Call me a dreamer. Call me a contrarian. I still believe in Bitcoins.
The collapse of Mt. Gox -- and the evident disappearance of perhaps 6 percent of the world's supply of the virtual currency -- hasn’t put me off at all. And even if I’m wrong, and Bitcoin fails, I’ll probably support the next digital currency. The reason is simple: For those willing to take the risk, eyes wide open and fully informed, money without government carries a certain appeal.
But not to everybody.
Senator Joe Manchin, a West Virginia Democrat, in a letter sent to pretty much every financial regulator in the federal government, has demanded action. The letter calls on regulators to “prohibit this dangerous currency from harming hard-working Americans.”
The trouble is the senator hasn’t come up with a particularly compelling list of harms. He’s angry, but not persuasive.
Let’s begin at the top. “This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy,” he writes.
Bitcoins might be described as lightly regulated, but "unregulated" is too strong. (A point the Treasury Department has emphasized.) And lots of other instruments allow users to participate in illicit activities. Like, say, dollars.
“Due to Bitcoin's anonymity," Manchin continues, "the virtual market has been extremely susceptible to hackers and scam artists stealing millions from Bitcoins users.”
Is this true? Yes, hackers and scam artists have plagued the Bitcoin market, as they plague lots of markets. That isn’t a regulatory failure; it’s a law-enforcement failure, or a security breakdown at the Bitcoin sites. Although it is theoretically possible for groups of Bitcoin miners to game the block-chain technology that protects against, say, Bitcoin forgeries, no serious evidence has yet been offered that the block-chain itself has been broken.
A better argument might be that Bitcoin sites are reluctant to cooperate with authorities investigating hacking and scamming because of concerns that their clients will lose their anonymity. But it isn’t clear why this isn’t the clients’ risk to take.
Manchin is also worried, sensibly, about anonymous purchases of illegal drugs and weapons. Here, he overreaches: “Bitcoin has also become a haven for individuals to buy black market items.”
We don’t know if Bitcoin is such a haven. Cash, too, is anonymous and virtually untraceable, and it is used to buy illegal drugs and weapons. The senator’s example is the notorious Silk Road, which allowed Bitcoins to be used for unlawful purchases, and a good example it is. But Silk Road, as Manchin acknowledges, was shuttered last year by the Federal Bureau of Investigation. (Credit where credit is due: The successful operation may have been in part because of pressure from Manchin.)
The letter goes on to suggest that the rest of the world is on its way to banning Bitcoin, meaning that “Americans will be left holding the bag on a valueless currency.” Unfortunately, Manchin’s only concrete examples are China and Thailand. Still, his predicted future might come to pass. No government is likely to be happy about competition in supplying money. For Bitcoin's biggest boosters, breaking up the state monopoly on money, with its constant manipulations of value, is precisely the point.
The most important part of Manchin’s argument is this: “There is no doubt average American consumers stand to lose by transacting in Bitcoin. As of December 2013, the Consumer Price Index (CPI) shows 1.3 percent inflation, while a recent media report indicated Bitcoin CPI has 98 percent deflation. In other words, spending Bitcoin now will cost you many orders of wealth in the future. This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental.”
The recent news media report to which Manchin refers is presumably this post by the always thoughtful Matthew O’Brien at the Atlantic. O’Brien is reflecting on the deflation built into the Bitcoin system. His point is that were prices of the goods and services that make up the Consumer Price Index denominated in Bitcoin, they would be rapidly falling. He goes on say (in a point Manchin echoes) that it makes no sense to spend a Bitcoin now if its value will be greater tomorrow.
Assume that this is true. That just means that Bitcoins are an asset rather than a currency. O’Brien fully understands this. Manchin’s letter, however, implies that the tendency of asset values to rise over time is a reason not to allow people to hold assets.
In any event, it isn’t clear why the deflation matters to the U.S. economy. Goods and services aren’t priced in Bitcoins. As O’Brien notes, the buyer who “spends” Bitcoins at a restaurant or store is really just exchanging them for dollars -- selling off an asset. It’s the dollars, not the Bitcoins, that do the buying.
I don’t mean to pick on Senator Manchin, whose heart is in the right place. Lots of serious people (my beloved editors at Bloomberg View among them) think it’s time for more regulation of Bitcoin. I simply disagree. The losses at Mt. Gox don’t by themselves demonstrate a fundamental problem with virtual currency. They demonstrate that virtual currency is volatile and risky. That might be an issue if the risk were being transferred to, say, the low-income people whom various states inveigle into spending significant amounts on nearly valueless lottery tickets.
But although some Bitcoins have doubtless found their way into the hands of unsophisticated investors, most of the purchasers, especially those who buy large quantities, are aware of the risks. The “average American consumers” Manchin worries about likely have never heard of Bitcoins. And even with the epic Mt. Gox collapse, Bitcoins are still trading far above their prices of a year ago. Let’s grant that Bitcoins might represent a bubble. They’re still a minuscule part of the economy, and should a handful of savvy investors get burned -- well, they knew what they were getting into.
(Disclosure: I’m not a savvy investor, and I don’t own any Bitcoins.)
(Stephen L. Carter is a Bloomberg View columnist and a professor of law at Yale University. He is the author of “The Violence of Peace: America’s Wars in the Age of Obama” and the novel “The Impeachment of Abraham Lincoln.” Follow him on Twitter at @StepCarter.)
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