The biggest risk to the virtual currency doesn’t come from hackers but from governments. And that’s good news.
The shuttering on Tuesday of Mt. Gox, hasn’t just left customers of the Japanese-based bitcoin exchange panicked to the tune of about $300 million, it’s instigated the latest round of comparisons to tulip-bulb mania, sour anti-semitic rants from neo-Nazis, and “Is Bitcoin Finished?” stories.
So: Is bitcoin finished? The short answer is no. And while I explain why, think on this: If and when the end does come for bitcoin, an internet payment protocol that only cranked up in 2008, it won’t be because of cyberspace’s answer to bank robber Willie Sutton undermining belief in a virtual currency (ain’t they all virtual?), it will be because governments around the globe are trying their damnedest to choke off a payment system that allows people to cut out the middle man.
While it’s not yet fully clear why the long-troubled Mt. Gox shut down, we do know its closing didn’t crater the value of bitcoin. On Wednesday, bitcoin’s price bounced up 5.5 percent, closing at $564 after dropping to the low $400s on Tuesday. Think about it: The price rose 24 hours after an exchange that held as much as 6 percent of bitcoin in circulation closed its doors for unspecified reasons, reports circulated that Mt. Gox was missing 750,000 bitcoins from its stash, and news came out that the feds had subpoenaed Mt. Gox earlier this month.
The folks still holding bitcoin aren’t sad-sack suckers or starry-eyed cyberpunks. As my Reason colleague Brian Doherty has argued, bitcoin critics may see Tuesday as “doom” for the stuff, but bitcoin users see it simply as “a normal day...for a currency that dies every day.” Doherty notes that if you had been foolish enough to invest $1,000 bucks of make-believe U.S. money in bitcoin, it would be worth about four times that today, even after the Mt. Gox avalanche. “People still believe,” writes Doherty. “And that's important when it comes to either investment or currency.
Bitcoin—or something very much like it—will survive scares on its security and dependability for the same reason that email, online commerce, and networked computers survived all manner of hacks, rhetorical and legal attacks, and viral infections that once scared the bejeezus out of the lumpen media in the early 1990s (remember all those stories about how fully 110 percent of all internet traffic was devoted to a terrifying mix of kiddie porn, identity theft, and dehumanizing flame wars?).
Bitcoin serves a purpose that is at once expressive and purposeful. It’s expressive because it’s an incredible marvel of distributed, shared technology that delivers on some of the liberatory promises of the internet. Most importantly, it delivers on the dream of “disintermediation,” of cutting out the middleman and the associated costs of going through third-party agents for all sorts of transactions. Bitcoin is purposeful because it lets people do things they couldn’t otherwise do. Remember when Visa, Mastercard, and PayPal—all exemplary, groundbreaking technologies in their own ways—wouldn’t process payments to Wikileaks because of U.S. government pressure? Bitcoin allowed supporters to keep sending donations because there wasn’t a third party the feds could threaten or squeeze. As Buzzmachine’s Jeff Jarvis howled via Twitter: “Hey, Visa, Mastercard, Paypal: It's MY money. How DARE you tell me where I can and can't spend it?"
Something that allows individuals to spend money however they want isn’t going away anytime soon. Just like we did with computer viruses, hacks, and a host of other once-seemingly cataclysmic issues, bitcoin’s users will figure out all sorts of ways to deal with theft, scams, and worse. The fixes will never be perfect, the patches and updates will be ongoing, and an alternative system may well supplant bitcoin, but what else is new in digital culture, right? As Veronique de Rugy suggested last November, it’s worth thinking about bitcon as “the Napster of the payment industry.” The specific platform is far less important than the forces it unleashes.
Which isn’t to say that there are no serious existential threats to bitcoin and other alternative, non-state-backed currencies. Far from it. Theft, fraud, and wild value swings all blood the path to government regulation. After Mt. Gox registered as a money-services business in 2013, the U.S. Treasury Department has some jurisdiction over it. Treasury’s Financial Crimes Enforcement Network (FinCEN) was already looking into Mt. Gox and the state of New York is pushing to license bitcoin dealers and shut down “the Wild West” days in cryptocurrency. The high-profile FBI case against the alleged proprietor of the “dark web” site Silk Road, where users could trade in all sorts black market and gray market goods and services, is already being used to demonize bitcoin in political and popular culture.
As Mercatus Center bitcoin expert Jerry Brito has written, government regulation can either be ham-fisted or light to the touch. “While governments can't kill Bitcoin,” he argues “it would be naive to think that they could not substantially slow down its development and raise the cost of using it.” Until now (and including relatively friendly Senate hearings last November), the feds have treated bitcoin more as a novelty than a problem. Even apart from Mt. Gox, as bitcoin’s value climbs over a few billion dollars, Washington will take it more seriously for sure. Given the track record of D.C. bureaucrats in regulating anything related to the economy—when they’re not being “captured” by special interests outright, they typically make incredibly counterproductive decisions—nobody should be optimistic that the Treasury Department (or Homeland Security, which is naturally squawking about the terroristic threat posed by bitcoin) will acquit itself well.
But here’s the thing: If the U.S.—not to mention any and all other governments around the globe—squeeze too hard, the hive mind that is constantly building, repairing, and revising bitcoin’s protocol will skip town one way or another. They—we—don’t want bitcoin per se. We want something like bitcoin that allows for greater freedom, reduced transaction costs, greater anonymity, and perfect accounting transparency. As long that need is there, it will be served.