who considered issuing his own crypto "currency."

Assuming that all countries will eventually reach Israel's position in terms of digital quality of life, this is not good news for bitcoin. Let alone other crypto "currencies." 

Pre-bitcoin mathematical monetary theory had a lot to say about bitcoin (September 27-29, 2022)

For 50 years before bitcoin, monetary theorists (myself included) have used math to study the simplest possible objects: no intrinsic value, not supported by laws, fixed supply, easy storage and transfer, no theft or counterfeiting. 

The similarity to bitcoin is striking. We studied the monetary potential of such objects for simplicity (less parameters and variables in models) and hoped they resembled money in reality.

Our findings about such bitcoin-like objects:

A. Such objects could be money.

B. Competition from similar objects and state money is fatal for such objects.

A. Such objects could be money

Paul Samuelson, a brilliant mathematician but with a challenged view of reality, was the first to study such objects in 1958.

It took three more decades to show that such objects could be money within the solution concept known as Nash equilibrium: Kiyotaki and Wright (1989) proved there is a Nash equilibrium in which it is a best response to accept such an object as money if everyone else accepts it. But there is also a Nash equilibrium in which it is a best response not to accept such an object as money if everyone else rejects it.

Oddly, by that point, through sloppiness of earlier works by Keynes, Friedman, and others, this theoretical object acquired the misleading name "fiat money." There were no laws or government in these simplistic models to justify the term. Nobody was bothered by that. That was the terminology and anyone playing the game had to obey it. I worked with such models and the sorry terminology myself, as in this 2007 article in the Journal of Monetary Economics, later played by students in an experiment in this 2020 article published in the Journal of the European Economic Association.

B1. Competition with state money is fatal for such objects

I started graduate studies at the University of Rochester in 1997 and quickly got into this line of research. With a law degree at hand I thought it would be obvious to add a legal tender law to these simplistic models. If these objects are called "fiat money" let's make them real fiat money! So what is "fiat money" in English rather than in ivory-tower economics jargon? It means legal tender, as in the United States Code (Title 31, Section 5103):

"Legal tender" applies only to pre-existing monetary obligations denominated in the state's currency. It has nothing to say about spot transactions! Of all the obligations enumerated in the American legal tender law I chose to foucs on taxes. Taxes are not voluntary and the taxpayers cannot choose to avoid them or to denominate them in other units of account as they can with contracts. Taxes were mentioned by Adam smith in this exact context. Taxes were also mentioned by my father, a businessman, when I inquired why he did not abandon Israeli currency that suffered from 450% inflation.

So in 1998-2000 I worked, under the guidance of Per Krusell, on a mathematical model of money that included occasional tax payments that had to be paid in only one object and not others. It became chapter 1 of my 2002 dissertation.

This model evolved over time and eventually I reached the following findings:

• By punishing those who don't have the legal tender object to pay taxes, the state can guarantee there is a Nash equilibrium with the legal tender object as money at the expense of all other objects.

• The state can similarly eliminate all Nash equilibria in which the legal tender object is not money.

• The mechanism is neutral with regard to the quantity of money: Doubling the quantity of money doubles the price level and therefore doubles the tax obligations, leaving the mechanism as strong as ever. This is how governments can create inflation without their currencies being abandoned.

Journals editors, referees, and other researchers in the field did not like this article. The most generous response was that this was irrelevant and not interesting. An editor in a leading journal said legal tender laws applied to all transactions, proving that he never read either the law  or Friedman's classic works. A senior researcher in the field told me he could pay his taxes in chicken if he wanted to. I should have dared him to try it. More than anything I encountered animosity for polluting the pristine mathematical models with realistic assumptions.

Eventually, after 12 years, the article was published in 2012. This published version includes only competition between a legal tender object and barter. The editor took out of it the part in which the legal tender object competes with a bitcoin-like object and beats it. The full version is available here. It was eventually invited for publication, also in 2012, in this book. Editor Randall Wray and I agree that tax receivability maintains modern money but we totally disagree about policy implications. He is MMT. He celebrates state control of money for the effectiveness of proactive economic policies; I lament the state control of money because of its inflationary consequences.

The conclusion so far: In simplistic mathematical theory, the necessity to pay taxes in the state money is an enormous obstacle to competitors. It helps explaining why bitcoin can't beat the dollar or any other national currency that is not badly abused (inflated) by its government.

One caveat should be noted: the model is extremely simplistic. If taxpayers can better prepare for tax day (which in this model is random - for mathematical simplicity), results might change.

B2. Competition with similar bitcoin-like objects is fatal

Those mathematical models showing that bitcoin-like objects can function as money implicitly rely on an assumption that the object is simply there and people choose whether to hold it or not. But what if people can easily produce new types of bitcoin-like objects? Then every seller presented with such money by a buyer rejects it and says: “Thanks for the idea, I’ll issue my own!”

With none of these objects accepted in payment, we get tons of potential currencies, but no ACTUAL currency.

So said Nobelist Edward Prescott and Jose-Victor Rios-Rull in 2005. 

Is bitcoin a collectible? (September 23, 2022)

After trashing bitcoin art portraying it as gold (see below Sep. 19), it was angrily explained to me:

Bitcoin is scarce, gold is scarce --> bitcoin is digitized gold.

No. Scarcity + no intrinsic value = a collectible, at best.

Like baseball cards and the worst of modern art.

Bitcoin and North Korea (September 19, 2022)

What do bitcoin artists and totalitarian North Korea have in common?

The triple-lie marketing strategy of fraud upon deceit upon scam:

Bitcoin pictured as coin (the ultimate money), made of gold, with dollar's vertical lines - be like:

The Democratic. People's. Republic. of Korea

Bitcoin's finite quantity (September 5, 2022)

The fallacy of bitcoin's obssession with its finite quantity:

Civil War ends; what should function as currency now - the North's greenbacks or the South's greybacks?

Greenback: I'm still legal tender for debts and taxes in a living, functioning state.

Greyback: But my quantity is now finite - thanks to the South's loss!

Yes, a bitcoiner going back in time to 1865 would have seriously predicted greyback’s triumph exactly because the South lost.

Of course, greenbacks won, and greybacks' finite quantity only made them eligible as collectors' items. Which is what crypto assets are most of the time.

Worrying about finiteness of quantity before giving sellers an incentive to even accept an object in payment is putting the cart before the horse.

Bitcoin joke (September 2, 2022)

Me: Why is it called bitcoin?

Myself: Well, does it function like a coin, i.e., in buying real goods and services?

Me: Just a bit.

Myself: There you go.

Bitcoin is not a GENERAL medium of exchange.

It's not money.

Yap stone money and bitcoin (August 8, 2022)

How I almost saved the world from bitcoin.

True story.

If only people had read my 2005 article that busted the myth of the stone money of Yap, this messy bubble might have been avoided.

The idea of bitcoin apparently contradicts both common sense and monetary history.

The idea is that an intrinsically useless, unbacked, inconvertible, not legally endorsed, private object could be currency.

But no precedents, you say? Really? Ever heard of the stone money of Yap (rai stones), cited by Milton Friedman, Greg Mankiw, and others?

This argument has been a classic among bitcoin enthusiasts.

As I proved in a 2005 article the stones had esthetic value and religious value, they were legal tender for taxes, and their use on special occasions was mandatory.

It was Yap's version of gold coins.

Myth – busted.

World – ignoring; then punished by bitcoin...

Why punished? Bitcoin has contributed nothing to humanity so far. Only confusion that such objects could be money, and the biggest financial bubble ever. If and when it fully bursts, it might kill banks who lent speculators, and then we'll get a new global financial crisis. Did central banks, regulators, and banks learned the lesson of 2008 and the system is protected from bitcoin? How about too-big-to-fail institutions like my pension fund that gambled on bitcoin? (I fled with my money) How about the resources wasted on mining? Bitcoin is at present analogous to art. It is nothing more than a collectible item, like old coins, and medals produced by national mints. Even more specifically, it is like modern art that sells for millions but that few to none can distinguish from toddlers' drawings or random stains. Bitcoin does not function as money (defined as a general medium of exchange), at least not yet.

Bitcoin's volatility (June 22, 2022)

Bitcoin is a crappy store of value.

(bitcoin-dollar exchange rate, December 2020 - June 2022, and extrapolated)

Crypto's uselessness (June 20, 2022)

Even in Israel, a luftgeschaft powerhouse, few to none pay crypto in physical stores, according to a new Bank of Israel poll: 65% credit cards, 21% cash, 10% phone, 0% checks, 4% unknown / not sure / varies.

How unenlightened! Come on people, why can’t we ignore thousands of years of monetary history and accept thin air as legit pay?!

The bitcoin bubble (June 15, 2022)

Bitcoin: castles in the sand

(bitcoin-dollar exchange rate, October 2020 - June 2022)