Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats. –H.L. Mencken
Two articles about Bitcoin caught my eye last week. By the end I sound like a Bitcoin defender. I’m not, I just hate shoddy work and hatchet jobs. Here goes.
First, am I just entirely too cynical or are all the Bitcoin fanboys excruciatingly naive?
This article over at Forbes by John Villasenor asks the question, ‘Could ‘Multisig’ Help Bring Consumer Protection To Bitcoin Transactions?‘ Well? Could it?
I should note that Villasenor is one of the nice people over at the Brookings Institution, people who have only our best interests at heart, so we’re in good hands.
Multisig is shorthand for multiple signature and basically means that two people or entities would have to sign a Bitcoin transaction in order to make it valid. Villasenor explains how multisig could provide some level of trust when using Bitcoin to pay for merchandise over the Internet:
Multisig approaches have the potential to address this by making transactions contingent on the collective agreement of multiple parties. In the example above, the system could be modified so that Alice and Bob each provide their public keys to an escrow service, which then uses its own key to generate a new bitcoin address to which Alice can send payment for the surfboard. Moving the payment from that address requires the authorization of any two of Alice, Bob, and the escrow service. This protects Bob, because he can ship the surfboard knowing that Alice can’t unilaterally take back the money she has placed in escrow. Alice is protected because Bob can’t unilaterally extract the money from escrow. Once Alice receives the surfboard, she and Bob can jointly authorize the transfer of the money out of escrow to Bob. Or, if she claims that she hasn’t received the surfboard, or that it is defective, the escrow service can arbitrate the dispute.
The obvious question that arises is, who will be this trusted third party? In order for people to trust this entity for dispute resolution it would have to be well known, someone like a PayPal. Bitcoin is supposed to be anonymous and free from government control but we all know virtually every large technology company (including PayPal) has been coerced by and/or voluntarily cooperated with the government, including the NSA in its mass surveillance efforts.
There is already talk of taxing Bitcoins and regulating transactions. What would make anyone think that if you startup a Bitcoin escrow service it will not also be co-opted and/or regulated by the state?
Second is an article by Jason Gordo at HuffPo titled, ‘Bitcoin: the New Era of Wildcat Banking‘, giving us a look at what passes for research and analysis over there.
Ol’ Gordo is a self-proclaimed ‘Personal finance expert’ and apparent amateur historian who thinks he’s got a snazzy new analogy for Bitcoin: wildcat banking.
I agree with Gordo on some of his points about the flaws in Bitcoin, but his analysis meanders back and forth between reality and his love of statism, central banking, and egalitarianism.
If you’re a history buff, you might remember a period of American history called the “free banking era,” or the “era of wildcat banking,” that took place in the decades before the Civil War. During that period, state banks were allowed to issue their own currencies without any federal regulation. Many of those banks operated on the frontier of the American West, some of them in remote places inhabited only by “wildcats” (hence the name) and engaged in some loose accounting practices. Quite often these fly-by-night operations went out of business, either as a result of fraud, incompetence or bad market conditions. In any case, the result was the same: The bank’s customers found themselves holding wads of worthless bills, since the FDIC wasn’t around in those days to bail them out.
Unfortunately for Gordo, a real historian and economist actually wrote about wildcat banks too. His name was Murray Rothbard.
In both ‘The Mystery of Banking‘ (p. 216) and ‘A History of Money and Banking in the United States‘ (pp. 78-79) Rothbard talks about the real reason for so-called wildcat banks. From ‘Mystery’:
The desire of state governments to finance public works was an important factor in their subsidizing and propelling the expansion of bank credit. Even Bray Hammond, scarcely a hard money advocate, admits that “the wildcats lent no money to farmers and served no farmer interest. They arose to meet the credit demands not of farmers (who were too economically astute to accept wildcat money) but of states engaged in public improvements.”11
11Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton, N.J.: Princeton University Press, 1957), p. 627. On the neglected story of the Jacksonians versus their opponents on the state level after 1839, see William G. Shade, Banks or No Banks: The Money Issue in Western Politics, 1832–1865 (Detroit: Wayne State University Press, 1972); Herbert Ershkowitz and William Shade, “Consensus or Conflict? Political Behavior in the State Legislatures During the Jacksonian Era,” Journal of American History 58 (December 1971): 591–621; and James Roger Sharp, The Jacksonians versus the Banks: Politics in the States After the Panic of 1837 (New York: Columbia University Press, 1970).
Got that, Gordo? It was the state that encouraged the irresponsible banking and real people were not left “holding wads of worthless bills”.
A few of his other reasons for hating Bitcoin are that “Bitcoin’s value is insanely volatile”, “Bitcoin is backed by nothing but the goodwill of its users”, “Bitcoin currently has no insurance or government protections”, and “Bitcoin ownership is highly concentrated”.
I agree that the last one is an issue, but not for the same reason as Gordo. He’s upset that the ever increasing difficulty of mining bitcoins “only magnifies the problem of wealth concentration”.
The other three are hilarious in their own right as well.
Volatility? I guess he prefers the constant devaluation of the US Dollar to anything that might ever increase in value.
Backing? Really? Gordo, where can I go to redeem my Federal Reserve Notes for gold or silver? What’s that you say? Full faith and credit? Right.
Insurance? This is only necessary in a fractional-reserve banking system where a bank can make itself insolvent by lending out money multiple times. If you believe that there are a fixed number of Bitcoins and that they can’t be double spent, then there’s really no danger of that.
That is all. You may return to your April Fools’ Day pranks.