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    Bitcoin: Threat or Menace?

    By Mandeep Bhandal, on 4 April 2013

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    ISRS Associate Fellow, Vinay Gupta provides an assessment of bitcoin.

    Bitcoin: Threat or Menace?

    It’s easy to get carried away by the rhetoric around bitcoin. A “came from nowhere” new financial instrument with murky anonymous origins, associated with non-state anarchocapitalist libertarians, seems like something sprung to life out of science fiction.

    Really we should not be surprised. Bitcoin is the unexpected interaction of three trends.

    Firstly, there are ongoing efforts to make digital systems replicate the properties of real objects. Copyright holders have created generation after generation of digital rights management (DRM) systems to try and make files on a DVD as hard to illicitly copy as bulky, expensive 35mm cinema projector prints rather than infinitely replicable bits on a spinning disk. That other groups would try to produce hard-to-clone property rights in the digital medium should be a surprise to nobody.

    Secondly, bitcoin is decentralized. Many modern computer utilities are decentralized: Skype, Spotify, Bittorrent and more are all “peer to peer” below their smooth exteriors. When you are running Skype, your computer is helping other users make calls, and nobody really cares. As sophistication increases, and user’s own computers increasingly do the work that was done in expensive data centers, it gets easier and easier to build systems which take the last jump and simply have no center at all.

    Finally, dotcoms have recently been acquiring value faster than ever. Instagram went from zero to a billion dollars of value in two years, and was then sold to Facebook. Value sloshes around in these ecosystems at stampede rates with very little predictability. Was a photo sharing service with some cool image processing filters ever really worth a billion dollars? Only the market knows – a greater fool purchases your stock, and to you, in that moment, the value is completely real. Is it real for the greater fool? That depends on access to an even greater fool. But fools have never been in short supply.

    In bitcoin these three trends combined: technical creation of hard property rights meets decentralization and an extremely rapid acquisition of perceived value. It should also be noted that “crypto-currencies” of this type go back at least 20 years in practice, and further in theory.

    Really, the only surprise is that it is happening now, and in this particular rather strange form.

    The end game for cryptocurrencies has always been the collapse of the State through tax starvation. Theorists like Tim May (formerly of Intel) predicted the collapse of the state as an inevitable consequence of widespread digital networks, and viewed the fall of the USSR as a direct result of information and communication technologies. They predicted that once cryptocurrencies became established, mass migration away from national currencies would spell and end to the current status quo. When we consider small nations like Cyprus, it’s easy to imagine a speculative future in which mass migration to a new currency standard leaves the European Central Bank largely without influence.

    To assess the plausibility of those scenarios, we need only ask one simple question: “is the internet bigger than the State?” In most cases, the answer is “no.” A few very small, very fragile states might be actively at risk from digital currencies, but for the most part, State regulation of the internet is still possible, and a currency which was becoming a genuine threat to the national currency could be killed one way or another. Draconian measures might be required, but where there’s a will, there’s a way.

    However, if Google-Facebook-Amazon-Apple-Microsoft-eBay-PayPal got in to the currency game, this situation could change rapidly. An internet currency backed by a consortium of that size could seriously upend many of our expectations about how the world should work. They would be capturing the last remaining part of the value chain left behind by the credit card companies.

    If they got it right, they might wind up bigger than VISA.

    The narrow libertarian reading of the State roots its power in finance and the coercive power of taxation. A broader understanding of the State might root its power in national identity or even simplistic notions on the monopoly on legitimate violence. Within that wider context, it’s obvious that for cryptocurrencies to have substantial impact, they are going to have to grow very broad shoulders indeed. The table is very large, the players many, and the histories long.

    It’s going to take more than a digital analogue of the old Swiss anonymous banking system to cause a real upset. It may yet come, but not today.