Digital Dollars
Jerry Brito is a senior research fellow at the Mercatus Center at George Mason University and the director of its technology policy program. In April, reason.com editor in chief Nick Gillespie spoke with Brito about how the digital currency Bitcoin is already transforming the global economy. You can watch a video of this interview at reason.com.
Q: Bitcoin is a decentralized currency. Talk a little bit about how it operates.
A: That's one of the main features of Bitcoin. It's a decentralized digital currency. What this means is that there's no central bank. There's no central banker that can decide to increase the money supply. The other aspect of it is a payment system. By being decentralized, this means that there is no central bank, but also no Bitcoin company.
If you think about the way we do online transactions today, you can think of PayPal. Why do we need PayPal? Why can't I just send you cash over the wires the way I send you an email? The reason is you need somebody to keep a ledger that has all of our balances. If I'm going to send you some money, PayPal, a trusted third party, deducts the money from my account and adds it to yours. If we didn't have a trusted third party, I could spend money twice. I could send you an amount and because it's digital I could make a copy and send that money to someone else a second time. Bitcoin solves the double-spending problem without employing a trusted third party. The way it does this is that the ledger that you need to keep is distributed peer-to-peer amongst all of the users of Bitcoin.
Q: What kind of transactions is Bitcoin most often used for?
A: Probably the most popular use of Bitcoin right now—probably 50 percent of the transactions on the Bitcoin network—are gambling. The other one you can imagine are like retail, or the selling of goods and services. WordPress.com is probably the most prominent example of a company that takes Bitcoin. Also Reddit. Then you have drugs and other illicit goods that are being sold in encrypted hidden sites.
Q: Is Bitcoin a sign that the global financial or monetary system is falling apart? Or is it actually a sign that things are really innovative and we're moving into a new stage? Are we actually past the nation-state currency system?
A: I think it's a little bit of both. Especially after the events in Cyprus, this idea that you have this currency that could be traded online, so it's a bit more portable than gold, and that can't be inflated, captured the minds of a lot of people.
Q: Can Bitcoin become a mainstream currency or payment system?
A: Can it become a mainstream currency? I don't think so. The dollar has nothing to fear from Bitcoin. Can it become a mainstream payment processor? Absolutely. We're already seeing this.
There's a company called BitPay which has jumpstarted this. Let's say WordPress is selling premium blogging services, and somebody in Iran wants to buy some of this—a dissident wants to put up a blog. They don't have access to Visa or MasterCard. They don't have dollars. So how do they pay? They choose an option to pay with Bitcoin. At that point they are taken to BitPay. They pay with Bitcoins. And then Bitcoin deposits dollars into the WordPress account. WordPress never touches Bitcoins. And it's much cheaper for everybody involved.