ALBUQUERQUE, N.M. — Bob Dylan put it this way: To live outside the law you must be honest.
The appeal of the virtual currency bitcoin is that, for now anyway, it lives outside the law. Unlike the euro, the dollar, the yen, the yuan and every other government-backed currency, bitcoin has no rules, other than the mathematical algorithms that dictate how a bitcoin is issued and how it is used as a medium of exchange. There is no bitcoin central bank, no bitcoin Treasury Department.
Some self-styled libertarians love that about bitcoin. Erik Voorhees, who runs a company that helps people transfer bitcoin, says the currency is “the greatest tool for global liberty since the Internet itself.”
“So imagine having a private, numbered Swiss bank account, but without having to bother with the Swiss bank itself,” Voorhees wrote on his blog last May. “That is bitcoin. Instead of placing your trust in a regulated bank governed by fallible humans, bitcoin enables you to place your trust in an unregulated cryptographic environment governed by infallible mathematics. 2+2 will always equal 4, no matter how many guns the government points at the equation.”
It takes some real conviction to stay with bitcoin after two serious thefts this winter. Computer hackers managed to steal $400 million worth of bitcoins from Mt. Gox, a Tokyo-based trading company that has since filed for bankruptcy court protection. A Canadian bitcoin bank, Flexcoin, lost $537,000 worth of bitcoins to hackers, which is to say the legal owners of bitcoin lost their virtual money to cyber thieves.
Flexcoin posted a notice on its website saying, “As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately.”
Flexcoin said it is working with law enforcement to try to learn who committed the crime. It’s not clear how you would call this a bank robbery, since a bank is an institution that is registered with a government agency and which must abide by certain rules designed to protect depositors. The libertarian beauty of bitcoin is no such government agencies or consumer protection rules are involved.
If Flexcoin were a bank and chartered in the United States and dealing in non-virtual currency like dollars, three things are supposed to be true: the bank’s regulators would require sufficient reserves that should a loss occur the bank would survive; the FDIC would make sure no depositors lost any of their own funds; should the bank fail another bank would take over the deposits and loans.
It is also hard to imagine a government-regulated bank that would be forced to shut its doors after losing an insured and paltry $537,000.
None of this would matter if all of those living outside the law were honest.
Bitcoin fans seem unfazed. According to The Washington Post, the bitcoin-dollar exchange rate is holding up despite these thefts and the absence of consumer protection.
It is hard to wrap one’s brain around bitcoin. The currency exists because some computer encryption experts decided to invent it. The currency has value because some people have decided to accept it as payment for real goods and services.
There is ample precedent for currencies simply to occur without any governmental involvement, according to a recent book, “Money: The Unauthorized Biography,” by Felix Martin of Liontrust Asset Management in London.
For example, in the 1970s in Ireland a nationwide labor dispute resulted in the complete breakdown of the financial system. Banks’ customers couldn’t withdraw cash and banks couldn’t clear checks, so after a while businesses accepted IOUs and personal checks drawn on accounts that could not release any funds. The currency was backed only by the willingness of businesses to accept the currency.
Jeff Klingelhofer, an associate portfolio manager with Thornburg Investment Management in Santa Fe, said in a Journal interview earlier this year that if people will accept your dirty socks in payment, your dirty socks are currency.
Martin’s point is that government backing is not necessary for a currency to be currency. That is music to libertarian ears since government, while it may be good at making the depositors of failed banks whole, is in the libertarian world the thief of liberty.
Unfortunately for Flexcoin and Mt. Gox customers, governments are not the only thieves out there.
UpFront is a daily front-page news and opinion column. Comment directly to Winthrop Quigley at 823-3896 or firstname.lastname@example.org. Go to www.abqjournal.com/letters/new to submit a letter to the editor.