Each generation has its own technological superstitions. Country folk used to vault off the bottom steps of escalators. Tribal peoples feared cameras. Until relatively recently, certain impressionable readers of the book of Revelation feared the government was using monetary and credit instruments to spy on them.
Turns out they had a point. After September 11 2001, airport security authorities started paying close attention to anyone who bought an air ticket in cash. There are indeed a lot of private transactions for which government expects a public record.
It is not surprising that the four-year-old “virtual currency” Bitcoin, which allows semi-anonymous transfers of funds across the internet, was the subject of hearings before the Senate Homeland Security committee in Washington this week. Ross Ulbricht, arrested in California in October for allegedly running an online drug market called Silk Road, was found to have $29m worth of bitcoins. Another secret internet site was revealed to have solicited funds for the assassination of western political leaders – again in bitcoins. Yet the Obama administration officials who testified before the Senate were more eager to stress the high-tech upside of Bitcoin than its criminal downside. Maybe they see entrepreneurial opportunities invisible to the naked eye. Maybe they’re forgetting that currency is the business of government.
Bitcoin is different things to different people. In practice, Bitcoin’s best defenders have been the allies of Edward Snowden, Julian Assange and Occupy Wall Street. But in theory, the idea that a private currency issuer can credibly compete with national central banks was first fleshed out by the Nobel Prize winner Friedrich von Hayek in the 1970s, and has found its main support on the most conservative frontiers of Reaganism. Bitcoin “mints” coins only according to a rigid algorithm. It ought to be hard money but Bitcoin has been volatile. The value of 1 Bitcoin has swung between pennies and $900, which it approached this week after getting the kid-gloves treatment in the Senate.
What makes Bitcoin a promising basis for innovation is its elegant solution to the “double spending problem”, which has long baffled designers of cyber money. How do you stop people spending the same digital money simultaneously in two places? The answer was laid out five years ago in a paper by Satoshi Nakamoto, the pseudonym of an unknown programmer or collective. Bitcoin is a peer-to-peer file-sharing system. Its users collaborate on a vast ledger of all transactions, updated with computing power dispersed across the network. The system has proved robust against hacking, even if some of the sites where bitcoins are bought and sold have not.
Bitcoin has something in common with currencies used in online games, but also with the old world of hard cash. Lose track of your bitcoins and you are out of luck. And Jerry Brito of George Mason University pointed out in testimony that Bitcoin is not as anonymous as it looks. Once authorities match your private identity to your publicly visible “key”, they can see all your transactions.
The sum of all bitcoins’ worth is about $2bn, Some describe this figure as its “circulation”, others as its “market value”, still others as its “market capitalisation”. Perhaps Bitcoin is less a currency than a commodity or a crowdfunded high-tech start-up. Some experts who testified before the Senate saw it more as a payments system, a competitor not to the mint but to MasterCard – and perhaps a formidable competitor indeed, since it would not have to charge “swipe fees” of at least 2 per cent.
One reason for this week’s hearings is thus that US authorities are hard pressed to figure out how to regulate Bitcoin. Thailand has cast it as an illegal rival currency, Finland as a perfectly legal monetary instrument.
Last summer a University of Chicago law journal asked whether the IMF ought to hold a stock of bitcoins in case dealers tried to use it in a speculative attack. Various US states have come up with different regimes for regulating it. For now the federal government is treating it like a money-wiring service.
Start-ups have always been worrisome to incumbent businesses. But the recent innovations of Google – its directories, its libraries, its epidemiological projections – are a sign that tech companies can compete not only with what business used to do but also with what government used to do. Bitcoin follows in that line. It is forcing an argument about where the trust comes from that allows a currency to bind together an economy and a society.
This trust can be conjured out of nothing, as the countries of the EU proved between the establishment of the euro and 2010. But only to an extent, as those same countries discovered soon thereafter.
The writer is a senior editor at The Weekly Standard