By Dan Kervick
John Gapper, writing in the Financial Times, argues that Bitcoin enthusiasts need to grow up, and that Bitcoin itself needs to grow out of its obsessive adolescence. He writes in the aftermath of last week’s Newsweek story purporting to identify Bitcoin’s creator, and following the recent collapse and bankruptcy filing of the Mt. Gox Bitcoin exchange. In regard to the first event, which has sparked an outburst of hysterical resentment from the Bitcoin community, Gapper writes:
The hysteria undermines Bitcoin’s chances of graduating from a hobbyists’ obsession to a mainstream technology. You cannot challenge fiat currencies and disrupt the global payments industry while reacting to any uninvited scrutiny like an adolescent whose parent has opened the bedroom door without knocking. It does not work that way.
And Gapper also has some advice about the evasions of Bitcoiners in response to the Mt. Gox debacle:
In the case of other exchanges, and perhaps Mt Gox, Bitcoin payments were settled as intended but hackers then altered identifying information on the transactions to fool exchanges into believing that Bitcoins had not changed hands. Mt Gox, the argument goes, was a victim of its own sloppy online bookkeeping rather than a Bitcoin flaw.
To the average consumer, this is a distinction without a difference. Being able to trust “Bitcoin” as a technology but not to be sure that your own Bitcoins are safe does not mean much. The basic function of a bank is to store its depositors’ cash more securely than keeping it under the mattress and if Bitcoin cannot match it, little else matters.
Gapper’s piece is a plea to Bitcoin fans to act like grownups, and to get to work restoring Bitcoin’s credibility. But I’m afraid the non-grownup features of the crypto-currencies that Gapper now bemoans are not just remediable accidents of their current stage of development, but are inherent in their basic setup, which has always reflected a very naive understanding of the social and institutional nature of currencies and monetary systems, and a juvenile affection for the online virtual world of masks and shadows. The processes by which the crypto-currencies might be rendered more safe, stable, well-regulated and legally transparent are the very same processes which are gradually removing whatever features once separated those would-be currencies from conventional currencies, and which will destroy them as viable alternative systems for anything but a small residual volume of black market transactions.
Any advantages cryptographic currency platforms might provide over conventional digital currency platforms employing state-backed, third party bank currencies and public currencies will eventually be mimicked or absorbed by conventional systems, or else out-competed by equally low-cost, but more conventional alternatives. The fact is that in the long-run most honest people don’t want to use a weakly-regulated peer-to-peer “crypto” currency which offers less security, stability and legal verifiability than conventional currencies. Also, since Bitcoin will never achieve its dream of becoming an all-purpose medium of exchange that people are willing to hold and save, and not just used for spot exchanges on an as-needed basis, there will remain transaction costs at both ends of Bitcoin transactions as its users convert out of and then back into the conventional currencies that they really want to hold. Finally, the lack of formal, institutionalized accounting in the small Bitcoin economy based on the transactors’ names and other legal identifiers – a feature the enthusiasts see as Bitcoin’s greatest virtue – is ultimately going to add another layer of reporting costs and potential legal liabilities for users, since governments are clearly not going to allow a massive tax evasion and money laundering system to flourish unencumbered by verifiable record-keeping and reporting. Once governments fully catch up to the technology, and all of those required regulatory features are built into the more mature version of the Bitcoin economy, it is hard to see what benefits will remain.
The surge of interest in these cryptographic platforms should have a beneficial competitive effect in driving down some of the costs of international transactions and spurring the evolution of more efficient correspondent bank relationships. Perhaps some societies and governments will even be spurred to explore public banking alternatives. That ongoing evolutionary process might move somewhat more rapidly now than would otherwise have been the case. So we can thank the Bitcoiners for that. But once that process is complete, most of the utility of the crypto-currencies that spurred the innovation will evaporate, since using those currencies comes with added risks and costs that the conventional currencies don’t possess in the same degree. The crypto-currencies might survive as a minor semi-legal sideline for the purchase of pornography, drugs and other unsavory items. But I’m inclined to think the dreams of the investors in both the currencies themselves and in the ancillary infrastructure around them will largely prove to be misguided.
I have been told by some of the Bitcoin fans that one cannot simply assimilate the features of Bitcoin into existing payment networks, since Bitcoin is really very different from the bottom-up, technologically speaking. That might well be true, but my claim is that in the long run the cost savings from Bitcoin transactions will prove so small, and the added costs, risks and inconveniences so great, that conventional third party payment systems will have no problem out-competing Bitcoin, not by assimilating Bitcoin technology but by running more conventional payment technology in a cheaper and more efficiently networked way.
Another Bitcoin fan told me, “you can exchange your bitcoins into dollars about six times back and forth and a transaction is still cheaper than with a credit card.” But the relevant comparison is with a check card used for immediate payment with one-time transaction fees, not credit cards used for deferred, interest-bearing payments. Conventional digital payment platforms continue to evolve, and will eventually be able to accomplish all that Bitcoin achieves, but without the risks that come from using a clandestine payment system that can’t be easily and directly regulated and in which contracts can’t be legally upheld and disputes legally resolved without a lot of time-consuming and cost-adding investigative headaches. The very existence of a system of market exchange based on private property rights presupposes and depends on a legal system that can efficiently assign and uphold those rights. A market system and a legal system are two faces of one and the same animal.
Bitcoin fans in the programming community are very impressed by the purely mathematical and technological achievement of Bitcoin in creating a “trustless” payment system that permits anonymity without double-spending and obvious fraud. But the feature of conventional monetary and payment systems that Bitcoin enthusiasts seem to regard as the source of original sin – transparency to governmental and legal authorities, and a retrievable and enforceable public record of transactions – is in fact one of the very cornerstones of the conventional systems’ well-established utility. Building a trustless and partly clandestine system is primarily of value to black marketeers, money launderers, gamesters and tax cheats. The fact that programmers have cleverly solved a technical problem that allows them to exchange virtual gold in a virtual kingdom without knowing the identity of the troll or dragon princess on the end of the transaction really isn’t all that awesome a source of value for non-virtual, real-world economies, or for the grownup people who live in those economies.
Cross-posted from Rugged Egalitarianism