The Bitcoin is getting a bunch of rah-rah today because someone has managed to sucker, er, raise $9 million in venture capital money for a startup to promote the digital currency. The financial community thought subprime mortgages was a great idea back in the day, a concept built on a lot more data and real-world connections -- and you know how that ended.
Back in the day, I earned a degree in Economics. It taught me a healthy respect for the existing monetary system and the limitations to using gold and silver to back paper currency. The Federal Reserve conducts an ongoing, complex juggling act maintaining the value and stability of the U.S. money supply.
Despite decades of (relatively successful) operation, the U.S. still has groups that call for moving the country back to a gold standard. One school of libertarians would like to see us go back to the old days where currency value is directly tied to a specific weight of gold or silver -- a quite messy prospect in today's digital economy where we pay for Starbucks coffee using a Visa credit card and typically are paid via direct bank deposit.
At its core -- supported by a different group of libertarians -- Bitcoin is a distributed and virtualized peer-to-peer currency based upon cryptography and a private network of computers free from government oversight.
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But the U.S. government is providing some public oversight through the Department of Treasury's Finance Crimes Enforcement Network (FinCEN). A ruling issued earlier this year said while Bitcoin is a "virtual currency" because it is not legal tender under any sovereign nation, American entities generating such currency become money transmitters if it is selling the bits for real world money or its equivalent. Other agencies are likely monitoring Bitcoin; place the odds at even that there's an Edward Snowden document waiting to be released in the future.
U.S. government oversight and venture capital backing is taking some of the Wild West aspect out of Bitcoin. Circle Internet Financial, with offices in Boston, MA, and Dublin, Ireland, has received a series A round of funding from Accel Partners, General Catalyst Partners, and long-time investor Jim Breyer. The Founder and CEO of the venture is Jeremy Allaire, co-founder of Allaire and Brightcove.
Circle is expected to include online services for both consumers and merchants seeking to adopt and use Bitcoin and digital currency for payments and money transfers. There's already been some limited acceptance of Bitcoin among Internet firms and moves for Bitcoin ATMs and physical Bitcoin pieces of paper.
But nobody should expect smooth sailing for Bitcoin. The virtual currency has fluctuated from around $13 dollars a "coin" to $266 this year, with prices rising and falling more like a volatile stock than a traditional currency. After the Silk Road drug warehouse was seized by the FBI this month, prices dropped from $140 down to $110. At around 5 p.m. (EDT) on October 31, Bitcoin was valued between $213 and $215.
It's the speculation aspect of Bitcoin and a comparison of the system of it being as good as gold that make me squeamish. There's an assumption of perfection that clashes with the parallel use of Bitcoin as a high-risk investment instrument -- most individuals and businesses prefer their money to be stable.
Further contradictions come from the promotion of Bitcoin as an anonymous way to conduct financial transactions. While that's great if you're buying drugs, guns, or various other illegal services, the rest of the world uses money in an established set of ongoing and typically public transactions with checks and balances if the purchased goods and services are defective.
About the only "good" that may result from Bitcoin is pressure on existing credit card-based systems to become more efficient and less vulnerable to fraud in order to lower payment transaction costs. Smaller businesses may be tempted by lower transaction costs using a Bitcoin-like digital currency, but lower pricing would have to come with the same or better level of reliability as current credit card systems.