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Tags: Bitcoin | digital | currency | sovereign

What's Up With Bitcoin?

Ed Moy By Friday, 20 December 2013 07:16 AM Current | Bio | Archive

When the price of one Bitcoin surged to over $1,200, this bundle of electronic digits was worth almost 1 ounce of gold. There has been a lot of Bitcoin buzz in the last year, but after the generally positive Senate hearing recently, interest in Bitcoin skyrocketed before coming down to earth when the Chinese government restricted the use of Bitcoins.

As a former director of the United States Mint, I'm frequently asked my opinion about digital currency, and the cryptocurrency industry, especially Bitcoin. The most common question that I get is, "Is Bitcoin the currency of the future?"

The currency standard has evolved from precious metal-based to fiat over time. When the first coins were minted, their melt value was equal to their face value. Even the later invention of a paper bill was essentially a note that could be redeemed for precious metal equal to the bill's face value. The last vestige of a precious metal standard died in the 1970s when the definition of the value of a dollar was changed to remove any reference to gold. The dollar is now fiat money, because no commodity backs it, just the "full faith and credit" of the United States government.

Further, the form of currency has evolved from coins to electronic currency. Governments, to facilitate commerce and trade, took on the role of determining denominations and standards, as well as the minting of coins. Eventually, government printed bills to supplement coins.

Then came checks and money orders, which cleared the way for transaction systems distinct from the physical transfer of currency. Electronic currency in the form of credit cards and debit cards were the logical next steps.

What comes after electronic currency? The next generation of currency may be digital currency.

The promise of digital currency is a new financial transaction system: cheaper, more efficient and secure transactions. No currency wars, exchange rates and arbitrage. There could be less friction and more transparency for every transaction.

One criticism of digital currency is that it has less backing than does fiat money, which at least has a sovereign government as a backstop. But is a centralized government decree more or less trustworthy than a decentralized free market where individuals' confidence determines acceptability?

Given the huge amounts of currency "printed" by many unelected central bankers around the world to stimulate their economies hurt from the financial crisis, a small but growing number of people are beginning to have more confidence in themselves and not what they perceive as reckless and unaccountable governments.

Naysayers also point out that if Bitcoins are lost or stolen, they are hard to recover and that its anonymity can facilitate illegal activity. But Bitcoins may be more secure because they can be "backed up," which is much more difficult to do with cash and, to some degree, electronic currency.

And while there is the potential for large-scale illegal activity, the most common currency used for illegal activity is the U.S. dollar, in both bill and electronic formats.

Other problems stem from it being new, like limited acceptability and volatility, but over time these issues will diminish.

Realizing digital currency's promise will be depend on one of two paths. First, governments may force digital currency to comply with the existing financial transaction system. This would slow digital currency's development, but make it easier for governments to get comfortable with it.

Second, government may allow the marketplace to develop a new financial transaction system. This would accelerate digital currency's development, but make it difficult for governments to get comfortable with it.

The next five to 10 years will be critical.

But like how the mobile devices, Internet, cable, television, movies, musicals, operas and symphonies all have found their niches, the same will be with currency. Precious metals like silver and gold will co-exist with coins and bills (necessary if the lights go out or cyber attack), checks and money orders, credit and debit cards, online payments and digital currency.

Competition begets innovation and the best innovations find their place in a free market, even forms of currency. In other words, digital currency may eventually be the most important player, but not the exclusive player.

In short, I don't think anyone knows for sure, but digital currency seems to be the next logical step in the evolution of currency. This technology has the ability to disrupt the status quo and springboard the global economy into the future. It gets sovereign nations out of the currency manipulation business. It may or may not be Bitcoin or its imitators, but chances are likely that digital currency is here to stay.

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When the price of one Bitcoin surged to over $1,200, this bundle of electronic digits was worth almost 1 ounce of gold.
Friday, 20 December 2013 07:16 AM
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