Germany: Bitcoin is Money….

Well this is certainly an interesting development in monetary theory circles.  The German government has apparently recognized Bitcoin as a “unit of account”.  And according to CNBC the online money can be used to pay taxes.

Now, it doesn’t surprise me that they would call Bitcoin money.  Of course it’s money.  It is used to settle payments.  That’s its whole purpose.  But what’s more interesting is that they would allow a privately issued money to be used for tax purposes.  That is a real game changer for the way we all think about money.

Could we be on the verge of a major innovative change in the way we use, produce and regulate money?  Or is this destructive and misguided thinking?   I haven’t fully digested it so feel free to use the comments to discuss.

 

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • SS

    Wow. That’s a total game changer, huh? Could we actually be on the path to privatized money?

  • Asher M

    Ouch, hate to be the ECB if BC picks up steam, difficult to implement monetary policy if people increasingly stop using your currency. I’m personally not a big fan of bitcoin, using electricity (massive server farms “mining” bc) to solve a useless hash equation seems a bit like mining an expensive metal just to back a printed note. A lot of wasted effort.

  • LVG

    Good point. How would the ECB even operate?

  • Ted

    That’s obviously a joke to try and discredit the MMTers.

  • Dr. Oliver Strebel

    In german newspapers the story is not so big. Transactions in bitcoins are now taxed by the german government like other currencies. If you buy now USD for EUR now and sell them later for EUR, the profit will be taxed in the same way as if you would perform the same trade with bitcoins instead uf USD.

  • Nils

    I doubt you can pay your taxes in it. I can’t pay my taxes in US Dollar, Thai Baht, Vietnamese Dong or whatever. I have to use Euros. I just wonder how they’ll determine the actual exchange rate.

    This just means that taxes *apply* to bitcoin transactions. That means if I pay you in bitcoin you have to pay VAT and income tax etc.. It just ensures that the German government gets their grubby mitts on all your money.

  • Tim

    The German government probably is just trying to tinker with how to get a piece, but I think there is a much greater historical significance here for private currencies. The development of a regulatory framework in real time for a private and digital currency will be very interesting to observe with regards to how it differs from government-issued currencies that aren’t entirely digital (just mostly digital nowadays).

    There may not even be an exchange rate in the government-issued currency sense. The bitcoin exchange rate may actually remain market-driven. I would hope it does.

    I’d suspect the government would make the choice to only make and receive payments in euros – or deutchmarks if the euro fails. That may change, but I don’t think it would any time soon, if only for practical reasons. I can’t see the government actually accepting bitcoins directly.

  • Geoff

    This scheme is being backed by a member the German Finance Committee who is a devotee of the Austrian school. That tells you all you need to know right there. But my biggest concern is that the bitcoin supply is determined arbitrarily by nerds solving math problems. How does that make any sense? The beauty of the current system in the USA is that it is very flexible. The money supply floats mainly according to demand (excess reserves created by QE notwithstanding). It is also a credit based system which history has proven is the natural way in which humans exchange goods and services. Bitcoins don’t seem natural to me.

  • Notagain

    Not a lot to digest frankly . I you are not an issuer of a currency i.e. a US state or a European country ‘Germany’ you are never collecting tax in your own currency and you are not give up collecting a currency you dont issue for anything else .
    In that sense you can collect money in any form you so chose provided it is freely exchangeable .
    Germany can engage in collecting bitcoins or cows for that matter as a form of payment for tax and then exchange them for Eur to pay back any debt it has issued in Eur .

  • Adam P.

    Banks are PRIVATE entities and have issued 95% of the money. So what’s new here? The current value of all bitcoins is 1 billion, so at least now we have a competitor, like comparing Mike Tyson with a flea.

  • http://www.theartofmarkets.com marketfowl

    It seems like a commodity relying on the greater fool theory.

  • Hoffa

    Functionally it does not matter for a country if it accepts currencies to pay domestic taxes or they have to pay in the domestic currency. Let say a person wants to pay taxes with a foreign currency. He sells that currency to buy the domestic, or if he is allowed to pay with the foreign currency, he does so directly. Then the government presumably sells the foreign currency to buy its own, at least has the option to do so. Either case, there will be pressure to buy the domestic currency, and everything else equal, appreciate the domestic currency.

    You would believe that a government can influence the exchange rate of its currency by deciding how much deficit spending to undertake. That is, it can control how much of its own currency it wants to tax, hence to some extent influencing its price. However, it can not influence the price of a currency it does not have any control over.

    Since Germany is in a currency union it can not print its own currency, so it would be somewhat different. To conclude, that Germany accepts Bitcoins as tax payments do not alter its fundamental value. However I would guess it could appreciate because of psykologi. That said it is a strange move from Germany. Of course it do not benefit the country in any way. Should not hurt them either, except this maybe shows their general lack of competence.

  • Max

    I know that some hard money types are attracted to bitcoin, but it doesn’t really make sense. Bitcoin is the softest of soft money – even the shakiest promise of the most untrustworthy government is better than nothing. Bitcoin is a pure bubble, since it has no use value or redemption value.

  • Widgetmaker

    I don’t think this is going anywhere. The fact that it is being pushed by a member of the German parliament who is a big fan of Hayek only confirms in my mind that this is a marginal development. Few take the Austrians seriously.

    So what is the article really saying, and does the reporter have all the facts straight? Is the German government merely saying that it is OK to use bitcoins to consummate transactions? All right, that is between two private parties, and that is their business. Private parties can do the same with gold bullion, American dollars, or bottles of cognac for that matter. But they are not going to make everyone accept it is as legal tender – that would be an entirely different matter.

    The German government will accept bitcoin as payment for taxes? So what? They’ll take the bitcoins they receive and convert them to euros that everyone accepts. Why not say they’ll accept payment for taxes in gold bullion or American dollars? They still have the same problem.

    It is an inefficient and pointless way to do business. If anyone doesn’t care for the unit of exchange they receive in their transactions they are free to convert that money into any store of value they choose. My bet is that Frank Schaeffler is a Ron Paul type of legislator and this is a nonstarter.

  • Widgetmaker

    Agreed. People are so quick to decry government issued currency but so willingly accept money that is basically untested, volatile, and has no legal authority backing it. Go figure.

  • Widgetmaker

    The USA did have private money back in the Free Banking Era (1837-1862). There’s a reason we don’t do that anymore – it didn’t work well. Lots of problems. How would you like to run a business and have to price your product in numerous different currencies that fluctuate on a daily basis?

    Money (banknotes) was issued by state chartered banks with an average lifespan of five years. About half of the banks failed, and about a third of which went out of business because they could not redeem their notes. Don’t think we want to go back to those days.

  • John Smith

    How is a flexible system run by bureaucrats any more concerning than nerds solving math problems? At least the latter has the added benefit of being transparent and consistent.

    The biggest issue with bitcoins is the limited supply, and inability to replace destroyed/lost coins. Expected population growth vs programmed BC growth guarantee built in deflation – something no developed economy is equipped to handle at this point.

  • Geoff

    John, the US monetary system is not run by “bureaucrats”. It isn’t really run by anyone. The money supply grows organically as bankers, businesses and individuals around the country make hundreds of thousands of lending and borrowing decisions every day.

  • A H

    It’s not clear that Bitcoin can actually be used to pay taxes in Germany. It would be weird if it was true, and give the government all kinds of annoying exchange rate risk. The article says that it is classified as a financial instrument. I wouldn’t think that all “financial instruments” in Germnay can be used to pay taxes, but I could be wrong.

    If it can’t be used to pay taxes, then this isn’t really so different than what the Fed published a few months ago.

    Rulings by government like this mean that if bitcoin is going to continue, it is going to be more regulated and centralized. Things that are not supposed to be possible. But if bitcoin users have to report bitcoin earnings to the authorities, they are probably going to have to go through regulated exchanges and bitcoin storage facilities. Seems like this might not be what some bitcoin enthusists have in mind.

  • widgetmaker

    In the USA you are also required to report your BC transactions idf you are a business. It is really no different than conducting business in a foreign currency – it is still taxable income.

  • Lewis Goudy

    Thank you for the facts (which I didn’t bother to verify given that you stink of truth). I think we would be better off in the bad old days when risk was not hidden/socialized.

  • Lewis Goudy

    A lot of wasted effort
    ——————————
    That goes to the core of the question. It is “wasted effort” in global context, but so is most of the effort expended in the hurly-burly of commerce itself viewed from the same (I’m not saying “Kumbaya” here but you get my drift) vantage point.

    My point is that the operational inefficiencies of bitcoin are a bargain versus the inevitable consequences of fiat money.

  • Lewis Goudy

    Thank you.

    As I see it, we are at the mercy of command/control (so far uniformly inadequate) or chaotic mechanics that afford politicians rent.

  • NK

    Statist thugs want to tax Bitcoin revenues and gains, that’s all.

    This is good news in the sense that is shows Bitcoin is gaining momentum and the taxman’s attention. The sooner they try to control or restrict it, the sooner we’ll see a forked Bitcoin 2.0 with better anonymity and other features that will make it even more difficult to control and tax.

    Some comments here are outright laughable, eg. Wigetmaker’s.

  • NK

    Legal authority? LOL. Most governments and CB’s are run by criminals and counterfeiters.

  • NK

    You clearly don’t understand what’s going on here, so why are you polluting the comments area?
    I won’t waste my time on your comment, but I’ll just say that many sellers can offer the option of payment with Bitcoin and many buyers will choose it due to Bitcoin’s low transaction cost. Noone needs to hold Bitcoin longer than necessary to complete their online transactions.

  • NK

    I think you,eant to post this comment on an earlier article on the US T-bonds.

  • NK

    Bitcoin is not money. Bitcoin is a currency.
    Of course it’s inherently worthless, just like the US dollar.
    But the both function well as currencies.
    How hard is it to understand that?

  • http://www.theartofmarkets.com marketfowl

    You can hedge Bonds.

  • Geoff

    And t-bonds mature at par. I agree that Bitcoins look very much like a commodity to me, and a very volatile one at that.

  • http://www.theartofmarkets.com marketfowl

    Thanks for filling out my reply.