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About the AuthorNiamh McIntyre has published 18 articles
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Could Bitcoin be the basis for a financial revolution?
While many UK economists recently focused on Osborne’s unprecedented reform of beer and bingo duty, something even more radical has been happening on the global stage: Bitcoin is back. After the recent collapse of MtGox, the world’s biggest exchange of the virtual currency, apocalyptic prophecies of the end of Bitcoin abounded. And yet, to the dismay of detractors who saw these events as a validation of their view of a wildly idealistic and untenable means of exchange, as of late there has been a kind of resurgence. MtGox, which formerly handled 70% of global Bitcoin exchanges, has rediscovered 200,000 Bitcoins in a wallet presumed lost. The International Business Times published evidence to suggest that ‘the crypto currency market [is] as stable as it has been in a long time’, and valued the current investment in Bitcoin at $117m. In one interesting development, the Aite Group produced a comprehensive 18-page report: ‘Bitcoin: The Good, The Bad and The Ugly’, which demonstrates how seriously its model is being considered, either as threat or opportunity, by global ﬁnancial institutions.
It would perhaps be helpful at this point to recap the basic economic premises of Bitcoin. It is a peer-to-peer payment system whose most fundamental innovation is its circumvention of centralized, third-party regulation and transaction fees. Bitcoins are created by ‘mining’, in which computing power is used to discover the coins by a series of complex algorithms. However, there is a ﬁnite amount of the virtual currency, meaning that Bitcoins become increasingly diﬃcult to mine. This move intends to keep inﬂation at a steady rate, because supply cannot be increased beyond certain amount. Its dollar value, of course, is allowed to ﬂoat and is highly variable.
There are currently 11 million Bitcoins in existence, and the number of those able to be discovered has been capped at 21 million by 2040. As Bitcoin has erupted from a highly niche experiment into the mainstream economy, its political implications have become increasingly contentious. Its potential to undermine the monopoly of global important factor in the 2008 globingly contentious. Its potential to undermine the monopoly of global banks and governmental regulation means that, depending banks and governmental regulation means that, depending on your point of view, it is simply aggressively libertarian venture capitalism or a revolutionary affront to the hegemony of traditional economic models. Those who hold the former view would point out that Bitcoin’s deregulation is a highly dangerous way of shoring up power for a minority akin to the deregulation of our banking systems, now widely held to be the most important factor in the 2008 global crash.
Does Bitcoin therefore merely transfer ﬁnancial power from the hands of one economically empowered elite to another, technocratic elite? It is telling that, while some in the banking sector are determined to eradicate the threat of the crypto-currency, many of their more forward-thinking colleagues have invested heavily. Bitcoin’s process of ‘mining’ is demonstrably undemocratic, in that increasingly complex systems involving multiple computers are now needed to operate it. However, the critiques which condemn Bitcoin’s attempt to circumvent regulation assume that governmental ﬁnancial regulation is objective, and distinct from the banks themselves; an assertion which would be extremely diﬃcult to prove in any of our large Western economies.
Bitcoin was released in 2009, developed in order to address the void of trust in governments and ﬁnancial institutions in the wake of the 2008 crash. In a statement accompanying the release, the elusive ‘Sashi Nakamoto’ asserts that “The central bank must be trusted not to debase the currency, but the history of ﬁat currencies is full of breaches of that trust.” While the users of Bitcoin are notoriously anonymous, every transaction in the currency’s history is veriﬁable and accessible, recorded in its public ledger, ‘the blockchain’. There is evidence that Bitcoin is being used to bypass traditional economic middlemen and help emancipate the worlds poorest. A good example is a BitPesa, a digital currency platform based in Kenya which will reduce by two-thirds the transaction fees taken from overseas transfers to Africa – such fees provide companies like Western Union with an income of around 110 million dollars a year.
The Kreuzberg neighbourhood in Berlin, renowned as a centre of counter-culture and vehement resistance to large corporations, currently boasts the world’s highest density of companies which accept Bitcoin: in the words of Lui, a blogger at Simulacrum, "To understand the sometimes slippery ethics of Bitcoin… We have to account for its perceived dialectical opponent, an entrenched and indifferent economic elite. [It is] a transnational community with no intentional barriers to entry, built on collaboration, relative transparency, and a surprisingly resilient idealism." For a people that saw ﬁrst-hand the results of strict control over the economy, Bitcoin and its associated Cryptography seem to oﬀer a permanent respite from the censorship and control that has plagued so much of recent German history.
Bitcoin is primarily an ideological move, a thought experiment which has spawned over 100 other crypto currencies, described by enthusiasts in evangelical terms. As Paul Singer said, “When kids wake up to the fact that they don’t need their parents’ help to create a Bitcoin wallet...when they can use Bitcoins for free international transactions, at any hour, in every major city on the planet, then you’ll know that something has changed.”
But many remain unconvinced that Bitcoin is any more than a particularly alluring bubble. The former President of the Dutch central bank called the hype around Bitcoin worse than the Netherlands’ infamous tulip mania of the 17th century. Bitcoin is still in an embryonic stage; no-one could conﬁdently predict its future. However, in spite of all its uncertainty, Bitcoin provides the potential for an economic battle-ground by interrogating the idea of the ﬁat currency itself, and that is what makes it endlessly exciting and corruptible in equal measure. Bitcoin is revolutionary, but only in the hands of revolutionaries.