Digital money

The EFF has an interesting article on something called bitcoin, a pure digital currency not backed by anything, or controlled by any single authority, and with a hard limit on the total cash that will ever be generated. The cash generation scheme is a proof-of-work system, which means it is not “free.” Not surprising, then, to see generation being thought of as “mining,” and people pooling computing resources via mining associations. Digital money is an old idea, and hasn’t been successful, yet, as far as adoption goes. Those that were adopted (they were backed by gold/silver), have been targeted by the US government. From a recent article at LewRockwell

[I]’ve spent much of my time thinking about how to inject a new currency into an existing regime without using force like with the Euro. I was an adopter of The Liberty Dollar, which was an interesting idea until the raid by the FBI in 2007. It highlighted the growing concern with the US Dollar; giving people the illusion of a silver-backed currency while hedging against its own success or failure by buying their coins and storing them away.

E-Gold’s troubles with The Man were equally predictable; thieves hate competition. The Liberty Dollar was being persecuted over a broad interpretation of counterfeiting laws (irony duly noted) while E-Gold was harassed over their customer’s actions, not any actions of their own. The Federal Government is allowed to run the twin Ponzi Schemes of Social Security and Medicare but U.S. citizens are not allowed to engage in commerce with those engaging in similar activities while not actively engaging in those activities themselves.

In other news, water is wet.

The ideal digital currency would be something that is scarce, can’t be generated for free, is decentralized, can’t be tracked or controlled by governments, and something that safeguards the anonymity of both parties to the transaction. What can’t be traced, can’t be taxed. If the currency does become successful, competitors (financial institutions) will no doubt go and complain to the government and demand regulation: it enables money laundering! And terrorism! And pornography of the you-know-what kind! And a multitude of other criminal activities! But there is nothing to raid, and no gold reserves to confiscate. The best that they can do is make the whole thing illegal and go after merchants accepting the currency, thereby driving the currency underground. But that will still leave individuals with some risk appetite trading services and products with other individuals. And surely money is better than barter!

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Comments

  • Mark Herpel  On January 29, 2011 at 9:50 pm

    Bitcoin rocks.

  • Ricketson  On January 31, 2011 at 3:43 am

    I’m excited about these currency systems that people develop, but disappointed that none seem the quite work yet.

    When I imagine the ideal currency, I’m forced to rely on children’s cartoons from the 1980’s — Energon! (from Tranformers).

    Anyway, the basic idea is to use energy as the medium of exchange. Of course, this would require technologies that have yet to be invented, and may be theoretically impossible, for all I know.

    This system would require a hand-held, general purpose battery with a few properties:

    1) Can hold a large amount of energy (>$100 worth)
    2) Does not not drain over time,
    3) Can transfer energy between batteries with minimal loss.

    This would allow small-scale, anonymous commerce. Energy utilities would act as banks, backed by their ability to deliver energy as demanded.

    • Aristotle The Geek  On January 31, 2011 at 6:31 pm

      # “I’m excited about these currency systems that people develop, but disappointed that none seem the quite work yet.”
      Lack of adoption due to inertia, and a possible government crackdown are somewhat minor problems. Though the idea is interesting, my question, from the point of view of economics, would be why should I go with, say, bitcoin, rather than its competitor xyz? After all, there is hardly any barrier to entry. The precious metals have survived for such a long time because they have alternative uses which make them valuable on their own. Digital currencies don’t have this property. Though effort has to be expended in “mining” them, they don’t have any alternative use for which people would be ready to give something up. This makes them highly vulnerable to a myspace-to-facebook kind of flight.

      # “Anyway, the basic idea is to use energy as the medium of exchange.”
      Energy might work because it is useful on its own. But energy is not “scarce” because of build-or-buy. Should I buy energy units from you every time I need them, or build my own wind mill which will provide me with free power for a long long time?

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