What Is Legal Tender?

Eddie Braverman's picture
Rank: The Pro | 21,117

As many of you know, I'm working on a series about BitCoin and my research is fast approaching adequate to produce a book-length exposition on the subject. I'm doing my best to pare it down, but in the meantime I've been coming across a few things I think you guys would be particularly interested in, and today's post is one of those things. The government may be poised to take an utterly unprecedented step to kill the nascent virtual currency before it becomes a real threat to the dollar.

So what exactly constitutes legal tender?

First of all, I think it's important to define what legal tender is and what it is not because, while you probably think you know what it is, you might be mistaken. Very simply, legal tender is any form of currency which must be accepted for payment of debts and monetary transactions. Put simply, you cannot refuse to accept legal tender.

At various times throughout history, legal tender laws had some real teeth to them, too. In a number of different circumstances, the penalty for refusing to accept a government-issued currency was death. Think about that for a minute. You had to accept (an often rapidly deteriorating) government currency under pain of death. That's how seriously issuing governments take legal tender laws.

Now let's talk about what legal tender is not. Legal tender laws do not under any circumstances forbid the acceptance of mutually agreed-upon stores of value for the satisfaction of debts or monetary transactions. In other words, if I want to exchange my bull for your three cows and you agree, that's perfectly fine. Likewise, if I'm selling a product or service online and I choose to accept BitCoins (or anything else, for that matter) as payment, someone paying me in BitCoins violates no laws whatsoever.

Until it does.

I'm not going to go into any great detail here, but BitCoins represent at least a nominal threat to every single denomination of fiat currency worldwide. There is no Central Bank or governing body issuing or controlling the supply of BitCoin, there is a finite supply of BitCoin available, and the usage of BitCoin can be as anonymous as the users of BitCoin choose for it to be.

For all of these reasons, but mostly due to the recent tomfoolery on the part of the ECB and various other actors in the region, the value of BitCoin has exploded. A BitCoin was worth $36.65 USD just 30 days ago; 30 minutes ago it traded at $195 on what is largely an ironic flight to quality.

The reason I'm bringing all this up really has nothing to do with BitCoin itself. The reason I'm bringing it up is that it appears a number of US states are turning their backs on the dollar, at least symbolically. And that's not good for anyone, especially an anonymous currency that makes the dollar look bad by virtue of the fact that it cannot be perverted by a Central Bank.

Under the twin spotlights of declining faith in paper money and redneck states pining for a return to a gold standard no one remembers, BitCoin might prove to be too clever for its own good.

Let's face it: the US government doesn't take too kindly to monetary competition. I'm reminded (sadly) of the Liberty Dollar. So swift and violent was the FBI response to Liberty Dollars once they started to catch on that it shocked everyone. The feds confiscated $7 million worth of legally purchased and stored "Ron Paul" silver dollars and never gave them back.

Cullen Roche thinks BitCoin might be headed for the same fate, and I have to say I'm afraid I agree with him. If BitCoin becomes too great a threat to the dollar, the feds will just reverse-legal tender it and make it illegal to accept BitCoin for anything. It'll be like buying groceries with cocaine.

I happen to think it's a sad commentary on the impotence of governments that, rather than modify monetary policy to more closely reflect the desires of the end user, the response is always criminalization. But as one WSO user reminded me the other day, and as governments never seem to learn:

You can't stop the signal, Mal.

Comments (57)

Apr 9, 2013

these guys are an AML nightmare. They will take and send funds/credit to anyone so perfect spot for terrorist funding.

Apr 10, 2013
ST Monkey:

these guys are an AML nightmare. They will take and send funds/credit to anyone so perfect spot for terrorist funding.

Forget about AML. If Bitcoin takes off, it would be impossible for Governments to even effectively levy income taxes.

Apr 9, 2013

But that's just it: there is no "these guys", "they", or "them". BitCoin is completely decentralized and only functions between individuals. I agree that it enables money laundering and various other nefarious activities, but you have to take the good with the bad. It also grants users total privacy and the assurance that there is a finite digital money supply which cannot be inflated.

Apr 9, 2013
Edmundo Braverman:

But that's just it: there is no "these guys", "they", or "them". BitCoin is completely decentralized and only functions between individuals. I agree that it enables money laundering and various other nefarious activities, but you have to take the good with the bad. It also grants users total privacy and the assurance that there is a finite digital money supply which cannot be inflated.

When people argue that it can be used to launder money and other nefarious activities, I generally have two responses:

--You can do all of that by simply using cash

--It isn't like money laundering and other illicit activities don't already happen with our current system. And at large scale. Just look at HSBC!

I love the idea of Bitcoin. I don't own any at this point, but am considering getting myself an encrypted wallet. The sheer fact that the currency can't be inflated, that it acts like a digital natural resource, is simply awesome.

People really shouldn't sleep on Bitcoin, there was a time when the internet itself was considered a fad for geeks and nerds.

Apr 9, 2013
Edmundo Braverman:

You can't stop the signal, Mal.

Intended irony in that the person who said this was killed by the reigning government?

Also, why is the supply of Bitcoin finite?

Counterfitting would be an interesting angle as well. Is it illegal to counterfeit an illegal currency? Any legal status would likely be local I imagine.

Interesting story for sure.

Apr 9, 2013
Aspirant21:
Edmundo Braverman:

You can't stop the signal, Mal.

Intended irony in that the person who said this was killed by the reigning government?

Also, why is the supply of Bitcoin finite?

Counterfitting would be an interesting angle as well. Is it illegal to counterfeit an illegal currency? Any legal status would likely be local I imagine.

Interesting story for sure.

Without going into how BitCoins are minted (kinda complicated, but basically it's computers solving math problems), the total supply of BitCoin can be known at any given moment. The code to create and transact with BitCoin is all open source, so everything can be verified by anyone at any given moment. The BitCoin supply is slowly expanding until 21 million BitCoins are in circulation and then no more will be minted. Counterfeiting is next to impossible due to the mathematical verification of every transaction and the difficulty with which mining is accomplished.

https://en.bitcoin.it/wiki/Controlled_supply

Just for a goof, I have a spare computer in my house mining BitCoin. It's been running 24/7 for 9 days doing nothing but solving problems, and I've racked up a total of .00024254 BitCoins for my effort (roughly 5 cents). I know a guy who was mining a couple years ago when a BitCoin was worth 6 cents (at the moment it's worth a little over $200) and he was cracking a block of 50 by himself every two hours. So he was mining 250 BitCoins a day, and making about $15. He sold out of all of them when they ran up to $9, so he still made a tidy profit, but nothing like the killing he'd make if he'd sat on them till today.

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Apr 9, 2013
Edmundo Braverman:
Aspirant21:
Edmundo Braverman:

You can't stop the signal, Mal.

Intended irony in that the person who said this was killed by the reigning government?

Also, why is the supply of Bitcoin finite?

Counterfitting would be an interesting angle as well. Is it illegal to counterfeit an illegal currency? Any legal status would likely be local I imagine.

Interesting story for sure.

Without going into how BitCoins are minted (kinda complicated, but basically it's computers solving math problems), the total supply of BitCoin can be known at any given moment. The code to create and transact with BitCoin is all open source, so everything can be verified by anyone at any given moment. The BitCoin supply is slowly expanding until 21 million BitCoins are in circulation and then no more will be minted. Counterfeiting is next to impossible due to the mathematical verification of every transaction and the difficulty with which mining is accomplished.

https://en.bitcoin.it/wiki/Controlled_supply

Just for a goof, I have a spare computer in my house mining BitCoin. It's been running 24/7 for 9 days doing nothing but solving problems, and I've racked up a total of .00024254 BitCoins for my effort (roughly 5 cents). I know a guy who was mining a couple years ago when a BitCoin was worth 6 cents (at the moment it's worth a little over $200) and he was cracking a block of 50 by himself every two hours. So he was mining 250 BitCoins a day, and making about $15. He sold out of all of them when they ran up to $9, so he still made a tidy profit, but nothing like the killing he'd make if he'd sat on them till today.

What type of processor do you have on that spare computer?

Apr 9, 2013
Edmundo Braverman][quote=Aspirant21:

Without going into how BitCoins are minted (kinda complicated, but basically it's computers solving math problems), the total supply of BitCoin can be known at any given moment. The code to create and transact with BitCoin is all open source, so everything can be verified by anyone at any given moment. The BitCoin supply is slowly expanding until 21 million BitCoins are in circulation and then no more will be minted. Counterfeiting is next to impossible due to the mathematical verification of every transaction and the difficulty with which mining is accomplished.

Did I read this right? So the total supply of Bitcoins (to be reached at some point in the future) is ~$4 billion? Daily FX volume for USD swaps is >~$1 trillion. Yawn. Also, that means the incidents of Bitcoin theft - which include episodes in which >15,000 coins were stolen - amounted to something along the lines of 0.5% of the total currency base being stolen at once. C'mon. Is this serious? Someone convince me that this isn't as stupid as it looks.

Apr 9, 2013

Global banks will be forced (or maybe even on their own) to refuse bitcoin wallet or payment processors that are known to work with bitcoins wallets in the near future.

Paypal and major payment processors will follow.

As someone who works in the offshore finance industry, this is a sure thing if bitcoin fad does not die down. However I must say that Bitcoins will most likely continue their atmospheric rise before this happens.

Apr 9, 2013
Unforseen:

Global banks will be forced (or maybe even on their own) to refuse bitcoin wallet or payment processors that are known to work with bitcoins wallets in the near future.

Paypal and major payment processors will follow.

As someone who works in the offshore finance industry, this is a sure thing if bitcoin fad does not die down. However I must say that Bitcoins will most likely continue their atmospheric rise before this happens.

Paypal has already banned transactions relating to bitcoins, since it is in direct competition.
Bitcoin renders offshore finance obsolete, as bitcoins do not exist on a physical plane. So, forget about FATCA.

The US and G8 can attempt to ban it, but exchanges can move to other jurisdictions.

Apr 9, 2013

Good post Edmundo--agree with your sentiments.

I still remember being pissed two years ago when it ramped up to 5 USD/bitcoin. At that time I think most people blamed miners/day traders. Now it's nothing but fear in the dollar, which means authoritative bodies will find a way to render bitcoin useless. Really a shame.

For anyone interested in seeing a bitcoin marketplace "in action", try this: download the Tor browser and read about .onion websites (look for the .onion Wiki). This is what some people refer to as the deep web, however I'm sure there are more experienced users who don't see it as remotely deep. Tor is supposed to be more secure as it doesn't leave "footprints" (where you came from or where you're going--computer guys correct me if I'm wrong.) It's slower, but that's the price of security. All the "underground" transactions are handled with bitcoin. Wired even wrote an article about the online drug marketplace known as Silk Road, which was for anonymous drug deals via mail, but some believe the guy who ran it either sold out or was identified by the FBI as there is no longer any trust amongst dealers. Disclaimer: you will see links for some really fucked up things.

Apr 9, 2013

this reminded me of the guy that paid to get his car out of impound with pennies....7700 i believe. The tow place called the cops said he had to use "legal tender" it's on youtube, pretty funny

Apr 9, 2013
Cmoss:

this reminded me of the guy that paid to get his car out of impound with pennies....7700 i believe. The tow place called the cops said he had to use "legal tender" it's on youtube, pretty funny

i did this to a bully in middle school, he wanted $10 for lunch money, so the next day i brought him a pile of pennies and nickels

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Apr 9, 2013
AndyLouis:
Cmoss:

this reminded me of the guy that paid to get his car out of impound with pennies....7700 i believe. The tow place called the cops said he had to use "legal tender" it's on youtube, pretty funny

i did this to a bully in middle school, he wanted $10 for lunch money, so the next day i brought him a pile of pennies and nickels

Holy shit, I can't believe you just admitted that. lol

Apr 9, 2013

While legal tender technically has to be accepted it isn't always accepted in inflationary times. The black market will increase and much needed goods will only be able to be purchased with hard currency.

A large government that has control of printing money is the enemy of all freedom loving people. This country will turn on its citizens just like every country in the past has. Once a government has this idea that it has a right to the money you earn it will tax people into their graves.

Personally, I cheer the rise of China. A bully always needs an equal adversary. Since the USA has been the sole superpower we've ran up a $16, going on $20 trillion dollar debt, invaded countries without cause, launched a global "war on terror" and now spy on our own citizens at a level that would make Stalin weak in the knees.

Apr 9, 2013

Guys, guys. Laundering money, paying off drug lords and fighting illegal wars in 3rd world countries are a risk with Bitcoin. Only the US government can do all those things.

Apr 9, 2013

"This is legal European tender!"

Southern Methodist University
Economics w/ Financial Applications

Apr 9, 2013

Anyone try and trade this? Is there much volume? Is it just a straight buy and sell or can you short it an write options on it?

Overall pretty fascinating stuff. I think it's brilliant and although its not technically 'legal tender' it's still legal to purchase goods with other means (ie. I'll trade you 1 cow for 4 chickens). We'll see how long the government puts up with it.

Apr 9, 2013
Kqtarc86:

Anyone try and trade this? Is there much volume? Is it just a straight buy and sell or can you short it an write options on it?

Overall pretty fascinating stuff. I think it's brilliant and although its not technically 'legal tender' it's still legal to purchase goods with other means (ie. I'll trade you 1 cow for 4 chickens). We'll see how long the government puts up with it.

Yet another problem: it's virtually impossible (yes, I'm aware that there are a few micro-scale outlets that allow this) to short the currency. As a result, there's no reliable source of liquidity in the currency (bank or trading house) that you can be sure will be there if and when you want to sell your Bitcoins.

Apr 9, 2013

One caveat: I absolutely like the idea of having a frictionless online mode of payment transfers that can span the globe. I also agree with the sentiment that having a decentralized currency that grows at a constant rate (though that isn't at all a new idea, thanks Milton). But Bitcoin just isn't it.

Apr 9, 2013

Bitcoins.....backed by the full faith and credit of.....the internet?

Apr 9, 2013

I read a Wired magazine article awhile back talking about Bitcoins. The article framed Bitcoins as being primarily used for the Silk Road. If you don't know what that is then check it out - you will be amazed.

Apr 9, 2013

Bitcoins are backed by math. The monopoly money we spend is backed by the faith in the US government. Hopefully everyone has been paying attention and that faith is near zero.

Apr 9, 2013

@NorthSider All good points. As for consortiums of miners pooling processing power, that's exactly how it's done today (and exactly why I've only made one nickel over 9 days of 24/7 computer usage).

Of course we're dealing with theory here, but an economy can be created and sustained on any amount of a given commodity as long as it's of finite quantity. Think about those giant stone disks they use in Yap.

Apr 9, 2013
Edmundo Braverman:

@NorthSider All good points. As for consortiums of miners pooling processing power, that's exactly how it's done today (and exactly why I've only made one nickel over 9 days of 24/7 computer usage).

Of course we're dealing with theory here, but an economy can be created and sustained on any amount of a given commodity as long as it's of finite quantity. Think about those giant stone disks they use in Yap.

But we all know the follies of having a deflationary currency. Monetary expansion (though it should be done at a constant rate, which governments are terrible at doing) is an essential component of a growing economy.

Apr 9, 2013
NorthSider:
Edmundo Braverman:

@NorthSider All good points. As for consortiums of miners pooling processing power, that's exactly how it's done today (and exactly why I've only made one nickel over 9 days of 24/7 computer usage).

Of course we're dealing with theory here, but an economy can be created and sustained on any amount of a given commodity as long as it's of finite quantity. Think about those giant stone disks they use in Yap.

But we all know the follies of having a deflationary currency. Monetary expansion (though it should be done at a constant rate, which governments are terrible at doing) is an essential component of a growing economy.

And the creators of BitCoin recognized that and built it into the system, but had no way of knowing that it might become the only way to get Euros out of a failing region just four years later. They are literally frisking people for cash at the airport in Nicosia. BitCoin is the only way to get money out right now. And it looks like Slovenia might be right behind them.

Apr 9, 2013

Bitcoin will crash in burn in the future. It really isn't a question of if, but when. Since there is a hard cap on the amount of currency, there is no way to build in increases in the money supply necessary to account for economic and / or population growth. You will just end up with a bunch of people holding bitcoins as it is more profitable to hold them then to spend them.

Now maybe Bitcoin 2.0 that was elegantly designed to expand / contract the number of bitcoins in accordance to the economy's needs could take off, but until then I'm just waiting for the bubble to burst.

Apr 9, 2013

LOL. Can't argue with that.

And I think BitCoin is being viewed right now (because it's all over the news) as a rival to the major world currencies, but that was never the aim. If you're interested, here's a copy of the original white paper that got the whole thing rolling:

http://bitcoin.org/bitcoin.pdf

The guy (or guys) who came up with the idea were really just trying to create an ultra-secure means of online exchange that didn't rely on any third parties.

Apr 9, 2013
Edmundo Braverman:

LOL. Can't argue with that.

And I think BitCoin is being viewed right now (because it's all over the news) as a rival to the major world currencies, but that was never the aim. If you're interested, here's a copy of the original white paper that got the whole thing rolling:

http://bitcoin.org/bitcoin.pdf

The guy (or guys) who came up with the idea were really just trying to create an ultra-secure means of online exchange that didn't rely on any third parties.

Yeah, I think that it was wildly successful to that end. However, the wave of new buyers/sellers that are pricing it as if it were the next world currency are surely being duped by media hype. Also, the random jump in popularity, ironically, might end up killing its original success. No doubt that regulators are going to start buckling down on this pretty quickly, with the recent surge.

Apr 9, 2013
NorthSider:

Yeah, I think that it was wildly successful to that end. However, the wave of new buyers/sellers that are pricing it as if it were the next world currency are surely being duped by media hype. Also, the random jump in popularity, ironically, might end up killing its original success. No doubt that regulators are going to start buckling down on this pretty quickly, with the recent surge.

Just like they cracked down on Bittorrent?

People will buy goods when they have an economic need to do so. The greatest economic growth in the history of the US occurred during the industrial revolution in the 19th century under the Gold Standard. Keep in mind that bitcoin is only 4 years old. You can't expect it to achieve say a $500 billion market cap, for example and stabilize itself in that period of time.

Of course, there will be volatility, even the US Dollar had volatility when it was starting out.

Apr 9, 2013

A friend of mine just told me he has put all of his savings and cash into this over the past few days. I can't imagine what the outcome is going to be. I wish him well.

Opstar lifestyle, might not make it

Apr 9, 2013

I wish I had a bank account and money to invest in BitCoins when I first discovered them a couple years ago, when I was in high school.

So, for the next few days, how much should we be expecting the price to get? $500, $1000, $5000?

Apr 9, 2013
link:

So, for the next few days, how much should we be expecting the price to get? $500, $1000, $5000?

I hope this is facetious.

Apr 9, 2013

As t --> ? , Value of bitcoins --> $0

Apr 10, 2013
blackrainn:

As t --> ? , Value of bitcoins --> $0

Original. Did you get that from ZH?

"On a long enough timeline the survival rate for everyone drops to zero."

Apr 12, 2013
john1:
blackrainn:

As t --> ? , Value of bitcoins --> $0

Original. Did you get that from ZH?

"On a long enough timeline the survival rate for everyone drops to zero."

gtfo that's fight club

Apr 9, 2013

The bigger question should be why is there a bitcoin? It is because governments have taken a paper currency and trashed it. Because government will tax infinite. Because government is corrupt. I am sorry but if paper currency is only backed by faith in the government then it isn't backed by much.

Apr 10, 2013

Don't look now... but your legal tender is crashing. BTC is down from a high of ~$266 to ~$160 in the last twelve hours.

Apr 12, 2013

I think you're all a bunch of haters cause you missed on it and didn't / don't have the balls to get in. I am fresh grad student and have made 4.8 million dollars from it. Now I own a portfolio of various rental properties and will never ever work again in my life. Bitcoin changed my life. Should have put in more money when I got in, but anyway, it made me rich. My dream was to be an investment banker. Now I see it as a career for losers. By the way, I am sill very long on Bitcoin with coins I got for free. This is just the beginning.

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Apr 12, 2013
advisers:

I think you're all a bunch of haters cause you missed on it and didn't / don't have the balls to get in. I am fresh grad student and have made 4.8 million dollars from it. Now I own a portfolio of various rental properties and will never ever work again in my life. Bitcoin changed my life. Should have put in more money when I got in, but anyway, it made me rich. My dream was to be an investment banker. Now I see it as a career for losers. By the way, I am sill very long on Bitcoin with coins I got for free. This is just the beginning.

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Apr 12, 2013
advisers:

I think you're all a bunch of haters cause you missed on it and didn't / don't have the balls to get in. I am fresh grad student and have made 4.8 million dollars from it. Now I own a portfolio of various rental properties and will never ever work again in my life. Bitcoin changed my life. Should have put in more money when I got in, but anyway, it made me rich. My dream was to be an investment banker. Now I see it as a career for losers. By the way, I am sill very long on Bitcoin with coins I got for free. This is just the beginning.

LOL @ this. There is so much wrong with this post. Thanks for the laugh, though.

Apr 12, 2013

Not that I know anything at all about this shit - still trying to figure out the absolute basics, which nobody is able to explain - but what's hilarious is all the discussions I've had about Bitcoin since this whole craze started revolve around the eventual cashing out into US DOLLARS.

My point is I have a very hard time thinking this ends up being significant enough to be as groundbreaking as some people want to believe it will be. Cool idea and great for buying acid on Silk Road (as my friends say it is) but really not time to start gathering investors for the Bitcoin Absolute Advantage Fund... or is it, Mr. Paulson?

Apr 12, 2013
BlackHat:

Not that I know anything at all about this shit - still trying to figure out the absolute basics, which nobody is able to explain - but what's hilarious is all the discussions I've had about Bitcoin since this whole craze started revolve around the eventual cashing out into US DOLLARS.

My point is I have a very hard time thinking this ends up being significant enough to be as groundbreaking as some people want to believe it will be. Cool idea and great for buying acid on Silk Road (as my friends say it is) but really not time to start gathering investors for the Bitcoin Absolute Advantage Fund... or is it, Mr. Paulson?

The fact that what is reputed as a valuable "currency" is priced and followed in USD just about tells the whole story.

Apr 13, 2013
NorthSider:
BlackHat:

Not that I know anything at all about this shit - still trying to figure out the absolute basics, which nobody is able to explain - but what's hilarious is all the discussions I've had about Bitcoin since this whole craze started revolve around the eventual cashing out into US DOLLARS.

My point is I have a very hard time thinking this ends up being significant enough to be as groundbreaking as some people want to believe it will be. Cool idea and great for buying acid on Silk Road (as my friends say it is) but really not time to start gathering investors for the Bitcoin Absolute Advantage Fund... or is it, Mr. Paulson?

The fact that what is reputed as a valuable "currency" is priced and followed in USD just about tells the whole story.

C'mon guys, don't make me defend BitCoin like this. Every currency's value is measured against that of another currency (EUR/USD, USD/JPY, GBP/USD, etc.). Over here BitCoins are measured against Euros, not dollars. You're being a little Ameri-centric (or Ameri-myopic maybe).

Apr 13, 2013

Agreed. Unless of course, as BlackHat mentioned, you're in the market for some acid on Silk Road.

I haven't been paying attention to it, but I'm assuming pretty much all commerce in BitCoin has ground to a halt over the past couple weeks. I mean, how do you price something in a currency that swings 50% a day literally from moment to moment? If anyone knows the impact these swings have had on Silk Road and some of the other BTC e-commerce sites I'd love to hear about it.

Apr 13, 2013
Apr 14, 2013

It's not about BTC becoming a mainstream currency replacing the dollar or not. I bet it will fail although I could be wrong given the ecosystem that's developing around it. What matters here is making a crazy amount of money in the middle, I made 4.8 millions $ and that's why I am in again. I want to reach 100 million $ net worth with this crappy thing before it blows out, which won't be tomorrow because this is the perfect long bet, the mother of all bubbles and when you start to think conceptually about it's design you can easily figure out that this will go up to unconceivable figures right now. Just wait and see. It's the same pattern that we've seen throughout history around other bubbles, it's just that this time it's going to be a mega bubble, the mother of all bubbles. Bitcoin has changed my life and is the chance of my life to make it really big and live a great life. When I see such an opportunity, I jump in and I am all in. I've invested many times in my life, but the expected reward vs. risk is this time the greatest risk arbitrage opportunity ever. And I don't care what the definition of a bubble is and all the theoretical discussions around whether this is a bubble, a pyramid, or whatever. This is just the same pattern that we've seen with other assets going up like crazy and then blowing up the whole place, it's just that this time it's been designed by a master genius mind in a completely new environment that makes the potential of this just amazingly unbelievable.

Apr 14, 2013
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Apr 14, 2013
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