One day, while I was learning about cipherspace, I discovered BitCoin. BitCoin is a completely decentralized, anonymous online monetary system that relies on a distributed database to facilitate transactions. The creator put a great deal of effort into ensuring that the system is secure and reliable. Unfortunately, there are no real assets backing he currency of BitCoin (and no coercive government backing it either). Thus ends BitCoin.
I can imagine, though, a system like BitCoin that allows people to write promissory notes and sign them with an RSA digital signature (to prevent couterfeiting). These promissory notes could be backed by gold, silver, fiat currencies, stocks and bonds, or pretty much anything. Then, these notes could be transfered from one person to another anonymously.
Couple this with an ebay-like service that allows people to swap these virtual currencies. Say, for example, that I have a gold note issued by a bank in South Africa. Since taking delivery of the gold could be a problem, I trade my notes for notes issued by a bank in U.S.A. Then, I can redeem those notes and have them FedEx me the gold (insured, of course).
This system would be Fed-proof, IRS-proof, FBI-proof and judgment-proof. This system would protect the users against monetary inflation, making it Fed-proof. Since nobody has a bossman ratting out their earnings, it is IRS-proof. It is FBI and NSA proof because all transactions are encrypted and anonymous. And, most importantly, it is judgment-proof because it is perfectly legal.
There are, at present, no laws that could be used to criminalize what I propose. Laws against money-laundering, for example, do not apply because there is no way to prove that the money came from an illegal source, such as drug dealing. Laws against tax-evasion do not apply either, because no taxes have ever been levied on imaginary currency. In addition, if you had your day in court, you could defend yourself on First Amendment grounds. Besides, international free trade agreements also have generous loopholes.
So what we are dealing with is anarcho-capitalism and wildcat banking on a global scale. If not for my non-existant programming skills, I'd be forking a new project off BitCoin right now.
Anybody here know C++?
"As long as there are sovereign nations possessing great power, war is inevitable."
@gabriel: Oh, man, you're begging for a flame-war.... ;-)
Of course, C++ and Perl are not even in the same solution-space... but I absolutely love Perl. Unfortunately, Perl has lost its roots with Perl6, which I think is going to be a fork, I don't think Perl5.x is ever going to be truly end-of-life'd, the code base is a large part of what makes Perl so powerful. Ruby and Python are Perl's closest relatives but they both lack the "down-and-dirty" quality of Perl5 that I fell in love with.
Clayton -
No worries, I'm just being inflammatory. I write C/C++ (C#, and some assembly) for a living, so I have a certain affection for them :). Now if there's any "God that Failed" book that should be written about a programming language, it's Ruby. Not a fan.
@gabriel: Agreed... but Ruby is so damn beautiful! It's just too beautiful to be a really useful language, IMO. There are other beautiful languages out there (e.g. Haskell) but it is my view that the most successful languages have been those that have not lashed themselves to some abstract paradigm (except, perhaps, Lisp). C is the single most important and universal language because of the portability of C libraries and the wide array of hardware on which C compilers are available. It is syntactically straight-forward* and very minimalist (it's generally possible to predict what the asm output of a particular C piece of C code will be... with optimizations disabled, that is). C++ is second-place but I don't like the "bureaucratic" feel of C++. I like how easy it is to logically organize like things with like via the OOP paradigm - and the efficiency of C++ among OOP languages is insuperable. But real-world C++ code is often way, way, way over-architected. I don't think C++ is itself to blame for this, I think it is the CS departments who keep pushing OOP as if OOP will solve your every problem and magically make all your code the bestest ever because it's OOP!
*Yes, it can be obfuscated but I mean this from the point-of-view of remembering the syntax when coding... I have found C to be the easiest language to remember the syntax, I never have trouble when writing a switch statement, but ask me to write a templated class... and I'll be reaching for my C++ reference books.
@Clayton,
I take it you're not a fan of the boost libraries, then? I totally agree with you concerning the ease of over-engineering that often occurs in C++ programs. It reminds me of a quote, I forget who said it: "With C you can easily shoot yourself in the foot. With C++ you can reuse the bullet." I think the origin of the over-engineering problem is the lack of a fully-featured standard library. In many other OOP languages (java [shudder], C#), the programmer can glean the common and suggested design patterns and methodologies from the easily understood standard libraries. The C++ standard library is leaner (a strength), but very difficult to follow, due largely to its templated design. It's almost that C++ is two languages: C with classes, and an extremly powerful but arcane template metaprogramming language.
I'm also a fan of Objective-C--I find it very sleek and elegant, but have not used it nearly as much as its brothers in the C family.
@gabriel: I'm not familiar with boost... I looked at their website and it appears to be a fairly nice set of libraries that give you most of the "nice-to-have" things that you get from modern scripting languages (Perl/Python/Ruby/etc.), such as regexes.
I think the way to look at it is that Bitcoins will be their own backing. Gold does not need a "reserve" to back it up because it backs itself up through its own natural scarcity, durability, and desirability by the market. Bitcoins are likewise engineered to be naturally scarce through mathematics, and they are their own reserve. Barring a digital equivalent to gold alchemy, their value comes from their usefulness in the market and their demand by the market.
Barring a digital equivalent to gold alchemy, their value comes from their usefulness in the market and their demand by the market.
Which both are currently zero or nearly zero. Never in the history of the world has there been a fiat money created from scratch. Even governments must initially back their paper money with accepted money in order to get people to use it. Only once the old money has been driven from the marketplace can the government engage in fiat inflation. Cf Mises's regression theorem.
There definitely is demand and the currency does have considerable value. Bitcoins are currently worth more than half a cent each and their value is steadily increasing. There are plenty of people eagerly waiting to both buy and sell bitcoins at https://bitcoinmarket.com/ . You can buy and sell them with US dollars or with Pecunix digital gold currency.
Damn, quote feature is broken, too.
Barring a digital equivalent to gold alchemy, their value comes from their usefulness in the market and their demand by the market. Which both are currently zero or nearly zero. Never in the history of the world has there been a fiat money created from scratch. Even governments must initially back their paper money with accepted money in order to get people to use it. Only once the old money has been driven from the marketplace can the government engage in fiat inflation. Cf Mises's regression theorem. Clayton -
I agree, there's a catch 22 in the beginning. However, Bitcoin is not really like a fiat currency; it is entirely voluntary, and no central agency can decide to double the money supply at whim. The model is also designed to encourage use by rewarding early adopters. Usefulness in the market is increasing. You can use bitcoins to donate to the Canadian Hayek Institute, pay for an online MMO, or pay for Link2VOIP services. Thereby, demand is slowly but surely increasing.
Also, there are several currency exchanges currently operating which are serving as a form of "backing" by providing liquidity in and out of Bitcoins. You are able to exchange your bitcoins into USD, Pecunix, Liberty Dollars, or whatever else the exchanges decide to accept. This is operating independently of the currency itself and is part of the growing ecosystem.
here definitely is demand and the currency does have considerable value. Bitcoins are currently worth more than half a cent each and their value is steadily increasing. There are plenty of people eagerly waiting to both buy and sell bitcoins at https://bitcoinmarket.com/ . You can buy and sell them with US dollars or with Pecunix digital gold currency.
It's a fad.
Clayton, ever heard of d2jsp? ;) The third biggest forum on the internetz, and home of the "forum gold" virtual game currency, which is fiat money from scratch, and extremely popular at that.
I had never heard of it. I looked at the site and your characterization is simply wrong. The "forum gold" enables the exchange of other already valued items, that is, game pieces from popular games like Diablo or WoW. The fg currency is no counter-example to Mises's regression theorem. If anything, it only goes to reaffirm it.
I agree, there's a catch 22 in the beginning. However, Bitcoin is not really like a fiat currency; it is entirely voluntary, and no central agency can decide to double the money supply at whim. The model is also designed to encourage use by rewarding early adopters. Usefulness in the market is increasing. You can use bitcoins to donate to the Canadian Hayek Institute, pay for an online MMO, or pay for Link2VOIP services. Thereby, demand is slowly but surely increasing. Also, there are several currency exchanges currently operating which are serving as a form of "backing" by providing liquidity in and out of Bitcoins. You are able to exchange your bitcoins into USD, Pecunix, Liberty Dollars, or whatever else the exchanges decide to accept. This is operating independently of the currency itself and is part of the growing ecosystem.
That's all fine and dandy but you and several other posters seem to be laboring under the common misconception that scarcity is a sufficient condition for something to be money. Yes, BitCoins - like hashcash or bitgold that came before it - are scarce. So what? My signature is also scarce but it cannot become money because it has no value. Dean Martin's signature, on the other hand, is valuable (and scarce). Scarcity is a logical consequence of value. Super-abundant things, like air, have no value because they are not scarce. So, all valuable things are scarce but not all scarce things are valuable. Dean Martin's signature likely would never become money for a variety of reasons but, unlike my signature or BitCoins, it could conceivably become money because it is valuable.
In a natural order economy, a digital currency could - and likely would - become a money substitute - like the banknotes of old. Hoppe characterizes money substitutes as titles to money. But the technological problems are relatively unimportant... these are like the anti-counterfeiting features of banknotes. What is important is the legal context... are these titles to money enforceable in court? If they are not, then they are worthless. Since our courts are owned and operated by the same organization that owns and operates the reserve bank (the Fed), you can bet your life that there is zero percent chance that they will enforce any title to money except Federal Reserve Notes, which are no longer even money substitutes but have been artificially made into money itself. So, the real problem is a legal/political one, not a technological one.
Please do not mistake me to be discouraging people from trying to break out of the central-bank-controlled money system. If there is any hope of escape, it is exactly through this brazen sort of attempt to circumvent the system... hopefully, if enough people start trying to circumvent the system all at once, the system itself will collapse and we will be freed of that globe-sprawling octopus: the global central banking system. So, I encourage the e-gold, Pecunix's, GoldMoney's, BitCoins and the like to keep trying. My only beef is with the implicit rejection of the Austrian account of the origin of money in the paper introducing BitCoin and on its website. Something cannot become money unless people will willingly exchange other valuable things for it and no one will exchange something of value for something of no value (fiat paper or digital tokens).
Google "bitgold" - an idea originally created by Nick Szabo at George Washington University - to understand what I'm talking about. He came up with his idea years before this BitCoin thing (I can't imagine that BitCoin was not modeled on bitgold). Bitgold, in turn, was an extension of the idea of hashcash which was originally invented as a counter-measure to spam and DDoS attacks. Szabo discusses bitgold as if it were being "mined" from some digital landscape. It's a nice metaphor as far as it goes but the difference between gold and bitgold is that people want to mine gold for its commodity uses. What is the commodity use of bitgold? There is none. What is the commodity use of BitCoin? None that I know of. But hashcash, on the other hand, is regularly used. Why? Because it solves a real-world problem so, therefore, it has commodity value. Another poster pointed me to d2jsp and "forum gold" - fg. The fg currency unit also has a commodity value (its exchange rate against WoW, Diablo, etc. game pieces) and this explains why it is used as a medium for real exchanges.
One purpose of stored value is to provide a stable long term investment. On the other end of the spectrum, its purpose is to provide short term liquidity. Physical commodities are at one end of the spectrum. They hold their value well, but they are not very liquid. Private currencies and legal documents representing ownership of commodities, such as digital gold currency and commodity exchange contracts, are more liquid than the actual commodities they represent, less liquid than money and generally a better investment than national currencies. National currencies, with their slow and steady inflation, offer a good balance between not terrible long term investment and very good local liquidity in the form of physical cash and long distant liquidity in the form of electronic banking services. Bitcoin's place on the spectrum is on the opposite side of physical commodities. It's not a stable investment, but it is extremely useful for its local and long distant anonymous liquidity. It doesn't matter if bitcoins will or won't be worth anything in two years from now because today I can purchase some bitcoins, spend them and the seller can cash out with little risk of loss or frozen assets to either of us. It works fabulously in the short term and it will continue to grow until something else better replaces it. But until then, it is the most secure way to easily and quickly transfer stored value anonymously.
I edited this post, but I didn't mean to turn it yellow. o_O
"That's all fine and dandy but you and several other posters seem to be laboring under the common misconception that scarcity is a sufficient condition for something to be money."
I agree; scarcity isn't the only condition. It should also function as a medium of exchange, it should be easy to store and retrieve, it should be fungible, and durable. Bitcoin meets all of these conditions except the medium of exchange, which is growing as its acceptance grows.
"But the technological problems are relatively unimportant... these are like the anti-counterfeiting features of banknotes. What is important is the legal context... are these titles to money enforceable in court? If they are not, then they are worthless... So, the real problem is a legal/political one, not a technological one."
This is a very real problem, but it does not follow that the money becomes worthless. I believe that gold and other money substitutes have this same problem, but they still have value.
"Please do not mistake me to be discouraging people from trying to break out of the central-bank-controlled money system. If there is any hope of escape, it is exactly through this brazen sort of attempt to circumvent the system... hopefully, if enough people start trying to circumvent the system all at once, the system itself will collapse and we will be freed of that globe-sprawling octopus: the global central banking system. So, I encourage the e-gold, Pecunix's, GoldMoney's, BitCoins and the like to keep trying. "
I completely agree. If a truly distributed form of money takes off, it will be difficult for that to be controlled without a gross violation of civil liberties and rights. Just look at the govt's "success" in dealing with P2P networks. Two situations can arise:
1) Digital currencies are subject to regulation, but people get around this in practice, save for large sums exchanged for USD/etc.... for which it is easy for the govt. to notice.
2) The government completely outlaws it and proceeds to enforce this by banning all encryption (except for govt.-approved encryption) completely. I cannot predict what will happen should this come to pass, but this can only foment discontent and rebellion, as well as confirm the government's increasing role as a tyrant in society; in the long run, this will be beneficial for those who believe in liberty and desire liberty.
"My only beef is with the implicit rejection of the Austrian account of the origin of money in the paper introducing BitCoin and on its website. Something cannot become money unless people will willingly exchange other valuable things for it and no one will exchange something of value for something of no value (fiat paper or digital tokens)."
Gold didn't become money and wasn't used for jewelry because it was valuable, gold became valuable because it was desired for money and for jewelry, and this was due to its beauty and its properties as money.
Bitcoin has similar properties as money applied to the digital sphere. It by no means follows that it will become valuable and that it will become an accepted means of money, but nor does it follow that it must remain worthless. Should people desire a distributed, anonymous currency that shares many of the commonly accepted properties of money, then its value will be at least what those people subjectively value it at.
"Google "bitgold" - an idea originally created by Nick Szabo at George Washington University - to understand what I'm talking about. He came up with his idea years before this BitCoin thing (I can't imagine that BitCoin was not modeled on bitgold)."
Do you think Bitgold was a bad idea? I don't know much about the history of Bitgold, but Bitcoin has a working implementation, it has its own website and community, and it is actually being used by 3rd parties. Volume on one of the main exchanges is between $50 and $500 a day, so it does have some demand. It is in an infant stage right now, but everything has to start somewhere. Bitcoin has many of the properties of money, not just scarcity, and it has properties that are demanded by the market, as as decentralization and anonymity.
The state monopoly on law and money is a very real obstacle; indeed, it's probably the largest obstacle. This isn't an issue just for Bitcoin, but for ANYTHING trying to challenge the status quo. That does not mean that we shouldn't try to vault over this wall. Bitcoin might fail due to these reasons, but it will at least have tried. Do you see any technical reasons why it could not work? I encourage you to head over there and share your thoughts at the Bitcoin forums; I think they would benefit from a little bit of dissent and a friendly challenge.
The Austrian view is that a commodity becomes money (the medium of exchange) because it was first already a highly marketable commodity. Gold and silver's commodity value for adornment is what made them valued. Because gold and silver also happened to have characteristics that made them attractive for use as a money, they won out over other commodities that had been used as media of exchange (salt, dried tobacco, pelts, cowrie shells, etc.)
Because bits have no commodity value (they are not scarce so they cannot be valuable), no digital currency will ever be money in its own right just as paper money was never money in its own right sans government interference in the market. Digital currency at best will be a money substitute and its role in exchange should be analyzed in the same light as other money substitutes.