Bitcoins: The Politics of A Virtual Currency

By: Raymond Tham   Date: 13 June 2011

About The Author

Raymond Tham

Follow The Money

Raymond Tham, Writer

 

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There’s a really easy way to find out if an issue or  topic is being widely talked about by the general public.

Bitcoins: The Politics of A Virtual Currency

Bitcoins: Is your dollar ready for a digital revolution?
Credit: FamZoo

Go to Google, search the keywords, then gaze in wonder. Somehow Google is able to instantly generate millions of websites and news articles  containing the search term tyou were looking for.

Do we take this for granted? After all, search engines have been around since the invention of the Internet, and it’s easy to forget what technological miracles they really are; sifting through endless streams of data and returning accurate search results..

It is then fitting, that in researching the latest technological invention beginning to sweep the Internet, another technological marvel emerges as an easy and convenient tool whereby people learn what others are thinking and talking about.

Bitcoins have been described as “the digital currency of the future” – a new global phenomenon that threatens to challenge all preconceived notions of currency and currency exchange.

As the chart below illustrates, worldwide interest in Bitcoins has started to grow almost exponentially in the past few of months. Generated by Google Insights, the chart tracks the number of times the term “bitcoins” was used as a search term in the past year.

 

But What Are Bitcoins?

According to founder Satoshi Nakamoto, Bitcoins are “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Not much is known about Nakamoto apart from the fact that the name is a pseudonym, he/she is most probably Japanese, and he/she ended his/her involvement in the Bitcoin project in late 2010.

Much like its founder, Bitcoins thrive on anonymity. Transactions made in Bitcoins are virtually untraceable, with no central authority or intermediary systems to control or prevent the flow of Bitcoins. Rather, Bitcoins rely on a public key cryptography to limit the supply of Bitcoins and ensure the legitimacy of any transactions.

Thomas Lowenthal of Arstechnica.com, explains the appeal of Bitcoins and how it could potentially be a valid form of currency.

The problem with purely digital currencies is that of double-spending. Economists in the audience will note that digital products like a movie or a text file are non-rivalrous. If you have a copy of my pseudo-trip-rock band's new MP3 album, there's still just as much MP3 to go around for everyone else who wants one. That's not a problem for files, but it is a problem with currency, since the whole point is that there's a limited supply. If you use a dollar at the grocery store today, you can't go out and spend that same dollar at a bar tomorrow.

The usual solution to the double-spending problem is a trusted intermediary. PayPal makes sure that you can't spend the same dollars twice by deducting them from your account before they get added to someone else's account. Visa, MasterCard, and every other bank and payment processor do the same. However, this centralized approach is the one that enigmatic creator Satoshi Nakamoto specifically tried to avoid in the original Bitcoin design. The idea was to use cryptography to create verifiable transaction records without the need to trust anyone but your own calculations.

The Bitcoin solution uses cryptography and an open transaction register. Whenever you spend a Bitcoin, you cryptographically sign a statement saying that you have transferred the coin to a new owner and you identify the new owner by their public crypto key. Whenever they need to spend the coin, the new owner uses his private key to sign it over to some further owner. As soon as a transaction takes place, the recipient (who has a very strong incentive to ensure that you don't spend the coin twice) publishes the transaction to the global Bitcoin network. Now every Bitcoin user has incontrovertible evidence that the coin has been spent, and users won't accept that coin from anyone but the new owner.”

Just how many Bitcoins are in circulation, and what is their value?

The Bitcoin Economy

Like real currency, Bitcoins have an actual monetary value and can be traded through sites such as Mt. Gox online exchange. However, unlike national currencies, artificial currency inflation is impossible.

Jerry Brito of Techland at Time Magazine explains:

In most countries, a central bank controls the money supply, and sometimes (such as during the recent economic crisis) it may decide to inject more money into an economy. A central bank does this essentially by printing more money. More cash in the system, however, means that the cash you already hold will be worth less. By contrast, because Bitcoin has no central authority, no one can decide to increase the money supply. The rate of new bitcoins introduced to the system is based on a public algorithm and therefore perfectly predictable.

The value of Bitcoins also has the ability to fluctuate over time as a result of its public algorithm. Since April 2011, the cost of a single Bitcoin has typically ranged between US$10.25 to US$24.99.

Presently, Mt. Gox is trading Bitcoins at US$23.45 per coin. Going by this valuation and with more than 6.2 million Bitcoins currently in existence, the Bitcoin economy has a potential value of over US$145 million.

This number is expected to gradually increase as more and more Bitcoins go into digital circulation. However, embedded within Bitcoin is a complex algorithm, which ensures that only 21 million Bitcoins can ever be made. The eventual result is a slow but consistent deflation.

"That is considered very destructive in today's economies, mostly because when it occurs, it is unexpected," said Russ Roberts, a professor of Economics at George Mason University, “(however) in a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now." 

Advocates vs. Critics of Bitcoins

Unsurprisingly, the usage of Bitcoins has both its advocates and critics.

Libertariannews.org’s Michael Suede describes Bitcoin as “the most important creation in the history of man” arguing that Bitcoins were superior to gold as a medium of exchange as:

“1. It is impossible to artificially inflate the supply of Bitcoins in existence. They are produced at a known steady rate, the supply of which will eventually top out. The nature of Bitcoin transactions makes it so that no bankers, nor anyone else, can use fractional reserve accounting to artificially inflate the money supply. Clearly this means governments, nor anyone else, can use artificial credit expansion to make more of them. 

2. Bitcoin transactions are made for the web! It is impossible to actually ship gold across a wire. The best one can do is use a medium that represents gold, such as shares of GLD, and trade those as a currency. Clearly this leaves room for inflation of the money supply by unscrupulous bankers. When a person transacts in Bitcoins, it is the equivalent of actually sending gold across a wire. The unreproducible currency itself is transacted with, unlike a paper currency that represents a commodity.

3. Bitcoins can not be confiscated since the files they reside on can be replicated and hidden in USB keys or anonymous servers.

4. The peer-to-peer nature of Bitcoin makes it as impossible to stop as BitTorrents. Governments would have to shut down the web to stop it.

5. It is impossible to create salted Bitcoins or “shave the edges” off of them. There are wide spread rumors that the supply of gold that central banks are holding is loaded with tungsten bars coated in gold. 

6. Obviously they are lighter, easier to transact with, and far easier to secure than gold bullion.”

Advocates of Bitcoins also point to the level of economic freedom afforded to Bitcoin users.

“Law-abiding citizens can carry on their affairs without anyone snooping on them or telling them what they can and can't do. Want to contribute to WikiLeaks or some other politically unpopular organization? No problem. Live under a repressive regime and want to buy a repressed book or movie? Here's how. No wonder the Electronic Frontier Foundation calls Bitcoin ‘a censorship-resistant digital currency.’”- Jerry Brito, techland.time.com

Similarly, critics of Bitcoins are adamant about the inherent dangers behind Bitcoins. Launch.is describes Bitcoins as “the most dangerous technological project ever created” that is “unstoppable without end-user prosecution.”

Bitcoins were also in the news recently with two US senators having written to the Attorney General and Drug Enforcement Adminstration to express their concerns about a website entitled “Silk Road” that was allegedly selling illegal drugs through the use of Bitcoins.

According to Senator Chuck Schumer (D-NY),

it’s (Bitcoins) an online form of money laundering used to disguise the source of money, and to disguise who’s both selling and buying the drugs.

Bitcoins are, in fact, the latest symbol of a divide that has plagued modern thought.

The Ideological Conflict

While both sides present compelling arguments that support opposing points of view, there is one clear element that manages to link and distinguishes each other at the same time.

The role of the state is a common denominator that is present in both arguments.

On one hand, advocates of Bitcoins would naturally point towards a reduced role for the state, in this case, over the usage of money and currency. Yet critics are calling for the state to be involved with this new form of currency so as to ensure proper regulations and reduce the possibility of misuse.

Breaking down the debate to its fundamental core, the arguments from both sides is also reminiscent to the dispute between Hobbes and Locke over the state of nature and its implications for the state. 

Locke, who is often credited as one of the early influencers of libertarianism, believed that mankind in the state of nature are inherently good and would therefore act in an honourable manner in most social situations.

The role of the state therefore is conditional and could be overthrown if it didn’t represent the views of the people. Accordingly civil society was more important than the state, and if the state could not do as much for people than they did for themselves in the state of nature, the state could be dismantled.

Hobbes, on the other hand, who was an early influencer of realism, believes mankind is in an eternal conflict with one other and therefore act only in self-interest.

As such, mankind could not be trusted and the state was responsible for governing and shaping society so as to prevent the fall back to the state of nature which is "solitary, poor, nasty, brutish and short", creating  a "war of every man against every man".

This ideological divide has separated political thought for centuries and is subtly manifesting itself today in the debate over Bitcoins. Clearly the concerns from both sides of the Bitcoins debate reverberate in this classic ideological distinction. The question over the legitimacy of either argument though boils down to personal opinion.

Advocates of Bitcoins will undoubtedly continue the fight to keep it out of government’s control, while critics will push towards legislation and regulations.

Like all new technological advances, the major dilemma lies in our understanding of human nature. As Alan Valentine puts it, "whenever science makes a discovery, the devil grabs it while the angels are debating the best way to use it."

It is perhaps interesting to contrast the tale of bitcoins with the tale of Google, which as mentioned above was a significant achievement in technology. Today, as bitcoin advocates the declining presence of a central governing system that is able to track people's actions and decisions, Google has become increasingly pervasive of our social lives through its numerous tools and functions.

The internet therefore cannot be considered as an advocate of either side of the argument, but rather a continuous demonstration on how two ideological differences are somehow able to co-exist.

Raymond Tham

EconomyWatch.com

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