A summary of the bitcoin currency:
- It is a purely electronic currency
- The rules and institutions of the currency that recognise the validity of its issue and transfer (with or without subdivision and/or combination) are customary (a kind of customary law of the opt-in variety)
- Currency value is held in and transferable between and divisible between public keys which represent the 'accounts' in the system, by way of transfer messages signed by the private key of the public key of the account from where it came, nominating the payee(s) and amounts.
- Transfers are published and approved to form a block-chain, to so all users can track the balance held in each account (to confirm where the value came from) and where it has gone (to control the double-spend problem)
- The community accepts the longest block-chain as being valid, which means that the community accepts all the previously recorded and published transactions in the block chain
- Extending the block-chain requires computing resources to solve arbitrary mathematical problems. Whoever can find these solutions can extend the block chain and issue a pre-determined quantity of new currency as their reward for processing the new transactions and thereby cementing acceptance of the older transactions. The community only accepts block chain extensions that transfer value with the proper signatures from the originating accounts.
- The identities and ownership and control of keys may be kept private or anonymous (i.e. the money is public (to control the double-spend problem) but the accounts where the money are held are not)
Because the currency is not issued in exchange for funds received by the issuer or owing by the issuer, and because the holder of the currency does not have any rights to redeem the currency against the issuer or to participate in any profits or assets of the issuer, the currency itself is not a debt security, nor an equity security, nor a bank note nor a negotiable instrument. Neither is it legally a form of currency or legal tender. It is a form of intangible personal property like ... like I'm not sure quite what. These features mean that it is typically not subject to any securities or banking laws, nor any AML laws. And even if it were to be within the definition of such laws, the ability of those laws to restrict or take legal action against the issuer or holder is rather moot: identifying and finding the issuer or holder is difficult and doing so will not stop others accepting or using it or mining more, and effecting confiscation may be difficult or impossible (e.g. with secret sharing as an antidote to the odious official key theft laws such as sec 130 of our very own Search and Surveillance 'law').
However, the lack of any issuance in exchange for assets and redemption in the form of assets means that its market value is determined by the combination of the quantity on issue (which is arbitrarily pre-determined by consensus in the community) and the demand to hold such currency. This can provide a determinate market value, but that value can be highly sensitive to the strength of the demand to hold the currency at any particular time. The actual market value has been highly volatile, and could now be driven largely by speculative fever, as suggested by this well written article:
The purpose of this post is to look further into the future as to what will replace bitcoin and how.
Firstly, note the consequence of price volatility in a currency: users of the currency will be hesitant to use it as a store of wealth, and will only use it as a speculative assets or for mediating actual trades. The vast wealth that now appears to exist in the form of bitcoins at the current market price will seek to migrate to other forms of wealth. Those other forms of wealth will not be denominated in bitcoins, either. Unlike gold and modern fiat currencies, credit markets in bitcoins will not emerge with any depth or liquidity or ubiquity.
Secondly, bitcoin users who are seeking alternative forms of wealth storage will expand markets for offshore financial services and for privacy enhanced (and confiscation resistant) wealth services. This expansion will be fueled by innovative offshore financial service providers who integrate their services with bitcoin.
Thirdly, the development and popularisation of bitcoin will put more pressure on AML laws and the FATF that will ultimately lead to acceptance or toleration of strong financial privacy, financial anonymity and asset protection. This is likely to be fueled by (and/or will fuel) a change in the tax mix from income tax to consumption taxes, and from progressive residence based income tax to flat rate source based income taxes, which reduces or eliminates the tax enforcement interest in personal and corporate offshore financial wealth holdings. This development will emerge through jurisdictional arbitrage and jurisdictional competition, and the breakdown of the FATF/OECD tax information cartel.
At the technical level, the bitcoin linking of 'mining' with approving transactions will be decoupled within bitcoin or by other similar currencies. The value-base of alternative currencies will move from mining economics to issue and redemption in exchange for commodities or financial assets. Commodities such as gold and silver provide the traditional market value anchor for currencies, and these could be restored in new digital currencies. The digital currencies will move back to being financial liabilities of issuers who will hold commodities and/or financial assets to be available to be used to redeem these liabilities. For this to happen, the current strangle-hold of restrictive securities laws and banking laws will have to be relaxed, and the AML laws will have to be scaled back to allow better financial privacy protections and to allow customer anonymity. These legal developments will only happen under considerable commercial pressure and by the re-emergence of more open jurisdictional arbitrage and jurisdictional competition (or alternatively the collapse of the state in a significant population area or areas).