Once upon a time in the late nineties, the internet was a crypto-anarchist’s dream. It was a new trans-national cyberspace, mostly free of the meddling of any kind of government, where information could be exchanged with freedom, anonymity, and (with a bit of work) security. For a certain strain of crypto-anarchist, Temporary Autonomous Zone was a guiding document, advocating small anarchist societies in the blank spaces of existing society temporarily beyond the reach of government surveillance or regulation. This was a great idea with some obvious drawbacks: On the one hand, TAZ served as a direct inspiration for Burning Man. On the other hand, it eventually came out that Peter Lamborn Wilson (who authored TAZ under the pseudonym Hakim Bey) was an advocate of pedophilia, which had clear implications as to why he wanted freedom from regulation. It’s a document whose history highlights the simultaneous boundless possibilities and severe drawbacks of anarchism.

Against this background, Lawrence Lessig’s Code made the case that the internet TAZ was in fact temporary. Lessig argued that the internet’s behaviour is determined by a combination of computer code and legal code, and that while the legal code hadn’t been written yet, it would be soon. His prediction (which has largely been realized) was that the internet would lose its anarchic character through government regulation mixed with a need for security and convenience in commercial transactions. (In addition to these forces, social media also came along, in which people largely sacrificed their anonymity willingly for the convenience of being able to easily communicate with their meatspace social networks.)

In thinking about Bitcoin, it’s useful to see how the regulation came to change the internet. The prediction (again pretty much correct) was that regulations would target large companies instead of individual users. Companies are compelled to follow the law under the ultimate threat of not being allowed to operate at all. Because of the tendency for people to glom onto just a few instances of working solutions, it becomes easy to target a few large entities to enact regulation on a broad base of users.

This is instructive for Bitcoin, which has amongst its supporters a large contingent of extreme libertarians. We could call these libertarians fisco-anarchists, who see in Bitcoin an opportunity to free economic transactions from government regulation in the same way the crypto-anarchists wanted liberated communication channels in the nineties. It’s currently 1999 for Bitcoin: The law simply hasn’t moved to regulate Bitcoin yet, and when it does it will likely target larger players like Coinbase, Circle, and BitPay instead of trying to regulate individual users.

In fact, the state of New York is in the process of implementing a ‘Bitlicense’ law which will work in exactly this way. The law will require registration of any businesses transacting in Bitcoin or other virtual currencies, and will require, for example, reporting any transactions over $10,000 in value.

I personally expect that we’ll see another successful crypto-currency come into existence, which should capture most of the actual benefits of Bitcoin while avoiding at least some of the major pitfalls. To my mind, the primary advantages offered by the cryptocurrencies include that they are:

Trans-national, and allows free movement of currency internationally, and have

Low/No transaction costs, which enables micropayments and will help to remove parasites from the commercial internet, while they

Provide a space for experimenting with new notions of currency.

While this list looks short, these functions are important and potentially transformational for the economy of the internet specifically and the world more broadly. Indeed, Scott McCloud’s ‘Reinventing Comics’ suggested micropayments as a way to move comics to the web all the way back in 2000, but transaction costs with PayPal and Visa never fell low enough for microtransactions to be viable.

Meanwhile, the biggest problems with Bitcoin are:

Deflation: The deflationary design is a huge long-term problem, encouraging people to sit on large hoards of Bitcoin instead of using them for small transactions. (Much as dragons like to sit on hoards of gold.) As the value of the Coin increases, the incentive to use it for small transactions decreases. This could eventually lead to a liquidity problem. For comparison, Europe in the middle ages suffered sever bullion shortages, which led to entire shiploads of cargo going unsold when no one at the destination city had any money to buy things.

Power consumption: Aside from the obvious ecological problems, the cost of electricity becomes a barrier to mining, which will further concentrate the distribution of Bitcoins in the hands of a few large mining outfits. There area few existing crypto-currencies which have fixes for this problem, most notably LiteCoin.

Prevalence: As Jessamyn West put it, you still can’t use Bitcoin to pay your rent.

Security: The best choices for securing you Coin for some time involved either giving them to an untrustworthy exchange, or doing the digital equivalent of hiding your cash in a mattress. I think CoinBase is helping with this, or at least they seem more trustworthy than MtGox…

Scalability: There are well-documented scalability issues, and a number of ideas in circulation for fixing them.

The deflation and power consumption issues are both architectural problems with Bitcoin, which probably necessitate a successor coin, or at least a major modification of the current architecture. I’ll emphasize that Bitcoin does have real utility and advantages over current payment networks, so we can expect some real interest in making a cryptocurrency which addresses Bitcoin’s shortcomings. Of course, commercial and government organizations will also have an interest in making sure that a successor is more convenient, secure, and regulable.

What might the successor coin look like? Let’s first think about how to ensure that people sign on for the new currency.

Interestingly, the deflationary aspect of Bitcoin has served as one of the primary ways to get people involved, in the form of speculators who view the currency itself as a kind of investment. A good question, then, is how to get people into a new Coin without having a deflationary structure. David Graeber’s book on the history of Debt suggests to me two easy ways to solve this problem:

It turns out that colonial Europeans often found cashless societies in their travels, which was fairly inconvenient from their perspective. As they set up the colonies, they would require that farmers start paying taxes which could only be paid in the currency of the colonialists. Meanwhile, they were happy to pay out this currency in exchange for their favourite crops or labour. This quickly led to general circulation of currency. For us, it’s easy to imagine, for example, the Amazon Cloud requiring that all payments be made in NewCoin, creating an instant need for those coins.

Alternately, a conglomeration of large players could directly solve the prevalence problem by announcing at launch time that the Newcoin will be accepted (and possibly preferred or discounted) at their sites. Again, sites like Amazon would be a natural choice of member in such a coalition.

We can wager that a non-deflationary successor to Bitcoin will be announced in a top-down way, with a number of players signed on at the outset: you need a strong incentive of one kind for another to adopt an inflationary currency.

The architecture for a successor coin should solve many of the current issues with Bitcoin, and if its coming from large commercial players, we can expect an architecture that will enhance security and convenience. My guess is that a successor currency would greatly reduce anonymity to help with these concerns, possibly requiring that users explicitly tie their identities to their accounts. As Lessig points out, commercial interests often coincide with measures that increase regulability.

There are interesting moves in this direction occurring even as I’ve been writing this essay. Square has been running an experiement with Bitcoin, and recently published an extremely interesting article on cryptocurrencies as a kind of infrastructure for the digital commercial space. And just today they’ve endorsed Stellar, a group working on creating easy interchange of cryptocurrencies with other currencies. Stellar has their own cryptocurrency, which seems to be centrally generated and strongly encourages users to tie their identity to their accounts through Facebook sign-in or associating an email address. As always, though, it will take time to see how these developments hold up.

Interesting times.

Thanks to John Mardlin for offering revisions and insight as I was working on this post.