Deep in the background of an economy run amok has been the development of a new currency that has found a home supporting both legal and illegal commerce in a way that makes it difficult for regulators to regulate. To facilitate these transaction, this new underground economy has turned to Bitcoins.
Bitcoins can be best described as digital currency whose wallet system is based on a digital address. They have no intrinsic value except that of the open market that has formed around the Bitcoin System. Bitcoins do not use a bank or any central authority to govern them and Bitcoins are valued by an open market. It is a peer-to-peer system that is self-regulated by its users and limited by the number of coins in existence.
To obtain Bitcoins, someone can use their machine and the Bitcoin client (available for Windows, Mac, and Linux) to try to create Bitcoins. A Bitcoin is created when the client solves a difficult mathematical equation. You can also buy Bitcoins on an exchange, trade cash for Bitcoins, or accept Bitcoins for goods and services. Because of the volatility of this market, exchange rates can fluctuate unpredictably.
Although there are legitimate uses for Bitcoins, last week it was reported that Bitcoin is being used to support illegal activities including being used to support the hacking group LulzSec and an underground website that deals illegal drugs called “Silk Road.” Following the publication of these stories, Senators Chuck Schumer (D-NY) and Joe Manchin (D-WV), has asked U.S. Attorney General Eric Holder to shutdown the Silk Road website.
Shutting down Silk Road may be difficult since it requires a technology that anonymizes Internet connections to make it difficult to find. Rather, it might be easier for for the government to cut off its money supply—Bitcoin.
Bitcoin is an interesting concept. Bitcoins are created electronically and have no intrinsic value. Bitcoins get its value through a market that is created around these bits of information and is used to create its own economy. They do not have the protection of being legal tender or backed by a government that would make Bitcoin users whole should the market crash or is closed by legal action. There is also a question whether Bitcoin is legal. Following the conviction of Bernard von NotHaus for creation, distribution, and handling of the “Liberty Dollars,” could Bitcoin be next?
It may not be that simple. It has been reported that the part of the indictment that said “it is a violation of law for private coin systems to compete with the official coinage of the United States” was struck from the document the jury used for its deliberations. In an exchange with prosecutors before the case went to the jury, the judge said that the paragraph did not “appear to the court to be a factual predicate that is supported by the evidence in the case.”
Does this mean that prosecutor was unable to show that von NotHaus tried to create a private coin system or that the government could not prove that a private coin system was a violation of the constitution? We may never know unless von NotHaus appeals the decision and appelate courts rule on the case. In the mean time, that does not prevent the Department of Justice from pursuing Bitcoin or similar ventures.
Bitcoin may be the ultimate private market that someone like Rep. Ron Paul may endorse. But after enduring an economy where legal tender and investments tied to them have shown great volatility, Bitcoin might have to find a more solid foundation before being able to compete in the mainstream economy.
2 comments:
"Pecunia non olet." Money has no smell, i.e., it leave no trace of its origin. For thousands of years, money was anonymous. Even though paper money has serial numbers that make each note theoretically traceable, they, too, leave the buyer and seller unnamed.
The long history of tokens, scrip, and chits, including community currencies, must be taken into account. We numismatists know that even 60 years after the first federal coins, Spanish coins were more common even in Michigan.
F. A. Hayek's monograph, "The Denationalisation of Money" explains why a stable, non-inflationary, banking system did not need a commodity base of gold or silver. He gave the example of an art dealer who owns the plates to make famous lithographs: he can make all he wants; but to maintain their value, he must buy them back at the highest price. I point to common stocks as being similarly valued only by the general market for them.
Furthermore, if you go to the US Treasury website (http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds.htm) you can buy Treasury EE Bonds electronically - and cash them in the same way - and e-EE bonds are a different deal than the paper kind.
Treasury EE Bonds are not currency and do not pretend to be a currency of any kind. They are debt instruments, essentially a loan to the United States government that is backed by the full faith and credit of the United States government. Yes, you can trade bonds, but their worth will be the amount at maturity plus interest at market rates as managed by the Department of the Treasury.
Bitcoin has no backing or promises. It is similar to the trading of tobacco leaves in the early part of the 18th century. When the colonial governments started to issue notes backed by something more tangible, the tobacco leaf notes became worthless.
My point is that Bitcoin's future and legality are questionable, at best. All I am suggesting is caveat emptor!
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