Bitcoin will destroy the world
Governments don’t like cash; it’s hard to trace, anonymous, and secure. Digital cash (which is essentially what bitcoins are) is even worse: It can travel instantly anywhere, and lacks things like serial numbers that can allow tracking, even after the fact.
Financial writer Cameron Keng posted on forbes.com the charge that “Bitcoin represents more of the same short-sighted capitalism that got us into this mess, minus the accountability.” (Of course, the accountability was laughable.)
Software engineer and writer Alex Payne has called the Bitcoin system “a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda,” which encompasses pretty much all of the criticisms of bitcoins.
He’s not talking about the time-tested technology of public-key cryptography, which the Bitcoin system uses to verify identities. Rather he’s expressing concern about the nature of the public ledger and the software by which it is maintained and updated. It is true that this arrangement is entirely new — it is, in fact, the major breakthrough of the Bitcoin system. And it’s true that it has flaws: In August 2010, someone figured out a way to spend the same coin multiple times; that counterfeiting attempt was detected, stopped, and reversed, but it does suggest there may be other vulnerabilities yet undiscovered.
The economics question is based on the concept of “money supply,” which is a tool by which centralized economies influence key aspects of their markets, such as interest rates. When the US Federal Reserve wants to lower interest rates, for example, it creates money out of thin air and then offers it cheaply to banks. If it wants to raise interest rates, it takes money out of circulation.
New York Times economics writer Paul Krugman wrote that having a currency with a limited total supply of money encourages hoarding, not spending, because scarcity makes the currency more valuable. (This is true, but it ignores the fact that bitcoins are almost infinitely indivisible into fractions far smaller than pennies, so while the total supply of money is limited at the top, it is effectively unlimited in terms of how many people can have, use, and exchange bitcoins.)
The “crypto-libertarian political agenda” Payne scorns calls attention to the perspective of some bitcoin fans: Because it’s new, because it’s independent of governments, and because it’s Internet-based, some people have expressed hope that bitcoins will help them avoid taxation, regulation, or other outside meddling. Libertarian-in-chief Ron Paul has called bitcoins potential “destroyers of the dollar,” and plenty of libertarian types are excited about the idea of a currency that is not tied to any particular government.
Regulators in the United States and elsewhere are paying attention, and issuing statements about how they will treat bitcoins. (It varies significantly by country; the United States said it would pay attention when dollars and bitcoins started to be interchanged — which is already happening, thereby beginning to attract government scrutiny.) Of course, government regulation and taxation helps pay for things like roads and fire departments, as well as limiting crime.
And oh yes, the crime. An online site called Silk Road is perhaps the poster child for the sort of crime made easier by verifiable (but anonymous) transactions over the Internet between total strangers. A clearinghouse for all sorts of illegal drugs, it was shut down by the FBI late last year; bitcoins were its currency. There is also a site that purportedly allows people to commission assassinations and pay via bitcoin. And of course there are plenty of other examples of ways bitcoins can be used nefariously.
There are other weaknesses: Transactions in bitcoins are not reversible in the way credit-card charges can be disputed and reversed. Of course refunds are possible, but only from the person you gave the money to. If an item is not as advertised, or never arrives, there is no third party available to handle a complaint or refund a buyer’s money.
And there are the costs. Running the ledger-keeping computers takes electricity, and the more computers are part of the network, the more it will require. It’s a fair claim, but usually avoids the fact that government money systems are also expensive: Pennies, for example, cost more than two cents each to mint. Printing dollars is more cost-effective: each new $100 bill costs just over 12 cents.
Of course, all this technology means bitcoins are not quite as populist as supporters might have you believe. Sure, they’re not beholden to governments, but to even use one you have to install a program on your computer to store and track your bitcoin holdings; when you do that, you’ll encounter all kinds of notices and alerts telling you that if you lose or forget the password to your bitcoin-holding account, the bitcoins themselves will be lost forever, These are not the sorts of messages that embolden non-tech-savvy types to continue and engage with the system.
Bitcoin will save the world
Despite all of those problems and potential downfalls, there is a lot of promise, much of it based on a key distinction, made by money-technology writer David Wolman (a college friend of mine) in Wired magazine: There are two ways to use the word bitcoin.
First is as a unit of currency and exchange, as in “This item costs 1.2 bitcoins.”
And there is significant promise in this arena. Chris Dixon, a venture-capitalist investor in Silicon Valley, notes that the payment industry is massive, with people paying $500 billion a year in fees just to move their money from one place to another. Distributing the work of handling transactions, and reducing identity fraud in the bargain, could substantially reduce those fees.
For most people, bitcoins would be an easy intermediary. They could buy bitcoins with dollars, send the bitcoins somewhere else cheaply, and the recipient would convert the bitcoins into their own local currency. Using the Bitcoin system would solve the problems of high-cost transactions that sometimes take days to process, especially in the massive sector that is remittances to developing countries from workers in developed countries who send huge chunks of their earnings home.
For people who worry about government overreaching its power a bit more, it solves the problem of having someone else control their money, with the ability to seize or freeze it. And using bitcoins could help avoid the issues that arose when major payment-processing companies were pressured by the US government to stop transferring funds to WikiLeaks, in an attempt to deprive that whistleblower organization of financial support.
As several security researchers have pointed out — and a goodly number of self-appointed investigative teams have proven — Bitcoin is not anonymous. In fact, it’s barely pseudonymous. After the feds shut down Silk Road, the site’s bitcoins were consolidated in one account. Since all the transactions are public, it didn’t take much effort to go from reading the FBI media announcements saying 26,000 bitcoins had been seized, to checking the ledger to watch as a brand-new account suddenly filled up with just that amount.
(This led to a hilariously ironic development: Because all the transactions are public in the ledger, and because there’s an option to send a message with a payment, all sorts of anti-government types started sending the feds tiny amounts of bitcoin — yes, giving the feds their money, just for the privilege of sending them a rude message.)
But beyond these financial advantages, there is another way to think about, and use, Bitcoin.
The Bitcoin system is, Wolman writes, “more than just a currency; it’s an open-source protocol.”
Marc Andreesen, co-author of the very first web-browser program and now a venture capitalist, wrote recently in The New York Times that Bitcoin is a major development, solving a longstanding problem: “how to establish trust between otherwise unrelated parties over an untrusted network like the Internet. The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
And they are just being explored. Trumpeted by Wired as an “NSA-Proof Twitter,” a new system called Twister has emerged, combining the encryption and identity confirmation of Bitcoin with the peer-to-peer connection-management system of BitTorrent (which allows multiple computers to exchange information rapidly and efficiently over the Internet) to create a vastly distributed social network that cannot be taken down by malicious governments or corporations. This would be a great boon to people in places like Iran or San Francisco, where authorities have shut down access to Twitter in an attempt to quell public protests. Other uses are just being imagined now, and will no doubt be developed and tested soon.
Next: Is Rhode Island ready for Bitcoin? Two perspectives
