Bitcoin: What Comes Next?

Having been called a techno-utopian for previously celebrating The Pirate Bay, Wikileaks, encrypted currencies and darknets, and given my recent gushing over Bitcoin, I feel I should say something about the Bitcoin crash.

Mt. Gox, the largest currency exchange on which Bitcoin can be exchanged for U.S. dollars (and vice versa), was hacked June 20 by someone who dumped a lot of Bitcoins for extremely low prices and caused the market to crash. The price of Bitcoins—which had been $1 in May—briefly plunged from $30 to a penny, before rising quickly to $14 and then regaining most of their previous value.

The period immediately after the crash saw considerable speculation as to whether Bitcoin was done for, or at least whether the Bitcoin bubble had popped. For now it seems to be more or less back to normal and regained most of its lost ground, and speculations on its demise have moderated. But questions of its long-term viability won’t go away so easily.

Analyst Doug Casey (Casey Research, June 22) commented that while Bitcoin itself probably wasn’t the ultimate answer, “Bitcoin is a beta version of what’s coming in the post-dollar world….”

Of course Bitcoin itself is probably not yet finished. In the short run, Mt. Gox is rapidly losing its 90% market share in Bitcoin trading and people are spreading the risk more evenly in a number of different exchanges. And Bitcoin, to repeat, seems to have recovered from the crash. But it still has vulnerabilities and shortcomings.

Center for a Stateless Society Media Director Thomas Knapp commented that the real problem is not Bitcoin itself—which is rather secure—but its interfaces with markets like currency exchanges and the actual vendors of goods and services. He speculated that “others are even now working on something that’s more ‘end-to-end’ secure, and that will probably eclipse Bitcoin at some point.”

In the long run, though, I question whether Bitcoin serves all the functions needed from an encrypted digital currency. Long-distance exchange between members of different trust networks will no doubt need a currency which serves as a secure store of past value, like Bitcoin or e-gold.

But the primary need is not for a store of value, but a medium of exchange between providers of present and future goods and services—especially in circumstances where such providers have only their goods and services to exchange, with no money on hand, and need a source of liquidity. In short, we need something like an encrypted digital version of Thomas Greco’s mutual credit clearing system.

If you’re an unemployed or underemployed person in the West, or a farmer or small producer in the informal economy of a developing country, I can’t stress the value of Greco’s ideas enough. In his system, currency isn’t a store of past value. Its “backing” comes from the value of the goods and services exchanged. Sellers create value by the act of exchange. The currency’s just a unit of measure for denominating the exchange and tracking the participants’ account balances.

Market anarchist Karl Hess once commented on how nonsensical it was to complain that local economies were stagnant because “there’s no money,” when some people had productive skills and services to provide, and others needed them. It was like complaining there were “no inches.”

In Greco’s system, everyone runs a balance like a checking account. When you sell a good or service to someone, your balance rises by the value of that good or service. And when you buy something, your balance goes down. The system allows people to run negative balances up to some value—perhaps a month’s average turnover for a participant—so long as the account keeps turning over. So people with skills and tools are able to create value and exchange their services for the things they need—even if there is “no money.” They create their own money by the acts of production and exchange.

The implications are revolutionary. Throughout history, privileged classes have extracted rents—with help from the state—by monopolizing the media of exchange and credit. When people can create their own money and credit in encrypted darknet economies, bypassing the state and the banksters, they can cut off the flow of tribute to the rentier classes.