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26 Apr, 2013 15:47

Should Bitcoin peg its price to US dollar?

Should Bitcoin peg its price to US dollar?

With China’s example at hand, one may think the idea of pegging the Bitcoin to the US dollar may become the salvation to most of bitcoin's problems.

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 yuan level - of which more than a 1 trillion is US dollars.

The Chinese workers themselves cannot 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.

With Bitcoin, there is an interesting corollary with China and its currency peg. And the question is, 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 exchange rate of Bitcoin’s wild fluctuations - having a fixed exchange 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. That agency has emerged as the top threat, at least in the United States, to the decentralized Bitcoin network – more so than the widely reported price volatility and hacker attacks." John Matonis writing in Forbes.

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’and hide behind cryptology. The conversion price of $100 is known so there is no need to 'see' the market.

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.

At some point in the future, when the Bitcoin industry and economy are big enough to lobby politicians and regulators sufficiently to get them to back off, 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.

For those who scream... But Max, this defeats the idea of non-fiat currency!  Consider this an interim solution to what is a very nettlesome problem: bitcoin's vulnerability on the exchanges - that are being shut down right now. An 'invisible' dollar peg would allow the entire exchange business to go dark behind cryptology - allowing for the capitalization of Bitcoin to rise to the critical $50 - $100 bn. level unmolested by governments.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.