Bitcoin has spurred interest in virtual currencies, which have the ability to revolutionize our world. But governments and regulators will have the last word on bitcoin’s future prospects.
After a year of wild price swings–from $13.50 per coin in January 2013 to $1,242 in November and now back to around $500–and the recent closure of Mt. Gox in Japan, until recently bitcoin’s largest exchange, the bitcoin currency system looks far too volatile to become a universal currency any time soon. However, some economists and venture capitalists believe that a digital monetary system has enough practical advantages that sooner or later, your money may be even more virtual than it is now. What is the future of bitcoin?
Invented in 2008 by Satoshi Nakamoto, the pseudonym of an unknown cryptographer, bitcoin is an ingenious peer-to-peer payment system that enables people to make transactions without any recourse to a government-issued currency.
But like the ones and zeros that make up the binary language of the digital world, the views of what that future might look like tend to run toward extremes. On the con side, science fiction writer and economic blogger Charles Stross imagines that a bitcoin economy would starve government services by reducing government’s ability to tax, make it easier to trade all kinds of illegal things, and in the end, make “a sub-Saharan kleptocracy look like a socialist utopia”.
Bitcoin boosters, on the other hand, see it as a key technology in building a more prosperous world in which capital moves with less friction, individuals are completely free to make their own economic choices, and money is no longer a government monopoly. As one bitcoin site puts it, “No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.”
Bitcoin Pluses and Minuses
If the advantages and the disadvantages sound quite similar, that’s no accident. Many of bitcoin’s most committed supporters have a Libertarian bent, and argue that apart from a few limited functions, the world could be run better if people were left largely to their own devices.
A world dominated by a digital, non-state currency, would be “a world of strong privacy,” says David D. Friedman, a law professor at Santa Clara University in California and son of the late free market economist Milton Friedman.
Strong privacy would share many of the characteristics of the old Swiss bank system that enabled people to hold assets anonymously–a good thing say, if you’re trying to escape from the Nazis, but not so good if you’re a citizen in a developing country trying to find your country’s vanished oil revenues.
Taxation would be more difficult in a world of strong privacy. “It’s really hard to tax something you can’t see,” Friedman says. It would also be a lot more difficult to watch what people are doing.
One possible preview of the dark side of that future came in November, when the US Justice Department disclosed the arrest of Ross William Ulbricht, the alleged founder of Silk Road, a kind of underworld eBay, in San Francisco. Prosecutors allege that the secret website had made it possible for people to buy and sell drugs, arms, and a variety of illicit services, all with bitcoins.
It would also make it more difficult for governments to clamp down on organizations for ideological reasons. Eli Dourado, a research fellow at the technology policy program of the Mercatus Center at George Mason University, says a virtual currency would also make it a lot harder for governments stop organizations they don’t like. Wikileaks, for instance, was starved of funds because the US government made it impossible for people to donate money to the controversial group.
Bitcoin could lead to considerable disruption in the financial world as well. For example, bitcoin could be a boon for migrant workers, who now must spend a considerable part of their income simply sending their hard-earned money home. Migrant workers send more than $500 billion home a year, according to World Bank figures, and currently pay high fees on those remittances: a 2010 United Nations report noted that they pay as much as $18 on a $200 transfer by Western Union or the other two leading operators.
However, as radical as some of these changes might sound, Dourado argues that people have overlooked even more revolutionary implications of bitcoin. “I think bitcoin is actually a kind of base-layer protocol in the same way that TCP/IP is for the internet,” he says.
“Bitcoin is programmable money,” Dourado explains. As a ledger-based system, a bitcoin could be attached to some real property. For example, a single bitcoin might be tied to a title deed, making it possible to buy a car without ever meeting the seller. Or it might be programmed to perform an if-then statement, he says, making it possible to create Kickstarter-like but entirely decentralized markets.
Dourado’s view isn’t unique. Marc Andreessen, the co-founder of Netscape, has argued in the New York Times that bitcoin is at a similar stage of development to the personal computer in 1975 or the internet in 1993, and represents “a sweeping vista of opportunity”.
Andreessen and number of other Silicon Valley venture capitalists are already trying to stake claims in that sweeping vista. In 2013, venture capitalists invested $74 million in 40 bitcoin-related ventures, $50 million of that in the fourth quarter, according to CB Insights, a venture capital data analytics firm.
Bigger players may be trying to get in on this virtual gold rush as well. In December, eBay filed a patent application for something that sounds a lot like electronic money and could be sent by one person to another, “a Gift Token… that can be limited to use at a specified store, a specified group of stores, or a specified chain of stores. The token can be limited to use in purchasing a specified product.” Tokens could also be limited geographically, according to the application, to a particular city or region.
Not-so-Brave New World
But whether bitcoin itself is part of that digital monetary future remains to be seen. Enough legal problems have already cropped up that the new currency could end up being the Napster of digital money–the pioneer that paves the way for a more government-friendly alternative. It has been especially difficult for bitcoin in China.
Government officials in Europe and elsewhere won’t sit back forever if the use of digital money grows, predicts Robert Pargac, Director of Global Investigations and Compliance for Navigant Consulting in New York. Should the value of bitcoins remain volatile, regulators could ultimately classify them as a type of commodity, he says.
“If [bitcoin proponents] really want a secretive, anonymous, free-floating market-driven virtual currency that’s not regulated, that’s simply not going to happen,” says Pargac. “It’s not going to be good for the consumer, it won’t be good for the economy and regulators and law enforcement will not permit it. They will find it and they will close it down.”