9.20.2012

Benefits of Online Currencies

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a minor section of the paper outlining some of the benefits of online currencies. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comment section below.

Online currencies could provide many benefits to users. Of course many of the benefits discussed here are dependent on the exact mechanisms by which such a currency would be established and maintained. However, for the sake of argument, we can take for granted a currency which is not backed by any commodity, which isn’t controlled by a sovereign, which allows for anonymity, which has controls for issuance, and which has a well-understood and trusted mechanism for record-keeping. In any case, these assumptions represent the state of the art, so they are not merely hypotheticals.

Inflation, other sovereign-related risks

In today’s markets, driven by demand forces in some cases, and by flight to safety in others, commodities are marked by volatility. This volatility is often to the upside, however there are downside risks as well. A currency pegged to a commodity, whether it be gold, silver, or something else, would be subject to the wild swings of the metal backing it. This has its benefits, but it also leads to uncertainty, a key factor in the pricing of everything from goods to contracts. Fiat currencies are similarly volatile. While the dollar has been relatively insulated from the textbook inflation the high volume of issuance of that currency would predict, it hasn’t been immune. Many believe that this immunity will not be indefinite as more money is printed, credit ratings are cut, and economic conditions remain less than robust. Other currencies are subject to sovereign whims to a far greater degree, conditions which breed uncertainty.

An online currency with the features noted above and which has a sensible pattern of issuance would be insulated from these issues to a far greater degree than alternatives.

Anonymity

Many buyers of goods wish for anonymity even in the absence of any wrongdoing. While cash transactions allow for some degree of anonymity, online transactions are not completed with cash, but rather credit cards or account numbers which leave a transactional footprint. Online currencies get around this problem.

In the alternative

However, online currencies are not without any downside, and it would be foolish for even an advocate to suggest otherwise. The virtue of not being backed by a national government or a commodity, but rather an individual or network of individuals, with self-interest and temptation, is clearly a danger. Computers are not failsafe, and hard drives can be erased, can crash or can be picked up by a thief with a minimal amount of difficulty. And, of course, they currently exist in a shadowy legal gray area.

However, an online currency which alleviated the former concerns as a technical matter, if it were validated as a legal matter, would go some way toward fixing many of the problems noted above.  

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.

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