By: Siavash Habibi
By now, most of you know of the Bitcoin phenomenon. It has grown exponentially in 2013, and it will be interesting to see the development this digital currency will have in the coming years. The opportunities are exciting, but there are some serious potential implications if Bitcoin continues growing at the same rate, possibly as grave as altering the international balance of power. Allow me to elaborate.
Briefly about Bitcoin
The digital currency Bitcoin can be generated by anybody through a process called “mining”, which requires certain software. This software is open source, and everyone can read the code. The flow of generating Bitcoins is limited by a set algorithm to prevent an overflow of the currency into the market. Bitcoins are traded and speculated on as other currencies, and are stored in “digital wallets”. The trading is anonymous, and the transfer of Bitcoins costs almost nothing. In addition, there are no prerequisites or preconditions set on trading Bitcoins, in contrast to traditional banks.
It should be noted that Bitcoin is one of 80 different e-currencies out there, but it seems to be the most prevalent. More and more institutions are using it, and it boasts a good $10 billion USD market cap. The value of each Bitcoin boomed from $13 USD in January 2013 to about $1200 in November 2013. There are now some speculations that it will jump to a value of $10 000 USD in 2014. Especially as Wall Street investors are pouring money into the infrastructure around Bitcoin such as ATM’s and debit cards, in addition to giants such as Amazon and Overstock being rumored to jump aboard. The first Bitcoin ATM is opening in Toronto very soon. Also, TV-Shows like “the Black List” and “Almost Human” and others, continuously reference the currency as a typical means of transaction.
Recently however, China banned its banks from providing Bitcoin services, i.e. exchanging them back to regular currencies. As one third of the world’s Bitcoin market are made on the Chinese exchange, it becomes interesting to know what spooked the Chinese government to set out the ban?
Drugs, money laundering and anarchy
For some time Bitcoin was associated with “Silk Road”, a website that was under investigation and believed to be used to facilitate drug trafficking, murder-for-hire, data hacking and other criminal activities, with Bitcoins transacted as compensations. The website was shut down, but it still showed the possibility of misusing the anonymity behind Bitcoin for payments toward illegal activities. These pose some of the stronger arguments against the e-currency, but cash is not much different in that regard.
There is a breath of anarchy around Bitcoin, where anti-establishment activists and über libertarians are using this as a mechanism to stick it to the government. Most recently, Forbes reported the creation of “DarkWallet”, an app that works as a regular digital wallet, with the caveat that it scrambles the trading information to make it even more anonymous and difficult to trace. This app is being created by Cody Wilson, the same guy who invented the world’s first fully 3D printable gun. The US government has insisted on greater regulations around Bitcoin usage, so as to combat money laundering and other misuses, but the creators of “DarkWallet” want to counteract these regulations with this app.
Challenging the monetary system and evading sanctions
As Bitcoin grows larger, so does the possibility of anarchists using it to make a statement. It becomes even more worrisome if a larger part of any population were to opt for Bitcoin rather than their given currency, as it has a possibility of offsetting the monetary system. Former US Representative and Presidential Candidate Ron Paul argued to CNN Money that the increased usage of Bitcoin challenges the US dollar, especially if the dollar finds itself in a crisis, at which point the Bitcoin will become viable alternative. Ben Bernanke, Chairman of the Federal Reserve maintained that Bitcoin “may hold long-term promise” as means of international transactions.
The idea of international transactions brings up another thought. What if governments used Bitcoin for transactions? Especially governments under sanctions like North Korea, Syria, Iran and Libya. In theory, these governments could circumvent sanctions by skipping regular banks and using Bitcoin instead. This could be very dangerous. Not only for obvious reasons, but also in terms of statecraft and diplomacy. Economic sanctions are a means of applying “sticks and carrots” in diplomatic negotiations. Without them, there is little gray zone between talking and fighting, and if verbal diplomacy fails, the “stick” alternative remaining is military engagement. If hegemony states like US and China cannot use their economic leverage as effectively, this poses some risks to the balance of power in the international community.
Finally, there is the aspect of non-taxable payments for services. If the use of Bitcoin remains anonymous, and used as payment for everyday services, how will it be regulated for taxation? The strain on the financial system could be quite large if more and more people refrain from regular bank transactions and instead use Bitcoin as means to pay for services. It would also make it even more difficult to measure the GDP and output of a country’s economy at large. Since Bitcoin barely has a transaction cost, its use is competitive against services like VISA, Master Card and American Express, which charge some 1-3% per transaction. The market provides good grounds for Bitcoin to continue growing.
Clearing the path
Perhaps these are among the reasons that China banned its banks to provide Bitcoin services. The idea that the e-currency could challenge its monetary system and alleviate for anti-establishment actors to prosper. For now it is a fairly new phenomenon and is only just starting to gain momentum. But the path is being cleared for Bitcoin to gain ground, especially with privacy concerns making headlines. Either this is a trend that will die out, or it will make its way into becoming a solid well-known currency, and perhaps even challenge the traditional monetary system. Either way, it is interesting how the founder of Bitcoin, Satoshi Nakamoto, probably a pseudonym for one or more people, has created such a significant phenomenon “out of thin air”…
Siavash Habibi is a consultant at The ForeSight Group. He has previously worked as Newsproducer for the Iranian TV station Manoto in London and for the Clinton Global Initiative in New York.
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