Sunday, November 12, 2017

Paul Krugman: The Tax Foundation Has Some Explaining To Do

I’m hearing from various sources that the Tax Foundation’s assessment of the Senate plan, which purports to show huge growth effects and lots of revenue gains from this growth, is actually having an impact on debate in Washington. So we need to talk about TF’s model, and what they aren’t telling us.
The basic idea behind TF’s optimism is that the after-tax return on capital is set by global markets, so that if you cut the corporate tax rate, lots of capital comes flooding in, driving wages up and the pre-tax rate of return down, until you’re back at parity. That is indeed a possible outcome if you make the right assumptions.
But there are two necessary side implications of this story. First, during the process of large-scale capital inflow, you must have correspondingly large trade deficits (over and above baseline). And I mean large. If corporate tax cuts raise GDP by 30%, and the rate of return is 10%, this means cumulative current account deficits of 30% of GDP over the adjustment period. Say we’re talking about a decade: then we’re talking about adding an average of 3% of GDP to the trade deficit each year — around $600 billion a year, doubling the current deficit.
Second, all that foreign capital will earn a return — foreigners aren’t investing in America for their health. As I’ve tried to point out, this probably means that most of any gain in GDP accrues to foreigners, not U.S. national income.
So how does the TF model deal with these issues? They have never provided full documentation (which is in itself a bad sign), but the answer appears to be — it doesn’t. Judging from the description here, the current version of the model has no international sector at all — that is, it says nothing about trade balances. They say that they’re working on a model that
tracks the effects of rapidly increasing or decreasing desired capital stocks on international capital markets. The international sector captures the capital payments that leave the domestic economy to the foreign owners of domestic assets and adjusts the growth factors for the tax-return simulator to reflect the actual growth in incomes.
In other words, the model they’re using now doesn’t do any of that.
So while they’re peddling an analysis that implicitly predicts huge trade deficits and a large jump in income payments to foreigners, they’re using a model that has no way to assess these effects or take them into account.
Maybe they’ll eventually do this stuff. But what they appear to be doing now is fundamentally incapable of addressing key issues in the tax policy debate.
NYT

Saturday, November 11, 2017

How Corporations and the Wealthy Avoid Taxes (and How to Stop Them)







The United States loses, according to my estimates, close to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens. That’s close to 20 percent of the corporate tax revenue that is collected each year. This is legal.
Meanwhile, an estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultrawealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities. This is… not so legal.
These figures represent a huge loss of resources that, if collected, could be used to cut taxes on the rest of us, or spent on social programs to help people in our societies.

How do they do it?

For an example, look no further than your search bar. In 2003, a year before it went public, Google (now a multinational conglomerate known as Alphabet) began a series of moves that would allow it to obtain favorable tax treatment in the future.

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND
Google Affiliate
Google Affiliate
Google Affiliate
Africa
europe
Middle
east

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND
IRELAND
$$$
Google Affiliate
France

(now Alphabet)
Google Ireland
Holdings
$$$
bermuda
“Managed”
Google Ireland
Limited
IRELAND
IRELAND
$$$
Google Affiliate
France
First, it transferred ownership of intellectual property related to its all-important search and advertising technologies to an entity named Google Ireland Holdings.
Why Ireland? Because not only did it have favorable corporate tax rates, its regulations also allowed Google Ireland Holdings to incorporate there but be “managed” in Bermuda.
Google Ireland Holdings then created another Irish subsidiary, Google Ireland Limited, and granted it a license to use the technology now owned by the Irish parent company.
Under this arrangement, which as far as we know is still in place, it is Google Ireland Limited that actually licenses the tech of Google’s main business to all the Google affiliates in Europe, the Middle East and Africa. (Google has a similar offshoot in Singapore that covers business in Asia).
Google France, for example, pays royalties to Google Ireland Limited.
That entity in turn moves its profits to Bermuda via a royalty payment to the Google Ireland Holdings.
See where this is going? In 2015, $15.5 billion in profits made their way to Google Ireland Holdings in Bermuda even though Google employs only a handful of people there. It’s as if each inhabitant of the island nation had made the company $240,000.

The corporate
tax rate there?

Zero

In doing this, Google didn’t break the law. Corporations like Google are simply shifting profits to places where corporate taxes are low. It’s not just Internet companies with valuable intellectual property that do this. A car manufacturer, for instance, might shift profits by manipulating export and import prices – exporting car components from America to Ireland at artificially low prices, and importing them back at prices that are artificially high.
According to the latest available figures, 63 percent of all the profits made outside of the United States by American multinationals are now reported in six low- or zero-tax countries: the Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland. These countries, but above all the shareholders of these corporations, benefit while others lose.
My colleagues Thomas Torslov and Ludvig Wier and I combined the data published by tax havens all over the world to estimate the scale of these losses. The $70 billion a year in revenue that the United States is deprived of is nearly equal to all of America’s spending on food stamps. The European Union suffers similar losses.

So what can be done?

Thankfully, Ireland has announced it will close the “double Irish” loophole that Google used, and arrangements that take advantage of that loophole must be terminated by 2020. But similar strategies will be used as long as we let companies choose the location of their profits.
Just look at what Apple did in 2014 — it’s one of the most spectacular revelations from the newly released Paradise Papers. After learning Irish authorities were going to close loopholes it had used, Apple asked a Bermuda-based law firm, Appleby, to design a similar tax shelter on the English Channel island of Jersey, which typically does not tax corporate income. Appleby duly obliged, and Jersey became the new home of the (previously Irish) companies Apple Sales International and Apple Operations International.
A potential fix would be to allocate the taxable profits made by multinationals proportionally to the amount of sales they make in each country.
Say Google’s parent company Alphabet makes $100 billion in profits globally, and 50 percent of its sales in the United States (a relatively similar scenario to the first quarter of this year, in which that figure was 48 percent). In that case, $50 billion would be taxable in the United States, irrespective of where Google’s intangible assets are or where its workers are employed. A system similar to this already governs state corporate taxes in America.
Such a reform would quash artificial profit-shifting. Corporations may be able to shift around profits, assets, and subsidiaries, but they cannot move all their customers to Bermuda.
This system is not perfect, but it’s orders of magnitude better than both the laws that now govern the taxation of international profits and the tax package being proposed by congressional Republicans. Under the proposed plan some international profits would be taxed at 10 percent, but there are many likely exemptions.
One advantage of allocating taxable profits as I suggest is that this reform can be adopted unilaterally. There is no need for the United States (or any other nation that wants to cut down on tax avoidance) to obtain permission from anybody.
But we’d still face an equally daunting problem, the far more shadowy – and ultimately illegal – tax evasion of ultrawealthy individuals, many of them with net worths already bolstered by the proceeds of corporate tax avoidance. Here’s an example.
Meet Michael. Michael is the (fictional) chief executive and owner of an American company, Michael & Company. Like many people, he would like to pay as little in taxes as possible. But unlike most people, he can take some steps that will allow him to do just that.

Michael & Co.
America
Anonymous
Shell Co. Inc.
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands
First, he creates an anonymous shell company incorporated in the Cayman Islands, which has lax regulations on disclosing the identities of company owners.
He then opens an account under the shell company’s name in Cyprus (or one of many other tax havens, such as Switzerland, Hong Kong and Panama, whose banks cater to the wealthy and aren't reliable about cooperating with foreign tax authorities).
Finally, Michael & Company buys fictitious services from the Cayman shell company (“consulting,” for example) ...
… and, to pay for these services, wires money to the shell company’s Cyprus account.
The transaction generates a paper trail that can appear legitimate at first glance. But the reality is more insidious. By paying for fictitious consulting, Michael fraudulently reduces the taxable profits of Michael & Company, and thus the amount of corporate income tax he pays.
And once the money has arrived in Cyprus, it is invested in global financial markets and generates income that the Internal Revenue Service can tax only if Michael reports it or if his Cypriot bank informs the I.R.S.
It’s supposed to, but many offshore banks have routinely violated their obligations in the past, by pretending they didn’t have American customers or hiding them behind shell companies. So this way, Michael can evade American federal income tax as well as paying fewer corporate taxes through his company.
And meanwhile, in America, if he wants to use any of the money stashed in Cyprus, he can simply go to an ATM and make a withdrawal from his offshore account.

How do we know all this?

Until recently, we did not have a good sense of who owns the wealth held offshore, but with my colleagues Annette Alstadsaeter and Niels Johannesen, we have been able to make progress thanks to leaks over the last few years. In 2015, the Swiss Leaks revealed the owners of bank accounts at HSBC Switzerland, and in 2016 the Panama Papers revealed those of the shell companies created by the Panamanian law firm Mossack Fonseca. These showed that 50 percent of the wealth held in tax havens belongs to households with more than $50 million in net wealth, a minuscule number of ultra-high-net-worth individuals who avoid paying their fair share. In the Paradise Papers, we see that these are not only Russian oligarchs or Belgian dentists who use tax havens, but rich Americans too.
As I mentioned above, about 11.5 percent of world G.D.P. is held offshore by households. For a long time, the bulk of it was held in Switzerland, but a fast-growing fraction is now in Hong Kong, Singapore and other emerging havens.
We can stop offshore tax evasion by shining some light on darker corners of the global banking industry. The most compelling way to do this would be to create comprehensive registries recording the true individual owners of real estate and financial securities, including equities, bonds and mutual fund shares.
One common objection to financial registries is that they would impinge on privacy. Yet countries have maintained property records for land and real estate for decades. These records are public, and epidemics of abuse are hard to come by.
The notion that a register of financial wealth would be a radical departure is wrong. And the benefits would be enormous, as comprehensive registries would make it possible to not only reduce tax evasion, but also curb money laundering, monitor international capital flows, fight the financing of terrorism and better measure inequality.
The onus here is on the United States and the European Union. Why do we allow criminals, tax evaders and kleptocrats to ultimately use our financial and real estate markets to launder their wealth? Transparency is the first step in making sure the wealthy can’t cheat their way out of contributing to the common good.
Advertisement

9

ARTICLES REMAINING
Get The Times from $15.99 $9.99 a month.

Objective reporting. No matter what the subject.

Politics. Business. Science. Driven by facts.

From $15.99 $9.99 a month.

9 ARTICLES REMAINING this month

See where The Times will take you.

NYT

Wednesday, November 8, 2017

Endowments Boom as Colleges Bury Earnings Overseas

In 2006, the endowments of Indiana University and Texas Christian University invested millions of dollars in a partnership, hoping to mint riches from oil, gas and coal.

The partnership was formed by the Houston-based Quintana Capital Group, whose principals include Donald L. Evans, an influential Texan and longtime supporter of former President George W. Bush. Little more than a year earlier, Mr. Evans had left his cabinet position as commerce secretary.

Though the group had an impressive Texas pedigree, presidential cachet and ambitions for operations in the United States, the new partnership was established in the Cayman Islands. The founders promised their university and nonprofit investors that the partnership would try to avoid federal taxes by exploiting a loophole called “blocker corporations,” which are typically established in tax havens around the world.




A trove of millions of leaked documents from a Bermuda-based law firm,

Appleby, reflects some of the tax wizardry used by American colleges and universities. Schools have increasingly turned to secretive offshore investments, the files show, which let them swell their endowments with blocker corporations, and avoid scrutiny of ventures involving fossil fuels or other issues that could set off campus controversy.

Buoyed by lucrative tax breaks, college endowments have amassed more than $500 billion nationwide. The wealth is concentrated in a small group of schools, tilting toward private institutions like those in the Ivy League and other highly selective colleges. About 11 percent of higher-education institutions in the United States hold 74 percent of the money, according to an analysis in 2015 by the Congressional Research Service.


The House Republican tax plan includes a 1.4 percent tax on the investment income of private colleges and universities with endowment assets of $250,000 or more per student. It would not apply to public schools. If passed, the new tax would affect about 70 elite private colleges, though it would not touch the type of offshore benefits the Texan partnership pursued.

On Monday, 45 education groups declared their opposition to the bill in a letter to Kevin Brady, the Texas Republican who is the chairman of the House Ways and Means Committee.

Photo
Indiana University also put money into the Cayman Islands partnership, which was designed to exploit a loophole that would avoid federal taxes in the United States. Credit Luke Sharrett for The New York Times

Tax ‘Blockers’

College and university endowment earnings are usually tax-exempt. But as endowments have sought greater investment returns in recent years, they have shifted more of their money out of traditional holdings like United States equities to alternative, potentially more lucrative investments. These include private equity and hedge funds that frequently borrow money, opening them up to tax consequences.

When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses.

Establishing another corporate layer between private equity funds and endowments effectively blocks any taxable income from flowing to the endowments, the reason they are called blocker corporations. The tax is instead owed by the corporations, which are established in no-tax or low-tax jurisdictions like the Cayman Islands or the British Virgin Islands.

“Congress is essentially subsidizing nonprofits by allowing them to engage in these transactions,” said Norman I. Silber, a law professor at Hofstra University who co-authored a paper on blocker corporations in 2015. “They’re allowing them to borrow so that they can build up their endowments.”

The use of blocker corporations has raised concerns among policymakers in recent years. That’s partly because they cost the United States Treasury millions of dollars, but also because they legitimize an opaque offshore network sometimes used for nefarious purposes.

“They’re not cheating. They’re not hiding money or disguising money,” said Samuel Brunson, a law professor at Loyola University Chicago who has studied endowment taxation. “But they’re adding money to a system that allows people, if they want to hide their money, to do it.” Not only do the universities benefit — so does the wealthy and influential private equity industry.

Perhaps illustrating the sensitivity of the topic, officials at most of the college and university endowments that use blocker corporations, including Colgate, Dartmouth, Duke and Stanford, declined to comment specifically, citing longstanding policies against discussing their investments. Among them was Matt Kavgian, the director of strategic communications for Indiana University’s $2 billion endowment, which had invested $10 million with Quintana.

An exception was the Quintana shareholder Texas Christian University, whose chief investment officer, Jim Hille, acknowledged that the $1.5 billion endowment had used blocker corporations. Mr. Hille said the decision to use one often came down to whether the expected return would offset the cost of establishing a blocker corporation.

References to such corporations in the Appleby files, shared with The New York Times by the International Consortium of Investigative Journalists, which obtained them from the German newspaper Süddeutsche Zeitung, date back at least to 2003. At that time, five elite schools — Columbia University, Dartmouth College, the University of Southern California, Stanford University and Johns Hopkins University — became partners in a Bermuda-based group called H&F Investors Blocker.

H&F Investors Blocker was formed to invest with one of the largest private equity firms, Hellman & Friedman, in shares of Axel Springer, a German publisher of newspapers and magazines.

Minutes from meetings at Appleby’s office in Hamilton, Bermuda, never mention tax avoidance or even explain why the word “blocker” is used in the partnership’s title. But an audit by Ernst & Young, contained in the minutes, shows that H&F Investors Blocker would owe no federal income tax.

By 2008, the University of Texas system — whose endowment last year was $24.2 billion, behind Harvard’s ($34.5 billion) and Yale’s ($25.4 billion) — asked Appleby to set up a Cayman Islands company called TX Liquidity Capital so “certain tax advantages will accrue to the system,” documents show.

Colgate University, with an endowment worth $822 million last year, stood to benefit from blocker corporations in 2008 when it invested in Genstar Capital, a private equity fund specializing in leveraged buyouts, according to the records. One investor in that Cayman Islands partnership, called Genstar Capital Partners V HV, took pains to include a handwritten a note near his signature: “elect to invest through the blocker.” Other investors were Dartmouth, Stanford and a Duke fund called Gothic Corporation.



Photo

In 2003, Dartmouth College became one of five schools to invest in a Bermuda-based group that would owe no federal income tax on its investments. Credit Ian Thomas Jansen-Lonnquist for The New York Times

A Shift in Public Attitude

While legal, blocker corporations are part of a system of endowment tax breaks fueling an undercurrent of populist anger. Many students across the country struggle under massive college debt. At the same time, critics say, some wealthy schools use these tax advantages to stockpile endowments that exceed the gross national product of entire countries.

Last year, three influential Republican legislators, led by Senator Orrin G. Hatch of Utah, sent a letter to 56 private universities with endowments of $1 billion or more, requesting information on “the numerous tax preferences” they enjoy. “Despite these large and growing endowments,” the letter said, “many colleges and universities have raised tuition far in excess of inflation.”
So far, universities have mobilized lobbyists to emphasize the public benefits they deliver, beating back challenges to their tax breaks. But there is evidence that the mood has shifted, said Charlie Eaton, a professor at the University of California, Merced, who has studied endowment tax breaks.

“In some ways, the anti-elite and anti-university spirit of Trumpism could create a favorable environment on Capitol Hill for some kind of action on this,” Dr. Eaton said. “That’s part of the reason universities urgently need to grapple with this. Because people genuinely feel that our elite universities have become islands of wealth.”

In a study this year, Dr. Eaton estimated that a trio of tax breaks benefiting universities costs federal taxpayers $19.6 billion a year. Taxpayers, many of them wealthy, get breaks when they donate to colleges. Tax-free municipal bonds allow schools to borrow money at low rates. And for the most part, endowment investment returns are tax-free.


Photo
Columbia University’s investment fund held shares in a company, registered in the Isle of Man, that generated controversy over a pipeline project in Brazil. Credit Karsten Moran for The New York Times

Controversial Ventures

Multiple Appleby documents offer a glimpse into the complex financial transactions and investments, some controversial, that university endowments engage in all over the world, aside from using blockers.

Universities have been under pressure from both students and activists to shift to “green” investments in response to climate change, as well as to take social policy and global governance issues into account in investments.

The Appleby records show that investment funds of Columbia and Duke, both ranked in the top 20 endowments, held shares as recently as 2015 in Ferrous Resources, registered in the Isle of Man. Its primary business is iron mining in Brazil.

The company drew criticism there with a planned 480 kilometer pipeline to transport iron slurry from a mine in Minas Gerais to a port.

“Major demonstrations took place against this project, which culminated in the creation of a campaign,’” researchers wrote in a 2015 paper published in the journal Society & Nature.

A 2010 environmental study of the pipeline revealed that more than 110,000 people might be affected by noise, dust, soil degradation and water quality issues. The project was postponed in 2012 after a downturn in iron prices.

The company, Ferrous Resouces, declined to comment, except to say that the project had been discontinued.

Columbia, which owned more than eight million shares in Ferrous Recources, or 1.1 percent of the company, declined to comment. Various investment funds connected to Duke, which also declined to comment, held more than two million shares in the company.

While some schools have announced shifts away from controversial investments, others have pointed out that divesting from fossil fuels would probably lead to a significant drop in operating funds.

Underscoring endowments’ reliance on hydrocarbon holdings, 10 schools invested in a Cayman Islands partnership in 2012 known as EnCap Energy Capital Fund IX-C, part of EnCap Investments, a private equity firm known for the acquisition and development of North American oil and gas properties.
Among the investors were the University of Alabama, DePauw, Northeastern, Pittsburgh, Purdue, Reed College, Rutgers, Syracuse, Texas Tech and Washington State.


NYT 

Monday, November 6, 2017

Hedge Funds Push the Price of Bitcoin to New Highs

Photo
A walk-in cryptocurrency exchange in Seoul, South Korea. While such exchanges cater to a growing interest among small investors, many hedge funds, too, are looking to capitalize on surging prices in virtual currencies like Bitcoin. Credit Jean Chung for The New York Times
SAN FRANCISCO — The chief executive of JPMorgan Chase, Jamie Dimon, has called Bitcoin a fraud and made it clear that he will not allow his bank to begin trading the virtual currency any time soon.
But that has not stopped a growing wave of big Wall Street investors — many of them hedge funds — from pouring their money into Bitcoin, helping extend an eight-month spike in its price.
The price of a single Bitcoin climbed from below $6,000 two weeks ago to above $7,400 on Monday, more than it moved in the virtual currency’s first seven years in existence.
Since the beginning of the year, the value of Bitcoin has jumped over 600 percent, putting the combined value of all Bitcoin at about $120 billion, or more than many of the largest banks in the world.
The rise has been fueled by several factors, including the sudden interest in virtual currencies from small investors in Japan and South Korea.
Continue reading the main story
Now market watchers say a significant amount of the new money is coming from large institutional investors, many of them hedge funds looking to capitalize on the skyrocketing price.
Many of the hedge funds were set up over the last year to invest exclusively in virtual currencies. The research firm Autonomous Next has said the number of such hedge funds has risen from around 30 to nearly 130 this year alone.
More general-purpose hedge funds have also been buying up Bitcoin, like one run by Bill Miller, a well known mutual fund manager who spent most of his career with Legg Mason.
Even more big investors are looking at the space after the Chicago Mercantile Exchange announced last week that it would launch a Bitcoin futures contract in the next few months. The contract will make it easier for financial institutions plugged into the exchange to get involved with the Bitcoin market without having to worry about holding Bitcoin itself.
Bobby Cho, the head trader at one of the largest Bitcoin trading businesses, Cumberland, said that after years of hesitancy, institutional investors now accounted for most of his business.
“The vast majority of the trading we do is with institutions,” Mr. Cho said. “The education and research have turned into real-life activity.”

The New York Times Explains...

The entrance of these big investors creates new risks for Bitcoin.
Kevin Zhou, a longtime trader in the space, said that hedge funds were more likely than small investors to pull out a lot of money at once, and that Bitcoin was still small enough that a single fund’s cashing out could cause the price to drop sharply.
“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank,” said Mr. Zhou, a co-founder of the trading firm Galois Capital. “That could cause a cascade of withdrawals.”
The rising importance of Wall Street is an unexpected turn for a virtual currency that was invented in 2008 by an anonymous creator known as Satoshi Nakamoto and designed to operate outside the traditional financial system.

The Soaring Price of Bitcoin

Since the beginning of the year, the value of Bitcoin has jumped over 600 percent.
$6,000
4,000
2,000
0
$7,377
2017
April
July
Oct.
(11/5)
Bitcoins, even those held by hedge funds, are recorded and stored on a decentralized database known as the blockchain, kept on a network of computers around the world. The whole system is governed by so-called open source software that is maintained by a community of volunteer programmers.
The lack of backing from any government or established institution has concerned many large banks. The chief executive of Credit Suisse, Tidjane Thiam, said last week that he saw no inherent value in Bitcoin, joining the list of bankers who have called the market a bubble.
But some financial leaders, including Goldman Sachs’s chief executive, Lloyd Blankfein, and Christine Lagarde, the head of the International Monetary Fund, have defended the idea that virtual currencies could one day play a role in the global financial system because they can be obtained by anyone with internet access.
The debate about Bitcoin has been part of a broader explosion of interest this year in the various technological concepts introduced by the virtual currency. Many banks, including JPMorgan, have been trying to find ways to create their own decentralized databases, like the Bitcoin blockchain, that could provide a more reliable and secure way to track information.
In the technology industry, there has been a rush this year of so-called initial coin offerings, a way for entrepreneurs to raise money by creating and selling their own custom virtual currencies. Initial coin offerings have taken over $3 billion from investors this year after attracting almost no interest before.
These coin offerings have created their own demand for Bitcoin because the new coins generally have to be bought with an existing virtual currency like Bitcoin.
The interest in Bitcoin could be dampened in the coming weeks, however, by a debate among Bitcoin followers.
Bitcoin start-ups and programmers have been fighting for nearly three years about the best way to update the software that governs the currency and the network on which it lives.
The battle is expected to come to a head this month when new Bitcoin software, backed by many of the biggest virtual currency start-ups, is released. The new software aims to double the number of transactions flowing through the network. Currently, the computers processing Bitcoin transactions are limited to about five transactions per second.
Most of the programmers who maintain the Bitcoin software have opposed the changes because they say it would make it harder for individuals to track their own Bitcoins.
Some of the computers on the network are likely to update to the new software while others stay with the existing rules, creating a split, or fork, in the network that would result in two separate Bitcoins.
A Bitcoin fork could prove disruptive and drive away investors. But several signals suggest that the proposed rule changes are not likely to win enough support to survive for long, which would leave the status quo in place.
Bitcoin has already survived past attempts to fork the software and create imitators. In August, a group of former Bitcoin supporters created Bitcoin Cash, a totally separate virtual currency that makes it easier to do small transactions, like paying for a cup of coffee.
The price of Bitcoin temporarily wavered before Bitcoin Cash was introduced. All previous holders of Bitcoin were automatically granted the same number of Bitcoin Cash, and the value of those has also been rising, essentially doubling in the last month.
Chris Burniske, a co-author of a book on virtual currency investing, “Cryptoassets,” said most of the new investors weren’t too concerned about the exact design of Bitcoin or the current debates.
“I don’t think a lot of the new buyers are overly concerned about the long-term technical aspects of Bitcoin,” he said. They are “simply approaching it as a financial instrument.”