Big Ideas For A New Economy: Social Currency Unleashed

Will part of remaking the economy involve rethinking our currency, changing from money supported by governments to money supported by communities? And is Bitcoin the model for this shift, or merely a flash in the pan?

In last week’s article we suggested alternative currency was one of the "next big things" for the new economy. In particular, Bitcoin has enabled an explosion of interest in alternative currency. But what can Bitcoin’s approach and scale teach us about the future of such currencies? While Bitcoin has been successful, local currency movements have never truly taken hold. So what are the drivers of Bitcoin’s success?

For those of you following along at home, Bitcoin is a new breed of currency (this is a great primer). After a series of failed Internet-currency dotcoms in the 1990s (Beenz anyone? Flooz?), Bitcoin has seemingly solved one of the core problems: Who controls an alternative currency?

The Achilles heel of these startups was actually their own existence; if they failed, the currency doesn’t just lose some value, it stops working completely. And the landscape for an alternative currency is fraught with peril. The earlier attempts all were centralized startups, each proposing a competing faux-currency to ease online (providing simplicity and improving trust) transactions and slowly build a virtual currency of sorts. Their business plans generally involved taking margins from the transactions or cost differentials. The early Internet currency attempts ran into regulatory problems (most countries frown upon private companies setting up alternate currencies, it turns out), and had to evolve their offerings to avoid getting shut out.

Bitcoin provides something different. Instead of a currency that has evolved from being backed by precious metals into fiat currencies, Bitcoin is backed by cryptographic algorithms, and has no company—or even an identifiable person—behind it. This shared system provides an amazing openness for a currency: Every transaction is part of a public, collaborative log. However, the people behind those transactions are known only by their account numbers, in a world where you can create as many accounts as you like.

This is, of course, great for all sorts of things. First and foremost, it provides a peer-to-peer currency that is borderless and decentralized. As Ars Technica’s Timothy Lee has noted, Bitcoin might be primarily a threat to Western Union-style money transfer agents as a meta-currency that allows quick, fee-free transfers of value, requiring only someone who will exchange Bitcoins for your preferred local currency. It’s also a boon to activists worldwide, providing a secure and private way for anyone to contribute effectively anonymously. For all we know, the U.S. Attorney General could be personally donating to Wikileaks via Bitcoins, despite the fact that his public job requires a somewhat more aggressive stance. Well, we can hope.

Like any other good privacy technology, this cuts both ways. Bitcoins are also being used to purchase illegal drugs from a website only accessible through the privacy-protecting TOR network, and you can imagine other nefarious uses for which a nigh-untraceable currency could be used. These were also problems for the proto-currencies—just under 20% percent of Flooz’s currency flow was fraudulent credit card charges before the service shut down.

While Bitcoin doesn’t technically rely on a central company to succeed, it did almost bite the dust this past summer. Bitcoin, like any currency, relies on spaces to host transactions (not unlike banks). In June, the largest hub for Bitcoin transactions was hacked. This resulted in the loss of $500,000 worth of Bitcoins. This underlines two things—first, Bitcoins are not just some crypto-geek fantasy currency being used by a handful of people, but a currency valued at over $130 million before the hacking incident. Second, that it is proving to be resilient against these early hiccups. Bitcoin trading has rebuilt some of its value and is stabilizing around $5 per Bitcoin:

But the ultimate question: Whether this is replacing one fetishized commodity (gold) for another (computing power) is unclear. Bitcoin lacks the community support that local currency alternatives provide, while still facing the challenge of finding vendors who will accept it as payment. This is balanced by its openness, privacy, and potential for easy, secure, cashless, and immediate virtual transactions. In the global betting pool that is currency, though, I’d put some money on Bitcoin continuing to be a fascinating disruptive, decentralizing technology.

Add New Comment


  • Clegggg

    Gold as a "fetishized commodity" ?? What on earth does that mean? 
    Probably written by some non-profit organizational hack with no concept
    of real markets and real world.

    fet-ish  Noun  An inanimate object worshiped for its supposed magical
    powers or because it is considered to be inhabited by a spirit.

    My dear authors, gold is not inanimate, and nobody I know thinks it has magical powers or is inhabited by a spirit. pffftt

  • Brill Galt

    I have seen the future world currency, and it is Bitcoin.  Nothing can stop an idea whose time has come.

  • John C. Turmel, B. Eng.

    Jct: They finally catch on to the power of social currency and then highlight with valueless Bitcoin. Har har har har har har. With Ithaca Hours, LETS, Timedollars, all based on human labor, and these guys tout Bitcoin based on nothing but stock market faith.

  • John C. Turmel, B. Eng.

    Jonathan Today 05:17 AM Hey, I'd like to buy your graphic design service and I'll pay you 30 Ithica Hours for it. Can you please send me your Ithaca Hours Internet address so that I can send you the 30 Ithica Hours over the Internet? Thank You.
    Jct: I know you think you're being smart but what do you say when I point out I already do run my own P2P timebank account. In 1999 I paid for 39/40 nights in Europe with a timebank IOU for a night back in Canada worth 5 Hours registered at my own P2P timebank account for those IOUs at http://facebook.com/john.turme... page listing my Offers, Wants, Hours given, Hours received. Find UNILETS UNISET to see how I set mine and how you can set up yours to join the 99% in the  underground timebanking economy. http://johnturmel.com/uniset.h... shows you how you can too. So all you have to do is send me an email saying you owe me 30 Hours for the lesson I just gave you, not for graphic design services and that's how it works. But you'll renege.

  • Mark

    Yep, faith is all there is and that's all a currency needs to function. If it's not true then it couldn't even work - but it's already working (which proves it).
    If you think labour=money then go to China and work for $1 per 10 hour day (minimum wage) and see how long you continue to believe it.

  • Jonathan

    Hey, I'd like to buy your graphic design service and I'll pay you 30 Ithica Hours for it. Can you please send me your Ithaca Hours Internet address so that I can send you the 30 Ithica Hours over the Internet? Thank You.


  • Plato

    Keep an eye on "OpenTransactions." It's a digital cash library intended to make it really simple for developers to work with online currencies. Expect to be able to issue your own currencies, stock certificates, etc. 

  • BladeMcCool

    Nation States. What a quaint little notion. Bitcoin is another nail in the coffin of statism. Next up, private mercenary/security forces who like to be paid in Bitcoin. That'll be the final nail.

  • Page80

    They do currently exist in the form of hit-men that accept BitCoin.  Not quite a full on merc force, but it is a step.