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Innovation in the Government Industry, Vol. 2: Bitcoin

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Continuing my series on innovation in the government "industry," I turn to the topic of currency. Government has a monopoly on currency. Our currency only has value because everyone believes it does and because the government forces us to use it. It's completely disconnected from gold (which also only has value because people believe it does). Because of it's monopoly, the government is able to continue devaluing our currency and limit our behaviors and there's nothing we can do about it.

Bitcoin

Bitcoin is a digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority, managing transactions and issuing money are carried out collectively by the network. It's not a company, it's an opensource technology. A purely peer-to-peer version of electronic cash allows online payments to be sent directly from one party to another without going through a financial institution.

Bitcoin presents an unambiguous challenge to the government monopoly on the power to print money. In concept, Bitcoin raises serious questions about the legitimacy of national monetary policy in a globalized digital economy. In practice, Bitcoin could undermine it completely.

Complete control over the monetary system enables governments to set the price of money. And they manipulate the market continually. In case you hadn't noticed, for three years governments all over the world have been flooding the market with money in the form of bailouts and fiscal stimulus. The result is an inflationary debasement of currency. National treasuries are printing their way out of the crisis. Your salary and savings bear the price. It's a hidden form of taxation. [Bitcoin] gives participants the option to opt out of their government's monetary policy. Bitcoin is immune to government manipulation.
-- Robert Tercek

Mechanics

BitCoin is distributed at an automated pace is to ensure regular growth of the monetary supply without hyperinflation. To prevent fraud, BitCoin maintains a pseudonymous public ledger of every transaction. The number of merchants that accept it is small but growing. A more detailed explanation of how BitCoin works it out of the scope of this article -- for more information, I recommend going here.

Advantages of BitCoin

Below is a list of advantages Bitcoin has over standard currency. Much of this list has been derived from Brandon Smietana(http://www.quora.com/Brandon-Smietana)'s post (http://www.quora.com/Brandon-Smietana/answers/Virtual-Currency) on Quora (quora.com)

• Free to hold and free to transfer
• Does not subject merchants to chargeback risk
• "Comparing Bitcoin to gold, Bitcoin is actually more stable if you get everyone using it. Gold can be manipulated if more is found or destroyed." -- Charles Peralo
• Stronger privacy protections than PayPal. Accounts are numbered, but have no personally identifiable information
• Accounts cannot be frozen or seized
• Accessibility -- Not everyone in the world has access to traditional banking services, but everyone in world who has a cell phone can use Bitcoin

My Thoughts

There are many risks and potential flaws associated with buying or using Bitcoin, but the idea of competing with government and creating a new currency outside of the control of a third party is very interesting to me. Bitcoin brings into question the widely held assumption that we have to use currency issued by the government to make a transaction and opposing a widely help assumption can present opportunities.

Big financial clearinghouses like Visa, Mastercard, and American Express serve as the government's minions, happy to enforce government policy while raking in the profit off of every transaction. Even PayPal dances to the government tune.
-- Robert Tercek

When major credit card companies and PayPal froze the accounts of WikiLeaks, they began accepting Bitcoin. Does the government have the right to force us to hold and use a currency -- especially if it continues to manipulate it's value? I think it's unethical for third parties to have control over the payments we choose to make, so long as it's for a legal transaction.

Prominent venture capitalist, Fred Wilson of Union Square Ventures heralded "societal upheaval" as the next big thing on the Internet, citing Wikileaks, PlayStation hacking, the Arab Spring, and bitcoin as examples.

Fred wrote a blog post saying "I've mentioned Bitcoin a number of times on this blog. It is something our firm is watching closely. We thought briefly about making a Bitcoin specific investment earlier this year but ended up deciding to sit on the sidelines for now. We are quite taken with the idea of a currency that is not controlled by governments and central bankers and that is based on faith in an algorithm and a network instead of the "full faith and credit" of a country. But Bitcoin or something else, I'm confident we'll see the emergence of currencies that are not controlled by nation states in my lifetime."

Adam Cohen provides some good insight on Quora:

The question to ask is why this would be at all desirable. Maybe you hate the US government, or all governments. Maybe you want to avoid bank interchange fees, or perhaps avoid tracking altogether because your payment is for something illegal, or because you're a particular private person. Or perhaps you just think that the world currency regime is going to collapse and you see Bitcoin as a technological salvation.

Conclusion

The risk that the government may declare Bitcoin illegal is a risk to the technology, and seems to be reflected in exchange rates. Bitcoin presents opportunities for entrepreneurs to make it easier to use the currency and will be beneficial to help the currency gain the critical mass of users and merchants that accept it for it to become a viable currency. It's an ambitious project that could have a major effect on society and perhaps encourage the government to become more efficient.

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