Bitcoin and the Challenges of Virtual Currency

bitcoinAlthough Bitcoin, the “world’s first decentralized digital currency”, was launched in 2009, it has only recently gained popularity as a currency. Unlike other existing currencies, Bitcoin lacks a central monetary authority, which creates problems for financial regulators. In place of a traditional central monetary authority, a computer network composed of Bitcoin users self-regulates the currency. Members of this Bitcoin network “monitor and verify” the creation of new Bitcoins and also regulate transactions between users.

Bitcoins are generated through a virtual process known as “mining.” A unique serial number is allocated to each Bitcoin after it is created. However, the total number of Bitcoins that can be produced is limited to 21 million. There are currently about 11 million Bitcoins in circulation, equivalent to approximately $1.2 billion. Popularity of the Bitcoin currency has recently surged, as Bitcoins have recently become available to “ordinary customers and businesses.” Many small businesses are therefore beginning to accept Bitcoin as a viable form of payment. Small businesses in particular benefit from Bitcoin’s swipe fees, which are on average about 2% lower than those of credit cards. Owners of small businesses also favor the simplicity of using a virtual currency as opposed to cash or other forms of payment.

Various complications have emerged as authorities attempt to regulate Bitcoin’s use as a currency. Because Bitcoin users can maintain anonymity in transactions, Bitcoins are likely to be used for illicit purchases or transactions. As a result, federal and state regulators “are taking steps to prevent people and companies from using them for illegal activities.” In a recent interview, Benjamin Lawsky, superintendent of New York’s Department of Financial Services, stated, “Virtual currency firms inhabit an evolving and sometimes murky corner of the financial world.” However, authorities must gain a deeper understanding of Bitcoin’s mechanics before instituting effective regulatory measures. As Tony Gallippi, CEO of Bitcoin-handling company BitPay, explained, “You can’t apply the rules for the horse and buggy to an automobile.”

Bitcoin has recently faced a stream of legal difficulties. Last week, two prominent officials of the Bitcoin Foundation travelled to Washington to meet with federal officials, attempting to prove their willingness work within federal laws. General council of Bitcoin, Patrick Murck, told officials, “There’s a myth about Bitcoin that it is an anonymous payment network. That is not true. [Bitcoin has] an open public ledger that shows every transaction.” Although Bitcoin’s ledger is public, there is no formal mechanism to tie Bitcoin addresses to the identities of their owners. It is also unlikely that Bitcoin will mandate user identification in the future, as this would alter the configuration that made it successful in the first place.

So far, Bitcoin has lacked stability as a currency and many argue that Bitcoin is losing steam. In January 2013, Bitcoins were worth $13, rising to $266 by April, and falling to about $100 today. Due to the general novelty of online currency, Bitcoin’s future remains uncertain. Perhaps with tighter regulations and less volatility, Bitcoin and other virtual currencies will gain prominence in the global market.

By: Marjorie Baker

Sources: Wall Street Journal, Economist, Economic Times, NBC News, Washington Post

Photo Credit: Bitcoin courtesy of flickr user Electric-Eye

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Reinvigorating Trade Negotiations: Optimists in the Midst of Battle

tradeFree trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.

The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:

The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.

The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.

However, as  ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.

This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.

There are reasons for optimism in trade policy circles, but the battle is only just beginning.

Posted By: Ben Copper

Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs

Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user      Reinhard_Schuldt

Do traditional measurements misinterpret global trade?

global communicationsAs the world economy becomes more interconnected, it has become clear that import/export trade figures by themselves do not fully capture how much the US contributes to global commerce. Imports and exports merely measure the trade in completed products between nations and present a flawed picture. On the other hand, metrics such as US foreign affiliate sales provide information on longer-term investment and entrenchment in foreign markets, thereby giving a substantially different, and perhaps more accurate, look at what the US provides in goods and services.

Taking a look at exports trade data, a country like Ireland looks inconsequential to US trade with only $7,276 million (USD) in exported goods. However, Ireland is actually an important hub for transnational companies, and rakes in huge amounts of investment as shown by the foreign affiliate sales which puts Ireland at around $171,895 million, a number that eclipses Mexico at $143,478 million. Using only exports, Mexico is our number two trading partner for exports, but when we use the Sales/Export ratio, Mexico stands at 0.9, whereas Ireland is at 23.6.Without accounting for foreign affiliate sales, policy makers would have no idea of the importance of Ireland to US commerce. In addition, using foreign affiliate sales sheds light on other trade relationships, including Germany a country that many policymakers are worried about due to our supposed trade imbalance. In actuality, while US exports with Germany are only at $48,161 million, the US foreign affiliate sales are at $244,785 million and a ratio of 5.1. This means that the US is very much invested into Germany and the trade imbalance is not as nearly as significant when looking at both sets of metrics. This also presents an interesting note on the relative significance of trading partners. Policy-makers often stress the importance of China to US trade, but when looking at foreign affiliate sales, China is only at $138,991 million compared to Germany’s $244,785 million. This has the implication that the US actually has more trade interests in Germany, which is something that is completely unacknowledged when measuring using only export trade.

Using only export numbers presents an incomplete depiction of US trade. It is very difficult to make smart policy that improves US trade potential if the true trade relationships between the US and foreign countries are not understood. In terms of trade importance to the United States, opportunities lie with the newly proposed Trans-Atlantic Trade Agreement at almost $1,473,483 million in foreign affiliate sales. The United States must begin to rely more on foreign affiliate trade data or at least use it to supplement traditional import/export measurements to get a more accurate representation of US trade interactions.

Posted by: Matthew Goldberg

Sources: U.S. International Trade Commission, Vox, OECD, U.S. Census Bureau

Guest Contributor William Krist: Exchange Rate Manipulation

gold coins from skyNegotiators for a Trans-Pacific Partnership Free Trade Agreement need to address currency manipulation when they meet March 4th in Singapore.  Deliberate manipulation of foreign exchange rates by a number of countries is one of the most egregious of all unfair trade practices today.  By maintaining an artificially low exchange rate, a country in effect imposes an extra charge on imports (equivalent to a tariff) and also gains an unfair trade advantage in the U.S. and third country markets.  While this practice has long been recognized as an unfair trade practice, international trade rules have no effective provisions to address this issue.  The U.S. wants the Trans-Pacific Partnership agreement to be a template for future trade agreements.  To achieve this goal, currency manipulation must be addressed in the agreement.  (To read the entire paper, click here)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Global Trade and the State of the Union

SOTUUnsurprisingly, the State of the Union address focused primarily on the domestic economy. President Obama emphasized issues such as the looming sequester and the need for immigration, entitlement, and tax reform. In terms of major announcements on the international trade front, the President revealed that the US aims to start talks with the EU towards creating a “comprehensive transatlantic trade and investment partnership.” This is a significant development for a multitude of reasons. A free trade partnership between the US and the EU would streamline trade by reducing regulatory barriers and tariffs, thereby expanding the already huge amounts of exchange. Not only would a transatlantic free trade agreement heighten the interconnectedness of these two massive markets, it would drive growth, deflect increasing competition from China, and would help reestablish the authority of the United States and Europe as leaders of the global economy.

The President also announced that the US is on course to finish negotiations over the Trans-Pacific Partnership, an agreement that will substantially increase US trade presence in the Pacific. There was no date given about when the talks would be complete, but it appears that things are falling into place. In addition, the President outlined some domestic economic policies that were relevant to global trade issues. For instance, President Obama’s unveiling of the “Fix-It-First” program, which intends to put people to work on urgent infrastructure repairs, could improve US trade performance through more efficient and faster travel times. Smart Grid enhancement would make the US a more appealing place to do business and it would protect vital information trade-lanes from cyber disruptions. The energy boom, both through enhanced fossil fuel production and clean energy development, will allow the US to dramatically increase its energy exports and could fundamentally transform the global energy trade. Through the creation of innovation centers, President Obama wants to accelerate the continuing trend of re-shoring in order to increase US export trade.

While domestic issues were clearly the main theme of the address, it is vital that President Obama address the larger context issues of global trade to enact policy that will take advantage of new economic opportunities. It would also be a mistake to underestimate the potential of trade as a key engine of economic growth for the US and the global community. A secure and healthy global economic structure is important in order to maintain further international stability.

Posted by: Matthew Goldberg

Sources: Wilson Center, United States Trade Representative, ABC News, Department of Energy

Photo Credit: Presidential Seal courtesy of flickr user Dave Newman

Currency Devaluation and the Threat of Global Currency War

moneyThe rapid devaluation of the Japanese yen has created fresh fears of global currency instability. Citing perennially slow economic growth, Shinzo Abe—the newly elected Prime Minister of Japan—decided to crackdown on deflation through aggressive monetary policy easing that would significantly devalue the yen. However, policy-makers from the EU and the US have decried Japan’s move as an attempt to gain a competitive trade advantage by cheapening its currency so that its goods and services cost less, thereby increasing export trade. The Euro in particular has seen a marked rise that may hurt the EU’s economic recovery if growth and demand for European goods were to slow down.  Japan has stressed that it is not deliberately trying to devalue its currency, saying the yen’s decline has more to do with a market correction following a period of strength. Nevertheless, there has been heated rhetoric demanding that Japan halt, or at least slow down, yen devaluation.

In order to diffuse tensions, the G7 (Group of Seven) countries—comprising the US, the UK, France, Germany, Italy, Canada, and Japan—said they would “consult closely” on any action in foreign exchange markets. Furthermore, the G7 avoided criticizing Japan and stated that “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” Japanese policy-makers were reassured by the announcement and according to Taro Aso, the Japanese finance minister, the statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets.”

The statement by the G7 comes ahead of a meeting of G20 finance ministers and central bankers in Moscow on Friday. It is expected that Japan will come under scrutiny for its currency policy. Hopefully, the members of the G20 will be able to reach some sort of agreement to regulate and resolve tensions that have arisen from exchange rate discord in order to avoid a potential currency war.

Posted by: Matthew Goldberg

Sources: New York Times, Reuters, Financial Times, CNN Money, Finance Enquiry

Photo Credit: Forex Money for Exchange in Currency Bank courtesy of flickr user epSos. de

World Economic Forum 2013: A Post Crisis Davos

WEFAs the global economy begins to show signs of recovery, leading economic thinkers, heads of states, and major CEOs recently met in Davos, Switzerland for the annual World Economic Forum. These VIPs attended numerous events, networked, and traversed a new global economic landscape characterized by renewed optimism. The new disposition was reflected by this year’s theme—“resilient dynamism”—which represents an important shift in the perception of the world economy from something that is weathered to a force that can provide new opportunities.

While the outlook has become more hopeful, it does not mean that we are out of the woods just yet. As Axel A. Weber, Chairman of the Board of Directors of UBS, Switzerland, and a Meeting Co-Chair, declared, “The feeling is that the worst is behind us. But the mood bordered on complacency.” Not everything pointed towards the positive, especially the WEF’s own Global Risks 2013 report which offers a pessimistic outlook, saying the global community’s ability to address significant challenges, such as global warming, were limited by economic issues like “severe income disparity” and “chronic fiscal imbalances.” The report concludes that these systemic problems must be addressed in the near future in order to both sustain global economic growth and to avoid widespread social unrest.

On an interesting side note, the WEF, working with the science magazine Nature, noted several important but relatively remote potential economic threats known collectively as “X Risk Factors.” These include: Runaway Climate Change, Significant Cognitive Enhancement, Rogue Deployment of Geoengineering, Costs of Living Longer, and Discovery of Alien Life. While these issues are currently not as tangible as “concerns such as failed states, extreme weather events, famine, macroeconomic instability or armed conflict,” says the WEF, “they capture broad and vaguely understood issues that could be hatching grounds for potential future risks.” However, it is not unimaginable that we may confront many of these issues in the coming decades, and therefore, it is prudent to prepare for these prospective threats.

Overall, while Davos may often be thought of merely as a gathering of “fat cats in the snow,” it does have real worth both through its influence in setting the economic discourse and its role as a place for global leaders to reflect on global economic challenges.

Posted by: Matthew Goldberg

Sources: WEF, CNN, Business Insider, The Information Daily

Photo Credit: World Economic Forum 2013: Microphones courtesy of flickr user World Economic Forum