July 21, 2013
The Mind-Boggling Implications of a Bitcoin EconomyBy Robert Berry
Just when we thought we had seen the last great innovation of our age, something new appears. Like the internet that came before, an obscure open-source computer protocol is poised to create and destroy whole industries and has already become a source of agita for government types the world over.
While much has been said and written about the nascent crypto-currency's underlying technology and recent volatility, one nagging question remains: what if Bitcoin emerges as a viable and sound currency, just as the world's central banks reduce their notes to confetti?
If this simple question doesn't inspire chills, perhaps it should, given Bitcoin's potential to overwrite the matrix of the world's ailing currency system even faster than the internet went mainstream. This will be among the topics of discussion this October at an unusual gathering of libertarians, economists, and computer scientists in Atlanta for the first ever Crypto-Currency Conference.
For the uninitiated, it might be helpful to think of Bitcoin as a numbered Swiss bank account living on your smartphone. By swiping your phone's camera over a special barcode, retail and online purchases can be made with virtually no transaction fees. It's the ultimate bank debit card, except there's no card -- or bank for that matter.
One last thing: there aren't any dollars, either.
Instead, your Bitcoin (BTC) balance is displayed alongside its equivalent in the currency of your choice. So, if you're based in the States, you would set your smartphone to display the funds as USD. Just like other currencies, BTC floats against the dollar, but unlike the so-called fiat currencies of the world, it is finite and can't be inflated by a central bank -- which is to say that BTC can't be destroyed by a central bank. Bitcoin are readily convertible to even the most unpronounceable of world currencies, making the currency a sort of financial Rosetta Stone.
This very day, some 50 million BTC transactions will be validated by the largest distributed computing infrastructure ever assembled, and no company or government controls it -- or can control it. The system went online in January of 2009 and is now growing at a rate resembling the internet's growth curve of the 1990s.
Though often referred to as a virtual currency because Bitcoin live in the ether, they are as real as the funds we access every time we reach for our debit cards. But, as no company or government backs the system, the asset is more like gold and silver in that its value is set by a worldwide market of buyers and sellers. The fact that there is no corresponding physical commodity establishing its value means that it derives its worth solely on the market's assessment of its usefulness as a store of value, a means of exchange, a universally fungible and astonishingly transportable currency. The peer-to-peer nature of the Bitcoin protocol obviates the need to have any repositories -- read: banks -- eliminating the possibility that funds could ever be seized or frozen.
The value of Bitcoin's unique attributes became apparent recently, when Cyprus began raiding bank accounts and imposing capital controls where withdrawals were capped, and then restricted from leaving the country. The reaction was a wholesale evacuation out of euros into every kind of alternative, with many disappearing into the ether as Bitcoin, sending the currency's value soaring. Interestingly, this occurred throughout Europe's banking trouble spots, but not in Cyprus, since the currency was almost completely unknown there and the Cypriots were caught a day late and a euro short.
Confronted with the need to "smuggle" one's own money out of a country, a Bitcoin fortune can be moved by simply toting an iPhone. This realization will not be lost on those living in other troubled regions, so it is reasonable to think that much more wealth will disappear into the ether, setting the foundation for the Bitcoin Economy, which knows no borders.
Ominously, and for perhaps the first time in history, the central banks of America, Japan, Europe, and the U.K. are acting in concert as they print aggressively, creating an illusion of stability -- one currency relative to the other -- while consumers wonder where their purchasing power has gone. This, we are told, is how moribund economies are resuscitated.
Indeed, the central bankers may have set themselves up for a rude shock. How could they possibly have imagined something so arcane as a crypto-currency acting as an opt-out vehicle for those who would otherwise have remained trapped within their system?
To be sure, other alternatives like gold and silver exist, but Bitcoin seem to have an advantage since they can move as freely as e-mail. Commodity-based currencies require a depository and the issuance of chits, either physical or virtual, which act as money substitutes when used in transactions. Such systems impose a burden on the currency and the taking of counter-party risk, the loss of privacy, and the certainty of being under one government thumb or another. They lead inevitably to rackets like fractional reserve banking, credit expansion, and inflation.
Since the monetary base of the Bitcoin system is finite, the value of individual Bitcoin are likely to increase as wealth leaves one mortally wounded fiat currency after another. Bitcoin's emergence as an appreciating safe haven may well drive its status not as the world's new reserve currency, but as the default one.
In the ether is a kind of freedom that none of us could have imagined. Beyond simply opting out of depreciating government currencies, each with its attendant ties to taxation and regulation, Bitcoin provides a means of escape into a free and largely anonymous parallel economy.
As real wealth migrates into the ether, so too will the prospect of earning there. The resulting capital formation will spawn unimaginable new industries with stocks, debentures, and payrolls, all denominated in BTC and held anonymously.
The new currency will be impossible for any government on earth to regulate, though they can be counted upon to try. Reluctant to legitimize the notion of a crypto-currency, the U.S. government has been slow to announce a regulatory regime, even while they have begun targeting so-called money transmitters, or exchanges which convert large-scale funds from USD to BTC. But transactions of smaller amounts are routinely done in person at spontaneous meet-ups of regular folk wanting to trade in and out of USD and BTC. In the end, the bureaucrats would have a better chance at regulating the next version of "World of Warcraft."
The world's political class would do well to make a virtue out of necessity and leave the Bitcoin economy alone. By allowing it to flourish, citizens will have somewhere to run should, or when, state currencies hyper-inflate. A ready alternative like Bitcoin could provide for a much needed soft landing.
Robert Berry writes about economic and constitutional matters and is the author of Amendments Without Congress: A Timely Gift from the Founders and Constitutional Coup: America's New Lease on Liberty.