Editor’s note: This article was initially published in The Daily Gazette, Swarthmore’s online, daily newspaper founded in Fall 1996. As of Fall 2018, the DG has merged with The Phoenix. See the about page to read more about the DG.
If you’re anything like the typical American college student, you’ve probably never had to deal with, or probably even think about, the use of “digital currency.” Maybe you’ve bought posters and textbooks online, but you’re still using real money even if the transactions use credit card numbers rather than hard cash. “Real” here doesn’t mean physical; it means controlled by a centralized power like a government or central bank. This has been the norm for so long it’s difficult to imagine an alternative, but now experimental “crypto-currencies” like Bitcoin are starting to offer one. Last Monday, Congress took a stab at trying to regulate this growing substitute to traditional currency, and the message to the currency’s trade representatives was, loosely paraphrased, to step off.
What the representatives actually said was that attempts to regulate the currency, if not done with extreme prudence, could force Bitcoin underground. This would make the currency more difficult to track and more easily used for the types of activities that have made Congress concerned in the first place; namely, as a medium of exchange for drugs and other illegal tender. There’s precedent for this concern; the recently closed website known as Silk Road – a one-stop shop for dealers in drugs, sex trafficking, child pornography, and other reprehensible products – only accepted the aforementioned crypto-currency. There’s a lot of potential for anonymity in Bitcoin transactions that creates understandable anxiety in federal regulators.
The anonymity comes from the fact that Bitcoin is a peer-to-peer transaction software that has no central regulating authority. The crypto-currency was created in 2009 by a person or group of people who are still enjoying anonymity and is available to users as an open-source software. There are trading exchanges for Bitcoin where the digital money can be exchanged for dollars, Euros, or virtually any existing currency, but all Bitcoin transactions are conducted between two parties without the involvement of an intermediary institution like a bank. The transactions are managed by computers running complex algorithms that also maintain the total number of Bitcoins, which is fixed and can never go above 21 million. Other then this, there’s nothing regulating Bitcoin use, allowing it to function like the P2P file sharing of the currency world and giving it an impact that’s potentially just as disruptive.
This fact has caused Bitcoin to attract some attention from the libertarian crowd, which sees it as a potential way for people to circumvent central bank money-management distortions. This has also led it to gain popularity in places like China, where government control of the national currency is notably heavy-handed, and also won it attention as a useful currency alternative in situations like Cyprus last year when the government froze the banks accounts of many of its citizens to help it pay off debt. There are also a number of progressives who see Bitcoin as a way to help people in the developing world without access to traditional financial institutions to enter the global economy. In short, there’s plenty of speculation surrounding the currency; nothing like Bitcoin has never really existed before, and advocates and critics are lining up on both sides of the spectrum.
The issue becomes more salient as Bitcoin itself continues to grow as a transaction medium. BTC China, now the world’s largest Bitcoin exchange, just received $5 million in investment capital, and the value of a single Bitcoin itself has shot up to $900 (thanks in part to all the attention the currency received from the Congressional hearing). Bitcoin is currently accepted by tens of thousands of vendors, and Baidu, the Chinese version of Google, announced last month that it would begin accepting Bitcoin for some of its subsidiary services. As the currency grows in global utility and popularity, calls to regulate it will only grow more intense – for the purposes of stability and consumer protection as much as for monitoring capabilities. It’s a 21st-century Wild West, a platform for the clash between traditional governing institutions and the technologically connected populace finding increasingly innovative ways to get along without them.