(image provided by 123rf)
Imagine you are back in the first or second grade and back on the playground again during recess. Let’s say that you and Jimmy and Suzy and Janie have created a very ephemeral unit for storing value, keeping score and trading amongst yourselves. In other words, a hypothetical money. Your imaginary, very abstract unit of account happens to be “butterfly kisses.” Laughable as they may be to others outside your game, to you they are very real. So real that the four of you jealously track and guard your inventory of butterfly kisses earned and traded—and amongst yourselves, you do indeed trade them for candy, playground rides, etc. To your group, at least, they clearly have real value.
One day, you come storming in to Ms. Sandusky with tears of self-righteous injury springing from your eyes. “What’s wrong?” She says with concern.
“Jimmy just stole 200 of my butterfly kisses from me. That’s what!”
Ms. Sandusky is understandably puzzled. “Stole your what?”
“My butterfly kisses. Janie, Suzy, Jimmy and I keep track of them, who owns them, and how they are traded on a hill of wet sand in the corner of the sandbox. It’s official. ‘Mt. Sand’ we call it. We write the amounts with a stick—or rather Janie does. She’s the only one we trust as our banker. She’s the only one allowed to use the stick. We don’t really use the butterfly kisses themselves. We just trade them among us for all kinds of things—like rides on the teeter-totter. I had 400 butterfly kisses and Jimmy stole from me by changing the 4 to a 2.”
“Oh you dear children!” Ms. Sandusky exclaimed. “How clever and imaginative of you. But I can make everything better. After all, butterfly kisses are just imaginary but wonderful. Everybody should have as many as they want.” She takes a moment to write something on a post-it. “Here you go. I just gave you 200 new butterfly kisses on this post-it and I made it official by signing it. Now don’t lose them!”
“But… You can’t just create them out of thin air. They’re valuable because they’re hard to get. If you can just make them up any time you choose, they don’t mean anything! That’s not fair!” (Your childish brain is dimly groping with the concept of scarcity being intrinsic to value)
“Now that’s quite enough from you young man. I’m trying to be nice. You take this post-it and go back out there and play nicely.”
So you and your friends apparently made two errors in your money system. First, you did not make sure that your system (Mt. Sand) for tracking ownership and exchange of your currency was secure. Secondly, your choice of an abstract, ephemeral money, while it has real recognized value to you is not widely understood or seen to have value by the appropriate controlling or regulating authority (Ms. Sandusky).
Sadly, the parallels to “Mt. Gox” and Bitcoins are obvious. One legitimate function of government is protecting the sanctity of voluntary trades and property rights. Nevertheless it appears that most governments appear puzzled and somewhat threatened by the rise of a private monies and, in particular, private digital currency. Why should their reluctance to recognize and enforce the real, trading value of Bitcoins be surprising? After all, the rise of a workable private currency threatens their lucrative monopoly on printing intrinsically valueless fiat money and deriving a counterfeiter’s rent from doing so.
One can only imagine the phone call…
“My account just got hacked into and fifty of my Bitcoins have been fraudulently transferred—stolen.”
“My Bitcoins! They are a virtual digital currency whose supply is cryptographically controlled—ultimately there will never be more than 21 million of them created over the next 40 years. They are currently used in trading for more and more things and the exchange and record of ownership is tightly monitored and controlled by the Bitcoin exchanges.”
“Evidently not that tightly controlled, Mr. Wilson, or yours would not have been stolen. Twenty one million you say? Wow, that seems like a lot! Say, I’m a little a fuzzy on this digital stuff. Is your ownership of Bitcoins kind of like wins at ‘Angry Birds?’ You can bet I’d be mad if someone stole my ‘Angry Birds’ wins!’
“No! ‘Angry Birds’ is just an imaginary game. Bitcoins are real! They are a real digital currency with a real trading value recognized by millions!”
“Wait now I got you, Mr. Wilson. You’re like that caller we got an hour ago who reported the theft of 9,615 of his likes for a comment he posted on ‘Facebook.’ He was real steamed too!”
“It’s not at all like that! Bitcoins are real, the ownership of them is real, and they have a real value in terms of the real goods they can buy!”
“Well if they’re real, if property has indeed been stolen, then can you describe one for me—so that I will know it if I see it?”
“Well you won’t see them, since they only exist in cyberspace, but I will give you the code that identifies one of my Bitcoins. Just a moment now, I have it somewhere… Ah! Here it is—“65//+#4139AB**\\\\b16hedgehog%$@@#1312^. Does that help?”
“You bet it does. That helps us a lot. If you give me the rest of your allegedly stolen codes, I can then hand you over to Ed. He heads up our new Digital Property Restitution Division. As a matter of fact—I hope you don’t mind—I’ve taken the liberty of letting Ed listen in on this call. What do you think Ed, can we help Mr. Wilson get his Bitcoins back?”
“Sure, Tom. If Mr. Wilson will be kind enough to give us all the codes using his current e-mail address, we can certify his report of them and e-mail them back to him. We’re good at that and we have the staff to handle it—just now they smartly clicked 10,000 likes for that poor guy who had his likes hacked and stolen from his ‘Facebook’ comment. We’re just here to serve.”
“What? This is ridiculous! You can’t just make up my Bitcoins! They were illegally hacked from my account. You’ve got to find who stole them, where they are, and get them back for me. I insist on the return of my property and the prosecution and punishment of the thief!”
“Whoa there! Hold your horses! Raising your voice isn’t going to help anyone. I don’t like you attitude Mr. Wilson. Ed and I are doing our best to help. I don’t know that we would know what your property is even if we saw it—and we’re not likely to see it. After all, cyberspace is a mighty big place! If I could offer you a suggestion. Next time why not let this be a lesson learned. Store your wealth in something real, in good old-fashioned U.S. dollars—legal tender and backed by the U.S. Government. Putting your money in something as solid as a rock would have avoided this whole problem.”
“You idiot! Federal Reserve notes aren’t real! They’re just a fiat money printed at the whim of the Government and the Federal Reserve. They’re just as abstract as Bitcoins. But unlike Bitcoins their supply is unlimited…”
Farfetched? Ominously, in current court cases concerning the fraudulent transfer or use of Bitcoins, arguments are already being framed by legal defenses that no crime has actually occurred because Bitcoins are not really money. Don’t get us wrong. We are sympathetic to all private money efforts (including Bitcoins) and we believe economies and private markets are more than ready for their introduction and the eventual replacement of the disastrous, de-stabilizing combination of government fiat monies coupled with fractional-reserve banking. The speed of exchange and record of ownership is technologically capable of supporting this evolution.
However, we prefer that the new, private money be backed by something of broadly recognized real value, aside from a hypothetical scarcity of cyber-money. That is why we prefer broad productive capital as the basis for exchange, valuation, and a store of value (for more detail read, Capital as Money, available from Amazon.com). While electronic records of capital ownership and exchange could conceivably be hacked and stolen (as, sadly, is also the case of anything else that has value), at least shares of productive capital and index ETFs are widely recognized by governments as property and the theft or attempted theft of them is recognized as a crime.