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Bitcoin - a missed chance for Estonia?

Posted on March 21, 2014  //  crypto Estonia

Bitcoin is not the money of the internet. It is the internet of money. Andreas Antonopoulos

As recently demonstrated by the warning of the Chinese government and the Russian Office of Prosecution against the use of bitcoins as alternative money, many authorities see themselves coerced in making a stand on the novelty of the cryptocoin concepts.

Money Contrary to popular belief, money is nothing natural, and the reason we use euros in the Eurozone or US dollars in the USA are quite interestingly more legally than economically based. In order to use money, we agree on certain conventions. Money is a store of value, it is a unit of account, and a universally binding medium of exchange. Any arbitrary token that wants to compete in this commitment requires a specific set of attributes. It needs to be scarce, uniform, transportable, identifiable, durable, and it needs to come in a predictable, steady supply. Gold has been a perfect fit for these attributes, and hence is practically unmatched. In order to understand the impositions of modern moneys like the euro or the US dollar we have to consider the legal attributes. Under scrutiny, they fail on the attribute of scarcity. Although all legal tenders are inherently inflationary, we are bound by law to use them. Hence a currency is not a natural phenomenon, nor is it set in stone.

So with the legal framework of modern money, and the alternative of rare metal coins, what makes cryptocoins, and bitcoins in particular, interesting as a money? The practical answer lays again in their attributes. Bitcoins can not be counterfeited; they are highly durable, combinable and mobile. And most importantly, bitcoins are scarce. The combination of practical and scarce produces the commodity character, and every commodity has a price. On another level the answer lays in two revolutionary concepts - their radical mobility and their unique infrastructure.

Mobility Cryptocoin transactions in the current network with standard tools are near instant, technically distributed and traceable in a matter of seconds. In the case of bitcoin, a transaction is irreversibly confirmed every ten minutes and secured by the ridiculous cost of hardware needed to crack this cycle, currently in the hundreds of millions of euros. Other comparable online transaction systems such as credit cards are commonly confirmed only after a week, and can be reversed by the credit authority.

The fee of a cryptocoin transaction is usually fixed on somewhere around 1 % of the transaction volume, which makes it cheaper than any other currently available global mode of transaction. And tools for transactions are readily available for all sorts of technical systems from a computer to smartphones, homepages, SMS text messages. Of course, if you prefer the security of a vault, a cryptocoin account does not need to be kept digitally, but can be scribbled on a piece of paper, making it crack proof.

Infrastructure Cryptocoin infrastructures are decentralized peer-to-peer networks. All participating members of the network (machines running a wallet program) have a proportional say according to their computing power. The only shift in network paradigms can be achieved if a majority agrees on a proposed shift (practically by making changes in the source code and updating the software).

From its first inception every single transaction of a particular cryptocoin is recorded into a public ledger, called the blockchain. This database can be regarded as a foundation for much more than only bitcoin transactions. At the moment it attaches a value in coins to a particular account, but for example Colored Coin already explores the possibility of attaching and exchanging other kinds of assets via the bitcoin network and its alternatives.

The underlying computing principles - the proof of work functions - are also in constant development. While most networks still rely on cracking hashes, more sophisticated networks are searching for prime numbers and are already challenging the efficiency of supercomputers in this category. The next generation of cryptocoin networks will provide generic programmable access, realizing decentralized computation with inherent economic incentive - SETI@home that pays.

Legal and market implications For the first time in history a money could be successfully decoupled from any form of centralized backing authority, which in traditional money system dictates prices, but also injects counterparty risk and makes a currency an object of politics and ideology. The decentralization is so advanced that not any single party would be able to turn off the system. Cryptocoins have no physical constraints, their production and transportation are fully audible processes, yet their exchange is in principle anonymous. Thus any single person or institution could use bitcoins as legitimate means to exchange value parallel to any mainstream money. This poses interesting questions and challenges to regulation and taxation. In the light of the polar relationship of centralized authority versus decentralized networks, cryptocoins need to be understood along the concepts of the open source movement. In that sense a critical stance and suspicion towards banks and regulators is inherent in this community.

In Finland cryptocoins are treated like a commodity, Canada’s central bank rejects their status as currencies. Great Britain’s tax authority regards them as private money, but not a tender for tax. The European central bank generally shows an attitude of rejection and warning. India is warning, but also considering to tax the mining process. After a very positive start with Baidu accepting bitcoins, now China’s government officially prohibits its banks to exchange them. Recently, the Russian State Prosecutor rejected bitcoin’s status as a legal money according to the Russian law. The governments of the USA and Israel are still in the process of investigating, with the US financial authorities looking into technical and legal possibilities of regulation.

The bank of Estonia has decided to follow the ECB line of warning and rejection - although their recent comparison of bitcoin to a pyramid scheme exposes a fundamental misunderstanding of the concept. And that commodities can be lost, stolen, or be subject to volatility is not really news. However, there is yet no governmental stance on the issue.

Possibilities The use of substitute currencies is not very uncommon, i.e. the Deutsche Mark has been a longtime substitution for any other practical currency in European countries with weaker currency systems. In the short term, there is no foreseeable need to substitute the mainstream use of the stable, accountable, usable euro.

Interesting overlaps can certainly be found between communities that have experience in the use of alternative currencies, i.e. the Paide Pai, the Brixton Pound and many others. Complex ecosystems can evolve around those, existing along or even in interaction with mainstream money. Currently, a private initiative is planning to establish a cryptocoin Auroracoin for Iceland, which will be pushed by handing out an initial amount to every citizen. Other coins like dogecoin are advancing along edge communities like reddit and surfing the media hype, trying viral ways of creating value based on attention.

When assessing new possibilities of use, it is essential to understand cryptocoins in Andreas Antonopoulos’ terms: “Bitcoin is not the money of the internet. It is the internet of money.” They provide a platform with the protocol, the transaction language and the network - in short the full technological capacity to develop services which intensify the connection of the digital and the material world.

Conclusion The cryptocoin ecosystem is in its very early time. It is very rare that a completely new money/commodity is established and economized (in some ways comparable to the introduction of crude oil to world economy in the early 19th century). Although its market capitalization and influence is still negligible, bitcoin’s niche is already challenging both regulatory and banking systems.

Currently the public narrative tends to be driven by the negative aspects, for example the associations with criminal activity. However, scenarios like the closing of the Silk Road and similar online trading places is only a would-be scandal compared to i.e. the involvement of the US dollar in criminal activity. Nobody would think of blaming the currency.

The problem of insecure environments (operating systems, software, devices) is something that needs to be addressed as part of a more general strategy to promote information awareness, technology training and best practice examples how to properly cater for your data. Yet again, it is not the tool, but the problematic context in which it is used.

I strongly believe that cryptocoins are here to stay. Money is prone to development, and the attractivity of near instant movement at low cost, and the independence from a central third party certainly will give room to at least one main and probably a handful of specialized coins in the long run. It might not be the bitcoin network prevailing, but as a contemporary digital alternative to cash money, cryptocoins are just too convenient.

References

Andreas Wagner - Bitcoin and beyond

Bitcoin Cryptocurrency Crash Course with Andreas Antonopoulos - Jefferson Club Dinner Meetup

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Andreas Wagner
freelance System Administrator and Ruby programmer in Tallinn, Estonia