Tags: Felten | bitcoin | McArdle | bank

Expert Discusses Bitcoin Currency

By Robert Feinberg   |   Thursday, 20 Feb 2014 01:22 PM

Edward Felten, policy director of the Center for Information Technology Policy at Princeton, was interviewed recently by John McArdle of C-SPAN's Washington Journal about the problems with the virtual currency bitcoin.

One of the themes of the year for these articles is that serious problems with the payments system have been festering for decades, and now, coincident with the 100th anniversary of the Federal Reserve, which runs the payments system in conjunction with "too big to fail" banks, these problems are coming to the fore.

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Congress sees opportunities to grab headlines and promote solutions that are bound to be inadequate. Since bitcoin has established itself as part of the picture and has received remarkable acceptance by key senators, it is timely to get the perspective of an expert from a well-endowed institution.

Felten explained that what is unique about bitcoin is the technology behind it, which is totally decentralized. It was created several years ago by someone called Satoshi Nakamoto, the pseudonym for the person who wrote a white paper and some software. It's use is becoming widespread, although it only represents $8 billion of value, and $100 million per day in payments.

Bitcoin is strictly digital, which provides a stronger level of security than a check does. Felten observed that in settings where traditional banking performs poorly, where it takes a long time, where it imposes high fees, it might be cheaper to use bitcoin to transfer money, especially across boarder.

Prices are set in a competitive market of bitcoin exchanges. Bitcoins are "mined" at about $20,000 very 10 minutes by people who manage to solve a particular equation, and a public ledger is kept that tracks everything that happens in the system. Felten emphasized that views differ as to whether bitcoin will continue to establish itself as an alternative currency or if it will turn out to be a stage in the evolution of some other payment medium or standard.

Asked by McArdle how regulators around the world view bitcoin, Felten responded crisply that they're trying to figure it out, including how to apply anti-money laundering regulations to these transactions, while still allowing the technology to flourish, and there's still a long road ahead in working toward these objectives.

Asked about the attractiveness of bitcoin as an investment, Felten again answered directly, "You'll probably lose all your money, but you might make a lot."

In response to a caller who dismissed bitcoin as a scam, Felten defended it as "designed in a very clever way that makes it very difficult for anyone to get control of it (for the ascribed purpose of robbing the system)." He pointed out that the system of administering the ledgers by consensus has proven so far to be very stable. He added that while the value of bitcoin depends on the willingness of people to accept it, that's ultimately true of any kind of money.

Two ideas that I find highly compelling are the potential, on the one hand, to disrupt the chronically obsolete payment technology administered by the Fed and the banking cartel, and on the other, to offer practical solutions if, for example, a powerful nonbank company decided to adopt and promote it.

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(Archived video can be found here.)

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