Virtual Currency Under Fire

Fans of Bitcoin, the digital currency, will tell you it is safer, cheaper, freer and more transparent than ordinary state-backed currencies. The currency works as a series of public key codes, which are cross-checked and processed using P2P networks. What that means is that every transaction is publicly visible, and only requires codes to be sent between computers, but the identity of the parties to the transaction are anonymous. Bitcoin is a store of value and mechanism for exchange that is independent of any government or any particular business, and can be operated anywhere in the world, so long as people can connect their computers to the internet. Because processing a transaction just means applying some brute CPU power to cross-checking codes, then transaction costs should always be nil or next-to-nil, depending on how much competition there is for people renting out a bit of CPU time to cross-check somebody else’s transaction. Given that we are talking about a task that could be done on anyone’s networked computer, you have to assume healthy competition will keep rates much lower than you ever get at a bank. So far, so theoretically good… until somebody hacks an account on one of the exchanges most commonly used to trade Bitcoins for hard cash, sells off huge numbers of stolen Bitcoins, and causes a spectacular crash in their value. This is what happened in more detail, per the Financial Times, Independent, Computerworld, and BBC.

The idea of a P2P currency is pretty intriguing if you can handle the concept that money might be better if stripped from the inflationary, interventionary instincts of governments. The average Joe may not know what quantitative easing really is, but if you talk about ‘printing money’ then they get the idea that their money is not going to rise in value as a result. Given that modern banking transfers more 1’s and 0’s than paper notes and gold bars, it is not a giant leap to imagine a system that has the 1’s and 0’s but nothing else. But Bitcoin will continue to be seen as a risky alternative to conventional currencies for as long as:

  1. Trading between Bitcoin and other currencies is limited to only a small number of unregulated exchanges;
  2. The total value of Bitcoins in circulation, and number of Bitcoin users, is relatively low and hence subject to great volatility, exacerbated by the likelihood that a few big trades could destabilize the market and that the trades can be executed at great speed, and;
  3. Politicians rail against anonymous currencies as a potential way for criminals to move money.

The status of Bitcoin was not helped by the announcement that the Electronic Frontier Foundation will no longer accept Bitcoin donations. The EFF’s prime reason for dropping Bitcoin was that they did not understand the legal implications of using this new currency. Given that the EFF exists to fight for legal rights relating to novel technology, there is something disconcerting about their reluctance to be the subject of any Bitcoin-related legal wrangling (as opposed to being an advocate in such a case). But perhaps the EFF’s move only highlights a different kind of digital divide – between the old school who want to maintain respectability in the ‘real’ world, and the digital activists who scorn the real world as the real source of corruption. After all, a currency can still be effective and valuable, even if it is only used by reprobates. Money shows no great deference to morality. Given WikiLeaks’ banking troubles, it should come as no surprise that they take Bitcoin donations and consider Bitcoin to be

a secure and anonymous digital currency. Bitcoins cannot be easily tracked back to you, and are safer and faster alternative to other donation methods.

When The Atlantic suggested WikiLeaks did not have confidence in Bitcoin they received a robust tweet from WikiLeaks in response:

The Atlantic is opportunistically trying to spread fear, uncertainty and doubt about Bitcoin. We have spent our Bitcoins on our work, and not as a result of speculation.

WikiLeaks believes that Bitcoin is a very promising censorship resistant currency and that people should support it in practice and in principle. Bitcoin will eventually need to be augmented with a sub currency that has fixed time spend retractability if it is to be successful as a safe storage (as well as exchange) currency for the average person, but this is a minor criticism compared to Bitcoins many emancipating benefits.

Where does this leave telcos? Well, obviously the prospect of a wholly digital currency, managed through P2P networks, with near zero banking commissions, might not seem like a dream business opportunity. At the same time, experiments with digital money transfer are unlikely to end with Bitcoin, in the same way that music file transfer did not end with Napster. A segment of the commercial world will be drawn to using digital currencies. Exactly who and how many will accept digital currencies depends on who and how many have previously accepted them. This makes it difficult to predict if a tipping point will be reached where the currency becomes mainstream – and how governments would respond if that point is reached. But whatever the incalculable probabilities, the threat exists. In the longer run, digital currencies could limit telco ambitions to profit from moving money, especially at the micro end of the market. Just like with over the top video, telcos may find themselves competing with over the top money. Once again, telcos need to be wary of becoming victim to the ubiquity of the internet they provide, and the ingenuity of those who use it.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

1 Comment on "Virtual Currency Under Fire"

  1. Eric,

    The arrival of Bitcoin is an interesting development. I’ve heard that people who play virtual games exchange currencies that can be traded with other players on the game. The players sometimes use the currencies to buy things in the real world.

    As you suggest, Bitcoin would be less interesting if real-world currencies were stable. Years ago, people counted on the U.S. dollar as a guarantee of value. But the last two administrations in Washington have been content to let the dollar decline greatly. And the price of gold (in dollars) has risen accordingly.

    One currency that has stood the test of time quite well is the Japanese Yen. There are now only 80 yen to the dollar. When I was stationed at the Sasebo navy base in Japan in 1980, the dollar was worth 250 yen –- quite a change, so I imagine the American sailors and their families in Sasebo now can’t enjoy the free-spending ways I enjoyed back in a day.

    Which makes me wonder: the mobile phone should be making it easier to carry and trade the Yen and other stable currencies. What would happen if people learned how to set up wireless bank accounts using foreign currencies. To me, that would be a more attractive alternative to Bitcoin.

    Finally, I’d like to add the words of Ralph Waldo Emerson to this discussion. In 150 years not much has really changed:

    “A dollar is not value, but representative of value, and, at last, of moral values. Wealth is mental; wealth is moral. The value of a dollar is, to buy just things: a dollar goes on increasing in value with all the genius, and all the virtue of the world. A dollar in a university, is worth more than a dollar in a jail; in a temperate, schooled, law-abiding community, than in some sink of crime, where dice, knives, and arsenic, are in constant play.”

    “The Bank-Note Detector is a useful publication. But the current dollar, silver or paper, is itself the detector of the right and wrong where it circulates. If you take out of State Street the ten most honest merchants, and put in ten roguish persons, controlling the same amount of capital, — the rates of insurance will indicate it; the soundness of banks will show it: the highways will be less secure: the schools will feel it; the children will bring home their little dose of the poison: the judge will sit less firmly on the bench, and his decisions be less upright; he has lost so much support and constraint, — which all need; and the pulpit will betray it, in a laxer rule of life. “

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