The New York Times calls them a “soaring, slightly scary virtual currency.” NPR described the phenomenon as “a lot like cash- for the online universe. It doesn’t actually exist in the physical world.” New Economic Perspectives mentioned many dismiss this emerging technology as “a Ponzi scheme.”
If you have not guessed by now, we are talking about bitcoins.
Bitcoins represent an entirely virtual currency and payment system. Transactions are intended to be entirely anonymous, secure, and not backed by any recognized government.
So far, most bitcoin use has been for illegal and dubious transactions, leading many to write the currency off as an unsustainable technology trend. Yet, those same arguments were made about the advent of the internet just a few decades ago.
Recently, bitcoins have been elevated from a strange and quirky invention to a potentially transformative economic concept. It is not only technology publications talking about bitcoins; government agencies are also exploring the concept.
Two Congressional hearings have been held on bitcoins. The Justice Department has commented on their legal status stating, “Virtual currencies in and of themselves are not illegal, we’ve all recognized that innovation is important,” according to NPR.
In a recent interview with CNN, former Congressman Ron Paul, who is famous for criticizing American monetary policy, argued that bitcoins could emerge as an alternative to the dollar. “Alan Greenspan said that he doesn’t understand the intrinsic value of the bitcoin, well I don’t understand the intrinsic value of the dollar,” Paul said, referring to the fact that the U.S. dollar is no longer backed by gold.
Bitcoins have advantages and disadvantages, many of which remain to be seen. What could bitcoins bring to government? I’ve brainstormed a few ideas.
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Bitcoins in Government
Advantage: Distribution of benefits
It’s easy to focus on what we give to the government; nothing is certain except death and taxes. However, a large portion of what government agencies do is focus on providing taxpayers goods and services. From social security for senior citizens to subsidies for green energy businesses, many dollars are exchanged in our economy based on government money and tax incentives. Bitcoins do not need to be tied to any kind of hard currency, making transactions progress as rapidly as your internet connection. The ease in which bitcoins can be exchanged may be ideal for government delivery of time-sensitive services, including EBT (food stamps) or tax rebates.
Disadvantage: Potential for Fraud
Bitcoins have been tied to illegal activity because they are the ideal currency for criminals: impossible to trace and anonymously obtained. Bitcoins may be convenient for government agencies, but that may mean less accountability and more opportunities for fraud. However, even our current system is not transparent enough for us to understand how our money is spent. In addition, government contracts and acquisitions have been plagued with more than a few corruption scandals. Bitcoins may have their disadvantages, but so does our current system.
Advantage: Currency Without Politics
When Congress negotiates the debt ceiling, or threatens a government shutdown, world markets fluctuate due to uncertainty. Due to the ubiquity of the dollar, American fiscal and monetary policy decisions affect currency exchange rates worldwide. Bitcoins do not have government policies regulating them, which may be an advantage when our legislators have trouble coming to agreements.
Disadvantage: Currency Without Protection
Governments create and regulate currency to ensure all of our transactions are backed by an institution’s “full faith and credit.” The United States has agencies like the Consumer Financial Protection Bureau to protect consumers and regulate transactions. However, when a government has no control over how a currency is used (or misused), it makes that currency ideal for taking advantage of individuals. A currency without a rule of law can be a scary prospect.
Could the budget for the agency of the future be created in bitcoins? What do you think of this fascinating new technology phenomenon?
Strange, how when you look at the heading “Could Congress Pass A Budget in Bitcoins?”
Well it all depends on where the emphasis is in the headline. If it is “Could Congress Pass A Budget”, well current predications look bleak. It seems we are headed down the same path as last October….the two sides are building trenches and trying to add tidbits to the budget that the know the other party will flat out defend to the last Congressman or Senator standing alive in their trench.
Now, if the emphasis is on a “Budget in Bitcoins”, I doubt that this would happen until the Federal Reserve recognizes Bitcoins as a valid currency. There is also the limitation on “creating your own money” that congress would face if they used Bitcoins.
As far as a guard against inflation, well they get you when you buy the bitcoins, rather than in the exchange rate when you buy a product. Same problem still exists, just you take the shellacking at a different time. Take a shellacking early when you buy a bit coin, or take it when you pay for a foreign product later.
What is interesting on the other end of the spectrum, there is also a movement to purchase gold and silver. Talk about hard currency. And, I am not talking about a piece of paper that says you own so many ounces of gold or silver, but actually having the gold and silver bars in physical possession.
I know if I won the lottery, I would buy Krugerrands rather than bitcoins. But that is just me.
Concerning your “Disadvantage: Potential for Fraud” there is no more or less potential for fraud with bitcoins versus cash. The association of bitcoin with illegal activity is mostly a historical artifact due to it’s use via the now (thankfully) taken down site SilkRoad. Each and every transaction (a transaction is a transfer of bitcoin funds) is recorded is something called the blockchain. The blockchain is a public ledger in which you can see all of the activity that has ever taken place using bitcoins. If I wanted to hide some illegal or fraudulent activity I’d be much better off with cash. I’d suggest people check out the Bitcoin Foundation bitcoinfoundation.org a good (authoritative) source for info about bitcoin. While I think talking about a congressional budget via bitcoins is kinda silly bitcoins are very interesting and technically fascinating.
Could a currency transform the ways we think of economy and politics?
Thank you all for your commentary. I do realize the notion of Congress passing a budget in bitcoins is “silly.” I really wanted to start a dialogue about how bitcoins can impact government with this piece, so I appreciate all of your thoughtful commentary on the topic. Keep the discussion going! I agree with Fotis, a currency like bitcoin COULD transform the way we think about the economy and politics.