Monthly Archives: May 2015

“America is no longer the land of the free…The laws setting out these crimes are often so complicated that only lawyers, working in teams, know everything that the law requires. Everyone knows how to obey the laws against robbery. No individual can know how to “obey” laws such as Sarbanes-Oxley (810 pages), the Affordable Care Act (1,024 pages) or Dodd-Frank (2,300 pages). We submit to them…

…The laws passed by Congress are just the beginning. In 2013, the Code of Federal Regulations numbered over 175,000 pages. Only a fraction of those pages involved regulations based on something spelled out in legislation. Since the early 1940s, Congress has been permitted by the Supreme Court to tell regulatory agencies to create rules that are “generally fair and equitable” or “just and reasonable” or that prohibit “unfair methods of competition” or “excessive profits,” and leave it to the regulators to make up whatever rules they think serve those lofty goals…..It gets worse. If a regulatory agency comes after you, forget about juries, proof of guilt beyond a reasonable doubt, disinterested judges and other rights that are part of due process in ordinary courts. The “administrative courts” through which the regulatory agencies impose their will are run by the regulatory agencies themselves, much as if the police department could make up its own laws and then employ its own prosecutors, judges and courts of appeals…The good news is that the Supreme Court has a history of responding to an emerging social consensus. A drumbeat of well-publicized cases in which the agencies have obviously acted arbitrarily and capriciously as those words are ordinarily used could lead the courts to adopt a more straightforward interpretation of them. That’s all it would take—not new legislation, not a sympathetic president, just the willingness of the Supreme Court to say that “arbitrary” and “capricious” can apply to the enforcement of regulations, not just their creation…”, Charles Murray, “Fifty Shades of Red A Modest Proposal for Rejecting Rules”, The Wall Street Journal

Fifty Shades of Red A Modest Proposal for Rejecting Rules

Too many government regulations serve no end and keep us from doing our jobs as well as we could. We should ignore them, argues Charles Murray.

By Charles Murray

America is no longer the land of the free. We are still free in the sense that Norwegians, Germans and Italians are free. But that’s not what Americans used to mean by freedom.

It was our boast that in America, unlike in any other country, you could live your life as you saw fit as long as you accorded the same liberty to everyone else. The “sum of good government,” as Thomas Jefferson put it in his first inaugural address, was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry and improvement.” Americans were to live under a presumption of freedom.

The federal government remained remarkably true to that ideal—for white male Americans, at any rate—for the first 150 years of our history. Then, with FDR’s New Deal and the rise of the modern regulatory state, our founding principle was subordinated to other priorities and agendas. What made America unique first blurred, then faded, and today is almost gone.

We now live under a presumption of constraint. Put aside all the ways in which city and state governments require us to march to their drummers and consider just the federal government. The number of federal crimes you could commit as of 2007 (the last year they were tallied) was about 4,450, a 50% increase since just 1980. A comparative handful of those crimes are “malum in se”—bad in themselves. The rest are “malum prohibitum”—crimes because the government disapproves.

The laws setting out these crimes are often so complicated that only lawyers, working in teams, know everything that the law requires. Everyone knows how to obey the laws against robbery. No individual can know how to “obey” laws such as Sarbanes-Oxley (810 pages), the Affordable Care Act (1,024 pages) or Dodd-Frank (2,300 pages). We submit to them.

The laws passed by Congress are just the beginning. In 2013, the Code of Federal Regulations numbered over 175,000 pages. Only a fraction of those pages involved regulations based on something spelled out in legislation. Since the early 1940s, Congress has been permitted by the Supreme Court to tell regulatory agencies to create rules that are “generally fair and equitable” or “just and reasonable” or that prohibit “unfair methods of competition” or “excessive profits,” and leave it to the regulators to make up whatever rules they think serve those lofty goals.

It gets worse. If a regulatory agency comes after you, forget about juries, proof of guilt beyond a reasonable doubt, disinterested judges and other rights that are part of due process in ordinary courts. The “administrative courts” through which the regulatory agencies impose their will are run by the regulatory agencies themselves, much as if the police department could make up its own laws and then employ its own prosecutors, judges and courts of appeals.

I’m not complaining about regulations that require, say, sturdy structural supports for tunnels in coal mines. But too often a sensible idea behind a set of regulations—for example, that exposed stairway floor openings with precipitous drops should have railings—is made ridiculous by their detail: If said railings are not 42 inches high, you can be fined, as per OSHA regulation 1910.23(e)(3)(v)(a).

Other regulations could be written only by bureaucrats with way too much time on their hands, such as ones that mandate a certain sort of latch for a bakery’s flour bins or the proper way to describe flower bulbs to customers, or the kind of registration form to be attached to a toddler’s folding chair, while also prescribing an option for registering the product through the Internet.

Regulations that waste our time and money are bad enough. Worse are the regulations that prevent us from doing our jobs as well as we could—regulations that impede architects from designing the most functional and beautiful buildings that would fit their clients’ needs, impede physicians from exercising their best judgment about their patients’ treatment, or impede businesses from identifying the best candidates for job openings.

It isn’t just people in the private sector who are prevented from practicing their vocations using their best judgment. Public-school teachers typically labor under regulatory regimes that prescribe not only the curriculum but minutely spell out how that curriculum must be taught—an infantilization of teachers that drives many of the best ones from the public schools. Workers in government offices are often governed by such strict job descriptions that chipping in to help out a co-worker or to take the initiative breaks the rules—and can even get them fired, as in the case of a Florida lifeguard who rescued a person who was drowning just outside the lifeguard’s assigned zone.

The broadest problem created by intricately wrought regulatory mazes is that, in an effort to spell out all the contingencies, they lose sight of the overall goal and thereby make matters worse. A particularly chilling example is offered by the 1979 Kemeny Commission’s postmortem on the Three Mile Island partial meltdown, which concluded that when “regulations become as voluminous and complex as those regulations now in place, they can serve as a negative factor in nuclear safety.”

I’ve been focusing on regulation in the workplace, but it isn’t just freedom to practice our vocations that is being gutted. Whether we are trying to raise our children, be good stewards of our property, cooperate with our neighbors to solve local problems or practice our religious faith, the bureaucrats think they know better. And when the targets of the regulatory state say they’ve had enough, that they will fight it in court, the bureaucrats can—and do—say to them, “Try that, and we’ll ruin you.”

That’s the regulatory state as seen from ground level by the individual citizens who run afoul of it. It looks completely different when we back off and look at it from a distance. For example, the Occupational Safety and Health Administration has authority over more than eight million workplaces. But it can call upon only one inspector for about every 3,700 of those workplaces. The Environmental Protection Agency has authority not just over workplaces but over every piece of property in the nation. It conducted about 18,000 inspections in 2013—a tiny number in proportion to its mandate.

Seen in this perspective, the regulatory state is the Wizard of Oz: fearsome when its booming voice is directed against any single target but, when the curtain is pulled aside, revealed as impotent to enforce its thousands of rules against widespread refusal to comply.

And so my modest proposal: Let’s withhold that compliance through systematic civil disobedience. Not for all regulations, but for the pointless, stupid and tyrannical ones.

Identifying precisely which regulations are pointless, stupid or tyrannical will be a lengthy process, but categories that should come under strict scrutiny include regulations that prescribe best practice for a craft or profession; restrict access to an occupation; prohibit owners of property from using it as they wish; prescribe hiring, firing and working conditions; and prevent people from taking voluntary risks.

Within each category, the task is to discriminate between regulations that should command our voluntary compliance from those that are foolish or worse.

When it comes to professional best practices, most people still want a government agency to prescribe precise checklists for, say, maintaining nuclear weapons. But prescribing, for example, how much time a worker in a nursing home must spend with each resident each week is stupid. Licensing has a strong rationale when it comes to physicians and airline pilots. But can’t we rely on the market to deal with incompetent barbers, interior decorators and manicurists?

Restricting the use of property makes sense if the proposed use would affect others by polluting air or water or by creating loud noises. But it should be OK to ignore the EPA when it uses a nonsensical definition of “wetlands” to forbid you from building a home on a two-thirds-acre lot sandwiched between other houses and a paved road—a description of the lot owned by the Sackett family in the famous Supreme Court case of Sackett v. EPA a few years ago.

Employers should not be free to ignore regulations that really do involve the exploitation of workers or unsafe working conditions. But there’s no reason for the government to second-guess employer and employee choices on issues involving working hours and conditions that don’t rise to meaningful definitions of “exploitation” or “unsafe.”

The full set of criteria for designating regulations that are appropriate for systematic civil disobedience is necessarily complex, but the operational test is this: If the government prosecutes someone for ignoring a designated regulation even though no harm has occurred, ordinary citizens who hear about the prosecution will be overwhelmingly on the side of the defendant.

At the end of the process, we will have a large number of regulations that meet the criteria for being pointless, stupid or tyrannical. Let’s just ignore them and go on about our lives as if they didn’t exist.

The risk in doing so, of course, is that one of the 70-odd regulatory agencies will find out what you’re doing and come after you. But there’s a way around that as well: Let’s treat government as an insurable hazard, like tornadoes.

People don’t build tornado-proof houses; they buy house insurance. In the case of the regulatory state, let’s buy insurance that reimburses us for any fine that the government levies and that automatically triggers a proactive, tenacious legal defense against the government’s allegation even if—and this is crucial—we are technically guilty.

Why litigate an allegation even if we are technically guilty? To create a disincentive for overzealous regulators. The goal is to empower citizens to say, “If you come after me, it’s going to cost your office a lot of time and trouble, and probably some bad publicity.” If even one citizen says that, in a case where the violation didn’t harm anything or anyone, the bureaucrat has to ask, “Do I really want to take this on?” If it’s the 10th citizen in the past month who says it and the office is struggling with a backlog of cases, it’s unlikely that the bureaucrat’s supervisor will even permit him take it on.

I propose two frameworks for implementing this strategy. The first would be a legal foundation functioning much as the Legal Services Corporation does for the poor, except that its money will come from private donors, not the government. It would be an altruistic endeavor, operating exclusively on behalf of the homeowner or small business being harassed by the regulators. The foundation would pick up all the legal costs of the defense and pay the fines when possible.

The other framework would be occupational defense funds. Let’s take advantage of professional expertise and pride of vocation to drive standards of best practice. For example, the American Dental Association could form Dental Shield, with dentists across America paying a small annual fee. The bargain: Dentists whose practices meet the ADA’s professional standards will be defended when accused of violating a regulation that the ADA has deemed to be pointless, stupid or tyrannical. The same kind of defense fund could be started by truckers, crafts unions, accountants, physicians, farmers or almost any other occupation.

The regulatory empire will doubtless try to strike back, asking Congress for more money to hire more inspectors and lawyers. But it’s going to be a hard sell. The regulatory agencies are becoming as unpopular as the IRS, and members of Congress know it.

The unpopularity of the regulatory state also opens up a potential landmark change in jurisprudence. Federal courts are already empowered to overturn agency actions that are “arbitrary,” “capricious” or “an abuse of discretion,” but the Supreme Court has set the bar so high that the regulatory agency almost always wins if it followed bureaucratic procedure in creating the regulation.

The good news is that the Supreme Court has a history of responding to an emerging social consensus. A drumbeat of well-publicized cases in which the agencies have obviously acted arbitrarily and capriciously as those words are ordinarily used could lead the courts to adopt a more straightforward interpretation of them. That’s all it would take—not new legislation, not a sympathetic president, just the willingness of the Supreme Court to say that “arbitrary” and “capricious” can apply to the enforcement of regulations, not just their creation.

Neither the defense funds nor the Supreme Court can deter regulators from writing bad regulations. That would require Congress to stop writing vague laws with good intentions—an impossible dream. But we can hope to introduce common sense into the enforcement of regulations.

The changes I envision can compel regulators to confront the same reality that state troopers on America’s interstate highways face every day. If you are driving 8 miles over the speed limit on a deserted stretch of interstate, you might get pulled over by a state trooper who is bored or needs to fill his quota of tickets. That’s the situation we as individuals face when we commit a harmless violation of a government regulation. We are an isolated target.

Figuratively, the purpose of the defense funds is to get us off the isolated stretch of highway and onto an interstate where the flow of traffic is several miles above the stated speed limit. Faced with many people who are technically breaking the law but who are actually driving safely, state troopers stop only those people who are driving significantly faster than the flow of traffic or driving erratically. The troopers are forced by circumstances into limiting enforcement of the law to drivers who are endangering their fellow citizens.

In sports, this enforcement philosophy is called “no harm, no foul.” If a violation of a rule has occurred but it has no effect on the action of the game, the officials ignore it and the game goes on, to the greater enjoyment of both players and spectators. As the sports announcers say, “The officials are letting them play tonight.”

The measures I propose won’t get the regulations off the books, nor will they improve the content of those regulations, but they will push the regulatory agencies, kicking and screaming, toward a “no harm, no foul” regime. They will be forced to let the American people play.

This essay is adapted from Mr. Murray’s new book, “By the People: Rebuilding Liberty Without Permission,” which will be published May 12 by Crown Forum. He is the W.H. Brady Scholar at the American Enterprise Institute.

“Though Wall Street and international financiers have been cast as the villains of the 2008 madness, they are minor actors in the larger narrative of spendthrift habit in which we each played our part. In the past three decades, aided and abetted by the enticements of consumerism, we Americans have been busily retuning our neural architecture…

…During the last 25 years of the 20th century, the U.S. economy was in recession only 5% of the time, compared with 22% of the previous quarter-century. Such long periods of uninterrupted growth reflexively foster a mood of complacency: Secure in our habits we have learned to be thoughtless. We have disrupted the autopilots of the brain’s internal market, resetting the balance between hedonism and prudent self-constraint. Passion has prevailed over reason…….Easy credit feeds our love of immediate gratification, distorts self-regulation and diminishes prudent market behavior, creating a destabilizing positive-feedback loop. Analysts trying to understand the explosion of consumer debt should look no further than neuroscience…Easy credit as an economic driver has become a Faustian bargain. A market ethos that feeds on short-term desire, low interest rates and tax systems that encourage borrowing has distorted consumer choice. But more than that, it has upended the ancient survival game our brains use to weigh risk and reward. The illusion of continuous economic growth and the explosion of credit have thrown that balance out of whack. Thanks to the seductive appeal of today’s consumer economy, perhaps for the first time in human history it is the affirmation of reward rather than the fear of punishment or failure that dominates the calculus of risk. We have become addicted to the quick fix, be that tasty junk food, the electronic cocaine of the Internet, or the painless ease of a credit card purchase…It is regrettable that discussion of how good character is built has become an unfashionable subject, largely ignored in today’s public debate. In such company, addicted to the short-term and too shy to consider the virtues that underpin civil society, easy credit finds its rightful place. Neuroscience suggests it’s time to put impulse aside and to consider the longer view. To think for a few days before making that big purchase may offer a running start.”, Peter C. Whybrow, “This Is Your Brain on Easy Credit”,

The Wall Street Journal

Opinion

Commentary

This Is Your Brain on Easy Credit

How did Americans rack up $11.83 trillion in debt? Short term rewards light up the brain’s emotional system.

Photo: Getty Images

By Peter C. Whybrow

The reward circuitry of the human brain is vital to our survival, but it wasn’t built to grapple with seductive credit card offers and no-money-down mortgages. Easy credit feeds our love of immediate gratification, distorts self-regulation and diminishes prudent market behavior, creating a destabilizing positive-feedback loop. Analysts trying to understand the explosion of consumer debt should look no further than neuroscience.

The total indebtedness of U.S. households at the end of last year stood at $11.83 trillion, the Federal Reserve Bank of New York has estimated. That’s up by $117 billion from the previous quarter. Credit card balances rose by $20 billion, auto loans by $21 billion, and student loans by a startling $31 billion. Falling indebtedness after the financial meltdown of 2008 was due largely to default rather than repayment. Now as restrictions on credit are easing, debt levels have begun to climb again

Easy credit as an economic driver has become a Faustian bargain. A market ethos that feeds on short-term desire, low interest rates and tax systems that encourage borrowing has distorted consumer choice. But more than that, it has upended the ancient survival game our brains use to weigh risk and reward.

The human brain is a hybrid, and in our ancient, preconscious core we are instinctively selfish creatures, focused on the short term and driven by habit. The twin frontal lobes, which sit above the eye sockets, are the brain’s “executive” cortex, overseeing risk assessment. Kaleidoscopic streams of incoming information are integrated there with past knowledge and instinctual drive.

A conscious, deliberative “thinking” cycle, drawing heavily on memory, runs through the outer cortex, the region predominantly concerned with punishment and control. An “emotional” circuit, focused on reward and pleasure, operates in the same region, but internally. In their crosstalk, these parallel cycles of perception and action create a balance between the fear of pain or loss and the expectation of pleasure or profit.

The illusion of continuous economic growth and the explosion of credit have thrown that balance out of whack. Thanks to the seductive appeal of today’s consumer economy, perhaps for the first time in human history it is the affirmation of reward rather than the fear of punishment or failure that dominates the calculus of risk. We have become addicted to the quick fix, be that tasty junk food, the electronic cocaine of the Internet, or the painless ease of a credit card purchase.

Research demonstrates that when presented with a choice between a reward now and a greater one after a delay—for instance, $80 today or $100 in two weeks—many of us will opt for the cash in hand, despite its lesser value. Scientists call this temporal discounting. Imaging studies using MRIs show that thinking about an immediate reward lights up the brain’s limbic system, which regulates emotion. Thus passion prevails over reason. That area of the brain is quieter when we’re considering a reward in the distant future, and thus logic wins out. Would you rather have $80 in one year, or $100 in a year plus two weeks? The question answers itself.

Though Wall Street and international financiers have been cast as the villains of the 2008 madness, they are minor actors in the larger narrative of spendthrift habit in which we each played our part. In the past three decades, aided and abetted by the enticements of consumerism, we Americans have been busily retuning our neural architecture.

During the last 25 years of the 20th century, the U.S. economy was in recession only 5% of the time, compared with 22% of the previous quarter-century. Such long periods of uninterrupted growth reflexively foster a mood of complacency: Secure in our habits we have learned to be thoughtless. We have disrupted the autopilots of the brain’s internal market, resetting the balance between hedonism and prudent self-constraint. Passion has prevailed over reason.

If we are to reset ourselves, the building of character will be key. As Adam Smith recognized, character is not born but crafted through thoughtful self-command. Ideally, over time a man becomes his own best critic, creating in the mind an intuitive capacity to monitor personal thoughts and actions. This facility Smith personified as the Impartial Spectator, moderating the perennial struggle between passion and reason.

Yet the habits of prudent concern and self-command develop, just as do profligate habits, through social exchange. Ask who is responsible for the development of character and there is no single answer, because it is a collective responsibility. It is regrettable that discussion of how good character is built has become an unfashionable subject, largely ignored in today’s public debate. In such company, addicted to the short-term and too shy to consider the virtues that underpin civil society, easy credit finds its rightful place. Neuroscience suggests it’s time to put impulse aside and to consider the longer view. To think for a few days before making that big purchase may offer a running start.

Dr. Whybrow is director of the Semel Institute for Neuroscience and Human Behavior at UCLA and the author of “The Well-Tuned Brain: Neuroscience and the Life Well Lived” (out May 18 from W.W. Norton), from which this op-ed is adapted.

“Argentina’s government and central bank causes massive monetary inflation (of the peso) and fixes the peso at artificially high levels relative to foreign currencies like the dollar. This creates huge monetary transaction costs for individuals and institutions, and as a result, they are willing to accept the risk of illegal, black-market monetary transactions, bitcoin price volatility, and questionable bitcoin security…

…I get it, but it seems to me that a digital “world currency,” outside the traditional payment system, invested directly in gold, silver, or some other commodity or basket of commodities (held in trust at a central location, by a huge and reputable firm or group of firms for a very small fee), makes a lot more sense to me. Finally, if it became a success and it should, governments around the world are going to regulate the heck out of it, to prevent money-laundering and tax avoidance schemes. In theory, the Federal Reserve could be this digital trustee and allow everyone to have a digital U.S. dollar account, with no fees. In this digital age, there is no reason for banks to be in the payment business and take a fee off (non-credit) payments between individuals and/or institutions. Banks should focus on time deposits and lending.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Can Bitcoin Conquer Argentina?

With its volatile currency and dysfunctional banks, the country is the perfect place to experiment with a new digital currency.

By NATHANIEL POPPER

Dante Castiglione stalked through the doors of a glass-walled office tower on the edge of downtown Buenos Aires, just a few hundred feet from the old port district. In the crowded elevator, he shook his head and muttered under his breath about the stresses of the day and his profession. “I swear, this job can kill me,” he said, his eyes cast downward.

On the 20th floor, he hustled into an impersonal, windowless office and quickly removed the tools of his trade from his backpack and set them on the desk: locked blue cash box, cellphone and clunky Dell laptop with the same yellow smiley-face sticker that he puts on all his electronics. Then he unbuckled the fanny pack from around his waist, which contained the most important part of his business: bricks of $100 bills and 100-peso notes.

This room, rented for the day, was not one of Castiglione’s regular haunts. He mostly drifts among the old cafes in Buenos Aires, where the bow-tie-wearing waiters serve small glasses of seltzer water with each coffee. In his line of business as a money-changer, temporary meeting places are preferred; they make things harder for would-be thieves, whom he has so far avoided. On this Friday in late February, Castiglione had run around the city in his camouflage-patterned sandals, trying to distribute cash to some clients and pick it up from others. Once back in his temporary office, his outdated LG phone alternately chirped, buzzed and sang with incoming text messages and emails.

‘I think I understand economics better than most people because I grew up in Argentina. I’ve seen every single monetary experiment you can imagine. This is the street-smart economics. Not the complex Ph.D. economics.’

Ordinarily, Castiglione would have help. His 18-year-old daughter, Fiona, often deals with customers, but she was about to give birth to her first child. Her twin brother, Marco, who used to make cash runs, was now focusing on school. So Castiglione was alone, his stress evident in the sweat on his forehead and the agitation on his face. When his business partner, who lives in Rosario, Argentina’s third-largest city, called to ask why he hadn’t taken care of one particularly insistent client, Castiglione erupted in frustration.

“If you want it done faster, you pick up the phone and call her yourself,” he growled in Spanish, before switching to another call.

After hanging up, he told me in English: “Everybody wants everything now, and I am just trying to do it. I’m not magical, as people think.”

Magical, no, yet something new all the same. His occupation is one of the world’s oldest, but it remains a conspicuous part of modern life in Argentina: Calle Florida, one of the main streets in downtown Buenos Aires, is crowded day and night with men and women singing out “cambio, cambio, cambio, casa de cambio,” to serve local residents who want to trade volatile pesos for more stable and transportable currencies like the dollar. For Castiglione, however, money-changing means converting pesos and dollars into Bitcoin, a virtual currency, and vice versa.

That afternoon, a plump 48-year-old musician was one of several customers to drop by the rented room. A German customer had paid the musician in Bitcoin for some freelance compositions, and the musician needed to turn them into dollars. Castiglione joked about the corruption of Argentine politics as he peeled off five $100 bills, which he was trading for a little more than 1.5 Bitcoins, and gave them to his client. The musician did not hand over anything in return; before showing up, he had transferred the Bitcoins — in essence, digital tokens that exist only as entries in a digital ledger — from his Bitcoin address to Castiglione’s. Had the German client instead sent euros to a bank in Argentina, the musician would have been required to fill out a form to receive payment and, as a result of the country’s currency controls, sacrificed roughly 30 percent of his earnings to change his euros into pesos. Bitcoin makes it easier to move money the other way too. The day before, the owner of a small manufacturing company bought $20,000 worth of Bitcoin from Castiglione in order to get his money to the United States, where he needed to pay a vendor, a transaction far easier and less expensive than moving funds through Argentine banks.

The last client to visit the office that Friday was Alberto Vega, a stout 37-year-old in a neatly cut suit who heads the Argentine offices of the American Bitcoin company BitPay, whose technology enables merchants to accept Bitcoin payments. Like other BitPay employees — there is a staff of six in Buenos Aires — Vega receives his entire salary in Bitcoin and lives outside the traditional financial system. He orders what he can from websites that accept Bitcoin and goes to Castiglione when he needs cash. On this occasion, he needed 10,000 pesos to pay a roofer who was working on his house.

Commerce of this sort has proved useful enough to Argentines that Castiglione has made a living buying and selling Bitcoin for the last year and a half. “We are trying to give a service,” he said.

That mundane service — harnessing Bitcoin’s workaday utility — is what so excites some investors and entrepreneurs about Argentina. Banks everywhere hold money and move it around; they help make it possible for money to function as both a store of value and a medium of exchange. But thanks in large part to their country’s history of financial instability, a small yet growing number of Argentines are now using Bitcoin instead to fill those roles. They keep the currency in their Bitcoin “wallets,” digital accounts they access with a password, and use its network when they need to send or spend money, because even with Castiglione or one of his competitors serving as middlemen between the traditional economy and the Bitcoin marketplace, Bitcoin can be cheaper and more convenient than Argentina’s financial establishment. In effect, Argentines are conducting an ambitious experiment, one that threatens ultimately to spread to the United States and disrupt some of the most basic services its banks have to offer.

Bitcoin first appeared in early 2009, introduced by a shadowy figure known as Satoshi Nakamoto. The software underlying its creation established that Bitcoins would be released slowly and steadily until there are 21 million of them; at that point, more than 12 decades from now, no more Bitcoins will be generated. These rules produced two somewhat predictable results, especially coming in the immediate wake of the financial crisis and the government bailouts of the big banks. The limited and regular release of Bitcoins appealed to libertarians, who have been skeptical of currencies that governments can print in unlimited quantities. (When Rand Paul announced his candidacy for president last month, his campaign’s website began accepting donations in Bitcoin.) The built-in sense of scarcity also led people to regard Bitcoin as a kind of digital gold, its value likely to increase over time — in other words, something to buy and sell as a speculative investment. The millions of traders, many of them in China, who have bet on the price of the virtual currency have kept the cumulative value of all outstanding Bitcoins well above $2 billion since late 2013. At the same time, that speculative activity has left much of the general public wondering why these virtual coins should be worth anything at all.

But the wild fluctuations in price — the value of a Bitcoin has bounced between $70 and $1,200 over the last two years — have obscured a significant aspect of the currency’s broader potential. Bitcoin digital tokens are part of a new kind of online financial network, which runs on the computers of those who use the virtual currency. People who join and support the network — hosting its open-source software, serving as record-keepers of sorts — receive new Bitcoins as they are released in a kind of recurring lottery, thus encouraging user participation. The details of how the network operates can be mind-numbingly complicated, involving lots of advanced math and cryptography, but at the most basic level, the network makes it possible for the first time to send valuable digital money around the world almost instantly, without moving through an intermediary like a bank or credit-card company or a service like PayPal. In a sense, the Bitcoin network was designed to be a financial version of email, which enables messages to be delivered without passing through a national postal service, or like the broader Internet itself, which allows people to publish news and essays without going through a media company. Instead of just delivering words, though, the Bitcoin network makes it possible to deliver money from New York to Shanghai in a matter of minutes without paying any financial institution.

The number of Bitcoin users in Argentina is relatively small; it barely registers on most charts of global Bitcoin usage. But Argentina has been quietly gaining renown in technology circles as the first, and almost only, place where Bitcoins are being regularly used by ordinary people for real commercial transactions. A number of large American companies have started accepting Bitcoin payments, but so far there has been little economic incentive for their customers to pay with Bitcoins.

Dante Castiglione, left, at the Rock Hostel, with its owner, Soledad Rodriguez Pons, who accepts Bitcoin. Credit Mark Peterson/Redux, for The New York Times

In contrast, the best-known Bitcoin start-up in Argentina, BitPagos, is helping more than 200 hotels, both cheap and boutique, take credit-card payments from foreign tourists. The money brought to Argentina using Bitcoin circumvents the onerous government restrictions on receiving money from abroad. Castiglione has some hotel clients, but he says that many of his 800 or so registered customers are freelancers who use Bitcoin to get paid by overseas clients, or companies that want to move money in and out of Argentina. A popular new online retailer, Avalancha, began accepting Bitcoin last summer and has seen the volume of Bitcoin transactions grow steadily since then. Avalancha offers customers a 10 percent discount when they use the virtual currency, because accepting credit cards generally ends up costing Avalancha more than 10 percent as a result of the vagaries of the Argentine financial system. The Bitcoin community in Buenos Aires has been vibrant enough to produce what’s known as the Bitcoin Embassy in the center of the city, a four-story building that serves as the home to eight start-ups whose businesses depends on the Bitcoin network.

Bitcoin proponents like to say that the currency first became popular in the places that needed it least, like Europe and the United States, given how smoothly the currencies and financial services work there. It makes sense that a place like Argentina would be fertile ground for a virtual currency. Inflation is constant: At the end of 2014, for example, the peso was worth 25 percent less than it was at the beginning of the year. And that adversity pales in comparison with past bouts of hyperinflation, defaults on national debts and currency revaluations. Less than half of the population use Argentine banks and credit cards. Even wealthy Argentines fear keeping their money in the country’s banks.

Wences Casares grew up on a remote sheep ranch in Patagonia and now lives on an estate looking out over Silicon Valley. He is, as much as anyone, responsible for making Bitcoin known in both Argentina and the United States. In 2001, he sold his first major start-up, a sort of ETrade for South Americans, to the Spanish bank Santander for $750 million. He sold his next big company, an online bank, to Banco Brasil. By the time he first heard about Bitcoin, in late 2011, he was in his first year of his latest start-up, Lemon, a mobile wallet for smartphones, not unlike Apple Pay, which came out three years later. His fascination with Bitcoin had less to do with professional experience, however, than a childhood spent in a country whose financial system seems to be terminally broken.

There was rarely a time during Casares’s youth when Argentina was not enduring some sort of financial crisis. In 1983, after years of inflation, the government created the new peso: each new one was worth 10,000 old pesos. In 1985, the new peso, its value eroded by inflation, was in turn supplanted by the austral, worth 1,000 new pesos. Eventually the government went back to the peso, this time pegged to the dollar, an effort that also failed.

“I think I understand economics better than most people because I grew up in Argentina,” Casares, now 41, told me. “I’ve seen every single monetary experiment you can imagine. This is the street-smart economics. Not the complex Ph.D. economics.”

One particular episode is seared in Casares’s memory. In 1984, during the first significant episode of Argentine hyperinflation following the military junta’s loss of power, Casares’s mother came to get him and his two sisters from school one day. His mother carried two grocery bags filled with cash — the salary she had just been paid. She rushed with Casares and his sisters to the grocery store and made them run through the aisles, grabbing as much food as they could before the prices changed. (An employee walked through the store all day doing nothing but re-pricing the goods on the shelves to keep up with the rapidly changing value of the peso.) After paying at the register, Casares and his sisters ran back for more food to spend the leftover money on. In this hyperinflationary environment, holding on to pesos was the same thing as losing money.

Casares is descended from one of Argentina’s old landholding families — a town called Carlos Casares, near Buenos Aires, is named after one of his ancestors — but his branch of the family went through hard times and ended up ranching sheep. When his father sold wool and the buyer’s check took a month to clear, that income could be halved by inflation, forcing yet more household cutbacks. Whatever savings accumulated were quickly exchanged for dollars, which held their value better than pesos.

In 2003, Casares and five friends bought a school bus and drove it on a three-week road trip from Buenos Aires, the capital, to Tierra del Fuego, at the southern end of South America. After the vehicle was stolen upon their return, the friends vowed to buy a second bus for another trip. In December 2011, one of them, Jorge Restelli, finally found a bus for 60,000 pesos, or $14,000, in the classified ads. The friends who lived in Argentina quickly paid their shares to purchase and fix it up, but Casares stalled, knowing how much it cost in time and fees to move money from the United States to Argentina. Then Restelli told him that Bitcoin might be just the answer.

At the time, the virtual currency had a small cult following in the United States and was essentially unheard-of in Argentina, but Restelli had read about it on an American tech blog. The same day Casares heard about Bitcoin, he found someone online who agreed to meet him at a cafe in Palo Alto and sell him 2,700 or so Bitcoins for about $8,000 in cash. Casares sent Restelli the Bitcoins that evening.

Casares was fascinated by the transaction. Here was money that anyone could buy online and that promised to hold its value better than the peso. (That promise would later be tested by extreme price swings.) It also seemed to offer access to the financial system for those who couldn’t open bank accounts or secure credit cards. Even Casares, who created his first start-up in the country, had never held an Argentine bank account.

He sent articles about Bitcoin to his bus-trip friends and explained how easy it was to move thousands of dollars in and out of Argentina. One friend went on to found the central Bitcoin advocacy group in Argentina and opened the Bitcoin Embassy in Buenos Aires. Casares began stockpiling Bitcoins, and when he visited Argentina during 2012, he posted offers to sell them on an Internet message board that was becoming a small, impromptu national marketplace for the virtual currency. He organized the first Bitcoin Meetup in Argentina in December 2012, though only a handful of people besides Restelli showed up at the whiskey bar where it was held.

Federico Murrone, left, and Wences Casares at Xapo, their company that handles Bitcoins, in Palo Alto, Calif. Credit Mark Peterson/Redux, for The New York Times

By then, Casares was proclaiming Bitcoin’s promise to any Silicon Valley friend who would listen. He had come to believe that the advantages of its network would push the value of each Bitcoin to astronomical values, just as slivers of the airwave spectrum increased in worth as more communication companies sought to use it. In the meantime, each Bitcoin could serve as an easy, secure place to store money, comparable to gold.

Many of Casares’s friends in the United States were initially skeptical: What could Bitcoin do that their credit cards couldn’t? But Casares explained how places like Argentina were different. His first big convert among his friends, and the one whose opinion in this area mattered the most, was David Marcus, who had recently become the president of PayPal. Marcus’s light-bulb moment came in the fall of 2012, when the Argentine government ordered PayPal to bar direct payments between Argentines, part of the government’s effort to slow the exchange of pesos into other currencies. As the policy went into effect, and Marcus watched the price of Bitcoin rise against the peso, he figured that Argentines were using Bitcoin to circumvent the government’s restrictions. Marcus began buying Bitcoins himself and also pushed PayPal to start investigating the currency’s use.

In March 2013 Casares attended an exclusive technology conference near Tucson hosted by the investment bank Allen & Company. At dinner the first night, Casares won the attention of a table full of investors by describing his childhood experiences in Argentina and how Bitcoin equipped people to avoid similar situations. He demonstrated the capabilities of the Bitcoin network by sending $250,000 worth of the virtual currency to the phone of a table mate, who was then directed to pass the money along to the man next to him with no more than a few taps of his iPhone keypad. During the next two days of the conference, a steady stream of attendees who had seen or heard about the Sunday-evening conversation approached Casares, including Reid Hoffman, the co-founder of LinkedIn. On a hike Wednesday afternoon, Casares spent the entire time explaining the concept to Charlie Songhurst, Microsoft’s head of corporate strategy.

At the time, Casares was still running his mobile-wallet start-up and had no business stake connected to Bitcoin beyond his own holdings of the virtual currency, which had become substantial. He urged his friends to make their own purchases. On Monday, the first full day of the conference, the price of a Bitcoin jumped more than $2, to $36, and on Tuesday it rose more than $4, its sharpest rise in months, to more than $40. After everyone flew home from the conference, Songhurst wrote a paper and distributed it privately to some of the most powerful investors in Silicon Valley. “We foresee a real possibility that all currencies go digital, and competition eliminates all currencies from noneffective governments,” it said, channeling Casares’s arguments. “The power of friction-free transactions over the Internet will unleash the typical forces of consolidation and globalization, and we will end up with six digital currencies: US Dollar, euro, Yen, Pound, Renminbi and Bitcoin.”

The buzz generated by the conference was not the only factor that pushed up the price of Bitcoin in March 2013. A financial crisis in Cyprus came to a head in the middle of the month; the closure of some bank accounts there led to conjecture that Russians were seeking refuge from the Cypriot banking system in Bitcoin. But Casares noticed that every time he helped another one of his wealthy friends start buying Bitcoins, prices rose, suggesting to him that they were responsible for much of the increase. Over the course of March, the price of a single Bitcoin nearly tripled, to around $100, and that surge generated the first widespread media coverage in the United States and Argentina (some of it, not coincidentally, from journalists cultivated by Casares). The crowd at the next Bitcoin Meetup in Argentina, hosted in April by one of Casares’s friends, was about five times larger than the first one organized by Casares just a few months earlier.

Dante Castiglione first heard about Bitcoin that same March. A Canadian who hired him to do some software consulting asked if he could pay him in Bitcoin. Castiglione, who grew up in a small apartment in downtown Buenos Aires, ran his own consulting firm, the latest in a long line of jobs after he dropped out of college. He is a successful version of what Argentines refer to as a buscavida, a person who gets by finding opportunities on the fringes of society, a more expansive career option in Argentina than in most countries.

When it came to working for overseas clients, the biggest issue for Castiglione, like many Argentines, was the government-set exchange rate between dollars and pesos. In an attempt to tamp down inflation, the government has long forced banks to sell dollars at artificially low rates. In March 2013, the government said a dollar was worth around 5 pesos. But anyone could go to one of the money changers on Calle Florida and trade a dollar bill for about 8 pesos, the black-market rate, also known as the dólar blue. (Economists and people outside Argentina often regard the dólar blue as the real exchange rate, a closer reflection of the peso’s actual worth.) The official exchange rate was costly for businessmen like Castiglione. When dollars from foreign customers came in through traditional means, banks automatically converted them at the mandated rate, and Castiglione ended up with three fewer pesos for each dollar than he would have gotten by exchanging them on the street. Castiglione had to sacrifice nearly 40 percent of a foreign payment to turn it into pesos.

When the Canadian customer paid Castiglione in Bitcoins, Castiglione found someone online willing to meet him in Buenos Aires and pay him in pesos at something close to the dólar blue rate. The demand for his Bitcoins was, in fact, so great that Castiglione, whose company was limping along, began to think there might be a business opportunity there. If he bought Bitcoins for slightly less than he sold them, he could make a profit on every trade, even if the price of Bitcoin didn’t go up. By September 2013, he had become a full-time Bitcoin broker.

In-person Bitcoin trading, as Castiglione does it, happens in many other cities around the world. But if this were the only way to procure Bitcoins, the interest in trading them would not have exploded as it has in the United States and China, where exchanging money directly with strangers — without a trusted middleman, in other words — is not a routine part of business. In most places where Bitcoin has become popular, there have been ways to buy the virtual currency online. This, of course, requires cooperation with banks or other payment networks, which happened in the United States and Europe. The American company Coinbase, for instance, allows customers to transfer money from their bank to a Coinbase account and buy Bitcoins online.

In Argentina, the banks refuse to work with Bitcoin companies like Coinbase, which isn’t surprising, given the government’s tight control over banks. This hasn’t deterred Argentines, long accustomed to changing money outside official channels. For Castiglione and his company, DigiCoins, this means operating at the edge of the law, but he takes comfort from the fact that, at least for now, the Argentine government has bigger problems to deal with.

Instead of bank tellers and branches, Bitcoin users in Argentina have come to rely on Castiglione and his competitors, some of whom are even willing to make house calls. This financial system developed much more slowly than it has in the United States, where American companies could take deposits from banks anywhere in the country. But as a result, Argentina’s Bitcoin economy is much more resistant to bank policies, government regulations and full-service companies like Coinbase that undermine Bitcoin’s decentralizing spirit.

‘It feels good, doing things that you are not supposed to, saying to the structures of power that they don’t have power over you.’

I first met Castiglione when I visited Buenos Aires in June 2014. At the time, he was working downtown, out of a stuffy single room in the same building as a Berlitz language-school office. A joker playing card was lodged in the corner of the whiteboard on the wall. A friend of Castiglione’s son was at a desk, working on the DigiCoins website. His daughter, Fiona, was in touch with customers by phone and online. His son, Marco, was in and out, taking cash to clients, which he carried in his backpack. Sitting behind his own desk next to the door, Castiglione was describing the life of a money-changer, especially when it comes to matters of security. He spoke with tough confidence: “Not many people will like to mess with us.”

But he acknowledged that he and his children remained safe largely because they successfully kept their clients ignorant of their location by switching offices frequently: “Right now, maybe God is on our side.”

One of Castiglione’s main competitors was another Bitcoin broker named Brenda Fernández. Originally from the Buenos Aires suburbs and a college dropout, she previously smuggled electronics into the country and sold them on the local equivalent of eBay. She talked in loud bursts, punctuated with high-pitched laughs, and proudly made provocative statements about breaking the law and ignoring standard business practices when I met her at an event at the Bitcoin Embassy. “I find a way to market myself as the crazy Bitcoin girl,” she told me.

In a more serious moment, Fernández, who is 24, attributed both her attitude and her embrace of Bitcoin in part to the gender transition she made in her early 20s, after years of struggling with traditional gender categories. “It feels good, doing things that you are not supposed to, saying to the structures of power that they don’t have power over you,” she said.

After the event at the embassy, Fernández took a small black-and-yellow taxi to a hostel near the National Congress that wanted to exchange about $1,000 worth of Bitcoins. The Rock Hostel, with band-themed rooms, caters to a young clientele. A number of people were drinking beer in the common area when Fernández showed up. The owner, a tattooed 29-year-old named Soledad Rodriguez Pons, had already transferred the Bitcoins to Fernández online, so after a bit of flirting, Fernández quickly handed over the cash; the transaction took place at the reception desk, where a sign offered customers a 10 percent discount if they paid by credit card. On top of the desk, under glass, were paper currencies from around the world.

The Rock Hostel is one of hundreds of hotels in the country using the Argentine start-up BitPagos to collect credit-card payments from foreign customers. If Rodriguez Pons accepted credit-card payments from American customers through the usual financial channels, customers would be billed in dollars, and when those dollars came to Rodriguez Pons’s Argentine bank account, they would be converted at the official rate, about 30 percent lower than the black-market rate. It would also take 20 days for Rodriguez Pons to get her pesos. BitPagos helped counter these drawbacks by taking the credit-card payment in the United States and then using the dollars to buy Bitcoins, generally from Coinbase, before sending them to Rodriguez Pons immediately. When Rodriguez Pons needed to pay the rent or laundry bills, she called Fernández or Castiglione — her two standbys — to sell the Bitcoins for pesos at a rate close to the dólar blue. Rodriguez Pons saved so much money this way that she could offer the 10 percent discount for credit cards and still easily come out ahead. In June 2014, BitPagos moved about $150,000 for the Rock Hostel and other tourist establishments, nearly twice what it handled three months earlier.

Rodriguez Pons, like many BitPagos clients, knew little about how Bitcoin worked and hadn’t tried hard to figure it out. She once, somewhat accidentally, held onto her Bitcoins at a time when the price was rising, and ended up with a small windfall when she sold. She used the proceeds to build a rooftop bar and a music-rehearsal space. Beyond those extras, Rodriguez Pons credited the savings from using BitPagos with keeping her business alive in Argentina’s very difficult business environment. The hardest part was often reaching Fernández and Castiglione.

“I had to call Brenda four times today,” she said with a smile.

As anyone who has dealt with Western Union or wired money abroad already knows, Argentina is not the only place that could benefit from Bitcoin’s easier and cheaper way of moving money across international borders. A Hong Kong firm called Bitspark recently opened a shop in a mall popular with Filipino domestic workers, through which they can send money back home using Bitcoin. Another firm, BitPesa, allows customers to convert Bitcoins into Kenyan shillings and deliver them into mobile wallets within Kenya.

Transactions of this sort inevitably stir up fears of money laundering and terrorist financing. Banks currently serve as the front line in stopping illicit money transfers. If these regulated institutions are cut out of the business of moving money, the banks and government officials say, who will ensure that terrorists and organized crime are not using the network to move millions across borders? The fact that there is no single authority responsible for supervising the Bitcoin system has also made it easier for con men and thieves to defraud companies holding Bitcoins for customers — something that became clear last year when Mt. Gox, once the largest Bitcoin exchange in the world, declared bankruptcy after nearly half a billion dollars of clients’ Bitcoins were fraudulently transferred out of their accounts. (A hacker generally needs only an owner’s password to steal his or her Bitcoins.)

Oddly enough, American regulators have actually been friendlier than banks toward the new technology. Even before the advent of Bitcoin, the Federal Reserve was looking into ways to update the relatively antiquated American payment networks, which often take two or three days to complete a simple money transfer. Several different branches of the Federal Reserve have released research papers over the last few years praising the improvements that Bitcoin might spur, even if Bitcoin itself isn’t adopted by the mainstream as a virtual currency. In 2013, when he was chairman of the Fed, Ben Bernanke wrote a letter to a Senate committee studying Bitcoin in which he praised its “long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”

The Bitcoin broker Brenda Fernandez scans the QR code of her client’s virtual wallet to make a trade. Credit Mark Peterson/Redux, for The New York Times

Banks are aware that this is an area in which they will likely have to adapt or lose business, perhaps even be made irrelevant. While most of the major banks have criticized Bitcoin and refused to work with virtual-currency companies, many of them are nonetheless spending a lot of time and energy behind the scenes studying the technology. JPMorgan Chase, the nation’s largest bank, decided in early 2014 not to conduct business with Bitcoin companies. But it did form its own Bitcoin Working Group, which consists of about two dozen executives throughout the bank who have been meeting fortnightly or monthly to discuss how the technology could change their business.

Banks are captivated, in particular, by the ledger on which all Bitcoins and Bitcoin transactions are recorded: what is known as the blockchain. Unlike traditional financial ledgers, kept by a central institution, the Bitcoin ledger is updated and maintained by everyone on the network, not unlike how Wikipedia is written and monitored by its users. One virtue of this approach is that the network has no central point subject to failure, like Visa and the New York Stock Exchange in their financial realms. It also means there is no middleman collecting fees with each transaction. And because the bookkeeping is publicly accessible, records can’t be manipulated in secret or after the fact.

JPMorgan belongs to an association of big banks, the Clearing House, that has been confidentially putting together a “proof of concept” for a decentralized ledger, or blockchain, that would run on the computers of all the participating banks. According to people involved, this network, which is still in the conceptual phase, could allow instant transfers between accounts at all the member banks and eliminate the current risks involved in having billions of dollars in limbo for days at a time. For many bankers, the most valuable potential use of the blockchain is not small payments but very large ones, which account for the vast majority of the money moving around the world each day. The banks, though, are moving slowly, even as several start-ups are trying to use the Bitcoin blockchain to do the same thing on a global basis, cutting out the banks altogether.

One of the most recent entrants into this area is a start-up led by a former top executive from JPMorgan. The Federal Reserve has had its own people looking at how to utilize the blockchain technology and potentially even Bitcoin itself. If someone can find a way to minimize the volatility of Bitcoin prices — as many are trying to do — it would be much easier for people to keep their savings in Bitcoin instead of a bank account.

“In the long run, Bitcoin will be very disruptive to the developed world,” Dan Morehead, a former Goldman Sachs executive who now runs a hedge fund focused on Bitcoin, told me. Things are happening sooner in Argentina, he said, because its financial system creates hassles for the people there. But, he added, “Argentina is just a more extreme example of the situation in every country.”

When I returned to Argentina in February this year, the price of Bitcoin had been falling for some time, scaring off many speculators in the United States. There was no sign of waning interest in Argentina, however. Several new companies were trying to provide a more seamless and reliable version of Castiglione’s service. BitPagos had recently started a service allowing its users to buy and sell small quantities of Bitcoin online and was closing in on a million-dollar fund-raising round with Silicon Valley venture capitalists, including Dan Morehead’s firm. A new company, Bitex, which had its own office down the street from the Bitcoin Embassy, was focused on using Bitcoin to transfer money among Latin American countries. All of the Argentine Bitcoin companies were working on expanding into Venezuela, where inflation is an even greater problem.

Castiglione was so busy running around the city, trying to keep up with the competition, that he was hard to pin down. When we finally met near the Bitcoin Embassy, late at night, he was with a tough-looking friend who was joining DigiCoins to help with the physical deliveries of cash, bringing with him a motorcycle and experience handling large amounts of money. The men had just come back from a trip to a town three hours west of Buenos Aires, where they had sold $20,000 worth of Bitcoins. They had been forced to make the trip at the last minute because another big sale had fallen through, and they did not otherwise have enough dollars to conduct business for the next few days. “If I hadn’t gotten that cash, I was done,” Castiglione told me, before heading out for a last trade just before midnight.

Earlier that day, as I sat with Fernández in a Subway sandwich shop, which was her temporary office, chosen for its free Wi-Fi, she did not try to hide her difficulty in adapting to the more competitive environment with her “crazy Bitcoin girl” routine, which was making it hard to keep big customers. She did have one business in the United States that sent her about $5,000 worth of Bitcoins each month and had her exchange the money and deposit the pesos into the company’s Argentine bank account, in order to make payroll. But a lot of her customers were young people who wanted to buy a few hundred pesos worth of a Bitcoin so that they could pay online for a Netflix subscription or a video game. “The market moved in another direction,” she said, “and I didn’t move in that direction.”

She had come to have serious doubts about whether Bitcoin would end up being any better than the old system if it was dominated by the ruling class, which would be immune to any popular backlash, thanks to the lack of a central Bitcoin authority. “The key turning point is when the rich elite see it as a way to safeguard their wealth,” she said.

Among the people Fernández and Castiglione were both contending with was Wences Casares. He decided in late 2013 that he cared too much about Bitcoin to leave its development to others. He quickly sold his digital-wallet start-up and started his own Bitcoin-centric company with one of the friends from the bus trip, Federico Murrone, an Argentine who was the head programmer on Casares’s past start-ups. Within two months of selling their old company, Casares and Murrone had secured $40 million in funding from investors like Reid Hoffman, the LinkedIn co-founder.

The office that Casares’s new company, Xapo (pronounced “zappo”), opened in Buenos Aires has none of the scrappiness of other virtual-currency players in the country. It occupies a full floor of a building in a fashionable part of the city; amenities included table tennis, glass walls and large, wall-mounted televisions. Xapo initially concentrated on ultrasecure storage for customers who own lots of Bitcoins — it holds the Bitcoins of many of the wealthy tech moguls who followed Casares’s advice. But Casares has ambitions to turn the company into a one-stop financial provider for the virtual-currency industry. The global aspirations were evident from the Hindi-language site that I saw his staff creating.

Casares spent months establishing a partnership with Taringa, the most popular Argentine social network. This month, millions of Taringa members in Argentina and the rest of Latin America automatically had a Xapo Bitcoin wallet opened for them. Users will be able to put Bitcoins or fractions of Bitcoins in their wallets by depositing cash at local drugstores, in the same way they pay utility bills. From those accounts, Argentines can pay for things online without a credit card or make online micropayments of 5 or 10 cents for video games and other digital goods (credit cards usually charge a minimum of 25 or 30 cents for each purchase).

When I asked Castiglione what he thought about a global venture like Xapo, he evinced a workingman’s skepticism. “We might not be as big as Wences, but the real thing happens here,” Castiglione said, as we sat in his temporary office between client visits. “People get the cash to spend.”

Whether his endeavors would help Bitcoin live up to its grand promise — supplanting Wall Street and central banks — was something Castiglione would consider only in the most pragmatic terms.

“If people don’t use it, it will go to trash, like anything that isn’t used in this world,” he told me. “If people use it, then it has a future.”

Nathaniel Popper is a financial reporter for The New York Times.

This article was adapted from “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money,” to be published in May by Harper, a division of HarperCollins.

A version of this article appears in print on May 3, 2015, on page MM48 of the Sunday Magazine with the headline: Quick Change

“…today the world’s central bankers are in something like a state of panic. Money is, quite clearly, uncontrollable. This manifests in large ways – like the six years of continuous crisis that have roiled the eurozone – but also in smaller, more technical matters. For example, the Federal Reserve has no idea how much money is out there, at least in all its digital forms, or how fast the overall supply is growing…

…This is alarming, because the whole concept behind the Fed is to monitor and control the money supply. That was a much easier task in an era of physical banks and highly regulated savings accounts. But today, each of us has the power to increase the money supply by simply carrying a balance on a credit card. (If you ever meet a central banker and want to get her stammering, ask this question: “How much money is there, precisely?”)”, Adam Davidson, “In Code We Trust”, New York Times Magazine

Magazine | The Money Issue

In Code We Trust

By ADAM DAVIDSON

Credit Illustration by Javier Jaén

When Caesar Augustus minted the denarius coin, around 4 A.D., he did so with a decree that it be made almost entirely of silver. But over the coming decades, as the financial health of the Roman Empire declined — largely because of its increasingly independent army, which demanded ever more money to subdue the rebellious provinces — the emperors began, slowly at first, mixing in copper to stretch the silver further. By 280 A.D., a denarius was 98 percent copper, with a thin silver wash on the surface. The implication was clear to every Roman: Here, in their hands, was a physical manifestation of the empire’s deepening desperation. Whatever proclamations the emperor might make, the coin told the truth.

The lesson, perhaps, is that money shapes — and is shaped by — the society at large. And the last century has seen far more transformation in money than any other to date. A hundred years ago, paper money was still just a reference document, the real value hidden away in a vault full of gold. But with the rise of information technology, money has increasingly become an abstraction. We’ve created A.T.M. and debit and credit cards, electronic transfers and 401(k) accounts. Since 1980, computers and deregulation have allowed Wall Street firms to experiment exuberantly with new securities that blur the line between finance and gambling. By the early 2000s, banks were selling securitized mortgage-backed assets as “money-good,” and it was largely this mistaking of junk for cash that brought about the financial crisis of 2008.

They do their best to hide it, but today the world’s central bankers are in something like a state of panic. Money is, quite clearly, uncontrollable. This manifests in large ways — like the six years of continuous crisis that have roiled the eurozone — but also in smaller, more technical matters. For example, the Federal Reserve has no idea how much money is out there, at least in all its digital forms, or how fast the overall supply is growing. This is alarming, because the whole concept behind the Fed is to monitor and control the money supply. That was a much easier task in an era of physical banks and highly regulated savings accounts. But today, each of us has the power to increase the money supply by simply carrying a balance on a credit card. (If you ever meet a central banker and want to get her stammering, ask this question: “How much money is there, precisely?”)

One way to understand this chaos is to see that power is shifting. The authority to create, move and define money — once confined to central banks and treasury departments — is being dispersed to an odd mix of entrepreneurs, libertarian hackers and old-line banking institutions. Even for the most technologically skeptical, this monetary chaos isn’t something we can choose to avoid. It’s a new and pivotal force in our economy, and it will change the way we work and live.

In this Money Issue, we’ve collected four articles that capture ways that technology is changing the very nature of money. Two of these articles are about Bitcoin and Kickstarter — two phenomena that represent, in extreme form, two contradictory aspects of money that have been there from the beginning: total anonymity and rich social context. As a digital form of currency, Bitcoin receives its authority not from a government but from an algorithm that is everywhere and nowhere. It allows for an anonymity of exchange and a creation of value all but completely unmoored from history. Kickstarter, by contrast, calls upon money’s other characteristic: its deeply social nature. It’s impossible to make an anonymous donation to Kickstarter, which is precisely the point, since our donations are often performances of sorts, put on for the benefit of friends or people we admire.

The other two articles revolve around technology that seeks to reduce the influence of money or even bypass it entirely. One of them profiles a Silicon Valley start-up that claims its technology can ameliorate some of the precariousness of working life — a precariousness that technology, paradoxically, has helped to create. The other documents how a software engine has enabled a profound form of nonfinancial exchange: a “kidney chain,” in which friends and family of patients with kidney failure, potentially as many as 70 in total, donate in an act of reciprocal generosity. It’s a wonderful example of an algorithm, built on the latest computer science, that allows for the most ancient form of exchange — that is, barter — to save the lives of loved ones.

There is a common perception that economists believe money drives human behavior. In fact, it’s almost precisely the opposite. Most modern economics is predicated on an idea first espoused by David Hume in his 1752 essay, “Of Money,” that currency, gold, bank slips, checks and so on are beside the point. What actually matters is what we make and do and feel and want. Money is just an imperfect tool to add it all up, to assign value to our fundamental human desires. We need money only because it, unlike passion, can be stored and traded and counted.

Arguably the two greatest economists of all time — Adam Smith and John Maynard Keynes — both wrote about money as a way to get at something far more important: who we human beings really are and how we can have the best possible lives. Smith believed that the core desire of all people was to be both loved and worthy of love. Keynes believed the highest possibility of human life came from creating and appreciating artistic works of true beauty. In either case, money is not some separate force, easily divided from other, more human, concerns. Money is changing now, very fast, but only because we are, too.

Correction: May 4, 2015
An earlier version of this article misstated when Caesar Augustus minted the denarius coin. The date is not precisely known, but scholars believe it was minted between 2 B.C. and 4 A.D, not around 15 A.D.

Adam Davidson is a founder of NPR’s “Planet Money” and a contributing writer for the magazine.

A version of this article appears in print on May 3, 2015, on page MM45 of the Sunday Magazine with the headline: The Money Issue.

 

“But Greenlining advised the Fed on Tuesday that it supported the deal “after ongoing negotiations with City National Bank to ensure that California’s low-income consumers and businesses of color benefit from the proposed merger.””, James F. Peltz, Los Angeles Times, May 7, 2015

“It isn’t a free and fair marketplace when a bank is extorted by advocacy groups, who hold sway over the government and its merger approval process, into making loans, they clearly would not otherwise make. This should ALWAYS be called what it truly is….an unsafe and unsound banking practice.”, Mike Perry, former Chairman and CEO, IndyMac Bank

City National Bank deal wins OK from a former foe

City National Bank

City National’s shareholders are scheduled vote on a merger with Royal Bank of Canada in late May. Above, City National Bank Plaza in downtown Los Angeles.

By James F. Peltz

  • An advocacy group for low-income and minority consumers no longer opposes City National Bank deal

Royal Bank of Canada’s proposed purchase of City National Corp. in Los Angeles cleared one potential hurdle when an advocacy group for low-income and minority consumers reversed course and said it supported the $5.4-billion deal.

But Greenlining advised the Fed on Tuesday that it supported the deal “after ongoing negotiations with City National Bank to ensure that California’s low-income consumers and businesses of color benefit from the proposed merger.”

Michael Cahill, City National’s general counsel, said Wednesday that the bank welcomed Greenlining’s support, which he called “very significant.”

He noted that another advocacy group, the California Reinvestment Coalition in San Francisco, also supports the deal.

But the banks still face opposition from the National Diversity Coalition, an amalgam of community, ethnic and minority groups in Daly City, Calif.

“We haven’t had a conversation [with the NDC] in the last few days,” Cahill said, but he noted that City National remained “open to more dialogue, more discussion with them.”

In approving bank mergers, the Federal Reserve takes into account the banks’ performance and pledges under the 1977 Community Reinvestment Act, which requires banks to serve poorer customers in their metropolitan areas.

The advocacy groups hope to ensure that the merger’s benefits include added service and investment for lower-income and minority consumers and businesses in areas served by City National, a bank sometimes dubbed the “bank to the stars” because of its deep Hollywood ties.

As part of the Royal Bank of Canada merger, City National has committed $11 billion over five years to help poor neighborhoods and small businesses.

But it took additional talks about specific efforts sought by Greenlining that helped City National and Greenlining come to agreement, Cahill said.

For instance, City National agreed to Greenlining’s request that the bank “focus more of its lending on transit-oriented development projects, projects around the rail and Metro hubs,” including loans for small businesses near those projects, he said.

City National’s shareholders are scheduled vote on the merger May 27.

“This Wall Street Journal article today about the SEC’s increased use of in-house judges makes me want to puke. This enforcement process is outrageous, un-American, and hopefully, sooner than later, will be ruled unconstitutional. And if it is, every lawyer who was a part of it and supported it should be disbarred and every lawyer who didn’t vociferously speak out against it should be ashamed.”, Mike Perry, former Chairman and CEO, IndyMac Bank

SEC Wins With In-House Judges

Agency prevails against around 90% of defendants when it sends cases to its administrative law judges

Joel Shapiro, the head of an investment firm, lost a hearing on an SEC civil enforcement action before an agency in-house judge who has never fully cleared a defendant. Mr. Shapiro's appeal will be heard by the SEC commissioners—the same body that earlier decided the case against him should go forward.

Joel Shapiro, the head of an investment firm, lost a hearing on an SEC civil enforcement action before an agency in-house judge who has never fully cleared a defendant. Mr. Shapiro’s appeal will be heard by the SEC commissioners—the same body that earlier decided the case against him should go forward. Photo: Dustin Chambers for The Wall Street Journal

By Jean Eaglesham

Joel Shapiro faced an uphill battle when he fought the Securities and Exchange Commission in an Atlanta court last year.

The investment-firm chief executive came before an SEC administrative law judge who has never fully cleared a defendant. In August, the judge found Mr. Shapiro had violated securities law, showing “reckless disregard” for his duty to investors.

The odds are once more against Mr. Shapiro as he challenges this ruling. His appeal will be decided by the SEC’s five commissioners, the same body that decided the case against him should go forward in the first place.

Mr. Shapiro, who denies any wrongdoing, called the process “the most unfair, the worst thing I’ve ever gone through.” The SEC declined to comment on his case.

An analysis by The Wall Street Journal of hundreds of decisions shows how much of a home-court advantage the SEC enjoys when it sends cases to its own judges rather than federal courts. That is a practice the agency increasingly follows, the Journal has found.

The SEC won against 90% of defendants before its own judges in contested cases from October 2010 through March of this year, according to the Journal analysis. That was markedly higher than the 69% success the agency obtained against defendants in federal court over the same period, based on SEC data.

Going back to October 2004, the SEC has won against at least four of five defendants in front of its own judges every fiscal year.

The SEC says its judges are impartial and the process is fair. It attributes the difference in outcomes partly to case mix. For instance, most of its complicated insider-trading cases have been heard in federal court, not by its in-house judges.

The Journal analysis also reveals the SEC’s high success rate in appeals of its administrative law judges’ rulings—the appeals its own commissioners hear.

The commissioners decided in their own agency’s favor concerning 53 out of 56 defendants in appeals—or 95%—from January 2010 through this past March, the Journal found. Five other cases were sent back to in-house SEC judges to reconsider.

“In an administrative law proceeding” at the SEC, said Bradley Bondi, a former counsel to two former SEC commissioners, “the commission is akin to the prosecutor and then, in an appeal, the judge in the same case.”

Defendants who appealed risked making their situations even worse. During the same stretch, the SEC commissioners reduced financial sanctions imposed on one defendant but increased the sanctions for seven others.

SEC officials believe appeals within the agency aren’t as one-sided as the Journal’s analysis suggests, according to people close to the agency. Several appeals involved cases where the underlying conduct wasn’t in dispute, such as appeals of industry bans. Stripping those out, the SEC decided appeals in its own favor 88% of the time, rather than 95%.

For comparison, U.S. attorneys had an average win rate of 84% before federal appellate courts in the past three fiscal years, according to Justice Department data. That rate applies to criminal cases, in contrast to the SEC’s civil cases.

Mary Jo White, the head of the SEC, has termed its in-house adjudication system “very fair.” Enforcement chief Andrew Ceresney said the SEC’s “excellent record in administrative proceedings reflects the strength of the evidence presented in each case, and not our choice of venue.”

The SEC brought more than four out of five of its enforcement actions as administrative proceedings, rather than federal-court cases, in the fiscal year ended Sept. 30. That was up from less than half of them a decade earlier.

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While many such cases are settled by agreement with defendants or address straightforward matters, SEC officials say they also are sending increasing numbers of contested lawsuits to their own judges, reflecting enhanced powers granted by the 2010 Dodd-Frank financial legislation. The law allowed the SEC to seek financial penalties in administrative proceedings from firms and people not under its regulatory purview.

“It is a fundamental change,” said Joseph Grundfest, a former SEC commissioner who is now a law professor at Stanford University. “By bringing more cases in its own backyard, the agency is not only increasing its chances of winning but giving itself greater control over the future evolution of legal doctrine.”

SEC officials said the agency has used its in-house court since the 1940s. It isn’t a guarantee of success, Ms. White noted last year: “We don’t win them all.”

Still, no defendant has escaped unscathed before SEC Judge Cameron Elliot, the judge who heard Mr. Shapiro’s case. In Mr. Elliot’s four years as an SEC judge, he has found all of the 28 defendants who came before him in contested cases liable on at least some of the charges the SEC enforcement arm had brought against them.

This compares to an 85% SEC win rate in cases before another in-house judge, Carol Foelak, and 87% in cases heard by the agency’s chief administrative law judge, Brenda Murray.

Bias allegation

One former SEC judge said she thought the system was slanted against defendants at times. Lillian McEwen, who was an SEC judge from 1995 to 2007, said she came under fire from Ms. Murray for finding too often in favor of defendants.

“She questioned my loyalty to the SEC,” Ms. McEwen said in an interview, adding that she retired as a result of the criticism.

Ms. McEwen said the SEC in-house judges were expected to work on the assumption that “the burden was on the people who were accused to show that they didn’t do what the agency said they did.”

A spokeswoman for the SEC judges declined to comment, and the judges declined to be interviewed.

The judges have their offices on the second floor of SEC headquarters in Washington, along with the agency’s press office and a staff health club, according to people close to the agency.

“The SEC appoints the judges, the SEC pays the judges, they are subject to appeal to the SEC,” U.S. District Judge Jed Rakoff said. “That can create an appearance issue, even if the judges are excellent, as I have every reason to believe they are.”

John Flannery and James Hopkins say their encounter with the SEC has cast a long shadow on their lives.

In a closely watched case, the two former executives of investment adviser State Street Corp. beat the odds by winning before SEC chief judge Murray, only to have the SEC commissioners partially reverse her ruling three years later.

The agency in 2010 charged that before the financial crisis, Messrs. Flannery and Hopkins misled fund investors about exposure to subprime bonds. State Street, which paid more than $300 million to settle related charges without admitting wrongdoing, declined to comment.

In 2011, after an 11-day hearing with 19 witnesses and about 500 exhibits, Judge Murray tossed out all of the charges against the two executives, calling them credible witnesses who showed “candor [and] conviction.”

“What they alleged was such an assault on my integrity and ethics,” said Mr. Flannery, a former State Street chief investment officer.

The SEC’s enforcement staff appealed the SEC judge’s rejection of charges against the two. They then had to wait more than three years for the SEC commissioners to decide the appeal.

“The SEC says the process is streamlined, but that’s not true if there’s an appeal,” said Mr. Hopkins, who had been a product engineer at State Street.

He said he hasn’t worked since the charges were filed more than four years ago. Firms overseen by the SEC appear wary of employing someone in a dispute with it, he said.

“Even though their chief judge said I’ve done nothing wrong, they’ve still put me in a box. They’re punishing me by keeping me out of a career I love and I’ve spent 35 years in,” Mr. Hopkins said.

In December 2014, the SEC commissioners, in a 3-2 vote, agreed with Judge Murray in rejecting many of the counts, but ruled against both men on some charges of misrepresenting information to investors—Mr. Hopkins in a slide in a presentation, and Mr. Flannery in two letters. The commissioners ordered Mr. Hopkins to pay a $65,000 civil penalty and Mr. Flannery $6,500, and suspended both from the investment industry for a year.

“They’re continuing to bully me,” Mr. Hopkins said.

A spokesman for the SEC declined to comment on the case.

U.S. court deference

Mr. Hopkins and Mr. Flannery now are asking a federal appellate court to reverse the SEC commissioners.

That is a tall order, according to legal experts. “The appeals courts tend to go along with the SEC unless there’s an egregious error,” said Thomas Gorman, a former SEC attorney now at Dorsey & Whitney LLP.

Supreme Court Justice Antonin Scalia said in November he was worried that deference to the SEC by federal appeal courts means the agency “can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain.” He made the remark in a statement, joined by Justice Clarence Thomas, during a criminal-case appeal.

SEC officials said federal courts retain the final say. “I do not think that you are taking away from the courts the ability to shape the law,” Mr. Ceresney, the enforcement chief, said at a congressional hearing in March.

The SEC added two new administrative law judges last year, bringing the number to five. The budget for their office has risen 44% this fiscal year to $2.5 million.

Some are calling for formal constraints on the SEC’s growing use of its internal tribunal. The trend “has the appearance of the Commission looking to improve its chances of success,” said Michael Piwowar, a Republican SEC commissioner, at a February conference.

He said the agency should create guidelines on its choice of courts “to avoid the perception that the Commission is taking its tougher cases to its in-house judges.” The SEC is considering such guidelines, said agency officials.

A number of suits in recent months have challenged the SEC’s use of administrative law judges, arguing that the system is unconstitutional or unfairly denies defendants the same rights afforded by federal courts. The SEC’s Mr. Ceresney said the agency’s administrative proceedings “have procedural protections that are not available to defendants in district court proceedings.” The legal challenges have so far been unsuccessful. Lawyers say it could take years for courts to resolve the issues.

SEC officials say that in addition to being fair, their in-house adjudication, with a 300-day deadline for many decisions, is much more efficient than using federal courts that can take years to resolve a case.

It can still be expensive for defendants, though. Mr. Shapiro, the Atlanta executive who lost before the SEC’s Judge Elliot and is appealing to the SEC commissioners, said he and fellow defendants have spent nearly $6 million on legal fees.

In 2013, the SEC leveled charges against Timbervest LLC—a manager of timber-related investments of which Mr. Shapiro is CEO—as well as Mr. Shapiro and three other executives. The four were accused of defrauding a pension-fund client by making unauthorized asset sales and paying themselves more than a million dollars in undisclosed fees.

After an eight-day hearing last year, Judge Elliot found against the executives on most of the charges and ordered them to pay sanctions totaling $1.9 million.

He didn’t bar them from participating in the investment industry, saying the conduct had occurred outside the five-year statutory limit for such a penalty. The SEC enforcement staff is appealing that part of his decision, saying defendants’ “highly calculated schemes to defraud their client” warranted being barred from the industry.

Timbervest, in its appeal, cited what it described as SEC Judge Elliot’s “record of utter deference” to the agency that employs him. The defendants also said the disputed transactions benefited clients and the fees were properly disclosed.

The battle could be a long one. The SEC commissioners are due to hear the appeal on June 8. If they back the SEC judge, the defendants plan to ask a federal appellate court to step in, said Stephen Councill, a lawyer for the defendants. “We’re hellbent on fighting this all the way,” he said.