Digital Currency Course Essay Series: Second Essay (Benefits of a decentralized currency)

I have the first three essays already finished, so I’ll go ahead and publish them all now. In the future, I’ll post the essays as I write them so they will appear here a bit more sporadically, though that’s probably a feature, not a bug. Anyway, onward we press, to essay number two.

Prompt 2: post research and mention your opinions on why a decentralized currency may have benefits over a centrally issued one for private issuers.

There are a couple as yet unmentioned advantages that a decentralized private currency might have over a centralized one:

First, and perhaps most importantly, since privately issued currencies compete to some extent with money sanctioned by sovereign states with court systems and law enforcement agents, decentralized private monies are more resilient to legal attacks and other forms of pressure than are centrally-issued currencies. Case in point is E-Gold, an early internet payment service provider, operated by Gold & Silver Reserve, Inc (G&SR) and initially backed by gold reserves in safe deposit boxes. After changes to money laundering standards promulgated in the USA PATRIOT Act, E-Gold and G&SR faced various allegations and legal attacks, including unlicensed transmission of money. The owners plead guilty, sentences were issued, and millions of dollars in assets were seized. Further, Paypal has notoriously been subjected to pressure from the U.S. government, such as State Department lobbying to freeze donations to Wikileaks. In the world of Bitcoin, exchanges have been a single point of failure and have been subject to hacks, legal action, and other attacks. Distributing issuance makes the currency less vulnerable to attacks on one node; instead, most or all of the network must be compromised to shut the currency down.

Second, by its nature a currency whose issuance is disbursed rather than concentrated must have rules and procedures for the issuance of additional units of the money. If anyone could issue the currency at any time, inflation would run rampant and the currency’s value would plummet. Bitcoin solves this problem with mining, a proof of work system, monetary policy built into the protocol, and the open source and transparent nature of currency issuance, among other innovations. These rules and systems make the issuance of new Bitcoin highly predictable, which is generally good for markets and efficient operation of businesses. Centralized private currencies, however, need not follow published, predictable rules for currency issuance. The “central bank” of the currency may be staffed by extremely intelligent, wise, and trustworthy individuals, or it may not. The babysitting co-op case study presented in the additional reading to the course articulates how first a recession, then a depression in the market for babysitting scrips was created by the monetary policy of the co-op board, not due to malfeasance, just ignorance and a poorly designed economy. According to Wikipedia, the wisdom of the crowd theory states that a “large group’s aggregated answers to questions involving quantity estimation, general world knowledge, and spatial reasoning has generally been found to be as good as, and often better than, the answer given by any of the individuals within the group.” If this holds true to the issuance of private currency, then the decisions made by consensus in a decentralized environment should tend to outperform ones made by a central authority.

References

1) Wikipedia.org, E-Gold

http://en.wikipedia.org/wiki/E-gold

2) Digital Currency Business E-Gold Pleads Guilty to Money Laundering and Illegal Money Transmitting Charges

http://www.justice.gov/opa/pr/2008/July/08-crm-635.html

3) Operation Payback cripples MasterCard site in revenge for WikiLeaks ban

http://www.theguardian.com/media/2010/dec/08/operation-payback-mastercard-website-wikileaks

4) The Bitcoin drama continues: another exchange shuts down, while Overstock reports over $1 million in Bitcoin sales

http://www.engadget.com/2014/03/04/another-bitcoin-exchange-shuts-down/

5) Bitcoin.org, Frequently Asked Questions, How are bitcoins created?

https://bitcoin.org/en/faq#how-are-bitcoins-created

6) Monetary Theory and the Great Capitol Hill Baby Sitting Co-op Crisis: Comment