I've been thinking around the possible pitfalls of Bitcoin looking for weaknesses. The process has been helped by some other thoughtful folk out there asking questions which do indeed make you go "Hmm". Here we go!
"Taxation will be impossible"
It does seem different for sure, but it's not impossible. Car tax, council tax are easy. They either got paid or they didn't. There's even a slight advantage that it's harder to cheat on the bitcoin system. I can't turn up at the DVLA with fake notes (knowingly or not) to buy my car tax and get away with it in bitcoin.
The two head scratchers are income tax and VAT. Income tax paid at source by the employer out of the employee's pay packet is simple enough to record per transaction. If there's an audit all the transactions can be looked up and you can see the timestamp for each. For self employed it gets a little more tricky.
It would be relatively easy to simply not declare income and therefore avoid tax. It sounds like the first major pitfall of bitcoin, but actually, it's the exact same problem you have with cash at the moment. No better. No worse. However. With the current system, undeclared work and income is only traceable by unidentified increases in bank balance with a careful check (if the cash ever reaches a bank balance that's being checked for fraud). At least with bitcoin, if you take a random sample of clients for a self employed person and ask them to show the payment transactions, you can double check they paid someone something. If the self-employed persons records show a few blanks in receipt and declaration, then you know you've got some tax avoidance going on. It's different, but not impossible. It becomes more a case for whistle-blowers to say "I don't think this guy is paying his taxes! Here's my transaction!" and it's incredibly easy and cheap for a government taxation department to just look up the transaction and see if it got declared by the self-employed person. The nasty then is ... some git pretending they paid you something just to get you in to trouble. Ah ha. Yes. Well. We have a problem here. It is possible to dodge some income tax for the self employed, but it's even worse news when it comes to someone trying to get you in to trouble. A possible external solution would be a government registered pay account address. The customer pays that address, the supplier gets the payment via a simple "got it, recorded it, passed it on" transaction. The supplier is expected to pay up tax for the sum of transactions through that address at year end. There's a bit of a black hole here bitcoin fans. Ok so it's the exact same problem you have at the moment in reverse. But it's still a problem. Any answers out there?
VAT is a bit more strange. At the moment it's charged to the customer then paid by the merchant. With bitcoin it becomes an audit trail of transactions from the lead supplier down. Say the manufacturer produces 10 things and sells them for X to a merchant for sale. As a producer, it's very important to record that you're not just giving the stuff away for free for your own records, so that side works. The merchant then needs to be able to provide transaction key evidence for the sale of each of the 10 units. So for a simple commodity based example, audit trails are still entirely possible and checkable. It's again not impossible. It does require a rethink of how correct taxation can be checked, because the "I can see how much you have in your wallet (bank)" part is removed. But as already noted. That's not a terrifically good way of detecting fraud at the moment anyway. Witness the rise of secret off shore accounts to see how well the current system is doing.
So ... different .. yes. In some cases trivially easy to still tax people. For income and sales tax, a little more tricky, or at least different, but not impossible.
The self employed black hole is a problem, as are malicious claims. But that's because we're looking at it from the perspective of the current taxation system and it's development. It would still be possible for a government to raise significant taxes, and to adjust those taxes. The method and place where taxation occurs though would in some cases have to shift to allow traceability and indemnity under bitcoin. Taxation at point of sale as in tax on fuel at the moment seems to take focus rather than backdated taxation. It's a problem to be solved, but not an impossible one, and if anything it appears to be the small fry self employed who have most ability to dodge taxes instead of the multi-national company. You may think that's no bad thing overall.
"You can't artificially deflate it in the case of a crisis"
True. Here we're beginning to enter uncharted ground. Bitcoin claims to answer this by it's divisibility. If it came to it, 0.0000000001 bitcoins could be the equivalent to a 4 bedroom house. That doesn't matter so much if it's trivially easy to use 0.000000000000001 bitcoins to buy a loaf of bread anyway. You don't need the wheelbarrows full of cash scenario with runaway inflation either. If it took 400,000,000 bitcoins to buy a house, then 1,000 bitcoin would still get you a loaf of bread. But this is something of a theoretical answer to the real problem. If you have a rapid fluctuation in either inflation or deflation direction, the real value of however many bitcoin you have in your account changes.
This probably is a weak point of bitcoin. (Found one!). Bitcoin is a new and previously unknown and untested model. It is easily subdivided without needing trillions of bits of paper to buy a loaf of bread. So that bit is nice to know. However, bitcoin is designed to have an absolute limit of 21,000,000 bitcoins. That's it. That's all there will ever be. In hard traditional economic theory, that sounds like complete stupidity. It's normal to expect a degree of inflation with all known currency systems. How will that work even with trivial subdivision for a currency? No one knows. It's also unknown how much inflation and deflation is due to government and central bank intervention. Economists have views on it. But there's no right answer. Fluctuations in supply and demand will inevitably happen. How much damage that would do to a persons bitcoin wallet is unknown. How much damage it would do to a society using bitcoin as it's currency is wild speculation. This truly is a brand new, never before known adventure in economics.
But .... Once again you're back to comparing with the current known fiat systems. In the cases of gradual inflation or deflation, bitcoin seems well able to allow controlled variation in bitcoin value to compensate with zero cost and minimal harm to bitcoin holders. In the case of massive sudden changes in fluctuation ... well ... your start point is, that's horrible news for any currency and society. How could a government compensate? Quantitative easing isn't an option. You can take the view that's a fantastic thing, and the reality of the economic situation will be brutally dealt with (some people will go bust for bad bets). We flirt with that at the moment, but at the moment, money printing seems to make things worse for everyone outside of bond holders and banks. Nobody defaults, because nobody in a position of money and power wants to allow that to happen. The knock on effects are simply too horrible in the current rehypothicated debt scenarios. Instead we have a system where people are basically cast out of the system to save the major investors. Right up to increasing suicide rates, axing health care and welfare and the resultant homelessness and premature deaths that will result. No really. It's that simple. The current system is killing some of it's own population to preserve the status quo.
Here? You'll have to form your own considered view. Some will see a lack of artificial intervention as the best thing that could possibly happen for a reliable currency to exist, even if that does punish failure by some. Other's will think that's a nightmare scenario that can't possibly be tolerated.
Ok lets look at this another way...
Hyperinflation - Not going to happen under bitcoin. The supply of the currency is not only limited, but it's exact curve of supply is known and predictable over time. In classical terms, that makes hyperinflation .. well lets say .. highly unlikely unless there's another world war.
Hungary in 1946 is your prime example for hyperinflation. The trigger was the aftermath of the second world war. Great! Let's see how bitcoin would cope with that situation! You can't. Bitcoin is a global currency. That hasn't happened before. The purchasing power of bitcoin will be averaged across all the countries and people that adopt it. Hyperinflation in Hungary in 1946 would have resulted in a very weird case scenario. The relative value of bitcoin would have remained stable(ish) so it's hard to know what the overall effect to a global currency after WWII would have been without looking at gold. If you look at gold over that period then it looks pretty darn stable. We'll have to assume bitcoin would be similar because I can't think of a better comparison. So the result in Hungary itself may have been the goods and services costing less and less in terms of bitcoins until they were in the millionths of a bitcoin to buy a house. Yes. I know that sounds backwards. Your brain wants to flip it back to what actually happened which was increasing quantities of currency to buy the exact same thing. What that means in reality though, is that compared to the currency, everything actually seemed to get a lot cheaper. It's the supply of money that went bonkers, not the underlying barter and exchange of value in society. Except ... it wouldn't pan out like that. If everyone is apparently finding everything very cheap, people spend. Curiously, Hungary after WWII looks like it might have had a very weird time of it under bitcoin, but without the crazy money printing being required, new bank notes, new coinage, the economy may have recovered even faster than it did.
The thing is in cases like this, the actual real value of goods and services to the people that supply and use them remains fairly constant. It's almost back to barter. I did you 12 hours work, so I expect to be able to buy this sort of thing tomorrow with the money I gained from the work. You could easily still do that under bitcoin. Or at least it appears that way. In fact in the case of 1946 Hungary, it would seem bitcoin might have levelled out the fluctuations naturally. Nobody can know for sure. This is speculation on historical fact with an unknown new element. Curiously, the subdivision factor doesn't help here at all. The relative stability of value in a global currency is the deciding factor.
Bitcoin may actually help even out cases of extreme hyper inflation across countries as well as the lamented gold standard was supposed to have done. Except without external influences fiddling with it.
Bitcoin may seem anti-capitalist, but at it's heart, it's brutally set to allow supply and demand to find it's own value within it's spectrum in a very hard line capitalist way.
There's more .... I think I need to do yet another post in a few days time ...
But I'll leave you with this!
The main catch I can find in bitcoin, is that the current investors and those that profit from the fiat system we have in place will try and kill it. That's one huge chunk of power levelled against it. At which point does bitcoin become it's own valid currency immune to that because the same set of people have money in bitcoin? Who knows? It's a new one. I doubt we are anywhere near there yet even with the current high value, it's not mainstream yet. It's a promising alternative with practical application problems to overcome in it's current state. Only the degree of adoption will change that in to problems solved and accepted.
No comments:
Post a Comment