The War on Digital Currency

A joke for you, Fellow Reckoner: How many Senators does it take to change a light bulb? Oh, wait, we’ve got a better one: How many Senators does it take to dismantle a cryptographically secured, completely decentralized, Peer-to-Peer (P2P) network of voluntary, free market traders exchanging goods and services across six continents using tens, perhaps hundreds, of thousands of individual computers and some of the most advanced cyber technology and software coding known to date?

Answer: we don’t know…but Senators Charles Schumer (D, New York) and Joe Manchin (D, West Virginia), seemingly immune to common ignominy, have taken on the challenge anyway.

Your editor has no idea of the cybercryptography aptitude of the two senators but, as with most endeavors undertaken by politicians in the name of “your own damned good,” practical experience and a sufficient understanding of the issue at hand are rarely prerequisites for intervention, again, “on your (unsolicited) behalf.”

The two erstwhile wonks took to the presses this week, demanding something be done about one particular free-market affront to authority.

We are referring, of course, to the latest furor surrounding bitcoin, a P2P cyber currency setting the virtual – and, some would argue, actual – world ablaze. (We first brought you the story a couple of weeks ago, when bitcoins were trading for roughly B$1 = US$7.5. As of this morning, they’ve shot up to B$1 = US$31.5. See “An Emerging Free Market Currency” and “How Governments Distort the Value of Money” for a “bit” of background about them and about the pitfalls of government-backed currencies in general.)

Long story short, bitcoin is a limited supply, decentralized digital currency; a free market alternative to state issued notes and coins. As such, it poses a direct – though entirely non-violent – threat to the state’s monopoly on counterfeiting. This, cry the powers that be, must not be tolerated. Of course, before any politico can act, they must first have a distraction, a fall boy, a pretense, a reason for rescuing us from the horror that is our own decision-making capacity. We picked it in that first column, the relevant portion of which is reprised here:

Another cause for concern among bitcoin skeptics is that, as the economy of the free market currency expands it will inevitably begin posing a threat to the state’s own money-printing racket. It will, thereby, raise the ire of bankers and politicians who will have every incentive to make the currency illegal in order that they may protect their own monopoly and continue cheating their citizens of the value of their president-stamped notes and coins. Given the state’s nature when it comes to these matters (and here we refer readers to the recent and despicable case against Bernard von NotHaus) there is every reason to expect that it will indeed crack down…and hard.

Here we expect all the usual arguments from all the usual suspects: “Bitcoin transactions are anonymous and therefore provide cover for peddlers of child pornography and drug traffickers,” they will contend.

But the astute reader knows in his gut there is something very wrong with this line of thinking right from the beginning. Cash is anonymous too. People by things deemed illegal by the state with state-issued currency all the time. So what? Does this mean US dollars should be banned? Some people drive their cars recklessly, with little or no regard for their own safety or for others’. Should we ban cars?

The question, however, is not whether the Feds should do something (moral considerations have rarely, if ever, stopped them before), but whether they could do something, even if they wanted to…

Now that we have a little background, let’s get back to those busybody senators. As one might imagine, a virtually untraceable currency – such as bitocin or…umm…CASH! – might find use as a medium of exchange to purchase both white and black market products like, say, drugs. Such was the case with Silk Road, a website where users (literally) can buy illegal substances with bitcoin.

Said Senator Chuck of Silk Road and bitcoin in a news conference on Sunday:

“Literally, it allows buyers and users to sell illegal drugs online, including heroin, cocaine, and meth, and users do sell by hiding their identities through a program that makes them virtually untraceable.” Apparently, the senator wants Silk Road shut down immediately with bitcoin, no doubt, soon to follow. The pair have written to Attorney General Eric Holder and the DEA asking that action be taken to crackdown on Silk Road.

Now that the pair have their straw man, we can be sure it will be used as a pretense to attack free-market currencies themselves. Stay tuned as the story unfolds on that front…

For now, we wonder what users of bitcoin are to do now that the self-appointed invigilators of free market activity are on their case? Well, for the past few weeks at least, they’ve been rejoicing. The currency has almost quadrupled in value since the Silk Road issue came to the fore.

Bitcoin enthusiasts may wish, therefore, to thank Senators Schumer and Manchin for, without their commitment to proffering illogical, largely ignorant remarks in the nation’s mainstream press, bitcoin might have taken a while longer to reach the critical mass on which it must now surely be verging. “Bravo, Senators,” we can almost here the cyber underground chorus, “Thanks for the free publicity!”

Joel Bowman
for The Daily Reckoning