Rather than foretelling the certain demise of this quirky digital currency, these trials tested and strengthened the network’s resilience. Bitcoin prices quickly re-equilibrated following each crash. The protocol exploitation became a case study in how quickly the Bitcoin community is able to spot and respond to coding problems: After a problem with the update in March was spotted on a Bitcoin forum, all of the major exchanges voluntarily suspended payments while the problem was patched. What could have been a death knell for this fledgling network was quietly handled before most traders even noticed. After withstanding considerable uncertainty and stress-testing, it appears that the Bitcoin model is here to stay.
While the viability of Bitcoin as a decentralized peer-to-peer payment system is becoming less of a question, the regulatory future of the cryptocurrency is still murky. An early red flag shot up with the reveal of FinCEN’s guidance on Bitcoin users and exchanges this March. The guidance appears to have been applied for the first time last week when the Department of Homeland Security suspended operations and seized the assets of Mt. Gox’s mobile payments account serviced by Dwolla.
Despite the troubling uncertainty that this new regulatory environment injects into the Bitcoin platform, Bitcoin prices have remained steady since the unprecedented expropriation. Still, public regulatory wishes from other powerful agency heads should give us cause for concern about the government’s capacity to stifle the full potential of this still-nascent technology.
Many people, if they have heard of Bitcoin at all, associate it with libertarian pipe dreams of overturning the dollar and that rascally Federal Reserve. I can’t blame anyone for holding this impression; after all, the average Bitcoin user is an atheist libertarian male in his early 30′s. However, to primarily view Bitcoin as, for better or worse, a libertarian dream currency is to overlook the wonder of its potential as a platform for financial innovation. The problem that Bitcoin’s mysterious creator, Satoshi Nakamoto (he will never be found), outlined in his original white paper is how to replace relatively-costly third party trust-based transfers with a system based on relatively-inexpensive cryptographic proof. I think that people of all political persuasions can find something to like about Bitcoin’s properties as a decentralized digital payment system.
First, Bitcoin holds enormous potential to help lift the world’s destitute out of abject poverty. Insufficient access to basic financial services is one of the biggest problems facing the poor in developing countries today. Jeff Fong observes that mobile payment services, like M-Pesa, are already wildly popular in countries like Kenya, Tanzania, and Afghanistan. An open, global system like Bitcoin will be a natural financial fit for the fiduciary needs of the world’s poor–and with the benefits of no middleman and more discretion. Additionally, Bitcoin’s capacity to cheaply transfer funds will save new immigrants the 20% fee that they currently pay to send remittances back to capital-starved relatives in their home countries.
Bitcoin’s assurance of privacy will also improve the lives of those in oppressive situations who need to make confidential transactions. Both women who need to gather their children and discreetly flee from a domineering husband and exploited citizens of oppressive regimes need some way to transfer funds away from the prying eyes of their particular tyrant. Already, citizens in Argentina are turning to Bitcoin as a way to escape the devastation of the 25% Argentine inflation rate. On the other side of the transaction, Bitcoin’s pseudonymity ensures that persecuted groups will not be blocked access to capital because of their ethnicity, gender, sexual preference, or disability.
Conservatives will find much to like about Bitcoin’s potential to help lift developing countries out of poverty through market means and export the Western values of industriousness and self-sufficiency. Progressives will be excited to learn of Bitcoin’s ability to help subvert to despotic regimes and obviate the potential for race-based and gender-based discrimination in transactions. Both groups will likely appreciate the privacy that Bitcoin can restore to our over-tracked and over-marketed digital lives. And of course, libertarians like myself will continue to enjoy sticking it to the central banks. But in terms of Bitcoin’s capabilities, these ideas still only scratch the surface of what is possible.
Many functions built into the Bitcoin protocol have yet to be harnessed. During the Bitcoin 2012 convention last year, Mike Hearn, one of the original developers of the Bitcoin protocol, unveiled a few of Bitcoin’s dormant features that programmers can harness. In true Satoshi style, the mastermind only provided a few comments on these in-built features, called “contracts,” before digitally vanishing. Hearn took to the task of discovering these capabilities himself; the possibilities are promising. The Bitcoin protocol contains the ability for seamless micropayments, dispute mediations, assurance contracts, and smart property, among other features that can be developed independently. This allows for the easy development of cheap internet translation services, Kickstarter-like services, and peer-to-peer stock and bond markets. If you’re excited about Bitcoin now, trust me: You ain’t seen nothing yet.
As I write now, scores of Bitcoin developers, investors, journalists, plain old enthusiasts, and one lucky Ümlaut editor are gathered in San Jose for the Bitcoin 2013 convention, discussing plans and possibilities for Bitcoin’s future. Amid high profile calls for protected areas of open experimentation and floating rumors of a new autonomous region that will officially recognize cryptocurrencies, the Bitcoin community is standing at a precipice. Either we can convince government regulators of Bitcoin’s promise as a financial innovation and procure a pledge for open experimentation, or we can risk losing the core capabilities of this cryptocurrency to the confused dictates of the state. It is time for the Bitcoin community to educate policymakers and the public of the vast untapped possibilities that this cryptocurrency can create, lest government regulators be allowed to unknowingly extinguish the potential of this force for good.