New Money and How To Buy Things Anonymously

The more I read, the more I am determined that privacy/anonymity vs. openness/sharing will be the defining dichotomy of our age. The more web sites start to track pieces of information about what we buy and sell, where we browse, and what we like, the greater the number of calls for regulation and privacy protection. The battle lines between privacy and the power of information have been drawn.

But now there is a way to keep spending private, at least. Bitcoin, a digital currency allegedly created by hacker Satoshi Nakamoto, contains complex encryptions that allow its holders to buy and sell anything, anywhere in the world over the Internet, without revealing their real names or having to pay any kind of exchange fees or taxes. (For an interesting and accessible overview of Bitcoins and their implications, see this article in ars technica.) Bitcoin has all the advantages of cash – anonymity – but without the hassle of having to physically transport it anywhere. It also has all the advantages of a “trust-based electronic currency,” such as credit cards, in that it allows instant, ubiquitous transactions, but without the need for an identity attached to them.

Bitcoin has consequently been embraced by Anonymous, an anarchic online community that first came to mass public attention when it disrupted the sites of PayPal, MasterCard, Visa and others in response to perceived censoring of WikiLeaks last year. It is disrupting them again with Bitcoin, but this time more indirectly.

Normally, when new currencies appear on the scene, they have a hard time with what is termed “adoption and valuation,” that is, getting people to use them, and determining what they are worth compared with other currencies. New currencies are usually the prerogative of federal governments, or supranational ones (as in the case of the Euro), which automatically gives them a head start because citizens need to pay taxes in the new currency and generally use it to make purchases. Even then, as this history of the Euro points out, there are remarkably complex logistical and emotional hurdles to overcome, from swapping the money found in ATMs to choosing the images and words for the notes that so many people identify with to establishing the value of the new currency against other existing ones.

It is very rare for new currencies to spring up without a national backing, and perhaps Bitcoin has only been able to gain attention and adoption of the market because it is digital, and thus doesn’t have the physical/logistical barriers to overcome. But why are people using it? Just like a new national currency, Bitcoin has appeared and boldly declared that it stands for a new order, in a sense. Its users can now engage in economic activity outside of the sphere of government control, or the control of multinational credit corporations, in total privacy.

As an article on BigThink puts it, “You don’t need a banking or trading account to buy and trade Bitcoins – all you need is a laptop. They’re like bearer bonds combined with the uber-privacy of a Swiss bank account, mixed together with a hacker secret sauce that stores them as 1’s and 0’s on your computer.” Bitcoin represents the complete disengagement of the buyer from the seller, the furthest distance yet discovered from bartering or exchanging one good for another. Purchases now require approval from no-one.

Is this radical new territory, or a return to what currency is intended to be? As a means of exchange, currency technically need not have an identity attached to it. It stands as a measure of commensurability; buyers and sellers can rely on the value of the currency as a standard without having to ascertain the value of goods being exchanged every time they buy or sell. And it was only very recently in the trajectory of human history that currency was created with no direct correlation to an existing good like gold (called fiat currency), but with instead the backing of a national government with whose laws and regulations the buying and selling parties tacitly agree to comply. New virtual currencies like Bitcoin are similar to all modern government currencies in that their value is not intrinsic but imposed by decree (and perceived rarity, and a bunch of other factors). But they lack the oversight of institutions and regulators that comes with a national means of exchange.

Whether Bitcoins will remain as seemingly ominous and valuable as they have recently become is questionable. This week, the Bitcoin plot thickened with an apparent heist in which approximately $500 000 worth of Bitcoins were stolen from one veteran user. The theft pointed to the limits of exchange without third-party oversight, whether in the form of government or a corporation to monitor fraud and persecute offenders. Is the anonymity of exchange worth the risk?

It seems as though this has come down to the same “privacy vs.  security” debate that has dominated public discourse since the rise of the Internet (and, of course, September 11). In all likelihood, some third-party institutions will step in to regulate Bitcoin trading with limited liability and criminal activity investigations, as the above-linked article details. But these would decrease the anonymity of the users of the currency, in some ways negating the whole point. Perhaps the main take-away of Bitcoin is  that anonymity, in today’s world, has its trade-offs too, and can never be an absolute good.

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2 Responses to New Money and How To Buy Things Anonymously

  1. Tim Crawford says:

    I have a friend who is already making money (real, CAD money) with Bitcoins. In a way, it seems like an exciting new prospect for an international, border-less economy. But on the other hand, the decentralization means groups will emerge to take advantage, and the average person – not knowing how it works, or why – will either get taken advantage of, or be too scared to embrace it.

    • Kathryn Exon Smith says:

      Good point, Tim. And I wonder if the fact that many people see it as a not-quite-legal invention by a group of shadowy tech types will put off many otherwise legitimate users — not to mention the fears of being victim to a theft of the kind I wrote about in the post.

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