Bitcoin: In Search Of Purpose
Silk Road kingpin Ross Ulbricht’s recent conviction and life sentence was more than simply a crackdown on a massive online black market for illegal drugs. It was a nail in the coffin of the radical new “cryptocurrency” Bitcoin, as Bitcoin was the glue that held Silk Road together.
Or was it? How significant the rise and fall of Silk Road was for Bitcoin is a matter of some debate, as is the purpose of Bitcoin itself. Controversy, however, is nothing new for Bitcoin. In fact, it seems the story of this digital currency consists of nothing but controversy.
In fact, perhaps the greatest challenge for Bitcoin is divining the technology’s true purpose. Early innovators often espoused radical Libertarian goals for revolutionizing the banking system and with it, the world economy. By disintermediating third parties, Bitcoin promised to usher in a new world order of free market commerce.
Only the Bitcoin story didn’t work out that way. Bitcoin soon became a haven for criminals – not just Silk Road, but any number of money launderers and other shady types who gravitated toward an anonymous, relatively safe method for conducting financial transactions, in particular across national borders.
“Because of its openness, Bitcoin will continue to be used by shady actors,” explains Nathaniel Popper, New York Times reporter and author of Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money. “In some ways, the good comparison is cash. Bitcoiners love saying the main medium for illicit transactions is still probably $100 bills because it can be an anonymous form of transacting that’s untraceable, and Bitcoin still has that quality as well.”
In fact, just this week news came to light that an Australian company paid hackers a ransom in Bitcoin. Clearly, Bitcoin is the extortionist’s currency of choice, as it combines the anonymity of cash with the global convenience of traditional wire transfers.
If Bitcoin’s true purpose is to facilitate criminal activity, then perhaps Bitcoin itself is – or should be – illegal. However, the US Government for its part pointed out that Bitcoin in and of itself wasn’t illegal, but clearly required regulation. “There’s no way the good attributes of Bitcoin will succeed without a strict regulatory regime,” points out Clay Nelson, until recently the Director of Business Development for Bitcoin startup BitPay.
As a result, “Early adopters with Libertarian or anarchist leanings are the least happy with the direction Bitcoin is going in,” Nelson continues.
If facilitating a new Libertarian world order isn’t in the cards for Bitcoin, and as regulations squelch the criminal angle, what then is Bitcoin’s true purpose?
Many people see Bitcoin as a speculative investment vehicle, as the technology places an upper limit in the number of Bitcoins that can exist, thus creating a permanently scarce commodity. And when each Bitcoin’s value quickly ramped up from a fraction of a penny to well over a thousand dollars, the speculators went crazy – only to cool off as the inevitable downturn more than quartered each Bitcoin’s value.
Furthermore, unless some other purpose promises to drive up demand for Bitcoin in the future, there’s little hope for a substantial price rebound. Speculative demand is a poor substitute for the real thing, after all.
Perhaps Bitcoin’s true purpose is a medium for routine commerce. Pay for your lattes in Bitcoin maybe, or transfer money overseas. Yes, Bitcoin offers some security and anonymity advantages over credit cards and wire transfers, but are those advantages enough?
Nelson is doubtful. “On the consumer side: We have price volatility, first generation wallet technology, entrenched behavior with card loyalty, access to credit, and a belief that customers aren’t responsible for fraud” with credit cards, Nelson says.“In other words, the consumer doesn’t feel they have a problem to solve.”
Furthermore, the commission for purchasing Bitcoin (or the spread, in the context of speculation) ranges from five to ten percent – even more than what merchants pay for their credit card support. Why would consumers ever agree to take on this expense if merchants are only too happy to bear such transaction costs today?
Bitcoin’s True Purpose: the Power of the Blockchain
If Libertarians, criminals, speculators, and consumers each find little value in Bitcoin over time, then what’s left? The answer is the blockchain, a critical element of the technology underlying Bitcoin.
The blockchain is a tamperproof, decentralized, globally verifiable record of all Bitcoin transactions since the creation of the technology. You can think of the blockchain as a massive accounting ledger – only unlike traditional ledgers, it exists in the form of widely distributed identical copies that everyone can agree contain accurate and up-to-date records of all Bitcoin transactions around the globe.
In fact, the blockchain has potential uses even beyond Bitcoin transactions themselves, for example, to record any kind of business transaction where the parties involved want to publish the details for everyone to see and to be able to verify.
Innovation in blockchain-based business models are therefore not surprisingly a current area of innovation and investment. Nelson agrees. “Investors are most interested in the Blockchain itself,” he admits.
From real estate deals to complex counterparty transactions, blockchain technology promises to lower transactional risk while increasing transparency – solid, above board business benefits that promise to drive both continued innovation as well as acceptance and adoption over time.
Admittedly, blockchain technology is still new, and there are indubitably both business and security risks that people have yet to uncover. At this point in time, however, there’s no question the smart money is betting on blockchain technology.