Digital Cash Changes Everything
Our money itself is broken. Whether we’re talking about the UK, the US, or anywhere else in the world, our money is created by indebtedness to banks rather than adding value into our economy. This causes a lot of problems that have been well explained by an increasing chorus of voices.
Fixing our broken money system isn’t going to happen from the top down. It will come as a result of a grassroots movement in legislative reform, such as the one initiated by Positive Money, and as a result of a grassroots movement in reinventing money itself.
It is actually possible for groups of people to band together and form their own local economies. This is both legal and beneficial. It’s happening in the UK (click here, here, and here for examples), the US (examples here and here), as well as many other countries.
Opening the Floodgates with Digital Currencies
Creating custom economic systems is actually becoming significantly easier with the advent of digital cryptographic currencies, or cryptocurrencies for short.
A cryptocurrency is something quite different than the electronic money used for credit or debit cards. Debit and credit cards are digital representations of money held by banks and credit card companies. Cryptocurrencies, on the other hand, are digital forms of cash. Unlike credit and debit cards, cryptocurrencies provide the same level of privacy as physical cash.
As an analogy, you may recall the days when businesses created and moved around mountains of paper documents. We digitized the documents and the paper went away. We still have the documents. We can still do everything with them that we could before. But the paper is largely gone.
Digital cryptocurrencies digitize cash. When we digitize cash, the bills and coins go away. But we still have money with all the properties of cash–one of them being privacy.
Bitcoin Paves the Way
Bitcoin is currently the most well known cryptocurrency. Bitcoin is a digital currency and a digital currency system. No one really knows who created the bitcoin system. Its creator appeared on the scene using a pseudonym and disappeared rather mysteriously. But the software he wrote is sheer genius.
The bitcoin software contains a digital wallet for storing and spending your bitcoins. When you digitize money, the coins and bills go away. Your money is now bits. So you need digital wallet software to store and use our money just like we need digital music players to store and use our digital music.
Therefore, the bitcoin software comes with a digital wallet. But in addition to being a wallet, the bitcoin software also does two other things. First, it contains a cryptographic puzzle that produces bitcoins. I won’t go into the details of how that works, but the cryptographic puzzle ensures that it gets harder to produce more bitcoins over time. It also limits the total number of bitcoins that will ever be created to 21 million.
The second thing that the bitcoin software does is to validate transactions. Everyone that installs the bitcoin software essentially contributes some of their computer’s processing power to the bitcoin network. When you install the bitcoin software, it uses the internet to automatically contact the rest of the network. This network collectively validates all bitcoin transactions.
The Watershed Event
A US court recently ruled that bitcoin is a currency and that the government can regulate it. In doing so, they’ve recognized it as a valid form of money. They’ve also established a precedent that can be used by any issuer of a non-national currency.
This decision means is that anyone can now legally issue a currency and it is acceptable as a valid form of money as long as its users agree to transact business with it. Like bitcoin, all currencies must accept government regulation. In other words, issuers must “come in through the front door” and not try to sneak past the laws that apply to currencies. As long as you play by the rules, you can issue a usable currency–but not legal tender–in the US. The same is likely to be true over most of the world.
Where Do We Go from Here?
The advent of digital cash has profound implications for our money and banking systems. In the next two blog entries, we’ll see how new currencies can be used in grassroots movements to provide ourselves with sound money, to create more humane financial systems, and to solve otherwise intractable social problems.