Charles Stross recently posted a fairly scathing critique of bitcoins on his blog anti-pope, which I highly recommend as a general rule. Most of his complaints were — well, ‘trivial’ is probably too strong a word, but let’s call them beside the point. Yes, long-term deflationary tendencies, yes, bitcoin miner malware, yes carbon footprint, yes, yes, yes, yes. Some of the issues raised have compelling counters (for example, three of them are already obsoleted by the rapid arms race in dedicated bitcoin mining hardware), but more importantly, they just don’t matter that much.

So let’s get to the heart of the matter. Stross writes in his conclusion,

To editorialize briefly, BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.

More generally, Stross is saying two things: first, that the bitcoin system is destructive to money-issuing banks (and that’s bad), and that bitcoins’ pseudonymous nature damages goverments’ ability to monitor and tax their citizenry to a degree that, in the long run, threatens the stable governance of the civilized world. Is he right? Is this a fair criticism of the situation?

In order to address that question, we’re going to talk, briefly about the history of money. Money is a peculiar special case of a mercantile asset, because its value is predicated on its convenience. Money (if enough of the world economy believes in it enough to use it) is meta-stable, given value by the convenience with which it can be converted into other tangible assets. Put simply, money is valuable because other people think it’s valuable. If faith is lost in a currency, it gets trapped at the low end of the energy function and you get hyperinflationary spirals. But, so long as some minimum fraction of the economy uses it, the value is real and sustainable.

This is not an uncontroversial opinion. Keynesians have been known to argue that currency only has real value when it’s backed by a government, as it is ultimately the tax-collection, debt-enforcement, and government spending apparatus that back its value. When asked about gold, they cough, sidle away, and suggest that gold’s value is predicated primarily upon our ability to turn it into shiny things. Paul Krugman, in a recent interview, went so far as to say that, “Fiat money, if you like, is backed by men with guns” — as opposed to bitcoin, which, he suggests, is based on nothing and is merely a self-fulfilling prophecy bizarrely idling away for a while before it inevitably collapses — an economic oddity not worth mentioning.

I’d like to spend a moment to debunk this idea, because the understanding of currency stated above is crucial to the argument that I’m going to make. Relax, it won’t take long. The truth is that currencies do collapse. Zimbabwe has gone through a period in which its citizens were burning money for warmth because it was cheaper than firewood. This is not because their government was lacking in men with guns, or was unwilling to use violence to back their money. It was because you simply cannot pass a law dictating to the market what is valuable. It doesn’t work. You can print on your money, if you like, that it’s good for all debts public and private, but it costs far, far more than a dollar to put boots on the ground and force people to actually accept that money if there’s a general consensus not to. It’s simply not practical if the economic realities ever turn against you.

That taken aside, we have the ridiculous idea that the value of the US dollar is predicated on its use in government spending and tax collection. Imagine, for a moment, that tomorrow everyone wakes up and decides they’re done with greenbacks. Currency traders stop buying them, people stop carrying them. Nobody uses USD except the US government. The dollar becomes nothing but company-store America-Bucks issued to government employees, and a commodity that taxes have to go through before they’re sent to Uncle Sam, hoarded in warehouses during the rest of the year so that they can be scalped during tax season.

In that situation, how much of its value do you think the dollar retains? To what extent is it actually a currency? We could force people to pay taxes in turnips, if we want, but that doesn’t help you if you want a cup of coffee, no matter how many turnips you’ve got. At some point, the person with the coffee has to agree with the government that the turnip is a legitimate medium of exchange. Krugman is simply wrong. Currencies aren’t backed by violence because you can’t back currencies with violence. It’s been tried, and it doesn’t work. As far as gold goes, the reflective index of aluminum is quite a bit higher than gold, it doesn’t tarnish, and you can alloy it to be pretty much any color you want, but if you go into a diner with a nugget of aluminum and try to buy lunch, it won’t go over nearly as well as if you tried the same thing with gold. The value of gold in jewelry and semiconductors and Nobel prizes simply does not account for its value in international trading, and it’s foolish to pretend otherwise.

If we take it as given that money is, in some sense, a meta-stable self-sustaining convenience-based store of value, then we can start to ask interesting questions — like, why are some things currencies and others aren’t? Why, in other words, do we spent dollars and not turnips? Well, a good money should have a few notable properties. It shouldn’t degrade over time: if you put it somewhere and come back in fifty years, it should still be in a spendable state. It shouldn’t be consumable. It should be finely divisible. It should be as portable as possible, to maximize the factor of convenience. Of course, currencies need to start somewhere, so there should be some force to cause a lot of people to start using it to start out — and, finally, it should be hard to make more of it.

The last point is important, so I’ll belabor it. A good currency is hard to counterfeit. While any player in the market would dearly love to be able to forge the money they use, they care more that everyone else can’t. If there exists some measure to force everyone in the market not to make more currency, every rational agent in that market will support it: the alternative is immediate hyperinflation and a breakdown of the economy they rely on to survive.

For a long time, we relied on the laws of physics to provide this guarantee. Only in the last few decades have we been able to make new gold atoms, in particle accelerators, and not at a rate that’s causing any panic in the world’s commodities markets. The supply of gold on planet Earth, for all practical purposes, is a constant for the foreseeable future. This makes gold useful, because it’s pretty (giving people a reason to believe in it), it’s rare enough that, once the market accepts it, a quantity of it that you can carry in your pocket is sufficient to make substantial purchases, and it’s essentially unforgeable. There’s a reason that so many ancient cultures adopted gold as a medium of exchange.

The nineteenth and twentieth centuries brought a new idea: gold certificates. It’s a good idea: you don’t need to really carry heavy gold around all the time, if you just carry a certificate suggesting that it can be redeemed for gold at any time at a reputable, gold-owning institution. Of course, where you have certificates, you have forgery, and that’s where governments come in. The shift from the gold standard to fiat money wasn’t nearly as significant as most people think, because the more fundamental shift happened as soon as governments began issuing gold bonds and using their local monopolies on violence (along with a magnificent list of printing tricks) to prevent counterfeiting. The gold no longer mattered, except as an initial kick to get people to believe in the certificates (and, by the property of transitivity, the fiat money). The unforgeability of gold had been replaced by the near-unforgeability of paper money, as enforced by the local government. You can’t force people to use a currency on the barrel of a gun, but you can just about keep them from forging it.

This is a new idea: money as a service. In exchange for protecting the supply of money from counterfeiters, we allow governments to print some of it for themselves, essentially paying a them a fee of (in the case of the dollar) about two percent per years. Using a currency, buying or selling, is in some sense a consent to their management of that currency in exchange for some guarantee that counterfeiting will be controlled to a manageable level, and that the value of that currency won’t substantially change during the period that you own it. If that consent goes away, and people stop believing in the currency, its value collapses, etc, etc, and you’re back to burning bills for warmth. This was a powerful idea, because it meant that, provided you trusted the issuing body to manage the currency well, you could have stable currencies that were optimized for the other characteristic of money — namely, portability, divisibility, and stability.

The rise of the first electronic money, in the form of credit and debit cards, in many ways paralleled the creation of gold certificates. Still centralized, still based on US dollars, but this time the convenient intermediate representation was at least partially protected from counterfeiting, not by the threat of violence but by cryptography and modern information technology.

Bitcoins are the logical culmination of that idea. The bitcoin protocol is nothing more than a convenient way for people to exchange abstract constructs and, communally, prevent counterfeiting in the network as a whole. Like fiat currency before it, the bitcoin network represents a new paradigm: currency, not as a service, but as a mathematical guarantee. Currency not backed by violence but by cryptography. A way to have a currency without having to have any trust in the issuing body. If fiat currency was the realization that we don’t need the gold anymore, cryptocurrency is the realization that we don’t need the government anymore.

Put simply, bitcoin is a competitor, in a market based primarily on convenience and trust, that is trivial to exchange over networks, is incredibly finely divisible, and can prove its trustworthiness to anyone who can read the protocol. Right now, bitcoin is plagued by problems: its pseudonymous nature has meant that many of its early adopters have been criminals, and its value has been driven up and made impractically unstable by a gold-rush of eager but incompetent investors.

Still, no matter how you look at it, in the long run bitcoin is going to win, because it makes much stronger guarantees than any of the other currency paradigms. Bitcoin value is essentially unforgeable — and, provided you keep your private key secure, it also can’t be stolen without actual extortion. Short of someone proving a flaw in SHA 256, bitcoin is solid. There is no risk that tomorrow the central bitcoin bank is going to triple the number of bitcoins in circulation to pay for a war or an economic stimulus. Bitcoin and cryptocurrencies like it are reliable, and markets like reliability. The great currency competition of the future isn’t between the dollar and bitcoin, it’s between bitcoin and later cryptocurrencies that improve on its feature set. In the long run, nobody in their right mind would ever use dollars or credit cards again, because they’re just plain worse.

In other words, to go back to Mr. Stross’s objection, governments and the money-issuing banks they affiliate with have had local monopolies on regulating the currency supply for about two centuries now. Now there’s competition, and it is much, much more powerful than either fiat money or gold ever was. Bitcoin is not a weapon aimed at the central banks, it’s just the first competition in a market with entrenched monopolies. Arguing that bitcoin will destroy the world economy is, more or less, arguing that competition is bad for the consumer, and the global monopolies have our best interests at heart.

But, to be fair to Mr. Stross, bitcoin’s attack on the central banks wasn’t his only objection to the currency. He’s also concerned about bitcoin damaging governments’ ability to collect taxes and financially monitor their citizenry. Well, fair enough — it’s inarguable that, to some degree, he’s absolutely right. Bitcoins, while not untraceable by any stretch, can be made much harder to trace back to the actual market participants than any other electronic exchange. It is, however, worth noting that every bitcoin transaction is logged in the blockchain. Even if you can’t tell who the participants are, you can still follow the money. Bitcoin, for all the hype, is still less anonymous than a paper bag full of cash behind the laundromat. If Bitcoin were successful, from a taxation and monitoring perspective, it’d be as though a substantial fraction of the world economy had switched back to cash transactions. Or, you know, the whole of human financial history up until the 1950’s.

Prior to 1958, the modern credit card did not exist. Even then, it took decades to achieve ubiquity. Prior to that, the widely monitor-able electronic networks that modern states take for granted were non-existent — most economic activity was cash based. The picture, from a taxation and monitoring perspective, was even more dire than a cryptocurrency economy — and, yet, states survived just fine. Laws were enforced. The nations’ borders were defended. Taxes were collected. Keeping that in mind, it’s probably wise to take any apocalyptic predictions about bitcoin economics with a grain of salt. The federal government has been collecting taxes in the US since 1862, and has plenty of practice, with or without the financial panopticon the credit card networks provides. As far as surveillance goes, yes, obviously people will use bitcoins to commit crimes. As Stross says, Bitcoin’s utter lack of regulation permits really hideous markets to emerge, in commodities like assassination (and drugs and child pornography).

Well… yes. That’s true. But, killing people and molesting children leaves evidence and bodies and witnesses, which can be converted into caught fugitives with the aid of good, old-fashioned policework. Is it inconvenient not to be able to monitor the financial transactions that pay for these things? Definitely. Is it going to lead a substantial breakdown of law and order and turn the world into an anarcho-capitalist utopia? Probably not. As far as illegal drugs go, well, you can ask me how upset I am that a safe, peaceful medium for exchange is taking business away from the cartels, but I’ll tell you right now — it isn’t very much. Breaking Bad would have had a far lower body count if Walt had been on Tor. I’d also suggest to Stross that maybe the government’s inability to sufficiently tightly monitor its citizens isn’t one of the most urgent problems of the twenty-first century.

If there’s one thing to take away from this, it’s that bitcoins are here to stay, for a laundry list of very good reasons, and it’s best you get used to them. It’s not like there’s anything you can do about them.