Back in July 2011 we blogged about Bitcoin, the world’s first digitalized, crypto-currency. At the time, many thought Bitcoin a flash in the pan, attracting attention simply because it was still relatively new and exciting – but imagined interest would soon wear off. After three years however, Bitcoin doesn’t show signs of slowing down. Our last post touched upon Bitcoin’s use for undertaking illicit activities and the lack of institutional involvement. I’m going to revisit these themes and also discuss Ripple – the next currency you’ve never heard of.
Due to the increased anonymity associated with transactions undertaken using Bitcoin, there has been a fear that illegal acts are being made a lot easier, and a lot safer to conduct. A recent article for PCPro claimed that Bitcoin “is now the currency of choice for the discerning cybercriminal.” This image problem has not been helped by articles associating bitcoins with Silk Road, an online ‘underground’ marketplace (accessible only via Tor) where all kinds of illicit goods may be purchased – weaponry, forgeries and drugs – and where the digital currency is the only accepted method of payment. This undoubtedly sullies Bitcoin’s reputation, and to a disproportionate degree: The Internet itself has facilitated commerce, and necessarily the crime which accompanies any marketplace. But security agencies can be just as resourceful as criminals, developing network analysis techniques based on statistical methodologies to detect suspicious transaction flows. Rather than a destructive force, the appearance of Bitcoin and its use for ‘bad’ as well as ‘good’ is simply another reiteration of the cat-and-mouse game played out every day between criminals and the law.
Focusing too heavily on the negative also draws attention away from positive aspects of the degree of anonymity afforded by Bitcoin users, such as the ability to engage online from states such as Iran or China via VPN services: when using bitcoins, no names are involved, so Internet service providers cannot divulge their client list to the authorities. Donations to legal – if perhaps provocative – causes can be made anonymously, reducing the potential for social stigma. In places where banking infrastructure is weak, Bitcoin allows people to conduct transactions through a mobile phone without the need for third-party interference. In the South for example, money can then be transferred directly to a recipient, bypassing state bureaucracy. Does this mean we should be championing Bitcoin as a tool for development? Not yet, maybe – but the potential exists and should be kept in mind.
Catherine Flick is a technological ethicist who uses bitcoins. She did a survey looking at the social and ethical aspects of Bitcoin, and presents her findings in the video slideshow below. It was not a truly representative survey, but the findings are nevertheless interesting.
Banking on the future?
Bypassing banks has been seen as a great benefit of using bitcoins, but this does not preclude bank involvement in the future. Gavin Andreson, the lead core developer for Bitcoin, said that there “is a big role potentially for banks, just as banks deal in all sorts of other currencies like euros, yen and dollars.” A stumbling block in the broader adoption of Bitcoin has been trust – many people simply don’t value a currency operating outside the traditional financial system. With support from the ‘old guard’, Bitcoin’s legitimacy would likely increase, aiding its diffusion. It may also help with the supply of bitcoins once the final limit of 21 million have been produced: banks would be able to lend out bitcoins deposited in accounts, facilitating the provision of credit. As the Bitcoin economy develops and becomes more sophisticated, banks may begin to recognize the benefits to their business of allowing customers to store multiple currencies: Fidor Bank AG already allows its account holders to buy platinum and palladium, and, should they so wish, send them to Twitter accounts or mobile phone numbers in the same way as if they were dollars or euros.
Ripple? More like an echo
I mentioned Ripple – another alternative currency, but one which has not scaled up to the required level to be useful – and therefore relatively unknown. What is it? Even more esoteric than Bitcoin. Taken from the Ripple Project website: “Money as we know it is made from promises, specifically bank promises, in the form of bank account balances. Ripple’s goal is to make your promises as useful for paying people as bank promises are.” Translated: Ripple is a peer-to-peer credit network where IOUs function as money. It is however all based on trust – if a seller does not trust the person proffering the IOU, then nothing can happen. So, a network of friends is required, so that if the seller does not trust you – but trusts your friend, who ‘vouches’ for you – then the transaction can continue. If this sounds a little like going ‘back to the future’, you may be right. Karl Polanyi discussed pre-market economy society in his book, The Great Transformation, and noted the existence of ‘reciprocity’ as a functioning system. It seems that despite our great leaps forward in terms of technology, history is inexorably repeating itself.
Ten or twenty years from now bitcoins may be as accepted as rupees, baht or ringgit are now. Ripple may have finally reached the level of network participation needed for it to function successfully. Or maybe central banks and governments will have legislated them into impossibility, claiming a monopoly on the creation of currency. Money talks, and the euro is currently screaming for help. After that experiment, is the world ready for another?