I just recently found out about Bitcoin, a digital currency that strives to be anonymous and have no central authority.
Instead of there being a single, trusted, centralized issuer of the currency, the entire network of peer-to-peer nodes, formed by people who use the currency, acts as the issuer of currency, and verifier of transactions.
The technical overview sounds convincing, and while there could be glitches I'm not aware of, I have no reason to believe right now that the system is technically deficient. It is already used in practice and accepted as a currency by a few.
But here's the bottom-line issue.
In order for a currency to be useful, you have to be able to use it to buy bread and pay electricity. Virtually all local government prohibits such transactions from using anything but the locally mandated currency.
In order for Bitcoin or a similar currency to become more than a curiosity, it has to be perceived as reliably exchangeable to a local currency.
In order to be perceived as reliably exchangeable, at least one country would have to credibly protect an exchange point between the digital currency and some other exchangeable currency.
That country, or group of countries, would then have to defend this courtesy, as the digital currency is used increasingly by folks worldwide to dodge taxes, and by mob lords to launder money from illegal activities.
As long as governments around the world maintain their irrational obsessions with making the drug problem bigger through prohibition, and making the tax problem bigger by trying to tax people's income, they will not tolerate an anonymous digital currency becoming more than a curiosity.
If any one digital currency threatens to become more than that, the US government will shut it down by outlawing exchange points within the US, and by outlawing transactions with exchange points outside the US.
They did the same to online poker.
Showing 4 out of 4 comments, oldest first:
Comment on May 19, 2011 at 05:11 by Anonymous
Bitcoin is going to grow. Soon.
Comment on May 20, 2011 at 00:36 by denisbider
Comment on May 21, 2011 at 11:14 by Boris Kolar
The governments can surely make things like digital currencies, anonymity, piracy, money laundering,... more difficult. But they can't prevent any of those things (IMO none of these things should be illegal). If the government fights too strongly, the technology will quickly evolve to the point where governments can't effectively fight against it. Therefore I expect that governments will be smart enough to leave Bitcoin alone.
What's worse: governments won't stop online poker, they will legalize, tax and control it. There will always be perfectly legal opportunities to gamble as much of your money as you want. The same will happen to digital currencies. Facebook credits have a much better chance than Bitcoin, I'm afraid.
Btw: there are Bitcoin exchange services.
Comment on May 22, 2011 at 17:30 by denisbider
I don't think that's an issue. Many online purchases can take that long. Bank transfers within many countries take a day. International wire transfers take a week.
Boris: there are Bitcoin exchange services
I'm aware of these sites, but:
- None of these sites is willing to act as a counterparty to your trades. They will help you find someone else to trade Bitcoins with, but they won't act as a market maker the way a normal currency exchange does.
- Would you trust one of these sites with $1,000?
Boris: If the government fights too strongly, the technology will quickly evolve to the point where governments can't effectively fight against it.
I just don't see how that's realistic. Guns and prisons beat software any day, any time.
Boris: (IMO none of these things should be illegal)
The real question is whether the government ought to be charged with maintaining economic stability and prosperity. Whether a government should sensibly do that is up for debate, but voters overwhelmingly say that it should. Governments therefore attempt to control the economy. Imposing a fiat currency under the government's control is a big part of that. Any competitive currencies are potentially a threat to the stability of the government-mandated currency, so it makes some sense to outlaw them.