Bitcoin, a digital cryptocurrency, is a potentially disruptive technology offering both social and economic gains. While the technology that has revolutionized peer-to-peer payments is growing in popularity, it is nevertheless vulnerable to being stamped out by overzealous regulators and reactionary politicians.
Bitcoin is the world’s first decentralized digital currency. Its revolutionary use of a public, distributed ledger has eliminated the need for a third party intermediary (like Paypal, for instance) to conduct financial transactions over the internet. Payments tracked by the ledger are denominated in bitcoins, which are traded on an open market.
Bitcoins have no intrinsic value, though they have several characteristics that make them desirable as currency, so the exchange rate is determined purely by market demand. But unlike fiat government currencies, bitcoins are limited in supply. Right now there are less than 12 million in circulation, with an estimated maximum of 21 million (and many more potential smaller units as bitcoins are divisible up to 8 decimal places). Bitcoins cannot simply be printed to fund profligate government and political vote-buying schemes. Rather, until the maximum is reached new bitcoins are introduced solely through computational “mining,” which essentially awards those who supply the computational power necessary to conduct the public transactions with “discovery” of new bitcoins, which happens at a diminishing rate over time. That’s the simple explanation, anyway, but it is sufficient for this post.
Absence of a third party intermediary allows Bitcoin to circumvent all manner of centralized financial controls, which makes the currency freedom enhancing. It has potential to benefit developing nations, or any place where bad policies and institutional corruption have made capital formation near impossible. Bitcoin is widely popular in Argentina, for instance, where government mismanagement is wiping out savings.
Benefits also abound closer to home. Bitcoin transfers have much lower transaction costs than the credit card fees that can be prohibitively expensive for small businesses, which opens up new possible business models and further benefits consumers via lower prices.
Unfortunately, being of economic value – even significantly so – is not enough to ensure success in the modern economy. The sad truth is that it’s not enough for new technologies to offer significant advances, they also must survive the political and regulatory gauntlet, which oddly appears to be proportional in difficulty to an invention’s upside.
A veritable alphabet soup of regulatory agencies are salivating at the chance to rein in Bitcoin and extend their authority to a new sphere. As an indication of the agencies lawmakers see as relevant to Bitcoin, the Senate Homeland Security and Government Affairs Committee recently sent letters requesting information on their approach to digital currency to the Homeland Security Department, Justice Department, Federal Reserve, Treasury Department, Securities and Exchange Commission, Commodity Futures Trading Commission and the Office of Management and Budget. That’s no doubt just the starting point.
The ongoing and misguided obsession of policymakers with pursuing excessive and destructive anti-money-laundering laws further threatens to entangle Bitcoin. The Treasury Department’s Financial Crimes Enforcement Network claimed in March that exchanges for Bitcoin and other digital currencies are considered money-services businesses and thus subject to the same onerous controls as traditional financial institutions. The U.S. government has already unconstitutionally shut down another private currency called Liberty Reserve for no other reason than that it allegedly “allowed criminals to hide the sources of their money.” So, of course, does cash, and regulators didn’t wait to convict any users of actual crimes. And while politicians are aiming for a world in which all of your financial information is available to them, financial privacy is still at this time legal.
Although Bitcoin’s decentralized nature is an asset in the free market, it is a hindrance in Washington DC where organized interests rule. Without an established industry to fight for Bitcoin, it ultimately falls on those of us who believe in free markets, financial privacy, and basic human liberty to keep the regulators at bay.
