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Should Bitcoin Peg Itself To The Dollar?

Posted: 04/26/2013 2:28 pm

China became the second biggest economy in the world by pegging their currency to the dollar at an artificially cheap rate. This boosted exports and built up reserves to the multi-trillion level - of which more than a 1 trillion is US dollars.

The Chinese workers themselves, for the most part, can't afford the goods they make for Apple and hundreds of other companies that manufacture their products on 'the world's factory floor' but they are better off working in these sweatshops than working the land; so we are told. One thing is for certain, China's economy has boomed thanks to the currency peg.

With Bitcoin, there is an interesting corollary with China and its currency peg. Why not peg Bitcoin to the dollar, at let's say $100 BTC to the dollar?

This might solve two problems. First, the volatility issue - with merchants and spenders of Bitcoin uncomfortable with the wild fluctuations of Bitcoin's exchange rate - having a fixed rate would introduce stability and predictability into the economy. Secondly, having a fixed exchange rate would open up a possible workaround of the the Fincen problem.

At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network (Fincen). That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network - moreso than the widely reported price volatility and hacker attacks.

Fincen, a captured regulator (like the SEC, and CFTC) is muscling bitcoin exchanges and shutting them down, hoping to take off the market any potential competitor to entrenched oligopolists Visa, Mastercard and PayPal.

Having a fixed rate of exchange for Bitcoin would allow all bitcoin exchanges to 'go dark.'

Without the need to publish trading activity, exchange rates, and current prices; there would be no need to operate within eyesight of troublesome thugs-for-hire working for the payment and currency cartel looking to shut down a competitor.

The fixed exchange rate could be managed by the Bitcoin Foundation who would publish the official 'fix' every day and continuously be adjusted upward to keep miners incentivized to continue mining. Additionally, the problems with market making I mentioned in a previous blog would also be mitigated.

At some point in the future, when the Bitcoin industry and economy are big enough to lobby politicians and regulators sufficiently to get them off their back, the exchanges can come out of the dark and business can be transacted more transparently. But until then, having a fixed rate and dark exchanges might be the most expedient way to grow this new economy.

 

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