Bitcoin And The End Of Money

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A commentator on Bloomberg, Princeton student Evan Soltas, writes that Bitcoin is an “existential threat to the modern liberal state,” a line that can be read in two ways. One reading of his op-ed suggests we are all in danger and that the inability to tax and track bitcoins will result in a thriving black market and reduced fiscal control that will be disastrous for all of us. Taken another way – and given Soltas’ biases, I suspect he’s focusing a bit more on the “liberal” part of the title versus the “modern” part – it suggests that the modern nation cannot afford to fritter money away on the welfare of its people because it will no longer be able to tax the rich unfairly, leading to a fiscal nirvana for men and women of a certain breed. Either way, it’s a goofy way to look at what will remain, for the time being, a blip on the economic radar.

There have long been ways to transfer money anonymously. Ad hoc networks, most notably Hawala, have allowed relatively seamless transfers of wealth for centuries. Further methods have consisted of the condensation of wealth into precious metals, jewels or jewelry – a sort of money ZIP file that has allowed all manner of misdeeds to thrive between borders.

Each of these methods have been seen as a way to launder money, support wars and help war victims, and, as Soltas notes, build an “existential threat to the modern liberal state.” The FBI, for example, says that “the way it creates, operates and distributes bitcoins makes it distinctively susceptible to illicit money transfers.” The same can be said of a $20,000 watch that someone wears over the border and resells when he lands.

Bitcoins still require a way to convert the virtual currency into something you can spend in the real world. While you can buy a Porsche with bitcoins, I doubt the service will become sufficiently popular that every merchant will have a wallet at the ready for your next Slurpee purchase.

Instead, Bitcoin represents a new part of the economic engine. As it stands, trusting, say, a wallet service or your own computer to hold millions in bitcoins is a risky proposition. The transfer may be seamless but the extraction will be hard. While I find it laughable that various federal agencies will be able to track the inflow and conversion of funds from a bitcoin transaction programmatically, an intrepid auditor should be able to raise a red flag when you have $100 one day and $20,000 the next – unless you keep your cash in turbulent bitcoins or less turbulent cash.

This talk of the destruction of the modern banking system is akin to the talk about 3D-printed guns: it’s an interesting aside but it’s still far easier and cheaper to just do things the old-fashioned way. If Bitcoin becomes truly seamless and relatively solid, I could see some cause for worry. As it stands, it’s a cool way of doing something that has been done for centuries before and it’s definitely something to watch.