Is BitCoin the currency of the future?

Economics Economics Questions
1

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++?

2

Subscribed.

3

How is BitCoin superior to just using physical gold and silver? I don’t see the advantage.

4

You can’t send physical gold and silver through the mail to pay your electric bill, for example. Physical gold and silver only works for face-to-face transactions.

Internet commerce, on the other hand, lets you buy things from people on the other side of the continent. So it makes sense to have an anarchic Internet currency, just like physical bullion is an anarchic local currency.

5

Real backing can be established whenever someone wants to. You could make a currency exchange web service that makes use of the PayPal API for instance, to automatically send dollars when Bitcoins are received and vice versa. That would provide the currency some initial value so it could be used as a medium of exchange. The only hindrance is that you will need to buy some bitcoins before starting the business and thus give away some money “for free”. Although, I guess people will initially sell their coins quite cheaply, as you’re the only buyer. When the currency gets more popular and the demand for it grows, the exchange rate can be raised.

I’m working with the Bitcoin project, and I’d like to ask the same question, since the original developer has been busy with other things lately, and I’m not too proficient with C++ yet. If you know C++ and are interested in doing something concrete to advance freedom, you’re very welcome to join the Bitcoin project :slight_smile:

The new Bitcoin website is available at http://bitcoin.sourceforge.net/.

6

It’s likely that most notes that people would issue would be backed by goods or services rather than by commodities. For example, if I want to build a widget factory, then I can issue and sell notes entitling the bearer to 1 widget at some time in the future. Various levels of collateral could be used to reduce the risk.

It would help if this service could arrange not only two-party transactions, but multi-party “ring” transactions as well. Otherwise, there is a double-coincidence-of-wants problem. For example, if I have 500 ACME notes and I want to trade them for 600 FDSA notes, then I can submit my offer to the exchange, which will then find someone who has 600 FDSA notes and is willing to trade them for 300 XYZ notes, and then find someone who has 300 XYZ notes… and so on until the loop is closed with someone who wants 500 ACME notes.

The algorithms to figure this out are well-known and are used in routing all the time. It’s basically a more complicated “6 degrees of Kevin Bacon” problem.

It can never be completely anonymous, since you ultimately have to trade your currency for some good or service in the real world. Still, I wonder: If only a few people use it, would it be worth a cash-strapped government’s time to try and tax it? (Particularly if the jurisdictional arrangements were chosen in such as a way as to make regulation prohibitively expensive.) And if a lot of people use it, would the government be able to?

I am interested. I think this has potential.

7

There is a site called www.loom.cc which does something similar if you are interested in checking out the competition for what it sounds like you are doing.

Why is it you think the price of producing bitcoins will be bound by the price of producing electricity eventually. I didn’t really get that. Maybe you can explain.

8

I’ve read various theorists who think that electronic cash production would be limited by the cost of electricity, bandwidth, CPU cycles, etc. Which is stupid, because that’s like saying the cost of paper and ink will limit the production of paper money.

So yeah, I think that the money supply should be limited by the assets backing it, not the costs of putting it into circulation.

9

Ok, I’ll check it out.

For example, if you can produce 30 coins/h and the power consumption of your computers costs 10 coins/h, there’s a profit margin of 20 coins/h. This profit margin will shrink close to the maintenance costs because of competition. That’s because there’s a constant amount of bitcoins created per hour, which is divided between the nodes by the CPU power they spend. So if the amount of CPU power in the network doubles, you’d be able to produce only 15 coins/h.

10

Well yes, Bitcoin needs a command line UI before it can be accessed from web application frameworks and used for automated trading. That’s why I haven’t yet started the exchange service myself.

11

But it’s still worthless if it can’t be redeemed for gold or some other asset.

12

That’s true, Bitcoin is just a token system. Just like any paper money, it has no inherent value, but it can be connected with an economy of real goods and services that people value.

13

I buy and sell bitcoins for USD dollars..

http://newlibertystandard.wetpaint.com/page/Exchange+Rate

14

In the long run the money creation will have to stop anyway, right? Otherwise the savings not generated through deferred consumption but through inflation will cause boom-busts anyway.

And bump for epic idea!

15

Great thread! This is coming, whether any of us are the ones to implement it or not.

It can still be completely anonymous for services. For instance, if you need a corporate brochure written, a contract translated, or a logo designed and the contractor is half-way around the world (telecommuting), as long as everything is encrypted no one can find out who performed what service or who paid who.

With actual physical goods and in-person services it gets harder, but there is still a measure of protection. Say you order a book from Amazon. Amazon would ordinarily have to pay taxes on that transaction, but if all shippers simply left their corporate info off the package - and paid the shipping company through an encrypted channel - a government would have no way of knowing which packages came from where unless the shipping company went out of its way to catalog which items came from where (and such a shipping company would lose business, although government could try to legislate this problem away).

The recipient would know where the package was from, based on a secret code fixed by the two parties at time time of order placement. Of course in this case a government could find out at least who was buying each item, so they could impose a sales tax or similar, but the sellers could remain anonymous. And really, instead of buying a book from “Amazon” all such anonymous sellers would have a different name with no known connection to any physical entity or address. Their brand power would be entirely determined in cyberspace, and even the buyers wouldn’t be capable of divulging the true physical identity of the sellers, because they would never know it in the first place.

The only issue I can see is that if, say, you yourself opened a successful net-based anonymous business and made tons of money without anyone knowing a thing. You’d be untraceable, but as soon as you started spending big money on stuff you actually need (besides remote services - like say you wanted to buy a Ferrari or two), a government could come up and ask where your money was coming from, and it could tax you on property (and legislate new taxes designed with this new reality in mind).

[Edit: Thanks Nir for fixing that.]

16

Thanks. You flatter me.

Also, here is a Wikipedia article I’m not smart enough to understand, but might be of interest.

17

That would require a totalitarian government though, to enforce this: ie massive random raids into everyones homes and warehouses to check the price of their owned goods

18

The laws already exist in the form of income tax, property tax and luxury tax. And the means to enforce the laws exist in the form of the IRS (and similar entities), search warrants and police officers. Of course they don’t have the resources to enforce the law in every case, but if they saw a billionaire or large company suddenly stop all traceable financial transactions, there would be intense investigation and enforcement.

19

But the question, whom to search? At least on the consumer level, it seems like impossible to know if transactions arentlogged

20

It’s no different than having a job on the side that you don’t report. There are many people who avoid paying their taxes. Some get caught and some don’t. The IRS audit people who seem suspicious. Don’t let your taxes look suspicious and you’ll probably never be audited.

Disclaimer: I neither support nor condone tax evasion. I pay my taxes and so should you. [8-|]