The recent Senate Homeland Security and Governmental Affairs Committee’s hearings on the potential of digital currencies as political donations may be of interest.
We have known virtual currencies that don’t involve banks: from Monopoly or poker, to more sophisticated video games where “money” is earned at various stages; likewise, they are used in closed communities and resorts.
Detractors see it as a short-lived digital craze; promoters believe this will be a game-changer. Whether called “digital currency,” “e-Money,” “electronic cash system” or “altcoins,” these innovations push the conceptual and practical limits of what we mean by money.
Money has both value and function, being exchanged for actual commodities or services according to a certain cultural logic that legitimizes it. Georg Simmel suggested over a century ago that it is “the most ephemeral thing in the external-practical world; yet in its content it is the most stable, since it stands as the point of indifference and balance between all other phenomena in the world.”
Are we all meeting at the public square and expecting the backing of government agencies and banks, or in a virtual space that allows for anonymity and complete disregard of state institutions. How long did it take us to trust paying bills virtually?
A group of cyberpunks was intent on challenging government authority. In 1998, Wei Dai proposed “b-money” as an untraceable digital currency. Ten years later, Satoshi Nakamoto (a pseudonym) released his version of bitcoin, saying “what is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
A coin is defined by Nakamoto as “a chain of digital signatures” or “hash.” A cryptographic hash function is an algorithm that configures an arbitrary block of data and affixes to it a hash value. With a “timestamp” one knows the timeline of each movement from one user to another. It cannot be reversed, thus avoiding double-counting. Though users remain anonymous, the exchange itself is public. Bitcoin owners are required to “mine” them: finding a solution to a difficult problem with high-powered computers and sophisticated programs.
More recent developments include PeerCoin, Litecoin and anoncoin. Unlike bitcoin’s reclusive originators, Charles Lee is open about his creation of Litecoin. The former Google programmer believes in advancing the future of cyber transactions — why not have more choices?
The value of one bitcoin has ranged from as little as $2 a couple of years ago, spiked at $2,000, to over $900 now; total value in circulation is billions of dollars. Surely this cyber-“ecosystem” is comprised of earnest cryptographers showing off their expertise, but it also invites criminals looking for ways to hide from scrutiny.
Promoters praise “peer-to-peer electronic cash systems” for eschewing “third party” reliance on governmental central banks or commercial banks and replacing “trust” with cryptography; this presumably avoids the collapse of money value from inflation and eliminates transaction costs levied by credit cards or banks.
The issues spawning this movement can be rewritten as individual freedom, distrust of government, trust in technology as a neutral and fair method, and distaste for waste. A strong libertarian streak is evident here!
Altcoins aim to appeal to merchants trading via Internet. What happens once altcoins are exchanged for dollars? Will they become traceable and regulated?
With claims to safety and reliability, trustworthiness and increased use, the bitcoin experiment is limited to about $20-40 million and will never threaten the status quo of trillions of dollars in annual transactions. Are altcoins counterfeit money? New ways to launder money? Taxable? Hence the Senate hearings.
Do you recall the so-called Swiss Dinar in Iraq? Backed by Iraq’s government before the 1990 Gulf War, it was “disendorsed” after the war and a “Saddam Dinar” took its place. The fascinating fact: In northern Iraq the Swiss Dinar retained its value while the Saddam Dinar was affected by hyperinflation after the 2003 invasion of Iraq. No gold reserves and no real value; was it the faith individuals put in the (Swiss vs. Saddam) name of the currency?
Unlike Monopoly money or coins at all-inclusive resorts, altcoins need to have a moral gravitas that anchors them in something other than the encryption world of programmers. They need the sanction of transparency and good faith, and more universal acceptance than by speculators alone. Till then, let me stay with dollar bills.