Platt Perspective on Business and Technology

Considering the nature and qualities of money 13: rethinking peer-to-peer currency exchanges

Posted in macroeconomics by Timothy Platt on August 9, 2014

This is my 13th posting to a series on money and on what monetary value functionally means (see Macroeconomics and Business, postings 142 and loosely following for Parts 1-12.)

I have been discussing peer-to-peer currencies in general, and bitcoin as a case study currency example of them throughout this series, leading up to Part 12, where I discussed how currency stability and valuation are transaction and currency exchange-driven and not just properties intrinsic to those currencies themselves. And in the course of that discussion, I noted how even some of the defining strengths of a currency such as bitcoin, as viewed by its designers and developers, can in fact become its defining weaknesses when implemented. In this regard, I discussed how the anonymity of bitcoin as built into its underlying code, has made it a target for governmental action.

And key to this posting, and as a starting point for it I repeat how bitcoin accepting currency exchanges have become a target of legal action and even of forced closure, and I repeat that this has made them a weakest link for these peer-to-peer currency systems. So I begin this posting with a simple assertion:

• Making a currency such as bitcoin more intrinsically stable and more widely and even universally acceptable, and both as a medium of here-and-now transactions and for long-term conservative investment, means identifying and remediating its weakest links.
• This means at the very least, redefining and redeveloping peer-to-peer currency accepting exchanges.

This does not mean that only certain currency exchanges can trade in this form of money – it just means that bitcoin and its peer-to-peer alternatives would set what amount to accreditation standards for their currency as it is value-determined through exchange processes. And people who wish to trade in these currencies would be able to see whether an exchange has received this accreditation as a matter of meeting specific due diligence standards.

What would go into defining these standards? At a minimum, this would mean meeting two sets of core requirements, which I note up-front hold the potential for being at least somewhat mutually contradictory, at least as of this writing.

• An accredited exchange has to support the currency with it authentication and other built-in, intrinsic processes, and with its built-in transaction anonymity assurances included.
• And it is going to have to meet governmental and other stability-gatekeeper requirements too, so that it does not raise external market-context red flags from meeting the core requirements of the first bullet point of this list.

We live in an increasingly governmental surveillance driven world, and in that regard I cite my series: Learnable Lessons from Manning, Snowden and Inevitable Others, in the context of the United States and their allies in the War on Terror (see Ubiquitous Computing and Communications – everywhere all the time 2 as postings 225 and loosely following.) I also cite my series: The China Conundrum and its Implications for International Cyber-Security (see my first Ubiquitous Computing and Communications directory page, postings 69 and loosely following for that.) And increasingly, I could cite the policies and actions of an increasing array of other governments as well.

• And as soon as nation states start viewing widespread and even open-ended surveillance as a requirement for their national security, they see that as an obligation and they see any challenge to it through attempted privacy and anonymity as a challenge and as a source of national threat.

That is where the point of collision is that I have raised between government action and peer-to-peer currency exchange action. And this brings me to the core conundrum. If the only acceptable resolution to this from a governmental and national security perspective would be to give governments a back door in to break the anonymity of a transaction process, with that perhaps only allowed on the basis of an explicit court order, where would that leave anonymity of any form, or in practice in any context? If there is a back door in that systematically allows for identity tracking in transactions conducted using a currency such as bitcoin, and if it is known that such a hack is possible, what assurances are even possible in principle, as to who will find and use it and for what? And what assurances can there be as to where and when and how this surveillance capacity would be “officially” used?

So I leave this point raised with questions, and ones that I do not have any answers to. Bitcoin is and will remain volatile as to its exchange rate valuation through any foreseeable future. The anonymity that it offers as one of its defining strengths does and will continue to be one of its defining weaknesses too, insofar as this makes currency exchanges that trade in it vulnerable to legal action and even outright closure through government agency and court action.

I expect to come back to the issues of peer-to-peer currencies in future postings, but will finish this series, at least for now with this, and with one more question that I raise as a point of speculation.

• What would be the consequences if a recognized nation state where to formally, legally declare that it accepted bitcoin as legal tender, on par with its own nationally printed and authorized currency and backed by it?
• Put slightly differently, what would happen to bitcoin’s stability and globally recognized level of legitimacy as a currency if some country where to in effect make it a national currency? In this regard, I note that Guatemala constitutionally pegs the value of its primary unit of money, the quetzal at the value of one half of a United States dollar, and that a number of countries, like it, have their own currencies and set their values in terms of, or in coordination with the valuation of what for them are external currencies too.

You can find this and related postings at Macroeconomics and Business.

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