Bitcoin, a virtual, decentralized currency, has recently been receiving a considerable amount of press coverage in international mass media. The digital coinage, which is based on an open-source, peer-to-peer online global network, was launched in 2009 by a mysterious developer who refers to himself as Satoshi Nakamoto. Bitcoin is currently the most widely used alternative currency in the world, with its total value in circulation recently estimated to be worth over a billion dollars. Though it is a highly sophisticated and well developed concept in both theory and practice, Bitcoin would have an extremely deleterious effect on our society if its broader economic role were to increase to substantial levels. Although many view it as an extremely attractive alternative currency alternative, Bitcoin could potentially harm our society in three particular ways: by significantly increasing crime, by causing a drastic decrease in social development investment, and by destabilizing economies due to lack of government control and regulation.
In recent months, Bitcoin has witnessed dramatic fluctuation in both cost and overall total value. With the price of a single Bitcoin recently reaching a high of $266 from $50 in mid-march and now hovering at around $103 , Bitcoin is currently the focus of a great deal of attention. Like any other commodity or currency, Bitcoin's value is derived from its demand and usage. In essence, its value stems from the people who value it. But the question remains: why are people so interested it? What is it about Bitcoin that makes it so controversial?
Bitcoin is a completely anonymous, decentralized currency. It runs on and is monitored by its massive online public network. In the world of digital currencies, there is no centralized bank controlling its rates; no Federal Reserve decides to limit or increase the production of Bitcoins. Based on a highly sophisticated and well-strategized long-term economic plan, the total amount of possible Bitcoins is fixed. This means that the currency is immune to inflation caused by over-circulation. As a result of its structural design and policies, Bitcoin has a myriad of advantages over other more traditional currencies. Some of Bitcoin's main draws include: the absence of transaction fees to credit card companies, its anonymity guarantees that no one knows what users are buying, users don't need to rely on or trust anyone to store or transfer their assets, and Bitcoins are not subject to governmental manipulation.
That last factor, the independence of Bitcoins from government manipulation of value, is likely most responsible for Bitcoin's recent surge in popularity. Due to the current European debt and currency crises, people are losing faith in conventional currencies and in their governments' supposed ability to effectively manage them. Economic crises, such as the recent one in Cyprus, have been directly responsible for the increased search for a more stable and reliable alternative currency.
Yet despite its growing popularity, Bitcoin possesses the power to be significantly detrimental to our society. The first sociological threat which Bitcoin poses is the risk of an increased crime rate and spread of illegal activity. Together with its lack of intermediaries, the anonymity of Bitcoins, which is protected by its highly sophisticated encryption software, make it an ideal marketplace for criminal activity. It has already been widely associated with illegal dealings, and its decentralized, anonymous nature would only help augment a thriving black market. Bitcoin could readily serve as an easily accessible global network for drug dealing, gambling, bribery, insider trading, and money laundering. In the words of Timothy B. Lee, a Forbes contributor, Bitcoin could very well become "the new Swiss bank accounts." Bitcoin's near-complete invulnerability to regulation and supervision makes it a substantial societal threat.
The second threat which Bitcoin poses is a drastic decrease in social development investment. Because it is completely decentralized and provides zero identification with respect to its users, Bitcoin is virtually impossible to tax. There is no way for governments to know who owns what, who is paying whom, what is being sold, who is buying what, and how much income a Bitcoin owner has. By preventing governments from levying taxes against their citizenry, Bitcoin could very well decimate governmental power and significantly diminish the ability of governments to operate. This would have horrific implications for social development investment, as much of that capital is currently generated by tax-collection. Nearly all social services and benefits provided for by governments could potentially be eradicated, as they are funded by taxpayer dollars.
This could mean the end of programs like Medicare, Medicaid and social security. It could lead to significantly reduced funding for public schools, universities, and research institutions. It would lead to dramatic reductions in industrial infrastructure investment, which is also tax-funded. This means that there would be a pronounced decrease in building projects like bridges, damns, airports, roads, and telecommunication. Bitcoin would cause a dramatic reduction of public welfare and social development.
The third threat which Bitcoin poses is that it could directly lead to a serious destabilization of national economies. Because Bitcoin's currency is completely decentralized with no particular individual or body in control, governments would no longer regulate and control the economy. Although the economy is currently not doing particularly well and currency issues certainly do exist, there still remains the possibility of governmental regulation and control of the economy to try to improve the circumstances. Policies could be enacted, reforms could be undertaken, and the central authorities could monitor the situation; however, in the case of Bitcoin, the situation is radically different. Bitcoin has no central authority or controlling governing body to monitor and regulate the currency according to the economic climate. In the words of John Biggs, a contributor to TechCrunch, Bitcoin could lead to "reduced fiscal control" of the economy.
The two biggest issues that make Bitcoin such a formidable threat to society are anonymity and its decentralized nature. The technology of crypto-currency (as Bitcoin is referred to) and digital currency is impressively sophisticated, and it has the potential to be used in beneficial manners, such as in international money transfers. Two of the three threats which we mentioned, namely, a surging crime rate and a sharp decrease in social development investment (as a result of Bitcoin's immunity to taxation), would be entirely taken care of if Bitcoin would not be anonymous. However, the threat of destabilization of the economy, which would result from the absence of regulation and control, is not easily solvable. This is simply because Bitcoin's main attraction is that it is completely decentralized.
Moving forward, the only thing we could do is ask ourselves the important question of: will Bitcoin really take off? Is it merely a fad, or does it actually contain the potential to play a central role in the global economy? Though there certainly is considerable room for growth in Bitcoin's market, it will most probably not become a substantial force in the global marketplace. Throughout its relatively short existence, Bitcoin has been subject to considerable price fluctuation in dollar value. This has caused many doubts about its suitability as a legitimate, widely-accepted currency. For many people, Bitcoin has a negative image due to its being a hotbed for criminal activity. It is popularly perceived by many to be a crime-ridden market for illegal dealing. Also, the sheer oddity and innovative design of Bitcoin can easily frighten a more traditional and conservative investor. The very idea that it is literally "backed by nothing and not regulated by anybody" will certainly scare off many people. Felix Salmon, a financial journalist, also agrees that Bitcoin is a bubble. He writes that "Bitcoin is less a currency and more a highly volatile commodity." The extreme change and fluctuation in market value could cause high rates of inflation and deflation, which would adversely affect the economy.
As Salmon poignantly notes, Bitcoin is fundamentally based on mistrust, as it was designed to evade governments and central banks. This is a significant obstacle in Bitcoin's growth, as economies, and in particular currencies, revolve around trust. Nevertheless, if Bitcoin ultimately does become a global economic force, it would then possess the power to significantly disrupt and deleteriously affect our society.