Are you ready for Bit Coin?

It’s not a sure thing just yet, but it’s possible that in the future we may see the dominant emergence of a currency called Bit Coin.

Bit Coins are a virtual, peer-to-peer crypto currency. They differ from everything that has come before in three ways:
– They do not require regulation and have no central governing organisation,
– They can be used completely anonymously under certain situations
– They do not claim to have any inherent value, instead relying on the market to decide their value

The technical details behind Bit Coin (or the BTC for short) are a very clever implementation of asymmetric encryption and a decentralised ‘node’ network that keeps track of all transactions worldwide. No one owns the Bit Coin system, like all good revolutions it’s just an idea that has started to spread.

How does a transaction work? Let’s say Bob wants to send money to Jane. Bob has three bitcoins stored on his computer. What he actually has is the private keys that have been used to lock the bitcoins. The entire world already knows the value of the bitcoin locked with the public key, but they don’t have the matching private key required to unlock it, only Bob does. When Bob wants to transfer them to Jane, he declares that he has the keys to these three coins, unlocks them to prove it, and passes them to Jane who locks them with her own set of public keys. The entire world can watch every aspect of this transaction, even the locking, and the identity of which key is required to unlock those bitcoins at that point in time will become obvious to all, as the key procured fit the lock perfectly. Jane has however relocked the Bit Coin again, once again ensuring that no one knows how to unlock it except herself with her own newly matching set of private keys.

The transaction can become anonymous when IP addresses are masked. It’s not important to the network who is unlocking or locking the coins, only that they were successfully unlocked at the time. The information then spreads through the system, each node who hears the news verifies that that key did indeed fit the lock. Slowly the system reaches concensus democratically, ensuring that everyone in the world is in agreeance that the transaction did in fact take place. The recipient can now confirm that they have received the money, the system works.

Basically, using a Bit Coin is just like using Cash that isn’t tied to any particular nation or group, but instead tied to every person simultaneously.

What are the ramifications of this new development? The most obvious is that governments are going to lose control of the money systems. If Bit Coin catches on, people won’t rely on currency issued by governments, government won’t be able to monitor transactions and currency will no longer be tied to national borders.

These seems like pretty large changes in the world, and the most immediate reaction by some governments may be to try and stamp out this new currency. Particularly the US government, who since decoupling their currency from Gold in the 1970’s have been able to print as much of it as they like, effectively devaluing the currency every year by anyone who was holding it. Since the USD is the defacto currency of the world, this has been a pretty great thing for them. It’s also not hard to imagine that any government would like to stomp out Bit Coin because it will make tax evasion and illegal economies less risky.

The most obvious method to stop the BTC would be to target the exchanges; any place where government issued currency can be converted to or from Bit Coins. Currenly 1 BTC trades for around $20 USD. This could add uncertainty to the Bit Coin economy, maybe even enough to stop it catching on at all. But if you think about it, all you really need to do to convert to BTC is to create some value (either a service or product), and ask for BTC as payment. And as long as anyone accepts it as payment for anything, it will still hold value. This would also require a coordinated global effort at unprecedented levels. As long as any country has a currency that can be bought for your local currency, and that country also allows exchange to BTC, you can still effectively buy and sell BTC in your local currency. In my mind, given the speeds that government work at, targetting the exchanges worldwide would be pretty much impossible.

Method number two would be to make trade in BTC illegal. This would work quite well for a while, however a sinister ally of the BTC could possibly emerge to aid the Bit Coin in this scenario. Drugs are also illegal, however they are still very much in existance despite that fact. At its worst, the BTC could be backed by the value of illegal goods and underground exchanges could spring up. Hackers selling exploits, money launderers, tax evaders and the entire underground economy are very likely to start using Bit Coins (in fact I suspect some elements might have started already). For the underworld, Bit Coins offer the perfect method to boost their economy by reducing the risks and shortfalls of plain old Cash, while at the same time protecting their identities.

And once again, if you block the BTC but other nations don’t, and those nations see economic advantage from using it, your citizens could effectively become workers for other nations or an online only economy anyway, using encryption and online BTC banks to work online. For example, a professional IT services economy in the Netherlands could see a programmer working for BTC. Even if you can’t legally spend those BTC in your own country (so let’s assume you don’t), you can have goods shipped from overseas, pay for international holidays, and still buy online services.

In my mind, unless the governments of the world manage to completely remove all underground economies, something they’ve sadly failed to do to date, the BTC isn’t going anywhere. Much like decentralised file sharing, and also strangely like cain toads, it’s a system that is impossible to pin point and destroy. We might as well accept that it’s here to stay.

So what are the upsides of the BTC?
A major one is that it will bring people closer together. Bit Coin doesn’t care which country you’re in, a bitcoin is a bitcoin, so if I want to buy server space from the USA I no longer need a credit card company or paypal (who charge 3%, imagine 3% of the entire worlds online economy), or an international bank transfer (the fees on these are also steep). I can literally just send money all by myself straight into the pocket of the guy selling me server space, no middle man required at all. How neat is that? This also means that more and more, Bit Coin is going to tear down international exchange rates. For better or worse, if the price of their currency is too high (say you’re buying something from Japan), you can just pay in Bit Coins instead. Great for Japanese, US or Australian exporters.

This could possibly mean that for poorer countries, time is running out. If your economy hasn’t had it’s chance to benefit from becoming a major exporter due to exchange rates in your favour, you might never get your chance! If this scenario pans out, wealth is going to concentrate into areas where it already exists. To counteract this luckily is the effect of increased communications worldwide. Hopefully in the future, it won’t matter where you’re born so long as you have internet access. Free online education is getting better and better, for those motivated individuals wherever they may be, opportunity will still exist. You could be earning BTC as an online retailer (completely outsourced) from a shack in the middle of Africa, with a solar panel and a computer connected to the mobile phone network. I really think it’s important that charities put more of a focus on improving worldwide communications.

This increased accessibility to each other is going to create increased efficiency when dealing with each other. Online communities won’t necessarily need a home country any more. Server space is largely becoming distributed worldwide due to the emergence of cloud computing and projects such as Apache Hadoop. Languages like English, Russian, Chinese and Portugese are steadily stamping out the smaller players. An online currency would slowly become the de facto world currency, tearing down borders and allowing organisations to form beyond the limits of national borders.

(as an aside, I secretly hope that Lojban, a 100% logical, unambigious language will catch on as the online language, so that later on machines will be able to join the party. If you’ve never noticed, English really is pretty unintelligible unless you’ve had a ton of practice due to all the exceptions that have built up over the years.)

If corporations truly do move beyond national borders, how will we pay for things like medicare, roads, the army, welfare? I expect taxes will shift toward a more user pays model. Home owners will be taxed simply for owning a house, incomes on known assets will need to be declared (and taxed more heavily), GST will be raised, GPS fitted cars will pay a per kilometer toll. Quite possibly, volunteering in the local community will become mandatory. Instead of paying with money, anyone residing in the country may be taxed in time.

So to summarise, if you believe in the rise of Bit Coin, what can you do to prepare?
– Keep learning IT and online skills, as if anyone didn’t know it, this is where everything is moving
– One day (20 years?), it may be necessary to move away from government related jobs, as this cost center becomes more obvious and more of a burden to the population at large.
– Think about not investing in property, it will be the easiest asset for governments to target.
– Ensure your corporation has no secrets other than those related to competitive advantage (eg excellent business practices, trade secrets). Governments may soon require unprecedented access to your IT infrastructure.
– Consider what strengths you can lend to your local community that would take very little effort, everyone will need to do their part
– Think beyond just your borders, how is your organisation doing on a worldwide level?

The distance between you and previously unknown competition might be about to get a whole lot smaller.

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5 Comments.

  1. Science and Robotics | Cooper Systems - pingback on July 14, 2011 at 01:32
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