By Stephen Bryen
[NEW UPDATE MARCH 1, 2014: The AP reported today as follows: “The Mt. Gox bitcoin exchange in Tokyo filed for bankruptcy protection Friday and its chief executive said 850,000 bitcoins, worth several hundred million dollars, are unaccounted for.” This follows the mysterious end of the British Bitcoin exchange which seems to have stopped functioning. Bitcoin investors have no recourse.]
[Update: Norway and China say that Bitcoins are not a legal currency. In addition, now the largest Bitcoin exchange in China will no longer allow customers to use the Yuan to buy Bitcoins because of pressure from the Chinese government and from the Central Bank of China. The Wall Street Journal says that Bitcoins have lost half their value in the past few weeks.]
Bitcoins are much in the news these days. Described as a “virtual currency” the value of Bitcoins has risen precipitously, and dropped in value as abruptly as the Bitcoin has earned value. Bitcoins are the subject of a number of books and tons of articles. The “virtual currency” has been described as an alternative currency that, because it is based on computer networks and secrecy achieved through heavy encryption, protects privacy and offers an alternative “libertarian” currency solution.
While the Bitcoin may be a “virtual currency” its main characteristic is that it is a non-state currency. In this connection, the Bitcoin shares some characteristics with gold, silver, diamonds and other fairly portable commodities that can be used for exchange. The difference is that while gold and silver are often manipulated by governments who hoard these materials, Bitcoins are not, so far at least, under any government control.
Bitcoins appear on the scene at an unusual moment in time. The currencies of democratic countries are in decline and significant value has been lost over the last decade or two. This has happened because governments, who issue these currencies, have been spending far more than they have in income and have used methods such as “quantitative easing” to temporarily keep them solvent. Quantitative easing is just a semi-sophisticated way of printing more money.
Complicating the picture is the unique situation involving the Euro, which is the European currency that replaced the national currencies of France, Germany, Spain, Italy, Greece, Portugal, Luxembourg, Austria, Finland, the Republic of Ireland, Belgium, and the Netherlands in 2002. The Euro temporarily “solved” the currency problem in the weaker European countries (e.g., Italy, Greece, Portugal, Spain etc.) by putting in place a strong currency dominated by Germany and by European banking and lending institutions and organizations. Weaker states, without the ability to print more of their own currency, still were able to keep spending by floating loans to cover some of their deficits. Today these countries, foremost among them Greece and Spain, face the precipice because the lenders now want fiscal discipline in exchange for loan relief. The social, economic and political costs of the previous ten year Euro-ride are spawning a deep reaction including the rise of neo-fascist, sometimes violent, political groups.
The Bitcoin, which works through networks of computers and uses encryption, was designed to get around state-run currencies and to avoid state demands, especially taxation. Transactions in Bitcoins are anonymous and it is said to be nearly impossible to discover who owns Bitcoins and how many Bitcoins are held by Bitcoin buyers, many of whom are investor-speculators.
Most certainly there will be political problems with Bitcoins as nation states fight to get some control over Bitcoins. China has banned its financial institutions from handling Bitcoin transactions, the first major move to regulate Bitcoins which is becoming popular with Chinese entrepreneurs seeking to get out from under the control of the Communist state. For Chinese Bitcoin investors, the Bitcoin represents portability and anonymity, both of which are in short supply on the mainland.
A big question for Bitcoins is its privacy claim. Experts who have looked at the algorithms and computer methodology see the structure of the Bitcoin system as credible and technically strong; but modern computers and networks are incredibly weak in security, meaning that big government probably has the ability to penetrate the Bitcoin system and the capability to disrupt or pervert the Bitcoin network.
Inherently the Bitcoin system is not based on any democratic standard. One could say that it is an anarchistic system, but if this is true as it may seem, it is anarchism with a hidden hand. The problem is the identity and location of the hidden hand is not known to the players (investors, buyers, miners etc.), and some claim it may not matter as the currency has a life of its own that goes beyond the significance of any hidden hand. On this latter point, the jury is still out because the system is dark, and therefore non-discoverable except to powerful players with resources for intervention, such as governments or large criminal organizations.
Privacy is an important issue these days as the protected space of most modern democracies has been deeply compromised by electronic surveillance and manipulation of personal and institutional information. The problem is extreme in the U.S. because the “checks and balances” system no longer is functional in protecting privacy, as the establishment simply preserves its wealth and prestige by stealing from the broader population. “Checking” institutions, such as the Congress and the courts, including the Supreme Court, are enmeshed in the establishment and despite some ineffective and worthless inquiries, generally have supported the surveillance system. To some degree the Bitcoin popularity is a reaction to the surveillance state.
A possible outcome of all this is that states will find a way, either overtly or covertly, to control the Bitcoin or blow it out of the water. The rise of the Bitcoin is only a symptom of a much bigger and unresolved problem, which is how freedom and privacy can be sustained against oppressive governments that were once democratic.