Econintersect: The surging value of Bitcoin is reminiscent of tulip mania in the early 1600s in Holland. GEI News has been following the parabolic rise on the value of bitcoin in 2013. At 12:10 am 08 April 
2013) the price of the Bitcoin is $170.90 according to bitcoinprices.com. This represents a continuation of the moonshot seen by Bitcoin after an event driven drop of $30 ($147 down to $117) during the middle of the day (U.S. time) of 04 April. It’s like the “crash” on 04 April never happened. See GEI News for details.
A Princeton University student who writes for the Washington Post and Bloomberg, Evan Soltas, has suggested that, looking past the bubble, Bitcoin represents a potential future wave which could undermine the modern financial system and governments supported by taxation.
Soltas suggests that Bitcoin’s status as a new global electronic payment system represents the forerunner of other future systems even if it does not make the grade in that regard itself. He says this is an “existential threat to the modern liberal state“.
Here is an excerpt from Bloomberg:
Electronic payments aren’t new. Bitcoin’s only innovations are its status as an independent currency and its decentralized network design. But those differences might make Bitcoin — or rather, crypto-currency in general — an existential threat to the modern liberal state. If widely adopted, crypto-currencies would cripple government in three central functions: taxation, police and macroeconomic stabilization. That is exactly what Bitcoin’s biggest fans are hoping.
- Taxation: How do governments collect taxes on transactions in Bitcoin? The answer is they don’t, and they can’t. Crypto-currency’s strong protections on anonymity make it impossible for any state to know who is buying what, who is paying whom, who earns what, and who has what in savings. That poses a direct challenge to the power of states to levy taxes.
The problem is that Bitcoin makes tax evasion easier. States could enforce reporting of Bitcoin income for individuals and businesses, as they try to do for cash, which is also hard to track. But encryption and the peer-to-peer network structure make Bitcoin even harder to follow than physical cash, and digital cash is much better than the physical kind for storage and transactions, so the scale of the challenge could end up being much bigger.
- Police:It would be almost impossible for states to detect certain crimes. One of the major alleged uses of Bitcoin — though, of course, one can never truly know — is buying illicit drugs. Bitcoin’s cryptography makes it uniquely able to facilitate money laundering, insider trading, fraud, and bribery. The transactions would be untraceable, and the money doesn’t ever have to return to the bank, where the financial crime might have been detected.
- Macroeconomic policy:A Bitcoin economy would undermine the power of real-world central banks to make monetary policy. Yes, governments can influence the demand for national currencies by requiring taxes to be paid in them. But the monetary lever on private transactions and lending would be gone if such commerce was denominated in Bitcoin. And by displacing governments as currency issuers, Bitcoin also threatens their ability to finance public debt. In a world where many transactions are anonymous, it’s unclear how governments could even compile accurate economic data, without which macroeconomic policy is impossible. Economic depression in a Bitcoin regime could be an insoluble problem.
If Bitcoin remains on the fringes, then the state is safe. The question is, if it shows signs of becoming a widely used currency, what could governments do to crush it?
Soltas says that there are actions that the U.S. (and presumably other governments) – and suggests some are already underway – but the decentralized and anonymous nature of bitcom transactions present severe regulation challenges.
Sources:
- Bitcoin Exchange Rates (bitcoinprices.com, as of 12:10 am 08 April 2013
- Bitcoin Really Is an Existential Threat to the Modern Liberal State (Evan Soltas, Bloomberg)
