Pur Autre Vie

I'm not wrong, I'm just an asshole

Sunday, April 07, 2013

A More Viable Bitcoin?

In my previous post, I expressed my doubts as to the long-term viability of the bitcoin.  But now I want to propose a possible alternative and consider whether it could thrive.

Here is what I have in mind.  I start a company called Gresham Inc. (a reference to Gresham's Law).  Gresham Inc. issues a product that is like a bitcoin in its technical attributes, but that is issued and traded differently.  We'll call it the "talent," which is an ancient unit of mass also used as a measure of value (by reference to a talent of precious metal).

Gresham sells talents for $10 each, initially.  It also buys them for $10 each (or perhaps for slightly less).  So to conduct an anonymous transaction, an individual could buy 15 talents for $150 and send them to the transferee.  The transferee can then exchange them for slightly less than $150.  The difference between what the buyer pays and what the seller receives is a transaction fee.

Gresham uses the proceeds from selling talents to buy U.S. treasury securities (or other dollar-denominated assets).  It then profits both from the transaction fees and from its income from the assets that it owns.  Of course, Gresham must also lay out cash to maintain its secure network for transacting in talents, so its profit is the difference between its revenues and its costs.

Gresham could increase the price of talents over time.  In this way, the holder of talents owns an appreciating asset, and so may be willing to hold it for a period of time.  However, Gresham would keep the rate of appreciation low enough that Gresham profits from the difference between the rate of interest it obtains from the assets it buys and the implied rate of interest from holding talents.  So for instance, if Gresham is receiving 2% on the dollar-denominated assets it buys, it might increase the value of a talent by 1% per year.  This would be competitive with a bank account in today's economy.

Gresham would function very much like a bank or a money market fund, except that the "securities" it issues would be useful for anonymous transactions.  Gresham would need to maintain significant liquid cash reserves, because it might have to redeem a large number of bitcoins at once—again, just like a bank or money market mutual fund.

It seems to me that talents would be much preferable to bitcoins.  In part, this is because much of the "seignorage" of bitcoins is wasted in useless computations.  Gresham would capture this surplus, share some of it with the holders of talents, and thereby profit.

Of course, Gresham would probably be taken down by the legal authorities.  But then, I expect the bitcoin also runs a pretty substantial risk of being shut down, unless it simply implodes before the authorities become too alarmed by it.


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