The New York Times calls them a “soaring, slightly scary virtual currency.” NPR described the phenomenon as “a lot like cash- for the online universe. It doesn’t actually exist in the physical world.” New Economic Perspectives mentioned many dismiss this emerging technology as “a Ponzi scheme.”
If you have not guessed by now, we are talking about bitcoins.
Bitcoins represent an entirely virtual currency and payment system. Transactions are intended to be entirely anonymous, secure, and not backed by any recognized government.
So far, most bitcoin use has been for illegal and dubious transactions, leading many to write the currency off as an unsustainable technology trend. Yet, those same arguments were made about the advent of the internet just a few decades ago.
Recently, bitcoins have been elevated from a strange and quirky invention to a potentially transformative economic concept. It is not only technology publications talking about bitcoins; government agencies are also exploring the concept.
Two Congressional hearings have been held on bitcoins. The Justice Department has commented on their legal status stating, “Virtual currencies in and of themselves are not illegal, we’ve all recognized that innovation is important,” according to NPR.
In a recent interview with CNN, former Congressman Ron Paul, who is famous for criticizing American monetary policy, argued that bitcoins could emerge as an alternative to the dollar. “Alan Greenspan said that he doesn’t understand the intrinsic value of the bitcoin, well I don’t understand the intrinsic value of the dollar,” Paul said, referring to the fact that the U.S. dollar is no longer backed by gold.
Bitcoins have advantages and disadvantages, many of which remain to be seen. What could bitcoins bring to government? I’ve brainstormed a few ideas.
Bitcoins in Government
Advantage: Distribution of benefits
It’s easy to focus on what we give to the government; nothing is certain except death and taxes. However, a large portion of what government agencies do is focus on providing taxpayers goods and services. From social security for senior citizens to subsidies for green energy businesses, many dollars are exchanged in our economy based on government money and tax incentives. Bitcoins do not need to be tied to any kind of hard currency, making transactions progress as rapidly as your internet connection. The ease in which bitcoins can be exchanged may be ideal for government delivery of time-sensitive services, including EBT (food stamps) or tax rebates.
Disadvantage: Potential for Fraud
Bitcoins have been tied to illegal activity because they are the ideal currency for criminals: impossible to trace and anonymously obtained. Bitcoins may be convenient for government agencies, but that may mean less accountability and more opportunities for fraud. However, even our current system is not transparent enough for us to understand how our money is spent. In addition, government contracts and acquisitions have been plagued with more than a few corruption scandals. Bitcoins may have their disadvantages, but so does our current system.
Advantage: Currency Without Politics
When Congress negotiates the debt ceiling, or threatens a government shutdown, world markets fluctuate due to uncertainty. Due to the ubiquity of the dollar, American fiscal and monetary policy decisions affect currency exchange rates worldwide. Bitcoins do not have government policies regulating them, which may be an advantage when our legislators have trouble coming to agreements.
Disadvantage: Currency Without Protection
Governments create and regulate currency to ensure all of our transactions are backed by an institution’s “full faith and credit.” The United States has agencies like the Consumer Financial Protection Bureau to protect consumers and regulate transactions. However, when a government has no control over how a currency is used (or misused), it makes that currency ideal for taking advantage of individuals. A currency without a rule of law can be a scary prospect.
Could the budget for the agency of the future be created in bitcoins? What do you think of this fascinating new technology phenomenon?