This Economic Theory Might Spell The End Of Bitcoin

The future of bitcoin trading is in question. Local authorities have had diverse reactions to average people trading bitcoins, from setting up sting operations to outlining lengthy regulatory frameworks. A main question that might be decided over the coming months is whether or not everybody who has sold bitcoins on Local Bitcoins could find themselves in violation of state laws.

All of this could have been predicted by you though, if you knew about one simple economic theory.


The Case Of Pascal Reid

In February, young Quebecker Pascal Reid was arrested and charged by the State Of Florida with 2 counts of money laundering and 1 count of operating a money service business without a license. Pascal has pleaded not guilty on all 3 counts.

Pascal Reid represents your typical bitcoin trader. An individual with spare cash trying to make due by buying and selling bitcoin, an in-and-of-itself perfectly benign act. The Secret Service officers involved in the sting tried to sell Pascal stolen credit cards. Pascal declined.

Why does the State of Florida have so much interest in Pascal’s actions? The $30,000 transaction for which he was “busted” is a droplet of water in the sea of the global economy, especially next to the deep levels of fraud and corrupt in the financial system. Still, he faces 25 years in prison. If he is convicted it will set the precedent to prosecute more average bitcoin traders, and not just the ones with specious ties to online black marketplaces, such as was the case when Charlie Shrem was recently arrested and charged with money laundering.

Pascal Reid never acted in a way that endangered anyone. We know in New York there is already a movement for “BitLicenses,” setting the precedent that bitcoin individuals will be treated as financial institutions, minus the ability to payoff government and absolve individuals of time-served. Pascal’s legal team costs $25,000 per month. His mom put up a website in order to raise funds: http://supportpascal.org/

What Happened?

As he strolled into Miami’s Art Deco district in February with a laptop and $316,000 in digital currency, he didn’t know he was walking into a trap. He thought he’d soon meet a man he knew who wanted to purchase some more bitcoins. In reality, this man was an undercover agent for the US Secret Service.

The case is among a few early precedent setting cases for Bitcoin. Alongside those of Ross Ulbricht and Charlie Shrem, Pascal’s case will set a precedent for alternative currencies.

Heretofore, Localbitcoins.com has been a holdout of sorts for bitcoin traders looking trade bitcoin’s away from the purview of law enforcement…or so many thought. This has changed in the wake of Pascal’s case.

Pascal’s lawyer has said the authorities are trying to set a precedent with Pascal to go after other bitcoiners. The investigation against him began in December 2013. Proy33, a user on Local Bitcoins, could be contacted “anytime” to meet in public and trade bitcoins for cash. Pascal was contacted by authorities.

After Pascal’s first meeting with the agent, a surveillance team followed him to his Broward County home and identified him. The second meeting involved a $1,000 transaction, and the law enforcement agent offered to sell stolen credit card data. Pascal declined. By January’s end, the two men agreed to a $30,000 transaction. Their meeting at the Casa Grande Suite was a fateful one for Pascal.

At that meeting the law enforcement agent informed Pascal the money used in the prior transactions came from credit card data stolen in the Target hacking. After the transaction, he was arrested. Two hours later, at the same hotel, investigators arrested 30-year-old Peruvian Michell Abner Espinoza, concluding yet another Localbitcoins.com investigation. Both were charged with two counts of money laundering and one count of operating an unlicensed money services business.

“[Pascal’s] a good kid. Never been any problem before, never, never, never,” his mother, Chantal Desbois, said in an interview. “I don’t know what could have happened. I don’t understand.”

“This is going to have a chilling effect on the public perception of bitcoins,” Pascal’s lawyer said in an interview.

The State of Florida has the opportunity to set a precedent with the Pascal Reid case, and what’s likely the precedent to be set will be towards new and tighter regulations.

A first time offender like Pascal could face maximum 15 years on one of the money laundering charge, an additional 5 years for the second money laundering charge and 5 years on the unlicensed money laundering charge for a grand total of 25 years.

First To Market

The traditional financial industry made it to market first. It was the big banks and big credit card companies that government regulators were tasked with regulating. But a phenomenon known as “regulatory capture” shows us how a serious danger to the bitcoin community evolved. Regulatory capture, a theory proposed by George Stigler, represents the process whereby regulatory agencies come to be managed and controlled by the industries they were meant to regulate, in the case of bitcoin, many of the agencies tasked with regulating bitcoiners have become beholden by big banks and financial services company. Regulatory capture comes to be so when a regulatory agency, formed to act in the public’s interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public.

Anybody who has followed finance in modern America can see that the government has become beholden to big banks. Regulatory capture means that agencies will set out to protect the status quo. This means many bitcoiners could end up behind bars.