Platt Perspective on Business and Technology

Considering the nature and qualities of money 11: thinking ahead to the next peer-to-peer currency generation 1

Posted in macroeconomics by Timothy Platt on June 16, 2014

This is my eleventh posting to a series on money and on what monetary value functionally means (see Macroeconomics and Business, postings 142 and loosely following for Parts 1-10.) And up to here I have been discussing the nature of money as a medium of value exchange and representation, and how peer-to-peer currencies do and do not fit into that larger ongoing paradigm. And in that I have largely focused on bitcoin as a best known example of a peer-to-peer currency offering, at least as of this writing.

My focus of attention in Part 10 of this series was on the reliability and constancy of money in its various forms, as a trustworthy basis for setting value in marketplace transactions. All of this series up to now has, in fact been directed towards that goal, and the matching goal of measuring and analyzing bitcoin as a peer-to-peer currency example for how it measures up to the standards set by more reliable and trusted nation-backed currencies for this.

I have, over the course of this progression of postings, raised and at least briefly discussed a series of issues that bitcoin brings up, highlighting both its strengths and its weaknesses in the process. And at this point I find myself returning to a point that I first raised in this overall series discussion in Part 4 where I first raised the notion of ending up on the wrong side of history in judging peer-to-peer currencies per se.

Bitcoin might pass through its current uncertainties and challenges as what in retrospect, would be seen as its initial growing pains. And it might come of out its early stage challenges stronger and more secure as a result of having faced and surmounted them. Or bitcoin itself might ultimately fail, and from the cumulative impact of challenges that have already reached the news and become part of public awareness and opinion, and from new revelations.

Either way and even if every one of the first generation peer-to-peer currencies that have arisen to date fail, I do expect the challenges of today’s peer-to-peer currency offerings to be resolved. In an increasingly transnational and global economy, and in an increasingly online and cyberspace-based economy, extra-national currencies will arise and come to thrive – when and as lessons learnable from their first generation forerunners are learned from and built from. And that brings me to the ending to Part 10 where I noted in anticipation what I would write about in this installment.

The right side of history, if you will, will all but certainly include at least some form of peer-to-peer currency option as at least one of the core bases of financial transactions and marketplace valuation determinations and purchases. What would such a vetted and secure peer-to-peer currency look like? How would it be generated, validated for authenticity, stored and used? And what is the best way to reach this state for these new currency forms, under terms where their unit value can be stable and reliable enough to meet even stringent due diligence requirements and for all significantly involved categories of interested and invested parties?

And this brings me to the precise wording that I cite here from the end of Part 10, where I stated that I would:

• Discuss some possible lessons that could be learned from bitcoin and other first generation peer-to-peer currencies and both for their own evolutionary development and for any second generation successors that would follow them.

As a matter of basic, general principle any response that I would give to that challenge would begin with a list of the strengths that bitcoin has going for it, and of the mistakes and missteps of bitcoin as the current generation poster child peer-to-peer currency. So I will couch my discussion to follow in terms of this working example currency option.

• And I note that if the points of vulnerability and of potential currency valuation failure that have arisen in bitcoin and its first generation peers are not effectively addressed from within their peer-to-peer currency generating and using communities, and in ways that meet the concerns of the overall marketplace, then they will be addressed externally and in large part under governmental aegis and mandate.
• And if these correcting mechanisms cannot come together to create reliable stability for those currencies they will fail. So the learning curve issues and challenges that I will write of here are not just matters of abstract academic principle; they have very real world, practical ramifications too.

I begin the core discussion of this posting with bitcoin and with its strengths. And for the larger online community, and given our globally reaching and increasing concern over privacy and confidentiality, one of bitcoin’s defining strengths is that it was set up from its initial design and coding to provide privacy and anonymity for its users.

I have to add to that point, that from a private sector consumer’s perspective that this is a strength. But from a governmental perspective that same quality and feature is more likely to be seen as a weakness and as a distinct source of societal vulnerability too. And that point is the topic for at least the balance of this posting.

Businesses and their customers face identity theft and other online security threats, and privacy concerns that have continued to rise in the public mind, and from news of online security breaches and unauthorized breaches of confidential personal information, and from the revelations of government surveillance programs. And for the later, I cite my still ongoing series: Learnable Lessons from Manning, Snowden and Inevitable Others (see Ubiquitous Computing and Communications – everywhere all the time 2 as postings 225 and loosely following.)

But from a government’s perspective, this same anonymity can be seen as representing more of a weakness or at least a source of vulnerability.

• Consider tax law and I add governmental capacity to identify criminal activity and to block it by addressing its financial underpinnings. When the US Department of Justice, working in collaboration with the Department of the Treasury, the Federal Bureau of Investigation and others stepped in and shut down Mt. Gox currency exchange operations, working closely with the governments of Japan and other nations in this, one of the primary, driving reasons motivating this action came from how a black market enterprise known as Silk Road had been conducting its marketplace transactions in support of criminal enterprises using bitcoin currency that flowed through this online currency exchange site.
• Silk Road was viewed as using bitcoin’s anonymity to transfer and launder money that was brought into criminal enterprises as a result of their criminal activities.

I have already raised and at least briefly discussed in this series, the significance of a fundamentally non-criminal currency exchange or bank being held liable for any and all criminal transaction use that currency passing through it has historically been involved in – and even when that currency’s transaction history is opaque so even prudent due diligence on the part of a currency exchange could not be expected to reveal it (see Part 9.) It is difficult not to see this governmental action, at least in significant part, as being a response to bitcoin’s built in user anonymity per se.

But at least as important to this, national governments see weakness and risk from bitcoin’s system of built in user anonymity for its potential use by terrorist organizations, and as a target of action in the War on Terror. In that regard I will simply note that anonymity on the part of bitcoin in its transaction systems is currently an active area of interest for organizations such as the US National Security Agency.

So I began this portion of this posting noting that I would start with strengths, and I add here that user anonymity and confidentiality constituted one of the core defining strengths that bitcoin was defined and built around and was one of the primary reasons why it was developed at all. But as I have at least briefly noted here:

• Strengths and weaknesses can be relative, and determination of which perspective applies to any given currency feature depends on who is doing the evaluation.
• The same even key and defining feature of a peer-to-peer currency can be logically and cogently seen as both essential strength and fundamental weakness.
• So developing a secure, reliable peer-to-peer currency and either out of bitcoin or its first generation alternatives, or out of next generation tries, will depend on finding due diligence balance between competing interests.

With that in mind I will now consider what might be considered bitcoin’s more overtly consumer and marketplace-perspective weaknesses. And that is going to be the topic for my next series installment, expanding that expected one more posting as suggested at the end of part 10 into at least two more. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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