Wednesday, December 18, 2013

A Brief Response to Glenn Jacobs

Finally, a sensible response to Bitcoin from the von Mises Institute community! Glenn Jacobs, aka Kane, puts his finger on two legitimate concerns about the digital currency instead of following Gary North down the path of (what should be embarrassing) ignorance. I'm going to respond as briefly as possible, with an eye toward shedding light on these concerns rather than just arguing.

Concern #1: Lack of commodity value -- Bitcoin is not something like gold or silver, nor is it backed by anything like gold or silver. While Jacobs, being an Austrian when it comes to economics, agrees that value is subjective, he's concerned that there doesn't seem to really be any "there" there with Bitcoin. It's just encrypted bits exchanged across a network.

My response: Jacobs is absolutely right, so far as I can tell. There's some noise from the Bitcoin community about Bitcoin's value deriving from the work of "mining" and maintaining the "block chain" of transactions, but I can't say I find that argument convincing.

Bitcoin's real value to people (apart from speculators who are just trying to grab fiat currency profits by "investing" in it while it lasts) seems to be responsive to Jacobs's question: "If the precious metals were actually allowed to compete in the market as money, would there even be a need for something like Bitcoin?"

Bitcoin is far from the first electronic currency. There were several metals-based transaction systems at one time. Some of them (e-gold and Liberty Dollar are two that come to mind) were prosecuted and had the assets backing their currencies stolen by the US government. Another, Goldmoney, apparently failed to catch on because its proprietors wasted too much time, money and effort attempting to jump through anti-competitive government regulatory hoops.

The reason there's a need for something like Bitcoin is that gold and silver aren't actually allowed to compete in the market as money. The value in Bitcoin is that it's able to function whether government wants it to or not. There's no overall system owner to prosecute. There are no physical assets to seize.

It's true that the only thing really backing Bitcoin is its users' belief in the soundness and security of the Bitcoin system itself. That's nowhere as good as gold bars in a vault, but it's better than the "full faith and credit" of governments who debase their currency offerings at will and at great cost to their unwilling customers.

My expectation is that once the state has been smashed (or at least brought to heel in some major way) such that currencies can compete in a free market, people will prefer digital currencies backed by real commodities (but maintaining some important characteristics of Bitcoin). Until then, Bitcoin and its kin are  reasonable kludges.

Concern #2: Jacobs's perception that "government and central bank officials have given Bitcoin lukewarm approval."

My response: I don't think Glenn is seeing this correctly, but I don't think he's seeing it unreasonably.

I've noted two different types of government response to Bitcoin.

In China, the regime is trying to crack down -- first banning bank involvement in Bitcoin, then banning payment processor acceptance of Bitcoin. The crackdown won't work, but they're trying it.

The US and other governments seem to be more aware of the fact that there's absolutely nothing they can do -- short of shutting down the Internet -- to stop Bitcoin. So they're trying to co-opt it in three ways:

  • Leveraging the desire of some of the big players (Mt.Gox, Coinbase) to become "part of the mainstream" by welcoming their willingness to e.g. require government-issued identification for large transactions.
  • Issuing edicts (e.g. "FINCEN Guidance") that they hope will cow other players and users into acting with Bitcoin like they do with fiat currency (pay their taxes, etc.).
  • Busting some of the other big players (e.g. Silk Road) in an attempt to prove that they can control Bitcoin (that isn't working, any more than China's crackdowns will).
The approval Glenn is seeing isn't "lukewarm" -- it's fake. Governments hate Bitcoin, because whatever else it might be, it's an economic phenomenon that is (or at least potentially can be) immune to their control, regulation and taxation schemes. Some of the smarter governments are ever so slightly playing along, looking for a weakness. But in reality none of them like it one little bit.

I can only see one real way in which governments could hope to compete with Bitcoin, and that is if they decided to give up on fiat paper and start issuing gold- and silver-backed currencies of their own. And I don't see that happening.

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