The Bitcoin blasphemy
Whenever I read a story about Bitcoin, the virtual currency that has been so much in the news these days, I think about a man named Dee Hock. In the early 1970s, Hock created the credit card system that we now know as Visa. Hock was a man who liked to think grandiose thoughts. When it came to Visa, and credit cards in general, Hock used to describe them not just as a way to get a short-term loan but as a new kind of payment system, an exchange of value that was on par with, and that competed with, cash.
As it turns out — and the Bitcoin experience is helping to illustrate this — Hock’s description of credit cards was more than a little hyperbolic. Yes, you could now use a small plastic card instead of cash to buy something, but that card had value because it connected both the buyer and the seller to a fiat currency. People trusted it because they believed in their country’s currency and financial institutions. The exchange of value was never the credit card itself; it was still the dollar, the pound, the yen.
Bitcoin, on the other hand, is truly a new form of payment system, unconnected to any currency or any government. Its libertarian proponents in Silicon Valley love that about it; they talk about it as a potential disrupter of traditional financial institutions. It has value not because a government has decreed and backed its value — the classic definition of a fiat currency — but because a community of users has decided to give it value. Its current travails, however, suggest that may also be its inherent flaw: that however much we say we mistrust governments and banks, when it comes to our money, we trust them a lot more than we trust some clever lines of computer code.
The Internet, I should note, could really use a digital currency. For starters, it would make transactions on the Web much easier while cutting down on the rampant credit card fraud and identity theft that exists online.
It is also true that there have been many unsuccessful attempts to create a digital currency. Bitcoin is by far the most ingenious attempt, and it solves numerous problems. It allows for anonymity, just like cash, while also rendering transactions public, which ensures against double spending (that is, using the same bitcoins for multiple transactions). It is virtually impossible to counterfeit. And, as Felix Salmon pointed out last year, “to all intents and purposes, bitcoins are invisible to law enforcement and the taxman.”
But so far bitcoins have less resembled a currency than a commodity. Up until now, they have mostly been used for pure speculation. Indeed, because there are only a limited number of bitcoins in circulation, the speculative ride has been pretty wild. In February, the bitcoin dropped in value from around $880 to the mid-$5oos.
Bitcoin’s gyrations hardly engender trust among potential users. And the recent Bitcoin-related news isn’t exactly reassuring either. First, a well-known Bitcoin entrepreneur was arrested for allegedly laundering criminals’ money on an underground website called Silk Road, which traffics in, among other things, illegal drugs. Then, Mt. Gox, the leading bitcoin exchange, went out of business — and nobody knows what happened to the hundreds of millions of dollars worth of bitcoins it was holding for customers.
The country’s most prominent Bitcoin backer, venture capitalist Marc Andreessen, whose firm is funding Bitcoin-related startups, raced to CNBC to claim that the Mt. Gox failure was just part of the growing pains for bitcoins. And maybe it is. But who in his right mind, whether merchant or customer, is going to engage in commerce with a currency so seemingly unstable or one that can so quickly disappear?
The great irony of Bitcoin is that its anonymous creator (or creators), who goes by the name Satoshi Nakamoto, believed that people would want his new currency because they had learned to mistrust financial institutions. As Salmon notes, when Nakamoto introduced Bitcoin, in February 2009, he wrote:
“‘The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.’”
All of which is true. But however angry we might be at bank compensation or at the role of financial institutions in the financial crisis, we still trust banks to safeguard our money, and we still trust government to back our currency. For Bitcoin to succeed, it will have to embrace the one thing it was most intended to avoid: government.
Joe Nocera is a columnist for The New York Times.