Bitcoins: the peer to peer currency

A couple of years ago I read a book called The End of Money, by Thomas Greco. In it, the author predicted that at some point, some internet application would do for money what Skype has done for the telecommunications industry. It’s only a matter of time before someone blows the whole thing open, re-writes the rules and changes the game for good. It’s happened already for communications, the music industry, software monopolies, and to my disappointment, book retail. So why not money?

Money, after all, is whatever we say it is. It is an agreed mechanism of exchange. Governments like to issue the only official currencies, because they can then control them (and print more of them if necessary), but money has always been broader than legal currency. The internet opens up the possibility of a global, peer to peer currency, outside of government control.

It is one of those ideas that is both exciting and dangerous. The internet is not controlled, which means it can be used for fraud and pornography as well as for information and trade and everything else. An internet currency would be subject to the same problems, and could be used to pay for illegal goods and illegal activities. Alongside the potential for abuse, it could do a power of good, opening up cheaper exchange mechanisms for small traders, and wrestling control of the money system away from both controlling governments and big companies such as Visa and Mastercard. Either way, like the internet itself, once it’s out there it can never go back in the box.

So is anyone about to do a Skype on the money system? One candidate is Bitcoin. It’s peer to peer, open source, untraceable and supposedly unhackable (!). It creates coins through ‘mining’, and those ‘coins’ can then be traded though a ‘digital wallet’. Here’s a technical paper explaining the idea, and an introductory video:

A friendly video, I’m sure you’ll agree, but the idea itself could be more powerful than it initially appears. Because it’s peer to peer, nobody controls Bitcoins or owns the system. Nobody can freeze your account, as Paypal can do, or reveal your identity under pressure, as Twitter was forced to do recently. You could use them to buy drugs online or move dirty money between countries, like an electronic version of bearer bonds. Equally, they could protect ordinary citizens from losing everything if their own legal currency does a Zimbabwe. It’s both a great freedom and a big risk, a libertarian’s dream and a government’s nightmare. In fact, Launch calls it ‘the most dangerous project we’ve ever seen‘, and ‘the Wikileaks of monetary policy’. They predict that governments will attempt to ban Bitcoins as soon as they hear of them. Which will probably be too late to stop them.

However, launching a new currency is difficult and these sorts of ideas fail all the time, both online and offline. Nothing is foolproof and beyond fraud, no matter how decentralised and hackproof it appears to be. Someone will work out how to defraud the system, or more likely, steal them. More importantly, all currencies that can be exchanged for others can rise or fall in value and are subject to speculation. Since the value of a bitcoin has soared ninefold in two months, some are already predicting a bubble. Even the fear of a bubble could prompt a rush to get rid of them, and the project would fail.

My own opinion is that bitcoins is a project to watch, but it’s not the end-of-the-line for money that Thomas Greco predicted. It’s still a currency, and I reckon the real game changer will transcend the need to exchange anything at all. The big innovation comes when money is brought back to its fundamental base unit, which is human labour. Everything I earn is rooted in my time and who I make it available to, so time-backed money is the purest and simplest form of it. Eventually, you and I will leverage our lifetime’s worth of productive hours and issue it as our own money. That’s the big one, and someone, somewhere, is working on it right now.

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