In the internet boom of the 1990s, there was a rush of new alternative payment systems or currencies (Paypal being the most successful). Forbes even ran a great cover story on this issue Politics for the Really Cool. For whatever combination of reasons (the tech being too far ahead of the curve, regulators being over-zealous, outdated laws ill-suited for innovation, etc), the movement petered out. Until recently, that is.
Bitcoin is a grassroots nonprofit project that seeks to fashion a new currency out of little more than cryptography, networking and open-source software, and Andresen is the closest thing the project has to a director. Bitcoin is not, he explains, just a new way to digitally spend dollars, pounds and yen. That's been tried before. Remember Beenz and Flooz?
Bitcoin is different: It wholly replaces state-backed currencies with a digital version that's tougher to forge, cuts across international boundaries, can be stored on your hard drive instead of in a bank, and–perhaps most importantly to many of Bitcoin's users–isn't subject to the inflationary whim of whatever Federal Reserve chief decides to print more money.
Slate is there now talking about Bitcoin with an article My Money Is Cooler Than Yours.
The currency has a few advantages. For criminals, libertarians, and privacy freaks, the Bitcoin system allows for complete anonymity and privacy. Once a transaction is completed, there is no central server with information for the government to subpoena. (If you buy Bitcoins on an exchange, of course, that transaction would have a record.)
The start-up faces formidable competition. Square’s goal is to replace cash registers and point-of-sale terminals and the companies that make them, like Verifone. Square is also taking on the many start-ups that offer cellphone loyalty cards, like Foursquare, and competing with Google, Apple, PayPal and major credit card companies and banks to provide mobile payments.
Jerry Brito adds that Bitcoin or other digital currencies could fill a void for politicized institutions that interfere with payment systems (and infringe on human rights) such as donating to Wikileaks or paying for your online gambling.
The Washington Post followed up with a story the next day that began:
Bitcoin. Oh, man, where to begin. Its Hype-O-Meter got cranked to 11 this week, and breathless histrionics are everywhere. Death and Taxes called this new currency “a seismic event“; Adam Cohen says it’s nothing but a giant scam; Jason Calacanis calls it “the most dangerous project we’ve ever seen“; and they’re all completely wrong. It’s interesting, and innovative, and down the line it might even be important … but in many crucial ways, Bitcoin is nothing new.
I think that this story got it right. The real opportunity for alternative monies will come where the demand is greatest. One of those places is the developing world with central banks that are often more politicized than in developed countries. Zimbabwe, which has been flirting with a return to a gold standard since 2009 and is revisiting the idea of a gold-backed Zim dollar, would be a prime example. Explains the Washington Post story:
Meanwhile, mobile electronic payments are taking off in a big way all over sub-Saharan Africa. It isn’t much of a stretch to imagine Zimbabwe in ten years’ time—or a whole group of developing nations with a history of crippling inflation—adopting a new currency that is independent, incorruptible, and anti-inflationary by design. In short, something a whole lot like Bitcoin. No, it isn’t the future, but it just may point the way.
Of course I pointed this all out in my talk at the Mises Institute's Austrian Scholars Conference panel on how to transition to sound money. There I highlighted the observation of Randy Kroszner's paper on the Scottish free banking experience as a model for developing countries. I think his analogy is a sound one that the conditions in many developing countries today are similar to those in Scotland during its free banking experience.
With the Federal Reserve monetizing our budget deficits, there is already increasing talk of the dollar losing its global reserve currency status. Some speculated the euro might challenge it, but those economies face their own problems. Others envision a basket of currencies or commodities. The most likely threat there was from the International Monetary Fund's Special Drawing Rights, but the SDRs have lost their sex appeal with the disgraced IMF leader in the tabloids.
The real challenge to the hegemony of the US dollar might just come from the likes of a Bitcoin.