Tuesday, April 26, 2011

Is bitcoin a decentralizing, democratizing agent?

A response to Duane on the importance of bitcoin as a new, decentralized currency. (This has been a fun running debate among friends over the last couple weeks.)

I read his recent post as claiming "decentralized is better." My response: "sometimes, but not always." Here's my reasoning.

Point 1: Money is a figment of our shared imagination. It has value because we all collectively accept that it has value. There's nothing particularly special about green paper, or gold rocks, or any given set of bits, except for the common knowledge that other people will also accept those currencies in exchange for goods and services. In that sense, the valuation of any currency is already "democratic" -- its real value exists in the minds of a distributed network of people. People were using rare stones as currency long before governments got involved.

Point 2: Enlightened self-interest leads us to centralize some of the responsiblity for maintaining currencies. One of the main threats to any currency is counterfeiting, so it makes sense to centralize responsibility for preventing counterfeiting to mints and enforcement agencies like the secret service. Another threat is inflation (or deflation), which is why every modern state with a large economy uses a central bank to manage inflation via the money supply. A third "threat" is transaction costs, which is why we use credit cards for so many things -- the artificial "currencies" maintained by these corporations are so convenient that they have displaced state-authorized currency in many transactions*.

Point 3: As a side-effect of centralization, governments gain some power to regulate other uses of money. (Note that governments, like currencies, are also a figment of collective imagination. The Constitution is law because we all agree that it's the law.) Thus, the imposition of taxes, tariffs, and embargoes; and continuing efforts by organized criminals to circumvent the system by laundering money. These things are not necessarily good or bad. They depend on whether we approve of the use of government power in those areas. By and large, I imagine most people approve of governments shutting down mobsters and sex trafficking rings. Using the same suite of tools for defense spending, planned parenthood, agricultural subsidies, "bailouts," etc. is more controversial.

On the whole, I'd argue that people are better off because governments have these capabilities at their disposal -- especially people living in places where government is reasonably transparent and accountable to its citizens. We're better off because we've decided to pay taxes for roadways, police stations, and schools. We're better off because the value of a dollar is reasonably stable. We're better off because corporations (especially publically traded firms) are forced to keep a strict accounting of their transactions. We're better off because the FBI and CIA can use financial information to crack down on terrorists and organized criminals.

Putting that all together, I see bitcoin as an attempt to float an unregulateable currency using P2P technology and cryptography. By construction, such a currency would make it very difficult for government to intervene in the ways discussed in points two and three. Although I don't agree with everything our government does**, I don't see compelling reasons to deny ourselves the ability to use those tools as a society. Together, we're made better off by careful use of centralized financial regulation and lawmaking. That being the case, bitcoin seems partly radical, partly old hat, and partly a step backwards.

*Semantic question: are credit cards a centralized or decentralized currency? What about frequent flyer miles? What about Subway sandwich discount punch cards? At some level, the labels "centralized" and "decentralized" are too blunt to be really useful. This seems related to Duane's comments about needing both more and less regulation.

**Nobody does. That's the nature of compromise.

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